8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): January 23, 2017

PATTERSON-UTI ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-22664	75-2504748
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(IRS Employer Identification No.)

10713 West Sam Houston Pkwy N., Suite 800 Houston, Texas	77064
(Address of principal executive offices)	(Zip Code)

(281) 765-7100

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☒ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01 Other Events.

As previously reported, on December 12, 2016, Patterson-UTI Energy, Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Seventy Seven Energy Inc. (“SSE”) and Pyramid Merger Sub, Inc., a direct, wholly owned subsidiary of the Company (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into SSE, with SSE continuing as the surviving entity and a wholly owned subsidiary of the Company (the “Merger”). On January 23, 2017, the Company filed a Registration Statement on Form S-4 (File No. 333-215655) relating to the Merger.

The Company is filing this Current Report on Form 8-K to provide certain financial information with respect to SSE and the Merger.

Included in this filing as Exhibit 99.1 are the audited consolidated financial statements of SSE for the periods described in Item 9.01(a) below, the notes related thereto and the Report of Independent Registered Public Accounting Firm, and included in this filing as Exhibit 99.2 are the unaudited condensed consolidated financial statements of SSE for the periods described in Item 9.01(a) below and the notes related thereto.

Included in this filing as Exhibit 99.3 is the unaudited pro forma condensed combined financial information described in Item 9.01(b) below.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements

• Audited consolidated financial statements of Seventy Seven Energy Inc. and its subsidiaries as of December 31, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015, and the related notes to the consolidated financial statements, attached as Exhibit 99.1 hereto.

• Unaudited consolidated financial statements of Seventy Seven Energy Inc. and its subsidiaries comprised of the condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015, the condensed consolidated statements of operations and cash flows for the two months ended September 30, 2016, the seven months ended July 31, 2016 and the nine months ended September 30, 2015 and the condensed consolidated statements of changes in equity for the two months ended September 30, 2016 and the seven months ended July 31, 2016 and the related notes to the unaudited condensed consolidated financial statements, attached as Exhibit 99.2 hereto.

(b) Pro Forma Financial Information.

The following unaudited pro forma condensed combined financial information of the Company, giving effect to the Merger and the adjustments set forth therein, is included in Exhibit 99.3 hereto:

• Unaudited pro forma condensed combined balance sheet as of September 30, 2016, the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2016 and the year ended December 31, 2015 and the related notes to the unaudited pro forma condensed combined financial statements.

(d) Exhibits.

Exhibit Number	Description
23.1	Consent of PricewaterhouseCoopers LLP
99.1	Historical audited consolidated financial statements of Seventy Seven Energy Inc.
99.2	Historical unaudited condensed consolidated financial statements of Seventy Seven Energy Inc.
99.3	Unaudited pro forma condensed combined financial information.

1

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

PATTERSON-UTI ENERGY, INC.
By:	/s/ John E. Vollmer III
Name:	John E. Vollmer III
Title:	Senior Vice President – Corporate Development, Chief Financial Officer and Treasurer

January 23, 2017

2

EXHIBIT INDEX

Exhibit Number	Description
23.1	Consent of PricewaterhouseCoopers LLP
99.1	Historical audited consolidated financial statements of Seventy Seven Energy Inc.
99.2	Historical unaudited condensed consolidated financial statements of Seventy Seven Energy Inc.
99.3	Unaudited pro forma condensed combined financial information.

3

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-166434, 333-126016, 333-152705 and 333-195410) of Patterson-UTI Energy, Inc. of our report dated February 17, 2016 relating to the financial statements of Seventy Seven Energy Inc., which appears in this Current Report on Form 8-K of Patterson-UTI Energy, Inc.

/s/ PricewaterhouseCoopers LLP

Oklahoma City, Oklahoma

January 23, 2017

EX-99.1

Exhibit 99.1

INDEX TO SEVENTY SEVEN ENERGY INC. FINANCIAL INFORMATION

	Page
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm		1
Consolidated Balance Sheets as of December 31, 2015 and 2014		2
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013		3
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2015, 2014 and 2013		4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013		5
Notes to Consolidated Financial Statements		6

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Seventy Seven Energy Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Seventy Seven Energy Inc. and its subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company is actively exploring and evaluating strategic alternatives to reduce the level of the Company’s long-term debt and lower its future cash interest obligations.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it presents deferred financing costs in 2015.

/s/ PricewaterhouseCoopers LLP

Oklahoma City, Oklahoma

February 17, 2016

1

SEVENTY SEVEN ENERGY INC.

Consolidated Balance Sheets

	December 31,
	2015			2014
	(in thousands)
Assets:
Current Assets:
Cash	$	130,648		$	891
Accounts receivable, net of allowance of $3,680 and $3,311 at December 31, 2015 and December 31, 2014, respectively		164,721			421,555
Inventory		18,553			25,073
Deferred income tax asset		1,499			7,463
Prepaid expenses and other		17,141			19,072
Total Current Assets		332,562			474,054
Property and Equipment:
Property and equipment, at cost		2,646,446			2,749,886
Less: accumulated depreciation		(1,116,026	)		(982,833	)
Total Property and Equipment, Net		1,530,420			1,767,053
Other Assets:
Equity method investment		—			7,816
Goodwill		—			27,434
Intangible assets, net		—			5,420
Deferred financing costs		1,238			1,592
Other long-term assets		38,398			6,924
Total Other Assets		39,636			49,186
Total Assets	$	1,902,618		$	2,290,293
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	53,767		$	45,657
Current portion of long-term debt		5,000			4,000
Other current liabilities		98,318			215,752
Total Current Liabilities		157,085			265,409
Long-Term Liabilities:
Deferred income tax liabilities		60,623			159,273
Long-term debt, less current maturities		1,564,592			1,572,241
Other long-term liabilities		1,478			2,347
Total Long-Term Liabilities		1,626,693			1,733,861
Commitments and Contingencies (Note 8)
Common stock. $0.01 par value: authorized 250,000,000 shares; issued and outstanding 59,397,831 and 51,158,968 shares at December 31, 2015 and 2014, respectively		594			512
Paid-in capital		350,770			301,644
Accumulated deficit		(232,524	)		(11,133	)
Total Equity		118,840			291,023
Total Liabilities and Equity	$	1,902,618		$	2,290,293

The accompanying notes are an integral part of these consolidated financial statements.

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SEVENTY SEVEN ENERGY INC.

Consolidated Statements of Operations

	Years Ended December 31,
	2015			2014			2013
	(in thousands)
Revenues:
Revenues	$	1,131,244		$	2,080,892		$	2,188,205
Operating Expenses:
Operating costs		855,870			1,580,353			1,717,709
Depreciation and amortization		295,421			292,912			289,591
General and administrative		112,141			108,139			80,354
Loss on sale of a business		35,027			—			—
Losses (gains) on sales of property and equipment, net		14,656			(6,272	)		(2,629	)
Impairment of goodwill		27,434			—			—
Impairments and other		18,632			30,764			74,762
Total Operating Expenses		1,359,181			2,005,896			2,159,787
Operating (Loss) Income		(227,937	)		74,996			28,418
Other (Expense) Income:
Interest expense		(99,267	)		(79,734	)		(56,786	)
Gains on early extinguishment of debt		18,061			—			—
Loss and impairment from equity investees		(7,928	)		(6,094	)		(958	)
Other income		3,052			664			1,758
Total Other Expense		(86,082	)		(85,164	)		(55,986	)
Loss Before Income Taxes		(314,019	)		(10,168	)		(27,568	)
Income Tax Benefit		(92,628	)		(2,189	)		(7,833	)
Net Loss	$	(221,391	)	$	(7,979	)	$	(19,735	)
Loss Per Common Share (Note 3)
Basic	$	(4.42	)	$	(0.17	)	$	(0.42	)
Diluted	$	(4.42	)	$	(0.17	)	$	(0.42	)
Weighted Average Common Shares Outstanding
Basic		50,096			47,236			46,932
Diluted		50,096			47,236			46,932

The accompanying notes are an integral part of these consolidated financial statements.

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SEVENTY SEVEN ENERGY INC.

Consolidated Statements of Changes in Equity

	Common Stock		Common Stock		Paid-in Capital			Owner’s Equity			Accumulated Deficit			Total Stockholders’ / Owner’s Equity
	(Shares)							(in thousands)
Balance at December 31, 2012		—	$	—	$	—		$	596,817		$	—		$	596,817
Net loss		—		—		—			(19,735	)		—			(19,735	)
Distributions to Chesapeake, net		—		—		—			(29,890	)		—			(29,890	)
Balance at December 31, 2013		—	$	—	$	—		$	547,192		$	—		$	547,192
Net income (loss)		—		—		—			3,154			(11,133	)		(7,979	)
Contributions from Chesapeake		—		—		—			190,297			—			190,297
Distributions to Chesapeake		—		—		—			(482,001	)		—			(482,001	)
Reclassification of owner’s equity to paid-in capital		—		—		258,642			(258,642	)		—			—
Issuance of common stock at spin-off		46,932		469		(469	)		—			—			—
Share-based compensation		4,227		43		43,471			—			—			43,514
Balance at December 31, 2014		51,159	$	512	$	301,644		$	—		$	(11,133	)	$	291,023
Net loss		—		—		—			—			(221,391	)		(221,391	)
Share-based compensation		8,239		82		49,126			—			—			49,208
Balance at December 31, 2015		59,398	$	594	$	350,770		$	—		$	(232,524	)	$	118,840

The accompanying notes are an integral part of these consolidated financial statements.

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SEVENTY SEVEN ENERGY INC.

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2015			2014			2013
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS	$	(221,391	)	$	(7,979	)	$	(19,735	)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization		295,421			292,912			289,591
Amortization of sale/leaseback gains		—			(5,414	)		(15,995	)
Amortization of deferred financing costs		4,623			6,122			2,928
Gains on early extinguishment of debt		(18,061	)		—			—
Loss on sale of a business		35,027			—			—
Losses (gains) on sales of property and equipment		14,656			(6,272	)		(2,629	)
Impairment of goodwill		27,434			—			—
Impairments of long-lived assets		18,632			21,063			52,400
Loss and impairment from equity investees		7,928			6,094			958
Provision for doubtful accounts		1,375			2,887			436
Non-cash compensation		48,509			47,184			—
Deferred income tax benefit		(92,686	)		(2,863	)		(9,255	)
Other		(717	)		150			1,641
Changes in operating assets and liabilities,
Accounts receivable		236,977			(81,001	)		(12,385	)
Inventory		7,099			(6,543	)		7,193
Accounts payable		9,109			(11,954	)		4,464
Other current liabilities		(89,650	)		9,949			38,324
Other		(179	)		961			(865	)
Net cash provided by operating activities		284,106			265,296			337,071
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(205,706	)		(457,618	)		(349,806	)
Proceeds from sales of assets		27,695			88,556			50,602
Proceeds from sale of a business		15,000			—			—
Proceeds from sale of investment		—			—			2,790
Additions to investments		(113	)		(675	)		(431	)
Other		3,457			2,091			28
Net cash used in investing activities		(159,667	)		(367,646	)		(296,817	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from revolving credit facility		160,100			1,201,400			1,216,900
Payments on revolving credit facility		(210,600	)		(1,555,900	)		(1,230,100	)
Proceeds from issuance of senior notes, net of offering costs		—			493,825			—
Payments to extinguish senior notes		(31,305	)		—			—
Proceeds from issuance of term loan, net of issuance costs		94,481			393,879			—
Payments on term loans		(4,750	)		(2,000	)		—
Deferred financing costs		(784	)		(3,597	)		—
Distributions to CHK		—			(422,839	)		(29,890	)
Other		(1,824	)		(3,205	)		3,287
Net cash provided by (used in) financing activities		5,318			101,563			(39,803	)
Net increase (decrease) in cash		129,757			(787	)		451
Cash, beginning of period		891			1,678			1,227
Cash, end of period	$	130,648		$	891		$	1,678
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
(Decrease) increase in other current liabilities related to purchases of property and equipment	$	(20,016	)	$	18,999		$	(54,457	)
Note receivable received as consideration for sale of a business	$	27,000		$	—		$	—
Property and equipment distributed to Chesapeake at spin-off	$	—		$	(792	)	$	—
Property and equipment contributed from Chesapeake at spin-off	$	—		$	190,297		$	—
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS:
Interest, net of amount capitalized	$	96,730		$	54,439		$	55,250

The accompanying notes are an integral part of these consolidated financial statements.

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SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Spin-off and Basis of Presentation

Spin-Off

On June 9, 2014, Chesapeake Energy Corporation (“CHK”) announced that its board of directors approved the spin-off of its oilfield services division through the pro rata distribution of 100% of the shares of common stock of Seventy Seven Energy Inc. (“SSE,” “we,” “us,” “our,” “Company,” or “ours”) to CHK’s shareholders of record as of the close of business on June 19, 2014, the record date. On June 30, 2014, each CHK shareholder received one share of SSE common stock for every fourteen shares of CHK common stock held by such shareholder on the record date, and SSE became an independent, publicly traded company as a result of the distribution. The transactions in which SSE became an independent, publicly traded company, including the distribution, are referred to collectively as the “spin-off”. Prior to the spin-off, we conducted our business as CHK Oilfield Operating, L.L.C. (“COO”), a wholly owned subsidiary of CHK. Following the spin-off, CHK retained no ownership interest in SSE, and each company has separate public ownership, boards of directors and management. A registration statement on Form 10, as amended through the time of its effectiveness, describing the spin-off was filed by SSE with the U.S. Securities and Exchange Commission (“SEC”) and was declared effective on June 17, 2014. On July 1, 2014, SSE stock began trading the “regular-way” on the New York Stock Exchange under the ticker symbol of “SSE”. See Note 14 for further discussion of agreements entered into as part of the spin-off, including a master separation agreement, a transition services agreement, an employee matters agreement and a tax sharing agreement, among others. As part of the spin-off, we completed the following transactions, among others, which we refer to as the “Transactions”:

• we entered into a new $275.0 million senior secured revolving credit facility (the “credit facility”) and a $400.0 million secured term loan (the “Term Loan”). We used the proceeds from borrowings under these new facilities to repay in full and terminate our $500.0 million senior secured revolving credit facility (the “Old Credit Facility”).

• we issued new 6.50% senior unsecured notes due 2022 (the “2022 Notes”) and used the net proceeds of approximately $493.8 million to make a cash distribution of approximately $391.0 million to CHK, to repay a portion of outstanding indebtedness under the credit facility and for general corporate purposes.

• we distributed our compression unit manufacturing and geosteering businesses to CHK.

• we sold our crude hauling assets to a third party and used a portion of the net proceeds received to make a $30.9 million cash distribution to CHK.

• CHK transferred to us buildings and real estate used in our business, including property and equipment, at cost of approximately $212.5 million and accumulated depreciation of $22.2 million as of the date of the spin-off.

• COO transferred all of its existing assets, operations and liabilities, including our 6.625% senior unsecured notes due 2019 (the “2019 Notes”), to Seventy Seven Operating LLC (“SSO”). SSO is an Oklahoma limited liability company, our direct wholly-owned subsidiary and, after giving effect to the Transactions, the owner of all our operating subsidiaries.

• COO was renamed SSE and converted from a limited liability company to a corporation.

Basis of Presentation

The accompanying consolidated financial statements and related notes include the accounts of SSE and its subsidiaries, all of which are 100% owned. SSE’s accounting and financial reporting policies conform to accounting principles and practices generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions within SSE have been eliminated.

Seventy Seven Finance Inc. (“SSF”) is a 100% owned finance subsidiary of SSE that was incorporated for the purpose of facilitating the offering of SSE’s 2019 Notes (see Note 6). SSF does not have any operations or revenues.

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SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. Significant Accounting Policies

Accounting Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Although management believes these estimates are reasonable, actual results could differ from those estimates. Areas where critical accounting estimates are made by management include:

• estimated useful lives of assets, which impacts depreciation and amortization of property and equipment;

• impairment of long-lived assets, goodwill and intangibles;

• income taxes;

• accruals related to revenue, expenses, capital costs and contingencies; and

• cost allocations as described in Note 14.

Risks and Uncertainties

We operate in a highly cyclical industry. The main factor influencing demand for oilfield services is the level of drilling and completions activity by E&P companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Demand for oil and natural gas is cyclical and is subject to large and rapid fluctuations. When oil and natural gas price increases occur, producers increase their capital expenditures, which generally results in greater revenues and profits for oilfield service companies. The increased capital expenditures also ultimately result in greater production, which historically has resulted in increased supplies and reduced prices that, in turn, tends to reduce demand for oilfield services. For these reasons, our results of operations may fluctuate from quarter-to-quarter and from year-to-year.

The sustained decline in commodity prices since mid-2014 has dramatically reduced the level of onshore United States drilling and completions activity and, consequently, the demand for our services. As of December 31, 2015, NYMEX WTI oil spot prices had declined to their lowest levels since 2003 and NYMEX natural gas spot prices had fallen from multi-year highs reached in early 2014. The extent and length of the current down cycle continues to be uncertain and is dependent on a number of economic, geopolitical and monetary policy factors that are outside our control. Until there is a sustained recovery in commodity prices, we expect that reduced equipment utilization levels and pricing pressure across each of our operating segments will persist. If drilling and completions activity remains at depressed levels or worsens, it would likely have a material adverse impact on our business, financial condition, cash flows and results of operations.

We have retained restructuring advisors and are actively exploring and evaluating various strategic alternatives to reduce the level of our long-term debt and lower our future cash interest obligations, including debt repurchases, exchanges of existing debt securities for new debt securities and exchanges or conversions of existing debt securities for new equity securities, among other options. The timing and outcome of these efforts is highly uncertain, and one or more of these alternatives could potentially be consummated, without the consent of any one or more of our current security holders, through voluntary bankruptcy proceedings. Although we believe that we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements, based on current market conditions, we believe that a reduction in our long-term debt is needed to improve our financial position and flexibility and to better position us to take advantage of the growth opportunities that are likely to result from the current industry downturn.

In addition, on January 18, 2016, we received notice that we are not in compliance with the continued listing standards of the NYSE because the current trading price for our common stock is below the minimum listing requirements. We intend to take actions to meet the compliance standards for continued listing on the NYSE. However, we cannot guarantee that we will be able to meet the necessary requirements for continued listing, and, therefore, we cannot guarantee that our common stock will remain listed for trading on the NYSE.

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SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Historically, we have provided a significant percentage of our oilfield services to CHK. For the years ended December 31, 2015, 2014 and 2013, CHK accounted for approximately 70%, 81% and 90%, respectively, of our revenues. As of December 31, 2015 and 2014, CHK accounted for approximately 65% and 77%, respectively, of our accounts receivable. If CHK ceases to engage us on terms that are attractive to us during any future period, our business, financial condition, cash flows and results of operations would be materially adversely affected during such period.

Accounts Receivable

Trade accounts receivable are recorded at the invoice amount and do not bear interest. The majority of our receivables, 65% and 77% at December 31, 2015 and 2014, respectively, are with CHK and its subsidiaries. The allowance for doubtful accounts represents our best estimate for losses that may occur resulting from disputed amounts with our customers and their inability to pay amounts owed. We determine the allowance based on historical write-off experience and information about specific customers. During the years ended December 31, 2015, 2014 and 2013, we recognized $1.4 million, $2.9 million and $0.4 million, respectively, of bad debt expense related to potentially uncollectible receivables. We also recognized reductions to our allowance of $0.5 million, $0.1 million and $0.4 million as we wrote off specific receivables against our allowance for the years ended December 31, 2015, 2014 and 2013, respectively.

Inventory

We value inventory at the lower of cost or market using the average cost method. Average cost is derived from third-party invoices and production cost. Production cost includes material, labor and manufacturing overhead. Inventory primarily consists of proppants and chemicals used in our hydraulic fracturing operations.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation of assets is based on estimates, assumptions and judgments relative to useful lives and salvage values. Upon the disposition of an asset, we eliminate the cost and related accumulated depreciation and include any resulting gain or loss in operating expenses in the consolidated statements of operations. Expenditures for maintenance and repairs that do not add capacity or extend the useful life of an asset are expensed as incurred.

A summary of our property and equipment amounts and useful lives is as follows:

	December 31,						Estimated Useful Life
	2015			2014
	(in thousands)						(in years)
Drilling rigs and related equipment	$	1,594,377		$	1,521,561			5-15
Hydraulic fracturing equipment		323,989			360,122			2-7
Oilfield rental equipment		324,976			332,085			2-10
Trucks and tractors		77,678			183,511			7
Vehicles		33,478			53,316			3
Buildings and improvements		196,240			202,196			10-39
Land		16,261			21,613			—
Other		79,447			75,482			3-7
Total property and equipment, at cost		2,646,446			2,749,886
Less: accumulated depreciation and amortization		(1,116,026	)		(982,833	)
Total property and equipment, net	$	1,530,420		$	1,767,053

Depreciation is calculated using the straight-line method based on the assets’ estimated useful lives and salvage values. These estimates are based on various factors including age (in the case of acquired assets), manufacturing specifications, technological advances and historical data concerning useful lives of similar assets.

We review the estimated useful lives of our property and equipment on an ongoing basis. Based on this review in 2015, we concluded that the estimated useful lives of certain drilling rig components and certain drilling rigs were shorter than the estimated useful lives used for depreciation in our consolidated financial statements. We reflected this useful life change as a change in estimate, effective January 1, 2015, which increased depreciation expense by

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$13.7 million, increased net loss by $9.7 million and increased our basic and diluted loss per share by $0.19 for the year ended December 31, 2015. Effective July 1, 2014, we concluded that the estimated useful lives of certain of our Tier 2 and Tier 3 drilling rigs were shorter than the estimated useful lives used for depreciation. This change in estimate increased depreciation expense by $3.9 million, increased net loss by $3.0 million and increased basic and diluted loss per share by $0.08 for the year ended December 31, 2014.

Depreciation expense on property and equipment for the years ended December 31, 2015, 2014 and 2013 was $295.1 million, $290.9 million and $285.6 million, respectively. Included in property and equipment are $77.7 million and $139.3 million at December 31, 2015 and 2014, respectively, of assets that are being constructed or have not been placed into service, and therefore are not subject to depreciation.

Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using a weighted average interest rate based on our outstanding borrowings until the underlying assets are placed into service. Capitalized interest is added to the cost of the assets and amortized to depreciation expense over the useful life of the assets. During the years ended December 31, 2015, 2014 and 2013, we capitalized interest of approximately $2.3 million, $2.1 million and $1.1 million, respectively.

Impairment of Long-Lived Assets

We review our long-lived assets, such as property and equipment, whenever, in management’s judgment, events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Factors that might indicate a potential impairment include a significant decrease in the market value of the long-lived asset, a significant change in the long-lived asset’s physical condition, a change in industry conditions or a reduction in cash flows associated with the use of the long-lived asset. If these or other factors indicate the carrying amount of the asset may not be recoverable, we determine whether an impairment has occurred through analysis of the future undiscounted cash flows of the asset. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. We measure the fair value of the asset using market prices or, in the absence of market prices, based on an estimate of discounted cash flows.

Investments

Investments in securities are accounted for under the equity method in circumstances where we have the ability to exercise significant influence over the operating and investing policies of the investee but do not have control. Under the equity method, we recognize our share of the investee’s earnings in our consolidated statements of operations. We consolidate all subsidiaries in which we hold a controlling interest.

We evaluate our investments for impairment and recognize a charge to earnings when any identified impairment is determined to be other-than-temporary. See Note 11 for further discussion of investments.

Goodwill, Intangible Assets and Amortization

Goodwill represents the cost in excess of fair value of the net assets of businesses acquired. In 2011, we recorded goodwill in the amount of $27.4 million related to our acquisition of Bronco Drilling Company, Inc. (“Bronco”). This goodwill was assigned to our drilling segment. Goodwill is not amortized. Intangible assets with finite lives are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized, which is generally on a straight-line basis over an asset’s estimated useful life.

We review goodwill for impairment annually on October 1 or more frequently if events or changes in circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. Circumstances that could indicate a potential impairment include a significant adverse change in the economic or business climate, a significant adverse change in legal factors, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel and the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of. Under GAAP, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if we conclude otherwise, accounting

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guidance requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. Second, if impairment is indicated, the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination on the impairment test date. The amount of impairment for goodwill is measured as the excess of the carrying value of the goodwill over its implied fair value.

When estimating fair values of a reporting unit for our goodwill impairment test, we use the income approach. The income approach provides an estimated fair value based on the reporting unit’s anticipated cash flows that are discounted using a weighted average cost of capital rate. Estimated cash flows are primarily based on projected revenues, operating expenses and capital expenditures and are discounted using comparable industry average rates for weighted average cost of capital. For purposes of performing the impairment tests for goodwill, all of our goodwill related to our drilling reporting unit. We performed the two-step process for testing goodwill for impairment on October 1, 2015.

Due to the further deterioration of industry conditions in the fourth quarter of 2015, including the further decline in oil and natural gas prices, the Company determined that there was an indication of impairment present based on the results of the first step of the goodwill impairment test. During the fourth quarter of 2015, we completed our assessment and recognized an impairment loss of $27.4 million on the goodwill associated with the Bronco acquisition.

Deferred Financing Costs

Legal fees and other costs incurred in obtaining financing are amortized over the term of the related debt using a method that approximates the effective interest method. We had gross capitalized costs of $37.3 million and $31.0 million, net of accumulated amortization of $12.4 million and $7.1 million, at December 31, 2015 and 2014, respectively. In 2015, we capitalized costs of $6.3 million associated with the issuance of a Term Loan due 2021. Amortization expense related to deferred financing costs was $4.6 million, $6.1 million and $2.9 million for the years ended December 31, 2015, 2014 and 2013, respectively, and is included in interest expense in the consolidated statements of operations.

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This standard requires retrospective application. This ASU is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted and we elected to adopt ASU 2015-03 effective December 31, 2015. This change in accounting principle is preferable since it allows debt issuance costs and debt issuance discounts to be presented similarly in the consolidated balance sheets as a reduction to the face amount of our debt balances. A retrospective change to the December 31, 2014 consolidated balance sheet as previously presented is required pursuant to ASU 2015-03. The retrospective adjustment to the December 31, 2014 consolidated balance sheet is shown below.

	December 31, 2014
	As Adjusted		Adjustment Effect			As Previously Reported
	(in thousands)
Deferred financing costs(a)	$	1,592	$	(22,259	)	$	23,851
Long-term debt, less current maturities	$	1,572,241	$	22,259		$	1,594,500

(a) The deferred financing costs, as adjusted, were incurred in association with the credit facility (See Note 6).

Accounts Payable

Included in accounts payable at December 31, 2014 are liabilities of $4.5 million representing the amount by which checks issued, but not yet presented to our banks for collection, exceeded balances in applicable bank accounts, considering the legal right of offset.

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Revenue Recognition

We recognize revenue when services are performed, collection of receivables is reasonably assured, persuasive evidence of an arrangement exists and the price is fixed or determinable.

Drilling. We earn revenues by drilling oil and natural gas wells for our customers under daywork contracts. We recognize revenue on daywork contracts for the days completed based on the day rate each contract specifies. Payments received and costs incurred for mobilization services are recognized as earned over the days of mobilization. We also recognize revenue for contract termination fees paid by our customers. Under certain of our contracts, we have agreed to allow customers to pay the termination cost over the life of the contract in lieu of a lump sum, and we refer to a rig in this circumstance as “idle but contracted” or “IBC”. IBC payments are structured to preserve our anticipated operating margins for the affected rigs through the end of the contract terms and are recognized as revenue over the life of the contract.

Hydraulic Fracturing. We recognize revenue upon the completion of each fracturing stage. We typically complete one or more fracturing stages per day per active crew during the course of a job. A stage is considered complete when the customer requests or the job design dictates that pumping discontinue for that stage. Invoices typically include a lump sum equipment charge determined by the rate per stage each contract specifies and product charges for sand, chemicals and other products actually consumed during the course of providing our services.

Oilfield Rentals. We rent many types of oilfield equipment including drill pipe, drill collars, tubing, blowout preventers, frac tanks, mud tanks and environmental containment. We also provide air drilling, flowback services and services associated with the transfer of water to the wellsite for well completions. We price our rentals and services by the day or hour based on the type of equipment rented and the services performed and recognize revenue ratably over the term of the rental.

Former Oilfield Trucking. Oilfield trucking provided rig relocation and logistics services as well as fluid handling services. Our trucks moved drilling rigs, crude oil, and other fluids and construction materials to and from the wellsite and also transported produced water from the wellsite. We priced these services by the hour and volume and recognized revenue as services were performed. As part of the spin-off, we sold our crude hauling business to a third party. During 2015, we sold our drilling rig relocation and logistics business and water hauling assets. As of June 30, 2015, there were no remaining assets or operations in this former segment.

Other Operations. We designed, engineered and fabricated natural gas compression packages, accessories and related equipment that we sold to CHK and other customers. We priced our compression units based on certain specifications such as horsepower, stages and additional options. We recognized revenue upon completion and transfer of ownership of the natural gas compression equipment. As part of the spin-off, we distributed our compression unit manufacturing business to CHK.

Litigation Accruals

We estimate our accruals related to litigation based on the facts and circumstances specific to the litigation and our past experience with similar claims. We estimate our liability related to pending litigation when we believe the amount or a range of the loss can be reasonably estimated. We record our best estimate of a loss when the loss is considered probable. When a loss is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to a lawsuit or claim. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates accordingly.

Environmental Costs

Our operations involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and regulated substances. These operations are subject to various federal, state and local laws and regulations intended to protect the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. There were no amounts capitalized as of December 31, 2015 and 2014. We record liabilities on an undiscounted basis when remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated.

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Leases

We lease rail cars and other property and equipment through various leasing arrangements (see Note 8). When we enter into a leasing arrangement, we analyze the terms of the arrangement to determine its accounting treatment. As of December 31, 2015, all leases have been accounted for as operating leases.

We periodically incur costs to improve the assets that we lease under these arrangements. We record the improvement as a component of property and equipment and amortize the improvement over the shorter of the useful life of the improvement or the remaining lease term.

Share-Based Compensation

Our share-based compensation program consists of restricted stock and stock options granted to employees and restricted stock granted to non-employee directors under the SSE 2014 Incentive Plan (the “2014 Plan”). We recognize in our financial statements the cost of employee services received in exchange for restricted stock and stock options based on the fair value of the equity instruments as of the grant date. In general, this value is amortized over the vesting period; for grants with a non-substantive service condition, this value is recognized immediately. Amounts are recognized in operating costs and general and administrative expenses.

Income Taxes

Through the effective date of the spin-off, our operations were included in the consolidated federal income tax return and other state returns for CHK. The income tax provision for the period before the spin-off has been prepared on a separate return basis for us and all of our subsidiaries. Accordingly, we have recognized 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 bases for all our subsidiaries as if each entity were a corporation, regardless of its actual characterization for U.S. federal income tax purposes. Our effective tax rate was 29%, 22% and 28% for the years ended December 31, 2015, 2014 and 2013, respectively. Our effective tax rate can fluctuate as a result of the impact of state income taxes, permanent differences and changes in pre-tax income. Effective with the spin-off, we entered into a tax sharing agreement with CHK which governs the respective rights, responsibilities and obligations of each company, for tax periods prior to the spin-off, with respect to the payment of taxes, filing of tax returns, reimbursement of taxes, control of audits and other tax proceedings, liability for taxes that may be triggered as a result of the spin-off and other matters regarding taxes. Following the spin-off, we are not entitled to federal income tax net operating loss (“NOL”) carryforwards that were generated prior to the spin-off and that have historically been reflected in our net deferred income tax liabilities on our consolidated balance sheet. As of the spin-off date, we made an adjustment to our deferred tax liabilities of approximately $178.8 million to reflect the treatment of NOLs under the tax sharing agreement. In connection with the spin-off, we received a one-time step-up in tax basis of our assets due to the tax gain recognized by CHK related to the spin-off in the tax affected amount of approximately $202.6 million.

A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Based on the expected reversal of our recorded deferred tax liabilities, we had no valuation allowance at December 31, 2015 and 2014.

The benefit of an uncertain tax position taken or expected to be taken on an income tax return is recognized in the consolidated financial statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authority. Interest and penalties, if any, related to uncertain tax positions would be recorded in interest expense and other expense, respectively. There were no uncertain tax positions at December 31, 2015 and 2014.

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3. Earnings Per Share

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide non-forfeitable dividend rights and are required to be included in the computation of our basic earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Diluted earnings per share is computed using the weighted average shares outstanding for basic earnings per share, plus the dilutive effect of stock options. The dilutive effect of unvested restricted stock and stock options is determined using the treasury stock method, which assumes the amount of unrecognized compensation expense related to unvested share-based compensation awards is used to repurchase shares at the average market price for the period.

	Years Ended December 31,
	2015			2014			2013
	(in thousands, except per share data)
Basic loss per share:
Allocation of earnings:
Net loss	$	(221,391	)	$	(7,979	)	$	(19,735	)
Weighted average common shares outstanding (a)		50,096			47,236			46,932
Basic loss per share	$	(4.42	)	$	(0.17	)	$	(0.42	)
Diluted loss per share:
Allocation of earnings:
Net loss	$	(221,391	)	$	(7,979	)	$	(19,735	)
Weighted average common shares, including dilutive effect (a)(b)(c)		50,096			47,236			46,932
Diluted loss per share	$	(4.42	)	$	(0.17	)	$	(0.42	)

(a) 46,932,433 shares of our common stock were distributed to CHK shareholders on June 30, 2014 in conjunction with the spin-off. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, we have assumed this amount to be outstanding for periods prior to the spin-off.

(b) No incremental shares of potentially dilutive restricted stock awards or units were included for periods presented as their effect was antidilutive under the treasury stock method.

(c) The exercise price of stock options exceeded the average market price of our common stock during the years ended December 31, 2015 and 2014. Therefore, the stock options were not dilutive.

4. Sale of Hodges Trucking Company, L.L.C.

On June 14, 2015, we sold Hodges Trucking Company, L.L.C. (“Hodges”), our previously wholly-owned subsidiary that provided drilling rig relocation and logistics services, to Aveda Transportation and Energy Services Inc. (“Aveda”) for aggregate consideration of $42.0 million. At the time of the sale, Hodges owned 270 rig relocation trucks and 65 cranes and forklifts. The sale did not include the land and buildings used in Hodges’ operations.

The consideration received consisted of $15.0 million in cash and a $27.0 million secured promissory note due June 15, 2020 (the “Note Receivable”). The Note Receivable bears a fixed interest rate of 9.00% per annum, which is payable quarterly in arrears beginning on June 30, 2015. Aveda can, at any time, make prepayments of principal before the maturity date without premium or penalty. The Note Receivable is secured by a second lien on substantially all of Aveda’s fixed assets and accounts receivable. The Note Receivable is presented in other long-term assets on our condensed consolidated balance sheet. During 2015, we recognized interest income of $1.4 million related to the Note Receivable.

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We recognized a loss of $35.0 million on the sale of Hodges. Additionally, during 2015, we recognized $2.1 million of additional stock-based compensation expense related to the vesting of restricted stock held by Hodges employees and $0.6 million of severance-related costs.

Hodges was included in our oilfield trucking segment. The sale of Hodges did not qualify as discontinued operations because the sale did not represent a strategic shift that had or will have a major effect on our operations or financial results.

5. Asset Sales and Impairments and Other

Asset Sales

During 2015, we sold our water hauling assets, which consisted of property and equipment that had a total carrying amount of $12.3 million, for $6.5 million. We sold other ancillary equipment for $21.2 million. During 2014, we sold 28 Tier 3 drilling rigs and ancillary drilling equipment for $44.8 million. We sold our crude hauling assets, which included 124 fluid handling trucks and 122 trailers that had a total carrying amount of $20.7 million, for $43.8 million. During 2013, we sold 14 drilling rigs and ancillary equipment that were not being utilized in our business for $50.6 million, net of selling expenses. We recorded net losses (gains) on sales of property and equipment of approximately $14.7 million, ($6.3) million and ($2.6) million during the years ended December 31, 2015, 2014 and 2013, respectively.

Impairments and Other

A summary of our impairments and other is as follows:

	Years Ended December 31,
	2015		2014		2013
	(in thousands)
Trucking and water disposal equipment	$	2,737	$	—	$	—
Drilling rigs held for sale		—		11,237		23,574
Drilling rigs held for use		5,202		8,366		25,417
Lease termination costs		—		9,701		22,362
Drilling related services equipment		8,687		—		—
Other		2,006		1,460		3,409
Total impairments and other	$	18,632	$	30,764	$	74,762

We recognized $2.7 million of impairment charges during the year ended December 31, 2015 for certain trucking and water disposal equipment that we deemed to be impaired based on expected future cash flows of this equipment. Estimated fair value for the trucking and fluid disposal equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

During the years ended December 31, 2014 and 2013, we recognized $11.2 million and $23.6 million, respectively, of impairment charges for certain drilling rigs and spare equipment we had identified to sell as part of our broader strategy to divest of non-essential drilling rigs. We are required to present such assets at the lower of carrying amount or fair value less the anticipated costs to sell at the time they meet the criteria for held for sale accounting. Estimated fair value was based on the expected sales price, less costs to sell.

We also identified certain drilling rigs during the years ended December 31, 2015, 2014 and 2013 that we deemed to be impaired based on our assessment of future demand and the suitability of the identified rigs in light of this demand. We recorded impairment charges of $5.2 million, $8.4 million and $25.4 million during the years ended December 31, 2015, 2014 and 2013, respectively, related to these drilling rigs. Estimated fair value for these drilling rigs was determined using significant unobservable inputs (Level 3) based on a market approach.

During the year ended December 31, 2014, we purchased 45 leased drilling rigs for approximately $158.4 million and paid lease termination costs of approximately $9.7 million. During the year ended December 31, 2013, we purchased 23 leased drilling rigs for approximately $140.2 million and paid lease termination costs of approximately $22.4 million.

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We recognized $8.7 million of impairment charges during the year ended December 31, 2015 for drilling-related services equipment that we deemed to be impaired based on the expected future cash flows of this equipment. The estimated fair value for the drilling-related services equipment was determined using significant unobservable inputs (Level 3) based on a market approach.

We identified certain other property and equipment during the years ended December 31, 2015, 2014 and 2013 that we deemed to be impaired based on our assessment of the market value and expected future cash flows of the long-lived asset. We recorded impairment charges of $2.0 million, $1.5 million and $3.4 million during the years ended December 31, 2015, 2014 and 2013, respectively, related to these assets. Estimated fair value for this property and equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management’s judgment. A prolonged period of low oil and natural gas prices or continued reductions in capital expenditures by CHK or our other customers would likely have an adverse impact on our utilization and the prices that we receive for our services. This could result in the recognition of future material impairment charges on the same, or additional, property and equipment if future cash flow estimates, based upon information then available to management, indicate that their carrying values are not recoverable.

6. Debt

As of December 31, 2015 and 2014, our long-term debt consisted of the following:

	December 31,
	2015			2014
	(in thousands)
6.625% Senior Notes due 2019	$	650,000		$	650,000
6.50% Senior Notes due 2022		450,000			500,000
Term Loans		493,250			398,000
Credit Facility		—			50,500
Total principal amount of debt		1,593,250			1,598,500
Less: Current portion of long-term debt		(5,000	)		(4,000	)
Less: Unamortized deferred financing costs(a)		(23,658	)		(22,259	)
Total long-term debt(a)	$	1,564,592		$	1,572,241

(a) See Note 2 for applicable disclosures relating to a change in an accounting principle

2019 Senior Notes

In October 2011, we and SSF co-issued $650.0 million in aggregate principal amount of 6.625% Senior Notes due 2019 (the “2019 Notes”). The 2019 Notes will mature on November 15, 2019 and interest is payable semi-annually in arrears on May 15 and November 15 of each year. The 2019 Notes are guaranteed by all of our existing subsidiaries other than certain immaterial subsidiaries and SSF, which is a co-issuer of the 2019 Notes.

We may redeem all or part of the 2019 Notes at the following prices (as a percentage of principal), plus accrued and unpaid interest, if redeemed during the 12-month period beginning on November 15 of the years indicated below:

Year	Redemption Price
2016		101.656	%
2017 and thereafter		100.000	%

The 2019 Notes are subject to covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to: (1) sell assets; (2) declare dividends or make distributions on our equity interests or purchase or redeem our equity interests; (3) make investments or other specified restricted payments; (4) incur or guarantee additional indebtedness and issue disqualified or preferred equity; (5) create or incur certain liens; (6) enter into agreements that restrict the ability of our restricted subsidiaries to pay dividends, make intercompany loans or transfer assets to us; (7) effect a merger, consolidation or sale of all or substantially all of our assets; (8) enter into

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transactions with affiliates; and (9) designate subsidiaries as unrestricted subsidiaries. The 2019 Notes also have cross default provisions that apply to other indebtedness SSE or any of its guarantor subsidiaries may have from time to time with an outstanding principal amount of $50.0 million or more. If the 2019 Notes achieve an investment grade rating from either Moody’s Investors Service, Inc. (“Moody’s”) or Standard & Poor’s Rating Services (“S&P”), our obligation to comply with certain of these covenants will be suspended, and if the 2019 Notes achieve an investment grade rating from both Moody’s and S&P, all such covenants will terminate.

2022 Senior Notes

In June, 2014, we issued $500.0 million in aggregate principal amount of 6.50% Senior Notes due 2022 (the “2022 Notes”). The 2022 Notes will mature on July 15, 2022 and interest is payable semi-annually in arrears on July 15 and January 15 of each year. Upon the full repayment of the 2019 Notes, the 2022 Notes will be fully and unconditionally guaranteed on a senior unsecured basis by each of our domestic subsidiaries that has outstanding indebtedness or guarantees in an aggregate principal amount greater than $15.0 million. Prior to the full repayment or refinancing of the 2019 Notes, each of our domestic subsidiaries, if any, that has outstanding indebtedness or guarantees in an aggregate principal amount greater than $15.0 million, other than (i) guarantors of the 2019 Notes, (ii) SSO or (iii) subsidiaries of SSO are required to fully and unconditionally guarantee the 2022 notes on a senior unsecured basis. We do not have any such subsidiaries currently; therefore, the 2022 Notes are not guaranteed.

We may redeem up to 35% of the 2022 Notes with proceeds of certain equity offerings at a redemption price of 106.5% of the principal amount plus accrued and unpaid interest prior to July 15, 2017, subject to certain conditions. Prior to July 15, 2017, we may redeem some or all of the 2022 Notes at a price equal to 100% of the principal amount plus a make-whole premium determined pursuant to a formula set forth in the indenture governing the 2022 Notes, plus accrued and unpaid interest. On or after July 15, 2017, we may redeem all or part of the 2022 Notes at the following prices (as a percentage of principal), plus accrued and unpaid interest, if redeemed during the 12-month period beginning on July 15 of the years indicated below:

Year	Redemption Price
2017		104.875	%
2018		103.250	%
2019		101.625	%
2020 and thereafter		100.000	%

The 2022 Notes are subject to covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to: (1) sell assets; (2) declare dividends or make distributions on our equity interests or purchase or redeem our equity interests; (3) make investments or other specified restricted payments; (4) incur or guarantee additional indebtedness and issue disqualified or preferred equity; (5) create or incur certain liens; (6) enter into agreements that restrict the ability of our restricted subsidiaries to pay dividends, make intercompany loans or transfer assets to us; (7) effect a merger, consolidation or sale of all or substantially all of our assets; (8) enter into transactions with affiliates; and (9) designate subsidiaries as unrestricted subsidiaries. The 2022 Notes also have cross default provisions that apply to other indebtedness of SSE and certain of our subsidiaries. If the 2022 Notes achieve an investment grade rating from either Moody’s or S&P, our obligation to comply with certain of these covenants will be suspended, and if the 2022 Notes achieve an investment grade rating from both Moody’s and S&P, all such covenants will terminate.

During 2015, we repurchased and cancelled $50.0 million in aggregate principal amount of the 2022 Notes in multiple transactions for $31.3 million. We recognized gains on extinguishment of debt of $18.1 million, which reflected the accelerated amortization of deferred financing costs of $0.6 million.

Term Loans

In June 2014, we entered into a $400.0 million seven-year term loan credit agreement. Borrowings under the Term Loan bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month London Interbank Offered Rate (“LIBOR”) rate adjusted daily plus 1.00% or (ii) LIBOR, with a floor of 0.75%, plus, in each case, an applicable margin. The applicable margin for borrowings is 2.00% for Base Rate loans and 3.00% for LIBOR loans, depending on whether the Base Rate or LIBOR is used, provided that if and for so long as the leverage ratio is less than a

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certain level and the term loans have certain ratings from each of S&P and Moody’s, such margins will be reduced by 0.25%. As of December 31, 2015, the applicable rate for borrowings under the Term Loan was 3.75%. The Term Loan is repayable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Term Loan and will mature in full on June 25, 2021.

Obligations under the Term Loan are guaranteed jointly and severally by all of our present and future direct and indirect wholly-owned material domestic subsidiaries, other than certain excluded subsidiaries. Amounts borrowed under the Term Loan are secured by liens on all of our equity interests in our current and future subsidiaries, and all of our subsidiaries’ present and future real property, equipment (including drilling rigs and frac spread equipment), fixtures and other fixed assets.

We may prepay all or a portion of our Term Loan at any time. Borrowings under our Term Loan may be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain condemnation events, and with excess cash flow in any calendar year in which our leverage ratio exceeds 3.25 to 1.00. The Term Loan contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates.

In May 2015, we entered into an incremental term supplement to the Term Loan and borrowed an additional $100.0 million in aggregate principal amount (the “Incremental Term Loan”), receiving net proceeds of $94.5 million. Borrowings under the Incremental Term Loan bear interest at our option at either (i) LIBOR, with a floor of 1.00% or (ii) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month LIBOR rate adjusted daily plus 1.00%, plus, in each case, an applicable margin. The applicable margin for borrowings is 9.00% for LIBOR loans and 8.00% for Base Rate loans, depending on whether the Base Rate or LIBOR is used. As of December 31, 2015, the applicable rate for borrowings under the Incremental Term Loan was 10.00%. The Incremental Term Loan is payable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Incremental Term Loan and will mature in full on June 25, 2021.

Credit Facilities

In November 2011, we entered into a five-year senior secured revolving bank credit facility with total commitments of $500.0 million. In connection with the spin-off, we repaid in full borrowings outstanding under this credit facility and terminated this credit facility.

In June 2014, we, through SSO, entered into a five-year senior secured revolving bank credit facility with total commitments of $275.0 million. The maximum amount that we may borrow under the credit facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable, subject to reserves and other adjustments. As of December 31, 2015, the credit facility had availability of $125.5 million, net of letters of credit of $10.2 million. All obligations under the credit facility are fully and unconditionally guaranteed jointly and severally by SSE, and all of our present and future direct and indirect material domestic subsidiaries. Borrowings under the credit facility are secured by liens on cash and accounts receivable of the borrowers and the guarantors, and bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the rate of interest publicly announced by Wells Fargo Bank, National Association, as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR Rate plus 1.00%, each of which is subject to an applicable margin, or (ii) LIBOR, plus, in each case, an applicable margin. The applicable margin ranges from 0.50% to 1.00% per annum for Base Rate loans and 1.50% to 2.00% per annum for LIBOR loans. The unused portion of the credit facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to average unused amounts. Interest on LIBOR loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on Base Rate loans is payable monthly in arrears.

The credit facility contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. The credit facility requires maintenance of a fixed charge coverage ratio based on the ratio of consolidated EBITDA (minus unfinanced capital expenditures) to fixed charges, in each case as defined in the credit facility agreement, at any time availability is

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below a certain threshold and for a certain period of time thereafter. If we fail to perform our obligations under the agreement, the credit facility could be terminated and any outstanding borrowings under the credit facility may be declared immediately due and payable. The credit facility also contains cross default provisions that apply to our other indebtedness.

7. Other Current Liabilities

Other current liabilities as of December 31, 2015 and 2014 are detailed below:

	December 31,
	2015		2014
	(in thousands)
Other Current Liabilities:
Accrued expenses	$	29,760	$	88,538
Payroll related		21,561		47,711
Self-insurance reserves		9,718		14,521
Interest		22,950		25,035
Income, property, sales, use and other taxes		8,336		13,937
Property and equipment		5,993		26,010
Total Other Current Liabilities	$	98,318	$	215,752

8. Commitments and Contingencies

Operating Leases

As of December 31, 2015, we were party to five lease agreements with various third parties to utilize 725 lease rail cars for initial terms of five to seven years. Additional rental payments are required for the use of rail cars in excess of the allowable mileage stated in the respective agreement.

As of December 31, 2015, we were also party to various lease agreements for other property and equipment with varying terms.

Aggregate undiscounted minimum future lease payments under our operating leases at December 31, 2015 are presented below:

	Rail Cars		Other		Total
	(in thousands)
2016	$	5,298	$	1,026	$	6,324
2017		2,724		553		3,277
2018		1,430		182		1,612
2019		715		3		718
Total	$	10,167	$	1,764	$	11,931

Rent expense for drilling rigs, real property, rail cars and other property and equipment for the years ended December 31, 2015, 2014 and 2013 was $8.0 million, $35.5 million and $103.9 million, respectively, and was included in operating costs in our consolidated statements of operations.

Other Commitments

Much of the equipment we purchase requires long production lead times. As a result, we typically have outstanding orders and commitments for such equipment. As of December 31, 2015, we had $69.0 million of purchase commitments related to future inventory and capital expenditures that we expect to incur in 2016.

Litigation

We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, property damage claims and contract actions. We record an associated liability when a loss is probable and can be reasonably estimated. Although the outcome of litigation cannot be predicted with certainty, management is of the opinion that no pending or threatened lawsuit or dispute incidental to our

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business operations is likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued and actual results could differ materially from management’s estimates.

Self-Insured Reserves

We are self-insured up to certain retention limits with respect to workers’ compensation and general liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history. Included in operating costs is workers’ compensation expense of $4.0 million, $8.3 million and $13.6 million for the years ended December 31, 2015, 2014 and 2013, respectively.

9. Share-Based Compensation

Prior to the spin-off, our employees participated in the CHK share-based compensation program and received restricted stock, and in the case of senior management, stock options. Effective July 1, 2014, our employees participate in the SSE 2014 Incentive Plan (the “2014 Plan”).

The 2014 Plan authorizes the Compensation Committee of our Board of Directors to grant incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, cash awards and performance awards. No more than 8.4 million shares of SSE common stock may be issued under the 2014 Plan.

In connection with the spin-off, unvested awards granted under the CHK share-based compensation program were cancelled and substituted as follows:

Each outstanding award of options to purchase shares of CHK common stock was replaced with a substitute award of options to purchase shares of SSE common stock. The substitute awards of options are intended to preserve the intrinsic value of the original option and the ratio of the exercise price to the fair market value of the stock subject to the option.

The CHK restricted stock awards and restricted stock unit awards were replaced with substitute awards in SSE common stock, each of which generally preserved the value of the original award.

Awards granted in connection with the substitution of awards originally issued under the CHK share-based compensation program are a part of the 2014 Plan and reduce the maximum number of shares of common stock available for delivery under the 2014 Plan.

Equity-Classified Awards

Restricted Stock. The fair value of restricted stock awards was determined based on the fair market value of SSE common shares on the date of the grant. This value is amortized over the vesting period.

A summary of the status and changes of the unvested shares of restricted stock under the 2014 Plan is presented below.

	Number of Unvested Restricted Shares			Weighted Average Grant Date Fair Value
	(in thousands)
Unvested shares as of December 31, 2014		3,933		$	24.02
Granted		4,003		$	4.58
Vested		(1,487	)	$	21.82
Forfeited		(553	)	$	18.07
Unvested shares as of December 31, 2015		5,896		$	11.93

As of December 31, 2015, there was $38.1 million of total unrecognized compensation cost related to the unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately twenty-five months.

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Stock Options. CHK granted stock options to our chief executive officer under CHK’s Long-Term Incentive Plan for incentive and retention purposes, which were replaced with a substitute option to purchase shares of SSE common stock in connection with the spin-off. The substitute incentive-based stock options vest ratably over a three-year period and the substitute retention-based stock options will vest one-third on each of the third, fourth and fifth anniversaries of the grant date of the original CHK award. Outstanding options expire ten years from the date of grant of the original CHK award. We have not issued any new stock options, other than the replacement awards, since the spin-off.

The following table provides information related to stock option activity for the year ended December 31, 2015:

	Number of Shares Underlying Options		Weighted Average Exercise Price Per Share		Weighted Average Contract Life in Years		Aggregate Intrinsic Value(a)
	(in thousands)						(in thousands)
Outstanding at January 1, 2015		348	$	16.19		9.24	$	—
Granted		—	$	—		—	$	—
Exercised		—	$	—		—	$	—
Outstanding at December 31, 2015		348	$	16.19		7.23	$	—
Exercisable at December 31, 2015		89	$	16.46		7.28	$	—

(a) The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

As of December 31, 2015, there was $0.4 million of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of approximately eleven months.

Through the date of the spin-off we were charged by CHK for share-based compensation expense related to our direct employees. Pursuant to the employee matters agreement with CHK, our employees received a new award under the 2014 Plan in substitution for each unvested CHK award then held (which were cancelled). We recorded a non-recurring credit of $10.5 million to operating costs and general and administrative expenses during the second quarter of 2014 as a result of the cancellation of the unvested CHK awards.

Included in operating costs and general administrative expenses is stock-based compensation expense of $38.5 million, $29.8 million and $13.2 million for the years ended December 31, 2015, 2014 and 2013. Prior to the spin-off, we reimbursed CHK for these costs in accordance with the administrative services agreement. To the extent the compensation cost relates to employees indirectly involved in oilfield services operations, such amounts were charged to us through an overhead allocation and are reflected as general and administrative expenses.

Other

Performance Share Units. CHK granted performance share units (“PSUs”) to our chief executive officer under CHK’s Long Term Incentive Plan that includes both an internal performance measure and external market condition as it relates to CHK. Following the spin-off, compensation expense is recognized through the changes in fair value of the PSUs over the vesting period with a corresponding adjustment to equity and any related cash obligations are the responsibility of CHK. We recognized (credits) expenses of ($1.6) million, ($0.4) million and $1.4 million related to these PSUs for the years ended December 31, 2015, 2014 and 2013, respectively.

10. Income Taxes

The components of income tax (benefit) expense for each of the periods presented below are as follows:

	Years Ended December 31,
	2015			2014			2013
	(in thousands)
Current	$	58		$	674		$	1,422
Deferred		(92,686	)		(2,863	)		(9,255	)
Total	$	(92,628	)	$	(2,189	)	$	(7,833	)

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The effective income benefit differed from the computed “expected” federal income tax expense on earnings before income taxes for the following reasons:

	Years Ended December 31,
	2015			2014			2013
	(in thousands)
Income tax benefit at the federal statutory rate (35%)	$	(109,906	)	$	(3,559	)	$	(9,649	)
State income taxes (net of federal income tax benefit)		(4,118	)		538			677
Stock-based compensation shortfall		8,967			—			—
Goodwill impairment		9,602			—			—
Other permanent differences		2,518			601			1,369
Effect of change in state taxes		(23	)		—			—
Other		332			231			(230	)
Total	$	(92,628	)	$	(2,189	)	$	(7,833	)

Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes. As of the spin-off date, we made an adjustment to our deferred tax liabilities of approximately $178.8 million to reflect the treatment of federal income tax NOL carryforwards under the tax sharing agreement. In connection with the spin-off, we received a one-time step-up in tax basis of our assets due to the tax gain recognized by CHK related to the spin-off in the tax-effected amount of approximately $202.6 million. The tax-effected temporary differences and tax loss carryforwards which comprise deferred taxes are as follows:

	Years Ended December 31,
	2015			2014
	(in thousands)
Deferred tax liabilities:
Property and equipment	$	(242,879	)	$	(230,480	)
Intangible assets		(1,551	)		(2,032	)
Prepaid expenses		(3,580	)		(4,262	)
Other		(1,121	)		(779	)
Deferred tax liabilities		(249,131	)		(237,553	)
Deferred tax assets:
Net operating loss carryforwards		172,822			62,826
Deferred stock compensation		10,035			9,682
Accrued liabilities		3,231			9,840
Other		3,919			3,395
Deferred tax assets		190,007			85,743
Net deferred tax liability	$	(59,124	)	$	(151,810	)
Reflected in accompanying balance sheets as:
Current deferred income tax asset	$	1,499		$	7,463
Non-current deferred income tax liability		(60,623	)		(159,273	)
Total	$	(59,124	)	$	(151,810	)

At December 31, 2015, SSE had NOL carryforwards of approximately $469.5 million. The NOL carryforwards expire from 2034 through 2035. The value of these carryforwards depends on the ability of SSE to generate taxable income. We considered both positive and negative evidence in our determination of the need for valuation allowances for the deferred tax assets associated with our NOLs and other deferred tax assets. We determined it is more likely than not that our NOLs and other deferred tax assets will be utilized, and accordingly no valuation allowance has been recorded. However, some or all of these NOLs could expire unused if we are unable to generate sufficient taxable income in the future to utilize them or we enter into transactions that limit our right to use them. We have retained restructuring advisors and are actively exploring and evaluating various strategic alternatives to reduce the level of our long-term debt and lower our future cash interest obligations, including debt repurchases, exchanges of existing debt securities for new debt securities and exchanges or conversions of existing debt securities into new equity securities, among other options. The outcome of these efforts could potentially reduce our NOLs or limit the use of them in the future. If it became more likely than not NOLs would expire unused, we would have to create a valuation allowance to reflect this fact, which could materially increase our income tax expense, and therefore, adversely affect our results of operations in the period in which it is recorded. We will continue to assess the need for a valuation allowance in the future.

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11. Equity Method Investment

We own 49% of the membership interest in Maalt Specialized Bulk, L.L.C. (“Maalt”). Maalt provides bulk transportation, transloading and sand hauling services, and its assets consist primarily of trucks and trailers. We recorded equity method adjustments to our investment of $0.9 million, ($1.6) million and $0.2 million for our share of Maalt’s income (loss) for the years ended December 31, 2015, 2014 and 2013, respectively. We also made additional investments of $0.1 million, $0.7 million and $0.4 million during the years ended December 31, 2015, 2014 and 2013, respectively.

We review our equity method investments for impairment whenever certain impairment indicators exist, including the absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. A loss in value of an investment which is other than a temporary decline should be recognized. Due to further deterioration of industry conditions in the fourth quarter of 2015, we determined that there were indications of impairment present. We estimated that the fair value of our investment in Maalt was zero as of December 31, 2015, resulting in a non-cash impairment charge of $8.8 million for the year ended December 31, 2015. We also recognized a non-cash impairment charge of $4.5 million for the year ended December 31, 2014. The impairment charges are included in loss and impairment from equity investees in our condensed consolidated statements of operations. Estimated fair value for our investment in Maalt was determined using significant unobservable inputs (Level 3) based on an income approach.

12. Fair Value Measurements

The fair value measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Authoritative guidance on fair value measurements and disclosures clarifies that a fair value measurement for a liability should reflect the entity’s non-performance risk. In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2- Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3- Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources.

Fair Value on Recurring Basis

The carrying values of cash, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.

Fair Value on Non-Recurring Basis

Fair value measurements were applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which consist primarily of impairments on long-lived assets, goodwill and an equity method investment based on Level 3 inputs. See Notes 2, 5 and 11 for additional discussion.

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Fair Value of Other Financial Instruments

The fair value of our note receivable and debt, as shown in the table below, are the estimated amounts a market participant would have to pay to purchase the note receivable or our debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on quoted market prices or average valuations of similar debt instruments at the balance sheet date for those debt instruments for which quoted market prices are not available. Estimated fair values are determined by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

	December 31, 2015				December 31, 2014
	Carrying Amount (a)		Fair Value (Level 2)		Carrying Amount (a)		Fair Value (Level 2)
	(in thousands)
Financial assets:
Note Receivable	$	27,000	$	17,842	$	—	$	—
Financial liabilities:
6.625% Senior Notes due 2019	$	642,713	$	221,975	$	640,832	$	519,188
6.50% Senior Notes due 2022	$	444,701	$	71,865	$	493,260	$	296,250
Term Loans	$	482,178	$	371,080	$	391,649	$	379,095
Credit Facility	$	—	$	—	$	50,500	$	47,407
Less: Current portion of long-term debt	$	5,000			$	4,000
Total long-term debt(a)	$	1,564,592			$	1,572,241

(a) See Note 2 for applicable disclosures relating to a change in an accounting principle

13. Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and trade receivables. Accounts receivable from CHK and its affiliates were $109.6 million and $326.7 million as of December 31, 2015 and December 31, 2014, or 65% and 77%, respectively, of our total accounts receivable. Revenues from CHK and its affiliates were $789.5 million, $1.676 billion and $1.960 billion for the years ended December 31, 2015, 2014 and 2013, or 70%, 81% and 90%, respectively, of our total revenues. We believe that the loss of this customer would have a material adverse effect on our operating results as there can be no assurance that replacement customers would be identified and accessed in a timely fashion.

14. Transactions with CHK

Prior to the completion of our spin-off on June 30, 2014, we were a wholly owned subsidiary of CHK, and transactions between us and CHK (including its subsidiaries) were considered to be transactions with affiliates. Subsequent to June 30, 2014, CHK and its subsidiaries are not considered affiliates of us or any of our subsidiaries. We have disclosed below all agreements entered into between us and CHK prior to the completion of our spin-off.

On June 25, 2014, we entered into a master separation agreement and several other agreements with CHK as part of the spin-off. The master separation agreement entered into between CHK and us governs the separation of our businesses from CHK, the distribution of our shares to CHK shareholders and other matters related to CHK’s relationship with us, including cross-indemnities between us and CHK. In general, CHK agreed to indemnify us for any liabilities relating to CHK’s business and we agreed to indemnify CHK for any liabilities relating to our business.

On June 25, 2014, we entered into a tax sharing agreement with CHK, which governs the respective rights, responsibilities and obligations of CHK and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and certain other matters regarding taxes.

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On June 25, 2014, we entered into an employee matters agreement with CHK providing that each company has responsibility for our own employees and compensation plans. The agreement also contains provisions concerning benefit protection for both SSE and CHK employees, treatment of holders of CHK stock options, restricted stock, restricted stock units and performance share units, and cooperation between us and CHK in the sharing of employee information and maintenance of confidentiality.

On June 25, 2014, we entered into a transition services agreement with CHK under which CHK provided or made available to us various administrative services and assets for specified periods beginning on the distribution date. In consideration for such services, we paid CHK certain fees, a portion of which was a flat fee, generally in amounts intended to allow CHK to recover all of its direct and indirect costs incurred in providing those services. These charges from CHK were $8.3 million and $18.0 million for the years ended December 31, 2015 and 2014, respectively. This agreement was terminated during the second quarter of 2015.

We are party to a master services agreement with CHK pursuant to which we provide drilling and other services and supply materials and equipment to CHK. Drilling services are typically provided pursuant to rig-specific daywork drilling contracts similar to those we use for other customers. The specific terms of each request for other services are typically set forth in a field ticket, purchase order or work order. The master services agreement contains general terms and provisions, including minimum insurance coverage amounts that we are required to maintain and confidentiality obligations with respect to CHK’s business, and allocates certain operational risks between CHK and us through indemnity provisions. The master services agreement will remain in effect until we or CHK provides 30 days written notice of termination, although such agreement may not be terminated during the term of the services agreement described below.

Prior to the spin-off, we were party to a services agreement with CHK under which CHK guaranteed the utilization of a portion of our drilling rig and hydraulic fracturing fleets during the term of the agreement. In connection with the spin-off, we entered into new services agreements with CHK which supplements the master services agreement. Under the new services agreement, CHK is required to utilize the lesser of (i) seven, five and three of our hydraulic fracturing crews in years one, two and three of the agreement, respectively, or (ii) 50% of the total number of all hydraulic fracturing crews working for CHK in all its operating regions during the respective year. CHK is required to utilize our hydraulic fracturing services for a minimum number of stages as set forth in the agreement. CHK is entitled to terminate the agreement in certain situations, including in the event we fail to materially comply with the overall quality of service provided by similar service providers. Additionally, CHK’s requirement to utilize our services may be suspended under certain circumstances, such as if we are unable to timely accept and supply services ordered by CHK or as a result of a force majeure event.

In connection with the spin-off, we entered into rig-specific daywork drilling contracts with CHK for the provision of drilling services. The drilling contracts had a commencement date of July 1, 2014 and terms ranging from three months to three years. CHK has the right to terminate the drilling contracts under certain circumstances.

Prior to the spin-off, we were party to a facilities lease agreement with CHK pursuant to which we leased a number of the storage yards and physical facilities out of which we conduct our operations. We incurred $8.2 million and $16.5 million and of lease expense for the years ended December 31, 2014 and 2013, respectively, under this facilities lease agreement. In connection with the spin-off, we acquired the property subject to the facilities lease agreement, and the facilities lease agreement was terminated.

Prior to the spin-off, CHK provided us with general and administrative services and the services of its employees pursuant to an administrative services agreement. These services included legal, accounting, treasury, environmental, safety, information technology and other corporate services. In return for the general and administrative services provided by CHK, we reimbursed CHK on a monthly basis for the overhead expenses incurred by CHK on our behalf in accordance with its allocation policy, which included costs and expenses incurred in connection with the provision of any of the services under the agreement, including the wages and benefits of CHK employees who perform services on our behalf. The administrative expense allocation was determined by multiplying revenues by a percentage determined by CHK based on the historical average of costs incurred on our behalf. All of the administrative cost allocations were based on assumptions that management believes are reasonable; however, these allocations are not necessarily indicative of the costs and expenses that would have resulted if we had been operating as a stand-alone entity. These charges from CHK were $26.8 million and $55.5 million for the years ended December 31, 2014 and 2013, respectively. In connection with the spin-off, we terminated the administrative services agreement and entered into the transition services agreement described above.

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15. Segment Information

As of December 31, 2015, our revenues, income (loss) before income taxes and identifiable assets are primarily attributable to three reportable segments. Each of these segments represents a distinct type of business. These segments have separate management teams which report to our chief operating decision maker. The results of operations in these segments are regularly reviewed by our chief operating decision maker for purposes of determining resource allocation and assessing performance. Management evaluates the performance of our segments based upon earnings before interest, taxes, depreciation and amortization, as further adjusted to add back nonrecurring items. The following is a description of the segments and other operations:

Drilling. Our drilling segment provides land drilling services for oil and natural gas E&P activities. As of December 31, 2015, we owned a fleet of 91 land drilling rigs.

Hydraulic Fracturing. Our hydraulic fracturing segment provides hydraulic fracturing and other well stimulation services. Currently, we own 11 hydraulic fracturing fleets with an aggregate of 440,000 horsepower.

Oilfield Rentals. Our oilfield rentals segment provides premium rental tools for land-based oil and natural gas drilling, completion and workover activities.

Former Oilfield Trucking. Our oilfield trucking segment provided drilling rig relocation and logistics services as well as fluid handling services. During the second quarter of 2015, we sold Hodges and our water hauling assets. As part of the spin-off, we sold our crude hauling assets to a third party. As of June 30, 2015, there were no remaining assets or operations in the oilfield trucking segment. Our former oilfield trucking segment’s historical results for periods prior to the sale continue to be included in our historical financial results as a component of continuing operations as reflected in the tables below.

Other Operations. Prior to the spin-off, our other operations consisted primarily of our compression unit manufacturing business and corporate functions, including our 2019 Notes, 2022 Notes, Term Loans and credit facilities. As part of the spin-off, we distributed our compression unit manufacturing business to CHK.

	Drilling			Hydraulic Fracturing			Oilfield Rentals			Former Oilfield Trucking			Other Operations			Intercompany Eliminations			Consolidated Total
	(in thousands)
For The Year Ended December 31, 2015:
Revenues	$	437,749		$	575,495		$	77,292		$	45,512		$	8,461		$	(13,265	)	$	1,131,244
Intersegment revenues		(1,345	)		—			(705	)		(2,773	)		(8,442	)		13,265			—
Total revenues	$	436,404		$	575,495		$	76,587		$	42,739		$	19		$	—		$	1,131,244
Depreciation and amortization		163,380			70,605			41,049			8,787			11,600			—			295,421
Losses (gains) on sales of property and equipment, net		10,566			230			(1,780	)		5,728			(88	)		—			14,656
Impairment of goodwill		27,434			—			—			—			—			—			27,434
Impairments and other		14,329			—			—			2,737			1,566			—			18,632
Gains on early extinguishment of debt		—			—			—			—			18,061			—			18,061
Interest expense		—			—			—			—			(99,267	)		—			(99,267	)
Loss and impairment from equity investees		—			(7,928	)		—			—			—			—			(7,928	)
Other income		813			1,201			68			16			954			—			3,052
Loss Before Income Taxes	$	(43,195	)	$	(22,680	)	$	(40,216	)	$	(38,420	)	$	(169,508	)	$	—		$	(314,019	)
Total Assets	$	1,144,144		$	291,584		$	92,588		$	—		$	374,302		$	—		$	1,902,618
Capital Expenditures	$	153,279		$	32,743		$	6,706		$	—		$	12,978		$	—		$	205,706
For The Year Ended December 31, 2014:
Revenues	$	774,888		$	885,907		$	154,416		$	195,618		$	109,942		$	(39,879	)	$	2,080,892
Intersegment revenues		(358	)		—			(1,296	)		(5,139	)		(33,086	)		39,879			—
Total revenues	$	774,530		$	885,907		$	153,120		$	190,479		$	76,856		$	—		$	2,080,892
Depreciation and amortization		140,884			72,105			52,680			21,817			5,426			—			292,912
Losses (gains) on sales of property and equipment, net		17,931			(17	)		(2,355	)		(21,853	)		22			—			(6,272	)
Impairments and other(a)		29,602			207			955			—			—			—			30,764
Interest expense		—			—			—			—			(79,734	)		—			(79,734	)
Loss and impairment from equity investees		—			(6,094	)		—			—			—			—			(6,094	)
Other income (expense)		364			60			179			226			(165	)		—			664
Income (Loss) Before Income Taxes	$	79,999		$	63,548		$	(2,459	)	$	6,359		$	(157,615	)	$	—		$	(10,168	)
Total Assets	$	1,322,160		$	449,966		$	155,683		$	138,909		$	224,754		$	(1,179	)	$	2,290,293
Capital Expenditures	$	373,353		$	37,211		$	22,337		$	3,599		$	21,118		$	—		$	457,618
For The Year Ended December 31, 2013:
Revenues	$	745,800		$	897,809		$	161,676		$	250,495		$	165,500		$	(33,075	)	$	2,188,205
Intersegment revenues		(4,988	)		—			(1,435	)		(6,115	)		(20,537	)		33,075			—
Total revenues	$	740,812		$	897,809		$	160,241		$	244,380		$	144,963		$	—		$	2,188,205

25

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Drilling			Hydraulic Fracturing		Oilfield Rentals			Former Oilfield Trucking			Other Operations			Intercompany Eliminations			Consolidated Total
	(in thousands)
Depreciation and amortization		133,785			69,507		59,559			25,870			870			—			289,591
Losses (gains) on sales of property and equipment, net		663			—		(1,146	)		(2,249	)		103			—			(2,629	)
Impairments and other(a)		71,548			—		1			—			3,213			—			74,762
Interest expense		—			—		—			—			(56,786	)		—			(56,786	)
Loss and impairment from equity investees		—			159		—			(1,117	)		—			—			(958	)
Other (expense) income		(231	)		254		1,129			184			422			—			1,758
(Loss) income Before Income Taxes	$	(26,360	)	$	67,224	$	(2,544	)	$	5,555		$	(71,443	)	$	—		$	(27,568	)
Total Assets	$	1,134,026		$	454,559	$	184,285		$	204,386		$	44,384		$	(5,795	)	$	2,015,845
Capital Expenditures	$	284,354		$	41,286	$	16,925		$	3,712		$	3,529		$	—		$	349,806

(a) Includes lease termination costs of $9.7 million and $22.4 million for the years ended December 31, 2014 and 2013, respectively.

16. Condensed Consolidating Financial Information

In October 2011, we issued and sold the 2019 Senior Notes with an aggregate principal amount of $650.0 million (see Note 6). In connection with the spin-off, COO transferred all of its assets, operations, and liabilities, including the 2019 Notes, to SSO, which has been reflected retrospectively in the consolidating financial information. Pursuant to the Indenture governing the 2019 Notes, such notes are fully and unconditionally and jointly and severally guaranteed by SSO’s parent, SSE, and all of SSO’s material subsidiaries, other than SSF, which is a co-issuer of the 2019 Notes. Each of the subsidiary guarantors is 100% owned by SSO and there are no material subsidiaries of SSO other than the subsidiary guarantors. SSF and Western Wisconsin Sand Company, LLC are minor non-guarantor subsidiaries whose condensed consolidating financial information is included with the subsidiary guarantors. SSE and SSO have independent assets and operations. There are no significant restrictions on the ability of SSO or any subsidiary guarantor to obtain funds from its subsidiaries by dividend or loan.

Set forth below are condensed consolidating financial statements for SSE (“Parent”) and SSO (“Subsidiary Issuer”) on a stand-alone, unconsolidated basis, and its combined guarantor subsidiaries as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

26

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2015

(in thousands)

	Parent		Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Assets:
Current Assets:
Cash	$	46	$	130,602		$	—		$	—		$	130,648
Accounts receivable		—		138			164,583			—			164,721
Inventory		—		—			18,553			—			18,553
Deferred income tax asset		—		376			1,123			—			1,499
Prepaid expenses and other		20		37,523			9,324			(29,726	)		17,141
Total Current Assets		66		168,639			193,583			(29,726	)		332,562
Property and Equipment:
Property and equipment, at cost		—		31,265			2,615,181			—			2,646,446
Less: accumulated depreciation		—		(4,958	)		(1,111,068	)		—			(1,116,026	)
Total Property and Equipment, Net		—		26,307			1,504,113			—			1,530,420
Other Assets:
Deferred financing costs, net		—		1,238			—			—			1,238
Other long-term assets		2,575		114,087			10,901			(89,165	)		38,398
Investments in subsidiaries and intercompany advances		575,089		1,415,997			—			(1,991,086	)		—
Total Other Assets		577,664		1,531,322			10,901			(2,080,251	)		39,636
Total Assets	$	577,730	$	1,726,268		$	1,708,597		$	(2,109,977	)	$	1,902,618
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	58	$	517		$	53,192		$	—		$	53,767
Current portion of long-term debt		—		5,000			—			—			5,000
Other current liabilities		14,131		25,276			88,637			(29,726	)		98,318
Total Current Liabilities		14,189		30,793			141,829			(29,726	)		157,085
Long-Term Liabilities:
Deferred income tax liabilities		—		—			149,788			(89,165	)		60,623
Long-term debt, less current maturities		444,701		1,119,891			—			—			1,564,592
Other long-term liabilities		—		495			983			—			1,478
Total Long-Term Liabilities		444,701		1,120,386			150,771			(89,165	)		1,626,693
Total Equity		118,840		575,089			1,415,997			(1,991,086	)		118,840
Total Liabilities and Equity	$	577,730	$	1,726,268		$	1,708,597		$	(2,109,977	)	$	1,902,618

27

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2014

(in thousands)

	Parent		Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Assets:
Current Assets:
Cash	$	77	$	733		$	81		$	—		$	891
Accounts receivable		—		4			421,551			—			421,555
Inventory		—		—			25,073			—			25,073
Deferred income tax asset		—		2,091			6,029			(657	)		7,463
Prepaid expenses and other		—		5,309			13,763			—			19,072
Total Current Assets		77		8,137			466,497			(657	)		474,054
Property and Equipment:
Property and equipment, at cost		—		22,397			2,727,489			—			2,749,886
Less: accumulated depreciation		—		(643	)		(982,190	)		—			(982,833	)
Total Property and Equipment, Net		—		21,754			1,745,299			—			1,767,053
Other Assets:
Equity method investment		—		—			7,816			—			7,816
Goodwill		—		—			27,434			—			27,434
Intangible assets, net		—		—			5,420			—			5,420
Deferred financing costs, net		—		1,592			—			—			1,592
Other long-term assets		—		38,950			5,731			(37,757	)		6,924
Investments in subsidiaries and intercompany advances		803,383		1,853,480			—			(2,656,863	)		—
Total Other Assets		803,383		1,894,022			46,401			(2,694,620	)		49,186
Total Assets	$	803,460	$	1,923,913		$	2,258,197		$	(2,695,277	)	$	2,290,293
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	—	$	6,579		$	39,078		$	—		$	45,657
Current portion of long-term debt		—		4,000			—			—			4,000
Other current liabilities		18,032		29,776			168,601			(657	)		215,752
Total Current Liabilities		18,032		40,355			207,679			(657	)		265,409
Long-Term Liabilities:
Deferred income tax liabilities		1,145		—			195,885			(37,757	)		159,273
Long-term debt		493,260		1,078,981			—			—			1,572,241
Other long-term liabilities		—		1,194			1,153			—			2,347
Total Long-Term Liabilities		494,405		1,080,175			197,038			(37,757	)		1,733,861
Total Equity		291,023		803,383			1,853,480			(2,656,863	)		291,023
Total Liabilities and Equity	$	803,460	$	1,923,913		$	2,258,197		$	(2,695,277	)	$	2,290,293

28

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2015

(in thousands)

	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Revenues	$	—		$	3		$	1,135,347		$	(4,106	)	$	1,131,244
Operating Expenses:
Operating costs		—			—			855,870			—			855,870
Depreciation and amortization		—			4,152			291,269			—			295,421
General and administrative		50			37,705			78,492			(4,106	)		112,141
Loss on sale of a business		—			35,027			—			—			35,027
(Gains) losses on sales of property and equipment, net		—			(229	)		14,885			—			14,656
Impairment of goodwill		—			—			27,434			—			27,434
Impairments and other		—			—			18,632			—			18,632
Total Operating Expenses		50			76,655			1,286,582			(4,106	)		1,359,181
Operating Loss		(50	)		(76,652	)		(151,235	)		—			(227,937	)
Other (Expense) Income:
Interest expense		(31,626	)		(67,641	)		—			—			(99,267	)
Gains on early extinguishment of debt		18,061			—			—			—			18,061
Loss and impairment from equity investee		—			—			(7,928	)		—			(7,928	)
Other income		—			771			2,281			—			3,052
Equity in net earnings of subsidiary		(212,094	)		(115,690	)		—			327,784			—
Total Other Expense		(225,659	)		(182,560	)		(5,647	)		327,784			(86,082	)
Loss Before Income Taxes		(225,709	)		(259,212	)		(156,882	)		327,784			(314,019	)
Income Tax Benefit		(4,318	)		(47,118	)		(41,192	)		—			(92,628	)
Net Loss	$	(221,391	)	$	(212,094	)	$	(115,690	)	$	327,784		$	(221,391	)

29

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2014

(in thousands)

	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Revenues	$	—		$	3,531		$	2,080,812		$	(3,451	)	$	2,080,892
Operating Expenses:
Operating costs		—			4,652			1,580,974			(5,273	)		1,580,353
Depreciation and amortization		—			218			292,694			—			292,912
General and administrative		166			78,175			29,798			—			108,139
Losses (gains) on sales of property and equipment, net		—			6			(6,278	)		—			(6,272	)
Impairments and other		—			—			30,764			—			30,764
Total Operating Expenses		166			83,051			1,927,952			(5,273	)		2,005,896
Operating (Loss) Income		(166	)		(79,520	)		152,860			1,822			74,996
Other (Expense) Income:
Interest expense		(17,168	)		(62,566	)		—			—			(79,734	)
Loss and impairment from equity investee		—			—			(6,094	)		—			(6,094	)
Other (expense) income		—			(216	)		880			—			664
Equity in net earnings of subsidiary		2,656			90,446			—			(93,102	)		—
Total Other (Expense) Income		(14,512	)		27,664			(5,214	)		(93,102	)		(85,164	)
(Loss) Income Before Income Taxes		(14,678	)		(51,856	)		147,646			(91,280	)		(10,168	)
Income Tax (Benefit) Expense		(6,699	)		(53,382	)		57,200			692			(2,189	)
Net (Loss) Income	$	(7,979	)	$	1,526		$	90,446		$	(91,972	)	$	(7,979	)

30

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2013

(in thousands)

	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Revenues	$	—		$	8,011		$	2,187,966		$	(7,772	)	$	2,188,205
Operating Expenses:
Operating costs		—			9,513			1,717,235			(9,039	)		1,717,709
Depreciation and amortization		—			27			289,564			—			289,591
General and administrative		—			20,506			59,848			—			80,354
Gains on sales of property and equipment, net		—			—			(2,629	)		—			(2,629	)
Impairments and other		—			—			74,762			—			74,762
Total Operating Expenses		—			30,046			2,138,780			(9,039	)		2,159,787
Operating (Loss) Income		—			(22,035	)		49,186			1,267			28,418
Other (Expense) Income:
Interest expense		—			(56,786	)		—			—			(56,786	)
Loss from equity investees		—			—			(958	)		—			(958	)
Other income		—			—			1,758			—			1,758
Equity in net earnings of subsidiary		(18,948	)		29,334			—			(10,386	)		—
Total Other (Expense) Income		(18,948	)		(27,452	)		800			(10,386	)		(55,986	)
(Loss) Income Before Income Taxes		(18,948	)		(49,487	)		49,986			(9,119	)		(27,568	)
Income Tax Expense (Benefit)		787			(29,752	)		21,439			(307	)		(7,833	)
Net (Loss) Income	$	(19,735	)	$	(19,735	)	$	28,547		$	(8,812	)	$	(19,735	)

31

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2015

(in thousands)

	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:	$	(34,133	)	$	155,945		$	506,502		$	(344,208	)	$	284,106
Cash Flows From Investing Activities:
Additions to property and equipment		—			(11,668	)		(194,038	)		—			(205,706	)
Proceeds from sale of assets		—			(624	)		28,319			—			27,695
Proceeds from sale of a business		—			15,000			—			—			15,000
Additions to investments		—			—			(113	)		—			(113	)
Distributions from affiliates		65,407			—			—			(65,407	)		—
Other		—			—			3,457			—			3,457
Net cash provided by (used in) investing activities		65,407			2,708			(162,375	)		(65,407	)		(159,667	)
Cash Flows From Financing Activities:
Borrowings from revolving credit facility		—			160,100			—			—			160,100
Payments on revolving credit facility		—			(210,600	)		—			—			(210,600	)
Payments to extinguish senior notes		(31,305	)		—			—			—			(31,305	)
Proceeds from issuance of term loan, net of issuance costs		—			94,481			—			—			94,481
Payments on term loans		—			(4,750	)		—			—			(4,750	)
Deferred financing costs		—			(784	)		—			—			(784	)
Contributions to (distributions from) affiliates		—			(65,407	)		(344,208	)		409,615			—
Other		—			(1,824	)		—			—			(1,824	)
Net cash used in financing activities		(31,305	)		(28,784	)		(344,208	)		409,615			5,318
Net (decrease) increase in cash		(31	)		129,869			(81	)		—			129,757
Cash, beginning of period		77			733			81			—			891
Cash, end of period	$	46		$	130,602		$	—		$	—		$	130,648

32

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2014

(in thousands)

	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:	$	53,039		$	(59,411	)	$	363,855		$	(92,187	)	$	265,296
Cash Flows From Investing Activities:
Additions to property and equipment		—			(17,888	)		(439,730	)		—			(457,618	)
Proceeds from sale of assets		—			—			88,556			—			88,556
Additions to investments		—			—			(675	)		—			(675	)
Contributions to affiliates		(119,711	)		(38,218	)		—			157,929			—
Other		—			—			2,091			—			2,091
Cash used in investing activities		(119,711	)		(56,106	)		(349,758	)		157,929			(367,646	)
Cash Flows From Financing Activities:
Borrowings from revolving credit facility		—			1,201,400			—			—			1,201,400
Payments on revolving credit facility		—			(1,555,900	)		—			—			(1,555,900	)
Proceeds from issuance of senior notes, net of offering costs		493,825			—			—			—			493,825
Proceeds from issuance of term loan, net of issuance costs		—			393,879			—			—			393,879
Payments on term loan		—			(2,000	)		—			—			(2,000	)
Deferred financing costs		(1,032	)		(2,565	)		—			—			(3,597	)
Distributions to CHK		(422,839	)		—			—			—			(422,839	)
Contributions from (distributions to) affiliates		—			79,823			(14,081	)		(65,742	)		—
Other		(3,205	)		—			—			—			(3,205	)
Net cash provided by (used in) financing activities		66,749			114,637			(14,081	)		(65,742	)		101,563
Net increase (decrease) in cash		77			(880	)		16			—			(787	)
Cash, beginning of period		—			1,613			65			—			1,678
Cash, end of period	$	77		$	733		$	81		$	—		$	891

33

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2013

(in thousands)

	Parent		Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:	$	—	$	13,766		$	404,170		$	(80,865	)	$	337,071
Cash Flows From Investing Activities:
Additions to property and equipment		—		(3,103	)		(346,703	)		—			(349,806	)
Proceeds from sale of assets		—		—			50,602			—			50,602
Proceeds from sale of investment		—		—			2,790			—			2,790
Additions to investments		—		—			(431	)		—			(431	)
Other		—		—			28			—			28
Cash used in investing activities		—		(3,103	)		(293,714	)		—			(296,817	)
Cash Flows From Financing Activities:
Borrowings from revolving credit facility		—		1,216,900			—			—			1,216,900
Payments on revolving credit facility		—		(1,230,100	)		—			—			(1,230,100	)
Distributions to affiliates		—		—			(110,755	)		80,865			(29,890	)
Other		—		3,287			—			—			3,287
Net cash used in financing activities		—		(9,913	)		(110,755	)		80,865			(39,803	)
Net increase (decrease) in cash		—		750			(299	)		—			451
Cash, beginning of period		—		863			364			—			1,227
Cash, end of period	$	—	$	1,613		$	65		$	—		$	1,678

34

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

17. Quarterly Financial Data (unaudited)

Summarized unaudited quarterly financial data for 2015 and 2014 are as follows:

	Quarters Ended
	March 31, 2015			June 30, 2015			September 30, 2015			December 31, 2015
	(in thousands)
Revenues	$	429,787		$	295,128		$	213,541		$	192,788
Operating loss (a)	$	(31,193	)	$	(104,645	)	$	(46,281	)	$	(45,818	)
Net loss(a)	$	(37,601	)	$	(74,670	)	$	(48,530	)	$	(60,590	)
Loss per share(d):
Basic	$	(0.78	)	$	(1.51	)	$	(0.95	)	$	(1.18	)
Diluted	$	(0.78	)	$	(1.51	)	$	(0.95	)	$	(1.18	)
	Quarters Ended
	March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
	(in thousands)
Revenues	$	509,710		$	549,466		$	526,773		$	494,943
Operating (loss) income(b)	$	(14,016	)	$	57,475		$	19,852		$	11,685
Net (loss) income(b)	$	(18,557	)	$	21,710		$	(1,770	)	$	(9,362	)
(Loss) earnings per share(c)(d):
Basic	$	(0.40	)	$	0.46		$	(0.04	)	$	(0.20	)
Diluted	$	(0.40	)	$	0.46		$	(0.04	)	$	(0.20	)

(a) Includes $35.0 million of loss on sale of a business for the quarter ended June 30, 2015, $27.4 million of impairment of goodwill for the quarter ended December 31, 2015 and $1.9 million, $1.6 million, $8.8 million and $6.3 million of impairments and other for the quarters ended December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015, respectively.

(b) Includes a non-recurring credit of $10.5 million for the quarter ended June 30, 2014 as a result of the cancellation of the unvested CHK restricted stock and stock option awards and $7.8 million, $3.2 million and $19.8 million of impairments and other for the quarters ended September 30, 2014, June 30, 2014 and March 31, 2014, respectively.

(c) On June 30, 2014 we distributed 46,932,433 shares of our common stock to CHK shareholders in conjunction with the spin-off. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, we have assumed this amount to be outstanding for periods prior to the spin-off.

(d) The sum of quarterly net income per share may not agree to the total for the year as each period’s computation is based on the weighted average number of common shares outstanding during each period.

18. Recently Issued and Proposed Accounting Standards

Recently Issued Accounting Standards

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes,” which simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets be classified as noncurrent in the balance sheet. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern,” which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be

35

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

issued when applicable). ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early application permitted. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; the FASB also provided for early adoption for annual reporting periods beginning after December 15, 2016. We are currently evaluating what impact this standard will have on our consolidated financial statements.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

36

EX-99.2

Exhibit 99.2

INDEX TO SEVENTY SEVEN ENERGY INC. FINANCIAL INFORMATION

	Page
Unaudited Condensed Consolidated Financial Statements and Supplementary Data:
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015		1
Condensed Consolidated Statements of Operations for the Two Months Ended September 30, 2016, the One Month Ended July 31, 2016 and the Three Months Ended September 30, 2015		2
Condensed Consolidated Statement of Operations for the Two Months Ended September 30, 2016, the Seven Months Ended July 31, 2016 and the Nine Months Ended September 30, 2015		3
Condensed Consolidated Statements of Changes in Equity for the Seven Months Ended July 31, 2016 and the Two Months Ended September 30, 2016		4
Condensed Consolidated Statements of Cash Flows for the Two Months Ended September 30, 2016, the Seven Months Ended July 31, 2016 and the Nine Months Ended September 30, 2015		5
Notes to Unaudited Condensed Consolidated Financial Statements		7

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Condensed Consolidated Balance Sheets (unaudited)

(in thousands, except share amounts)

	Successor			Predecessor
	As of September 30, 2016			As of December 31, 2015
Assets:
Current Assets:
Cash	$	23,004		$	130,648
Accounts receivable, net of allowance of $47 and $3,680 at September 30, 2016 and December 31, 2015, respectively		109,328			164,721
Inventory		11,303			18,553
Deferred income tax asset		—			1,499
Prepaid expenses and other		14,547			17,141
Total Current Assets		158,182			332,562
Property and Equipment:
Property and equipment, at cost		812,611			2,646,446
Less: accumulated depreciation		(29,566	)		(1,116,026	)
Property and equipment held for sale, net		8,418			—
Total Property and Equipment, Net		791,463			1,530,420
Other Assets:
Deferred financing costs		1,194			1,238
Other long-term assets		22,114			38,398
Total Other Assets		23,308			39,636
Total Assets	$	972,953		$	1,902,618
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	19,228		$	53,767
Current portion of long-term debt		5,000			5,000
Other current liabilities		45,043			98,318
Total Current Liabilities		69,271			157,085
Long-Term Liabilities:
Deferred income tax liabilities		—			60,623
Long-term debt, excluding current maturities		423,347			1,564,592
Other long-term liabilities		1,875			1,478
Total Long-Term Liabilities		425,222			1,626,693
Commitments and Contingencies (Note 13)
Stockholders’ Equity:
Predecessor common stock, $0.01 par value: authorized 250,000,000 shares; issued and outstanding 59,397,831 shares at December 31, 2015		—			594
Predecessor paid-in capital		—			350,770
Successor preferred stock, $0.01 par value: authorized 10,000,000 shares; zero outstanding at September 30, 2016		—			—
Successor common stock, $0.01 par value: authorized 90,000,000 shares; issued and outstanding 22,280,349 shares at September 30, 2016		223			—
Successor paid-in capital		514,765			—
Accumulated deficit		(36,528	)		(232,524	)
Total Stockholders’ Equity		478,460			118,840
Total Liabilities and Stockholders’ Equity	$	972,953		$	1,902,618

1

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

	Successor			Predecessor
	Two Months Ended September 30, 2016			One Month Ended July 31, 2016			Three Months Ended September 30, 2015
Revenues:
Revenues	$	79,656		$	40,438		$	213,541
Operating Expenses:
Operating costs		63,628			33,835			160,889
Depreciation and amortization		31,208			22,902			68,854
General and administrative		16,601			4,688			26,709
(Gains) losses on sales of property and equipment, net		(798	)		285			1,804
Impairments and other		—			22			1,566
Total Operating Expenses		110,639			61,732			259,822
Operating Loss		(30,983	)		(21,294	)		(46,281	)
Other (Expense) Income:
Interest expense		(6,185	)		(2,374	)		(25,480	)
Gains on early extinguishment of debt		—			—			4,975
Loss from equity investee		—			—			(230	)
Other income		886			391			942
Reorganization items, net		(246	)		(16,465	)		—
Total Other Expense		(5,545	)		(18,448	)		(19,793	)
Loss Before Income Taxes		(36,528	)		(39,742	)		(66,074	)
Income Tax Benefit		—			(28,102	)		(17,544	)
Net Loss	$	(36,528	)	$	(11,640	)	$	(48,530	)
Loss Per Common Share (Note 8)
Basic	$	(1.66	)	$	(0.21	)	$	(0.95	)
Diluted	$	(1.66	)	$	(0.21	)	$	(0.95	)
Weighted Average Common Shares Outstanding (Note 8)
Basic		22,041			55,847			51,117
Diluted		22,041			55,847			51,117

2

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

	Successor			Predecessor
	Two Months Ended September 30, 2016			Seven Months Ended July 31, 2016			Nine Months Ended September 30, 2015
Revenues:
Revenues	$	79,656		$	333,919		$	938,456
Operating Expenses:
Operating costs		63,628			237,014			731,627
Depreciation and amortization		31,208			162,425			226,779
General and administrative		16,601			66,667			95,436
Loss on sale of a business		—			—			34,989
(Gains) losses on sales of property and equipment, net		(798	)		848			15,023
Impairments and other		—			6,116			16,720
Total Operating Expenses		110,639			473,070			1,120,574
Operating Loss		(30,983	)		(139,151	)		(182,118	)
Other (Expense) Income:
Interest expense		(6,185	)		(48,116	)		(73,964	)
Gains on early extinguishment of debt		—			—			18,061
Income from equity investee		—			—			877
Other income		886			2,318			1,889
Reorganization items, net (Note 4)		(246	)		(29,892	)		—
Total Other Expense		(5,545	)		(75,690	)		(53,137	)
Loss Before Income Taxes		(36,528	)		(214,841	)		(235,255	)
Income Tax Benefit		—			(59,131	)		(74,455	)
Net Loss	$	(36,528	)	$	(155,710	)	$	(160,800	)
Loss Per Common Share (Note 8)
Basic	$	(1.66	)	$	(2.84	)	$	(3.24	)
Diluted	$	(1.66	)	$	(2.84	)	$	(3.24	)
Weighted Average Common Shares Outstanding (Note 8)
Basic		22,041			54,832			49,627
Diluted		22,041			54,832			49,627

3

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Condensed Consolidated Statement of Changes in Equity (Unaudited)

	Common Stock						Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
	Shares			Amount
	(in thousands)
Balance at December 31, 2015 (Predecessor)		59,398		$	594		$	350,770		$	(232,524	)	$	118,840
Net loss		—			—			—			(155,710	)		(155,710	)
Share-based compensation		(1,930	)		(19	)		36,889			—			36,870
Balance at July 31, 2016 (Predecessor)		57,468		$	575		$	387,659		$	(388,234	)	$	—
Cancellation of Predecessor equity		(57,468	)		(575	)		(387,659	)		388,234			—
Balance at August 1, 2016 (Predecessor)		—		$	—		$	—		$	—		$	—
Issuance of Successor common stock and warrants		22,000			220			510,010			—			510,230
Balance at August 1, 2016 (Successor)		22,000		$	220		$	510,010		$	—		$	510,230
Net loss		—			—			—			(36,528	)		(36,528	)
Share-based compensation		280			3			4,755			—			4,758
Balance at September 30, 2016 (Successor)		22,280		$	223		$	514,765		$	(36,528	)	$	478,460

4

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

	Successor			Predecessor
	Two Months Ended September 30, 2016			Seven Months Ended July 31, 2016			Nine Months Ended September 30, 2015
Cash Flows from Operating Activities:
Net Loss	$	(36,528	)	$	(155,710	)	$	(160,800	)
Adjustments to Reconcile Net Loss to Cash Provided by Operating Activities:
Depreciation and amortization		31,208			162,425			226,779
Accretion of discount on term loans		2,077			—			—
Accretion of discount on note receivable		(277	)		—			—
Amortization of deferred financing costs		41			2,455			3,381
Gains on early extinguishment of debt		—			—			(18,061	)
Loss on sale of a business		—			—			34,989
(Gains) losses on sales of property and equipment, net		(798	)		848			15,023
Impairments and other		—			6,116			16,720
Income from equity investee		—			—			(877	)
Non-cash reorganization items, net		—			9,185			—
Provision for doubtful accounts		47			1,406			1,930
Non-cash compensation		8,224			12,635			43,646
Deferred income tax benefit		—			(59,124	)		(74,455	)
Other		9			(10	)		(810	)
Changes in operating assets and liabilities		(11,755	)		26,243			176,197
Net cash (used in) provided by operating activities		(7,752	)		6,469			263,662
Cash Flows from Investing Activities:
Additions to property and equipment		(6,100	)		(82,787	)		(151,799	)
Purchases of short-term investments		—			(6,242	)		—
Proceeds from sales of assets		3,808			2,638			18,573
Proceeds from sale of a business		—			—			15,000
Proceeds from sales of short-term investments		—			6,236			—
Additions to investments		—			—			(112	)
Other		14			29			3,434
Net cash used in investing activities		(2,278	)		(80,126	)		(114,904	)
Cash Flows from Financing Activities:
Borrowings from revolving credit facility		—			—			160,100
Payments on revolving credit facility		—			—			(210,600	)
Payments to extinguish senior notes		—			—			(31,305	)
Proceeds from issuance of term loan, net of issuance costs		—			—			94,481
Payments on term loan		(1,250	)		(17,500	)		(3,500	)
Deferred financing costs		—			(1,235	)		(784	)
Other		(3,466	)		(506	)		(1,822	)
Net cash (used in) provided by financing activities		(4,716	)		(19,241	)		6,570
Net (decrease) increase in cash		(14,746	)		(92,898	)		155,328
Cash, beginning of period		37,750			130,648			891
Cash, end of period	$	23,004		$	37,750		$	156,219

5

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Condensed Consolidated Statements of Cash Flows (unaudited) — (Continued)

Supplemental disclosures to the condensed consolidated financial statements of cash flows are presented below:

	Successor		Predecessor
	Two Months Ended September 30, 2016		Seven Months Ended July 31, 2016			Nine Months Ended September 30, 2015
Supplemental Disclosure of Significant Non-Cash Investing and Financing Activities:
Increase (decrease) in other current liabilities related to purchases of property and equipment	$	1,363	$	(3,351	)	$	(9,459	)
Note receivable received as consideration for sale of a business	$	—	$	—		$	27,000
Supplemental Disclosure of Cash Payments:
Interest paid, net of amount capitalized	$	2,620	$	30,814		$	69,181

6

SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Risks and Uncertainties

Basis of Presentation

The accompanying condensed consolidated financial statements of Seventy Seven Energy Inc. (“SSE,” “Company,” “we,” “us,” “our” or “ours”) were prepared using accounting principles generally accepted in the United States (“GAAP”) for interim financial information. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. Certain footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been appropriately condensed or omitted. Therefore, these interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2015 contained in our Annual Report on Form 10-K (Commission File No. 001-36354) filed with the U.S. Securities and Exchange Commission (“SEC”) on February 17, 2016. As described below, however, such prior financial statements may not be comparable to our interim financial statements due to the adoption of fresh-start accounting.

On June 7, 2016 (the “Petition Date”), SSE and its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Petitions”) under Chapter 11 of the United States Code (“Chapter 11” or the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), case number 16-11409. The Debtors continued to operate their business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The subsidiary Debtors in these Chapter 11 cases were Seventy Seven Operating LLC (“SSO”), Seventy Seven Land Company LLC, Seventy Seven Finance Inc. (“SSF”), Performance Technologies, L.L.C., PTL Prop Solutions, L.L.C., Western Wisconsin Sand Company, LLC, Nomac Drilling, L.L.C., SSE Leasing LLC, Keystone Rock & Excavation, L.L.C. and Great Plains Oilfield Rental, L.L.C., which represent all subsidiaries of SSE. On July 14, 2016, the Bankruptcy Court issued an order (the “Confirmation Order”) confirming the Joint Pre-packaged Plan of Reorganization (as amended and supplemented, as the “Plan”) of the Debtors. On August 1, 2016 (the “Effective Date”), the Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 cases.

Upon emergence from bankruptcy, the Company adopted fresh-start accounting and became a new entity for financial reporting purposes. As a result of the application of fresh-start accounting and the effects of the implementation of the Plan, the Company’s condensed consolidated financial statements on or after August 1, 2016 are not comparable with the financial statements prior to the Effective Date. See Note 3 for additional discussion.

Subsequent to the Petition Date, all expenses, gains and losses directly associated with the reorganization are reported as Reorganization items, net in the accompanying statements of operations.

References to “Successor” or “Successor Company” relate to SSE on and subsequent to August 1, 2016. References to “Predecessor” or “Predecessor Company” relate to SSE prior to August 1, 2016. References to “Current Successor Quarter” relate to the two months ended September 30, 2016 and “Current Predecessor Quarter” relate to the one month ended July 31, 2016. References to “Current Predecessor Period” relate to the seven months ended July 31, 2016, and “Prior Predecessor Quarter” and “Prior Predecessor Period” relate to the three and nine months ended September 30, 2015, respectively. All significant intercompany accounts and transactions within SSE have been eliminated.

Risks and Uncertainties

We operate in a highly cyclical industry. The main factor influencing demand for oilfield services is the level of drilling and completions activity by E&P companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Demand for oil and natural gas is cyclical and is subject to large and rapid fluctuations. When oil and natural gas price increases occur, producers increase their capital expenditures, which generally results in greater revenues and profits for oilfield service companies. The increased capital expenditures also ultimately result in greater production, which historically has resulted in increased supplies and reduced prices that, in turn, tend to reduce demand for oilfield services. For these reasons, our results of operations may fluctuate from quarter-to-quarter and from year-to-year.

7

The sustained decline in commodity prices since mid-2014 has dramatically reduced the level of onshore United States drilling and completions activity and, consequently, the demand for our services. The current downturn has begun to show signs of improvement, however, any long-term recovery continues to be uncertain and is dependent on a number of economic, geopolitical and monetary policy factors that are outside our control. Until there is a sustained recovery in commodity prices, we expect that reduced equipment utilization levels and pricing pressure across each of our operating segments will persist. If drilling and completions activity remains at depressed levels or worsens, it would likely have a material adverse impact on our business, financial condition, cash flows and results of operations.

2. Emergence from Voluntary Reorganization under Chapter 11 Proceedings and Related Events

On May 12, 2016, the Company and all of its wholly owned subsidiaries entered into a Second Amended and Restated Restructuring Support Agreement (the “Restructuring Support Agreement”) with (i) certain noteholders of the 6.625% senior unsecured notes due 2019 of SSO and SSF (the “2019 Notes”), (ii) certain lenders under the Company’s Incremental Term Supplement (Tranche A) loan (the “Incremental Term Loan”), (iii) certain lenders under the Company’s $400.0 million Term Loan Credit Agreement dated June 25, 2014 (the “Term Loan”), and (iv) certain noteholders of the 6.50% senior unsecured notes due 2022 of the Company (the “2022 Notes”).

On June 7, 2016, the Debtors filed the Bankruptcy Petitions for reorganization under Chapter 11 in the Bankruptcy Court. The filings of the Bankruptcy Petitions constituted an event of default with respect to the 2019 Notes, the 2022 Notes, the Term Loan (see Note 11) and the Incremental Term Loan (see Note 11) (collectively, the “Outstanding Debt”) and constituted an event of default under our pre-petition revolving credit facility. Pursuant to Chapter 11, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the filing of the Bankruptcy Petitions or to exercise control over the Debtor’s property. Accordingly, although the Bankruptcy Petitions triggered defaults under the Outstanding Debt, creditors were generally stayed from taking action as a result of these defaults. These defaults were deemed waived or cured upon the Effective Date of the Plan. The Debtors also filed the Plan and a related solicitation and disclosure statement on June 7, 2016.

On July 14, 2016, the Bankruptcy Court entered the Confirmation Order. The Debtors satisfied the remaining conditions to effectiveness contemplated under the Plan and emerged from Chapter 11 on August 1, 2016.

The Plan contemplated that we continue our day-to-day operations substantially as previously conducted and that all of our commercial and operational contracts remained in effect in accordance with their terms preserving the rights of all parties. The significant elements of the Plan included:

• payment in full in the ordinary course of all trade creditors and other general unsecured creditors;

• the exchange of the full $650.0 million of the 2019 Notes into 96.75% of new common stock issued in the reorganization (the “New Common Stock”);

• the exchange of the full $450.0 million of the 2022 Notes for 3.25% of the New Common Stock as well as warrants exercisable for 15% of the New Common Stock at predetermined equity values;

• the issuance to our existing common stockholders of two series of warrants exercisable for an aggregate of 20% of the New Common Stock at predetermined equity values;

• the maintenance of our $400.0 million existing secured Term Loan while the lenders holding Term Loans (i) received (a) payment of an amount equal to 2% of the Term Loans; and (b) as further security for the Term Loans, second-priority liens and security interests in the collateral securing the company’s New ABL Credit Facility (as defined herein), which collateral, together with the existing collateral securing the Term Loans and Tranche A Incremental Term Loans, is governed by an inter-creditor agreement among the applicable secured parties; and (ii) continued to hold Term Loans under the Term Loan Credit Agreement, as amended to reflect, among other modifications, the reduction of the maturity date of the Term Loans by one year and an affirmative covenant by the Company to use commercially reasonably efforts to maintain credit ratings for the Term Loans; and

• the payment of a consent fee equal to 2% of the Incremental Term Loan plus $15.0 million of the outstanding Incremental Term Loan balance, together with the maintenance of the remaining $84.0 million balance of the Incremental Term Loan on identical terms other than the suspension of any prepayment premium for a period of 18 months.

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The Plan effectuated, among other things, a substantial reduction in our debt, including $1.1 billion in the aggregate of the face amount of the 2019 Notes and 2022 Notes.

In accordance with the Plan, on the Effective Date, we issued an aggregate of 22,000,000 shares of New Common Stock to the holders of the 2019 and 2022 Notes.

In accordance with the Plan, on the Effective Date, we entered into a warrant agreement with Computershare Inc. and Computershare Trust Company, N.A., as the warrant agent, (the “Warrant Agreement”) and issued three series of warrants to holders of 2022 Notes and to our existing common stockholders as follows:

• We issued Series A Warrants (“Series A Warrants”), which are exercisable until August 1, 2021, to purchase up to an aggregate of 3,882,353 shares of New Common Stock, at an exercise price of $23.82 per share, to holders of the 2022 Notes.

• We issued Series B Warrants (“Series B Warrants”), which are exercisable until August 1, 2021, to purchase up to an aggregate of 2,875,817 shares of New Common Stock, at an exercise price of $69.08 per share, to our existing common stockholders.

• We issued Series C Warrants (“Series C Warrants,” and, together with the Series A Warrants and Series B Warrants, the “Warrants”), which are exercisable until August 1, 2023, to purchase up to an aggregate of 3,195,352 shares of New Common Stock at an exercise price of $86.93 per share, to our existing common stockholders.

All unexercised Warrants will expire and the rights of the holders of such warrants (the “Warrant Holders”) to purchase shares of New Common Stock will terminate on the first to occur of (i) the close of business on their respective expiration dates or (ii) the date of completion of (A) any Affiliated Asset Sale (as defined in the Warrant Agreement), or (B) a Change of Control (as defined in the Warrant Agreement). Following the Effective Date, there are 3,882,353 Series A Warrants, 2,875,817 Series B Warrants and 3,195,352 Series C Warrants outstanding.

In accordance with the Plan, on September 20, 2016, the Company adopted the Seventy Seven Energy Inc. 2016 Omnibus Incentive Plan (the “2016 Omnibus Incentive Plan”) (see Note 14).

Successor Issuer

Pursuant to Rule 12g-3(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Series B Warrants and Series C Warrants are deemed to be registered under Section 12(b) of the Exchange Act, and the Company is deemed to be the successor registrant to the Company in its state before the Effective Date. Such registration expired on September 6, 2016, and we filed a Registration Statement on Form 8-A to effect the registration of the Series B Warrants and Series C Warrants under Section 12(g) of the Exchange Act. As a result, the Company remains subject to the reporting requirements of the Exchange Act following the Effective Date.

Trading of New Common Stock

The New Common Stock is not traded on a national securities exchange. The Company can provide no assurance that the New Common Stock will trade on a nationally recognized market or an over-the-counter market, whether broker-dealers will provide public quotes of the reorganized Company’s common stock on an over-the-counter market, whether the trading volume on an over-the-counter market of the Company’s common stock will be sufficient to provide for an efficient trading market or whether quotes for the Company’s common stock may be blocked by the OTC Markets Group in the future.

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Registration Rights Agreement

On the Effective Date, by operation of the Plan, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with certain funds affiliated with and/or managed by each of Blue Mountain Capital Management, LLC, Axar Capital Management, LLC and Mudrick Capital Management, LLC (collectively, the “Registration Rights Holders”).

The Registration Rights Agreement provides certain demand registration rights to the Registration Rights Holders at any time following the six-month anniversary of the Effective Date. The Company will not be required to effect more than (i) four demand registrations delivered by each Registration Rights Holder or (ii) one demand registration delivered by any holder in any 180-day period.

If, following the six-month anniversary of the Effective date, the Company qualifies for the use of Form S-3, the Registration Rights Holders may require the Company, subject to restrictions set forth in the Registration Rights Agreement, to file a shelf registration statement on Form S-3 covering the resale of such holder’s registrable securities.

In addition, if the Company proposes to register shares of its New Common Stock in certain circumstances, the Registration Rights Holders will have certain “piggyback” registration rights, subject to restrictions set forth in the Registration Rights Agreement, to include their shares of New Common Stock in the registration statement.

Senior Secured Debtor-In-Possession Credit Agreement; New ABL Credit Facility

On June 8, 2016, in connection with the filings of the Bankruptcy Petitions, the Company, with certain of our subsidiaries as borrowers, entered into a senior secured debtor-in-possession credit facility (the “DIP Facility”) with total commitments of $100.0 million. See Note 11 for additional discussion related to the DIP Facility.

On the Effective Date, by operation of the Plan, the DIP Facility was amended and restated, and the outstanding obligations pursuant thereto were converted to obligations under a senior secured revolving credit facility in an aggregate principal amount of up to $100.0 million (the “New ABL Credit Facility”).

New Directors

On the Effective Date, in accordance with the Plan and pursuant to the Stockholders Agreement that we entered into with certain stockholders on the Effective Date, Jerry Winchester and Edward J. DiPaolo, who were existing directors of the Company, and Andrew Axelrod, Victor Danh, Steven Hinchman, David King and Doug Wall became members of the Board until the first annual meeting of the Company’s stockholders to be held in 2017, and their respective successors are duly elected and qualified or until their earlier death, resignation or removal.

Conversion to Delaware Corporation

Effective July 22, 2016, in accordance with the Plan and with the laws of the State of Delaware and the State of Oklahoma, we converted our form of organization from an Oklahoma corporation (the “Oklahoma Predecessor Corporation”) to a Delaware limited liability company and, immediately thereafter, to a Delaware corporation (the “Delaware Successor Corporation”). As a result of the conversions, the equity holders of the Oklahoma Predecessor Corporation became the equity holders of the Delaware Successor Corporation. The name of the Company remains “Seventy Seven Energy Inc.”

For purposes of Delaware law, the Delaware Successor Corporation is deemed to be the same entity as the Company before the conversions, and its existence is deemed to have commenced on the date of original incorporation of the Company. Furthermore, under Delaware law, the rights, assets, operations, liabilities and obligations that comprised the going business of the Company before the conversions remain the rights, assets, operations, liabilities and obligations of the Company after the conversions.

3. Fresh-Start Accounting

In connection with the Company’s emergence from Chapter 11, the Company applied the provisions of fresh-start accounting, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

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(“ASC”) 852, Reorganizations, (“ASC 852”), to its condensed 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. The Company applied fresh-start accounting as of August 1, 2016, which was the date of emergence from Chapter 11. Adopting fresh-start reporting results in a new reporting entity with no beginning retained earnings or accumulated deficit. The cancellation of all existing common shares outstanding on the Effective Date and issuance of new shares of the reorganized entity caused a related change of control of the Company under ASC 852 as the holders of existing voting shares immediately before confirmation received less than 50% of the voting shares of the Successor Company.

Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. Upon the application of fresh-start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values.

Reorganization Value

In support of the Plan, the enterprise value of the Successor Company was estimated and approved by the Bankruptcy Court to be in the range of $700 million to $900 million. The Company used the high end of the Bankruptcy Court approved enterprise value of the Successor Company of $900 million as its estimated enterprise value.

The following table reconciles the enterprise value to the estimated fair value of Successor common stock as of the Effective Date (in thousands, except per share value):

Enterprise value	$	900,000
Plus: Cash and cash equivalents		37,750
Less: Fair value of debt		(427,520	)
Less: Fair value of warrants		(24,733	)
Fair value of Successor common stock	$	485,497
Shares outstanding at August 1, 2016		22,000
Per share value	$	22.07

In connection with fresh-start accounting, the Company’s debt was recorded at fair value of $427.5 million as determined using a market approach. The difference between the $475.8 million face amount and the fair value recorded in fresh-start accounting is being amortized over the life of the debt. The fair value of the Company’s debt was estimated using Level 2 inputs.

The fair values of the Series A, Series B and Series C Warrants were estimated to be $4.62, $1.03 and $1.20, respectively. The fair value of the Warrants were estimated using a Black-Scholes pricing model with the following assumptions:

	Series A			Series B			Series C
Stock price	$	16.27		$	13.83		$	12.45
Strike price	$	23.82		$	69.08		$	86.93
Expected volatility		50	%		50	%		50	%
Expected dividend rate		0	%		0	%		0	%
Risk free interest rate		1.26	%		1.26	%		1.57	%
Expiration date		5 years			5 years			7 years

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

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

Enterprise value	$	900,000
Plus: Cash and cash equivalents		37,750
Plus: Fair value of non-debt working capital liabilities		63,365
Plus: Fair value of non-debt long-term liabilities		1,933
Reorganization value of Successor assets	$	1,003,048

In determining reorganization value, the Company estimated fair value for property and equipment using significant unobservable inputs (Level 3) based on market and income approaches. SSE 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. Additionally, the Company utilized the discounted cash flow method on certain assets. SSE estimated future cash flows for the period August 1, 2016 to July 31, 2026 and discounted the estimated future cash flows to present value based on weighted average cost of capital.

Reorganization value and enterprise value were estimated using various projections and assumptions that are inherently subject to significant uncertainties that are beyond our control. Accordingly, the estimates set forth herein are not necessarily indicative of actual outcomes, and there can be no assurance that the estimates, projections or assumptions will be realized.

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.

	July 31, 2016 Predecessor Company			Reorganization Adjustments			Fresh-Start Adjustments			August 1, 2016 Successor Company
	(in thousands, except share amounts)
Assets:
Current Assets:
Cash and cash equivalents	$	71,376		$	(33,626	)(1)	$	—		$	37,750
Accounts receivable, net		94,024			—			—			94,024
Inventory		13,422			—			—			13,422
Deferred income tax asset		20,773			(20,773	)(2)		—			—
Prepaid expenses and other		15,309			—			—			15,309
Total Current Assets		214,904			(54,399	)		—			160,505
Property and Equipment:
Property and equipment, at cost		2,681,896			—			(1,862,505	)(10)		819,391
Less: accumulated depreciation		(1,244,536	)		—			1,244,536	(10)		—
Total Property and Equipment, Net		1,437,360			—			(617,969	)		819,391
Other Assets:
Deferred financing costs		—			1,235	(3)		—			1,235
Other long-term assets		39,098			—			(17,181	)(11)		21,917
Total Other Assets		39,098			1,235			(17,181	)		23,152
Total Assets	$	1,691,362		$	(53,164	)	$	(635,150	)	$	1,003,048
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts Payable	$	21,418		$	—		$	—		$	21,418
Current portion of long-term debt		5,000			—			—			5,000
Other current liabilities		59,338			(17,391	)(4)		—			41,947
Total Current Liabilities		85,756			(17,391	)		—			68,365

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	July 31, 2016 Predecessor Company			Reorganization Adjustments			Fresh-Start Adjustments			August 1, 2016 Successor Company
	(in thousands, except share amounts)
Long-Term Liabilities:
Deferred income tax liabilities		47,868			(46,638	)(2)		(1,230	)(12)		—
Long-term debt, excluding current maturities		475,852			(14,226	)(5)		(39,106	)(13)		422,520
Other long-term liabilities		1,933			—			—			1,933
Liabilities subject to compromise		1,135,493			(1,135,493	)(6)		—			—
Total Long-Term Liabilities		1,661,146			(1,196,357	)		(40,336	)		424,453
Commitments and Contingencies
Stockholders’ Equity:
Predecessor common stock, $0.01 par value: authorized 250,000,000 shares; issued and outstanding 57,467,915		575			(575	)(7)		—			—
Predecessor paid-in capital		387,659			(387,659	)(7)		—			—
Successor common stock, $0.01 par value: authorized 90,000,000 shares; issued and outstanding 22,000,000		—			220	(8)		—			220
Successor paid-in capital		—			510,010	(8)		—			510,010
Retained earnings (accumulated deficit)		(443,774	)		1,038,588	(9)		(594,814	)(14)		—
Total Stockholders’ Equity (Deficit)		(55,540	)		1,160,584			(594,814	)		510,230
Total Liabilities and Stockholders’ Equity	$	1,691,362		$	(53,164	)	$	(635,150	)	$	1,003,048

Reorganization Adjustments

1. Reflects the cash payments recorded as of the Effective Date from implementation of the Plan (in thousands):

Predecessor liabilities paid upon emergence	$	17,391
Partial repayment of Incremental Term Loan		15,000
Debt issuance costs		1,235
Total	$	33,626

2. Reflects the tax adjustments and corresponding change in valuation allowance as a result of the Company’s emergence from Chapter 11 bankruptcy.

3. Reflects the $1.2 million of debt issuance costs incurred related to the New ABL Credit Facility.

4. Reflects $17.4 million paid in professional fees associated with the implementation of the Plan that were included in other current liabilities.

5. Reflects the $15.0 million principal payment on the Incremental Term Loan and write-off of related deferred issuance costs of $0.8 million.

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

6.625% Senior Notes due 2019	$	650,000
6.50% Senior Notes due 2022		450,000
Accrued interest		35,493
Liabilities subject to compromise of the Predecessor Company		1,135,493
Fair value of equity issued to holders of the senior notes of the Predecessor Company		(503,434	)
Gain on settlement of liabilities subject to compromise	$	632,059

7. Reflects the cancellation of the Predecessor Company equity to retained earnings.

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8. Reflects the issuance of 22.0 million shares of common stock at a per share price of $22.07 to the holders of the Predecessor Company’s 2019 and 2022 Notes and 9.954 million warrants to purchase up to 35% of the Successor Company’s equity valued at $24.7 million with a weighted average per unit value of $2.48.

9. Reflects the cumulative impact of the reorganization adjustments discussed above (in thousands):

Gain on settlement of liabilities subject to compromise	$	632,059
Fair value of warrants issued to Predecessor stockholders		(6,797	)
Cancellation of Predecessor Company equity		388,234
Tax impact of reorganization adjustments		25,865
Other reorganization adjustments		(773	)
Net impact to retained earnings (accumulated deficit)	$	1,038,588

The net gain on reorganization adjustments totaled $624.5 million and is included in reorganization items, net in the statement of operations. The cancellation of Predecessor Company equity was recorded as a direct reduction to retained earnings and had no impact to the statement of operations.

Fresh-Start Adjustments

10. Reflects a $618.0 million reduction in the net book value of property and equipment to estimated fair value.

• To estimate the fair value of drilling rigs and related equipment, hydraulic fracturing equipment and oilfield rental equipment, the Company commissioned a third-party appraisal service to value such assets using a market approach. This approach relies upon recent sales and offerings of similar assets.

• To estimate the fair value of land and buildings and other property and equipment, the Company considered recent comparable sales as well as current market conditions and demand.

• The fair value of these assets was estimated using significant unobservable inputs (Level 3) based on market and income approaches.

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

	Successor		Predecessor
Drilling rigs and related equipment	$	510,902	$	1,019,792
Hydraulic fracturing equipment		127,438		157,236
Oilfield rental equipment		34,313		52,397
Land and buildings		118,759		170,110
Other		27,979		37,825
Total	$	819,391	$	1,437,360

For property and equipment owned at August 1, 2016, the depreciable lives were revised to reflect remaining estimated useful lives.

11. An adjustment of $17.2 million was recorded to decrease other long-term assets to estimated fair value based on the following:

• The Company recorded a $6.5 million adjustment to decrease the book value of the Note Receivable (as defined in Note 6) to fair value. Fair value of the Note Receivable was estimated using Level 2 inputs based on a market approach.

• Based on management’s judgment and the current economics of the industry, the Company recorded additional adjustments totaling $10.7 million to decrease other long-term assets to fair value.

12. Reflects the tax adjustments and corresponding change in valuation allowance as a result of the Company’s emergence from Chapter 11 bankruptcy proceedings.

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13. Represents a $39.1 million adjustment to record the Term Loan and Incremental Term Loan at fair value using Level 2 inputs, including the write-off of the remaining balance of deferred issuance costs totaling $9.1 million.

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

Property and equipment fair value adjustment	$	(617,969	)
Other long-term assets fair value adjustments		(17,181	)
Long-term debt fair value adjustment		39,106
Net loss on fresh-start adjustments		(596,044	)
Tax impact on fresh-start adjustments		1,230
Net impact to retained earnings (accumulated deficit)	$	(594,814	)

The $596.0 million net loss on fresh-start adjustments is included in reorganization items, net in the statement of operations.

4. Reorganization Items, Net

Reorganization items represent liabilities settled, net of amounts incurred subsequent to the Chapter 11 filing as a direct result of the Plan and are classified as Reorganization items, net in our condensed consolidated statement of operations. The following table summarizes reorganization items (in thousands):

	Successor		Predecessor
	Period from August 1, 2016 to September 30, 2016		Period from January 1, 2016 to July 31, 2016
Net gain on settlement of liabilities subject to compromise	$	—	$	(632,059	)
Net loss on fresh-start adjustments		—		596,044
Stock-based compensation acceleration expense		—		25,086
Professional fees		246		20,228
Write-off of debt issuance costs		—		13,318
Fair value of warrants issued to Predecessor stockholders		—		6,797
DIP credit agreement financing costs		—		478
Total	$	246	$	29,892

For the periods from August 1, 2016 to September 30, 2016 and January 1, 2016 to July 31, 2016, cash payments for reorganization items totaled $0.4 million and $18.6 million, respectively.

5. Significant Accounting Policies

Fresh-Start Accounting

As discussed in Note 3, the Company applied fresh-start accounting upon emergence from bankruptcy on August 1, 2016 which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical condensed consolidated balance sheet. The effects of the Plan and the application of fresh-start accounting were reflected in our condensed consolidated financial statements as of August 1, 2016 and the related adjustments thereto were recorded in our condensed consolidated statements of operations as reorganization items for the periods prior to August 1, 2016 (Predecessor Company).

As a result, our condensed consolidated balance sheets and condensed consolidated statement of operations subsequent to the Effective Date will not be comparable to our condensed consolidated balance sheets and statements of operations prior to the Effective Date. Our condensed consolidated financial statements and related footnotes are presented with a black line division which delineates the lack of comparability between amounts presented on or after August 1, 2016 and dates prior thereto. Our financial results for future periods following the application of fresh-start accounting will be different from historical trends, and such differences may be material.

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6. Sale of Hodges Trucking Company, L.L.C.

On June 14, 2015, we sold Hodges Trucking Company, L.L.C. (“Hodges”), our previously wholly-owned subsidiary that provided drilling rig relocation and logistics services, to Aveda Transportation and Energy Services Inc. (“Aveda”) for aggregate consideration of $42.0 million. At the time of the sale, Hodges owned 270 rig relocation trucks and 65 cranes and forklifts. The sale did not include the land and buildings used in Hodges’ operations.

The consideration received consisted of $15.0 million in cash and a $27.0 million secured promissory note due June 15, 2020 (the “Note Receivable”). The Note Receivable bears a fixed interest rate of 9.00% per annum, which is payable quarterly in arrears beginning on June 30, 2015. Aveda can, at any time, make prepayments of principal before the maturity date without premium or penalty. The Note Receivable is secured by a second lien on substantially all of Aveda’s fixed assets and accounts receivable. The Note Receivable is presented in other long-term assets on our condensed consolidated balance sheet.

In connection with fresh-start accounting (see Note 3), the Note Receivable was recorded at fair value of $20.5 million using an income approach. The difference between the $27.0 million face amount and the fair value recorded in fresh-start accounting is being accreted over the remaining life of the Note Receivable.

We recognized interest income of $0.4 million, $0.2 million and $1.4 million during the Current Successor Quarter, Current Predecessor Quarter and Current Predecessor Period, respectively, related to the Note Receivable. We recognized interest income of $0.6 million and $0.7 million during the Prior Predecessor Quarter and Prior Predecessor Period, respectively, related to the Note Receivable.

We recognized a loss of $35.0 million on the sale of Hodges during the Prior Predecessor Period. Additionally, we recognized $2.1 million of stock-based compensation expense related to the vesting of restricted stock held by Hodges employees and $0.6 million of severance-related costs during the Prior Predecessor Period.

Hodges was included in our oilfield trucking segment. The sale of Hodges did not qualify as discontinued operations because the sale did not represent a strategic shift that had or will have a major effect on our operations or financial results.

7. Change in Accounting Estimate

We review the estimated useful lives of our property and equipment on an ongoing basis. Based on this review in the first quarter of 2015, we concluded that the estimated useful lives of certain drilling rig components and certain drilling rigs were shorter than the estimated useful lives used for depreciation in our consolidated financial statements. We reflected this useful life change as a change in estimate, effective January 1, 2015, which increased depreciation expense by $0.6 million and $13.7 million during the Prior Predecessor Quarter and Prior Predecessor Period, respectively. For the Prior Predecessor Quarter and Prior Predecessor Period, these changes increased our net loss by $0.4 million and $9.3 million, respectively, and increased our basic and diluted loss per share by $0.01 and $0.19, respectively.

8. Earnings Per Share

Upon emergence from bankruptcy on August 1, 2016, the Company’s then outstanding common stock was cancelled and the New Common Stock and Warrants were issued.

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide nonforfeitable dividend rights and are required to be included in the computation of our basic earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Diluted earnings per share is computed using the weighted average shares outstanding for basic earnings per share, plus the dilutive effect of stock options for the Predecessor periods and warrants for the Successor period. For the Predecessor periods, the dilutive effect of unvested restricted stock and stock options was determined using the

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treasury stock method, which assumes the amount of unrecognized compensation expense related to unvested share-based compensation awards is used to repurchase shares at the average market price for the period. For the Successor period, the dilutive effect of warrants is determined using the treasury stock method, which assumes that any proceeds obtained upon the exercise of the warrants would be used to purchase common stock at the average market price for the period.

	Successor			Predecessor						Successor			Predecessor
	Two Months Ended September 30, 2016			One Month Ended July 31, 2016			Three Months Ended September 30, 2015			Two Months Ended September 30, 2016			Seven Months Ended July 31, 2016			Nine Months Ended September 30, 2015
				(In thousands, except per share data)
Basic earnings per share:
Allocation of earnings:
Net loss	$	(36,528	)	$	(11,640	)	$	(48,530	)	$	(36,528	)	$	(155,710	)	$	(160,800	)
Weighted average shares outstanding, basic		22,041			55,847			51,117			22,041			54,832			49,627
Basic loss per share	$	(1.66	)	$	(0.21	)	$	(0.95	)	$	(1.66	)	$	(2.84	)	$	(3.24	)
Diluted earnings per share:
Allocation of earnings:
Net loss	$	(36,528	)	$	(11,640	)	$	(48,530	)	$	(36,528	)	$	(155,710	)	$	(160,800	)
Weighted average shares outstanding, diluted(a)(b)(c)		22,041			55,847			51,117			22,041			54,832			49,627
Diluted loss per share	$	(1.66	)	$	(0.21	)	$	(0.95	)	$	(1.66	)	$	(2.84	)	$	(3.24	)

(a) No incremental shares of potentially dilutive restricted stock awards or units were included for the periods presented as their effect was antidilutive under the treasury stock method.

(b) The exercise price of stock options exceeded the average market price of our common stock during the Current Predecessor Quarter, the Current Predecessor Period, the Prior Predecessor Quarter and the Prior Predecessor Period. Therefore, the stock options were not dilutive.

(c) The exercise price of warrants exceeded the average market price of our common stock during the Current Successor Quarter. Therefore, the warrants were not dilutive.

9. Property and Equipment Held for Sale

During the Current Successor Quarter, we identified certain drilling rigs to sell. We are required to present such assets at the lower of carrying amount or fair value less the anticipated costs to sell at the time they meet the criteria for held-for-sale accounting. Estimated fair value was based on the expected sales price, less costs to sell. Included in property and equipment held for sale on our consolidated balance sheet was $8.4 million as of September 30, 2016. These assets are included in our drilling segment.

10. Asset Sales and Impairments and Other

Asset Sales

During the Current Successor Quarter and Current Predecessor Period, we sold assets, primarily consisting of real estate and ancillary equipment, for $5.7 million and $3.3 million, respectively. During the nine months ended September 30, 2015, we sold our water hauling assets for $6.5 million, which consisted of property and equipment that had a total carrying amount of $12.3 million, and other ancillary equipment for $12.1 million. We recorded net (gains) losses on sales of property and equipment of approximately ($0.8) million, $0.8 million and $15.0 million related to these asset sales during the Current Successor Quarter, Current Predecessor Period and Prior Predecessor Period, respectively.

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Impairments and Other

A summary of our impairments and other is as follows (in thousands):

	Successor		Predecessor				Successor		Predecessor
	Two Months Ended September 30, 2016		One Month Ended July 31, 2016		Three Months Ended September 30, 2015		Two Months Ended September 30, 2016		Seven Months Ended July 31, 2016		Nine Months Ended September 30, 2015
Drilling rigs held for use	$	—	$	—	$	—	$	—	$	305	$	3,290
Drilling-related services equipment		—		—		—		—		2,900		8,687
Trucking and water disposal equipment		—		—		—		—		—		2,737
Other		—		22		1,566		—		2,911		2,006
Total impairments and other	$	—	$	22	$	1,566	$	—	$	6,116	$	16,720

We recognized $0.3 million and $3.3 million of impairment charges during the Current Predecessor Period and Prior Predecessor Period, respectively, for certain drilling rigs that we deemed to be impaired based on our assessment of future demand and the suitability of the identified rigs in light of this demand. Estimated fair value for these drilling rigs was determined using significant unobservable inputs (Level 3) based on a market approach.

We recognized $2.9 million and $8.7 million of impairment charges during the Current Predecessor Period and Prior Predecessor Period, respectively, for drilling-related services equipment that we deemed to be impaired based on the expected future cash flows of this equipment. The estimated fair value for the drilling-related services equipment was determined using significant unobservable inputs (Level 3) based on a market approach.

We recognized $2.7 million of impairment charges during the Prior Predecessor Period for certain trucking and water disposal equipment that we deemed to be impaired based on expected future cash flows of this equipment. Estimated fair value for the trucking and fluid disposal equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

We recognized impairment charges of a nominal amount, $2.9 million, $1.6 million and $2.0 million during the Current Predecessor Quarter, Current Predecessor Period, Prior Predecessor Quarter and Prior Predecessor Period, respectively, related to certain other property and equipment that we deemed to be impaired based on our assessment of the market value and expected future cash flows of the long-lived asset. Estimated fair value for this property and equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

The assumptions used in our impairment evaluation for long-lived assets are inherently uncertain and require management’s judgment.

11. Debt

As of September 30, 2016 and December 31, 2015, our long-term debt consisted of the following (in thousands):

	Successor		Predecessor
	September 30, 2016		December 31, 2015
6.625% Senior Notes due 2019	$	—	$	650,000
6.50% Senior Notes due 2022		—		450,000
Term Loans		428,347		493,250
Total debt		428,347		1,593,250
Less: Current portion of long-term debt		5,000		5,000
Less: Unamortized deferred financing costs		—		23,658
Total long-term debt	$	423,347	$	1,564,592

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2019 Senior Notes

In October 2011, we issued $650.0 million in aggregate principal amount of 6.625% Senior Notes due 2019. The filings of the Bankruptcy Petitions described in Note 2 constituted an event of default with respect to the 2019 Notes. The Company did not make the payment of $21.5 million in accrued interest that was due on May 15, 2016. The amount of contractual interest on the 2019 Notes that was not recorded from June 7, 2016 through July 31, 2016 was $6.5 million.

On the Effective Date, by operation of the Plan, all outstanding obligations under the 2019 Notes were cancelled.

2022 Senior Notes

In June 2014, we issued $500.0 million in aggregate principal amount of 6.50% Senior Notes due 2022. The filings of the Bankruptcy Petitions described in Note 2 constituted an event of default with respect to the 2022 Notes. The Company did not make the payment of $14.6 million in accrued interest that was due on July 15, 2016. The amount of contractual interest on the 2022 Notes that was not recorded from June 7, 2016 through July 31, 2016 was $4.4 million.

On the Effective Date, by operation of the Plan, all outstanding obligations under the 2022 Notes were cancelled.

During the Prior Predecessor Quarter, we repurchased and cancelled $10.0 million in aggregate principal amount of the 2022 Notes for $4.9 million. We recognized gains on extinguishment of debt of $5.0 million, which included accelerated amortization of deferred financing costs of $0.1 million. During the Prior Predecessor Period, we repurchased and cancelled $50.0 million in aggregate principal amount of the 2022 Notes in multiple transactions for $31.3 million. We recognized gains on extinguishment of debt of $18.1 million, which included accelerated amortization of deferred financing costs of $0.6 million.

Term Loans

In June 2014, we entered into a $400.0 million seven-year term loan credit agreement (the “Term Loan”). Borrowings under the Term Loan bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month London Interbank Offered Rate (“LIBOR”) rate adjusted daily plus 1.00% or (ii) LIBOR, with a floor of 0.75%, plus, in each case, an applicable margin. The applicable margin for borrowings is 2.00% for Base Rate loans and 3.00% for LIBOR loans, depending on whether the Base Rate or LIBOR is used, provided that if and for so long as the leverage ratio is less than a certain level and the term loans have certain ratings from each of S&P and Moody’s, such margins will be reduced by 0.25%. As of September 30, 2016, the applicable rate for borrowing under the Term Loan was 3.75%. The Term Loan is repayable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Term Loan and will mature in full on June 25, 2020.

Obligations under the Term Loan are guaranteed jointly and severally by all of our present and future direct and indirect wholly-owned material domestic subsidiaries, other than certain excluded subsidiaries. Amounts borrowed under the Term Loan are secured by liens on all of our equity interests in our current and future subsidiaries, and all of our subsidiaries’ present and future real property, equipment (including drilling rigs and frac spread equipment), fixtures and other fixed assets.

We may prepay all or a portion of our Term Loan at any time. Borrowings under our Term Loan may be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain condemnation events, and with excess cash flow in any calendar year in which our leverage ratio exceeds 3.25 to 1.00. The Term Loan contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates.

On May 13, 2015, we entered into an incremental term supplement to the Term Loan and borrowed $100.0 million in aggregate principal amount (the “Incremental Term Loan”), receiving net proceeds of $94.5 million.

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Borrowings under the Incremental Term Loan bear interest at our option at either (i) LIBOR, with a floor of 1.00% or (ii) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month LIBOR rate adjusted daily plus 1.00%, plus, in each case, an applicable margin. The applicable margin for borrowings is 9.00% for LIBOR loans and 8.00% for Base Rate loans, depending on whether the Base Rate or LIBOR is used. As of September 30, 2016, the applicable rate for borrowing under the Incremental Term Loan was 10%. The Incremental Term Loan is payable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Incremental Term Loan and will mature in full on June 25, 2021.

Obligations under the Incremental Term Loan are guaranteed jointly and severally by all of our present and future direct and indirect wholly-owned material domestic subsidiaries, other than certain excluded subsidiaries. Amounts borrowed under the Incremental Term Loan are secured by liens on all of our equity interests in our current and future subsidiaries, and all of our subsidiaries’ present and future real property, equipment (including drilling rigs and frac spread equipment), fixtures and other fixed assets.

We may prepay all or a portion of our Incremental Term Loan at any time. Borrowings under our Incremental Term Loan may be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain condemnation events, and with excess cash flow in any calendar year in which our leverage ratio exceeds 3.25 to 1.00. The Incremental Term Loan contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. All prepayments of the Incremental Term Loan, except for mandatory prepayments described above, if made on or prior to the 42-month anniversary of the Incremental Term Loan, are subject to a prepayment premium equal to (i) a make-whole premium determined pursuant to a formula set forth in the Incremental Term Loan if made on or prior to the 18-month anniversary of the Incremental Term Loan, (ii) 5.00% of such principal amount if made after the 18-month anniversary and on or prior to the 30-month anniversary of the Incremental Term Loan, or (iii) 3.00% of such principal amount if made after the 30-month anniversary and on or prior to the 42-month anniversary of the Incremental Term Loan.

The filings of the Bankruptcy Petitions described in Note 2 constituted an event of default with respect to the Term Loan and the Incremental Term Loan. Upon the Effective Date of the Plan, such defaults were deemed cured or waived. As outlined in the Plan, we paid a consent fee equal to 2% of the Term Loan and Incremental Term Loan, paid $15.0 million of the Incremental Term Loan balance and the Incremental Term Loan prepayment premium was suspended for an 18-month period beginning on the Effective Date of the Plan.

On the Effective Date, by operation of the Plan, the Company entered into an amendment to the Term Loan and related guaranty agreement that, among other things, requires us to use commercially reasonable efforts to maintain credit ratings with Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services, restrict our ability to create foreign subsidiaries, and revise certain provisions to address the granting of new liens on our assets.

In addition, on the Effective Date, by operation of the Plan, the Company entered into a waiver in respect of the Incremental Term Loan (the “Incremental Term Loan Waiver”) whereby the incremental term lenders agreed to waive their right to any prepayment premium that may be payable in respect of the Incremental Term Loan (other than in connection with a pre-maturity acceleration of the Incremental Term Loan) for a period of eighteen months following the Effective Date. The Company also entered into an amendment to the Incremental Term Loan and the related guaranty agreement to revise certain provisions to address the granting of new liens on our assets.

On the Effective Date, by operation of the Plan, the Company entered into new amended and restated security documentation in connection with the Term Loan and Incremental Term Loan that grants liens on and security interests in substantially all of our assets (subject to certain exclusions). The Company also entered into an inter-creditor agreement with the agents for the New ABL Credit Facility, the Term Loan and the Incremental Term Loan that will govern the rights of its lenders with respect to the distribution of proceeds from our assets securing our obligations under the New ABL Credit Facility, the Term Loan and the Incremental Term Loan.

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Senior Secured Debtor-In-Possession Credit Agreement

On June 8, 2016, in connection with the filings of the Bankruptcy Petitions, the Company, with certain of our subsidiaries as borrowers, entered into a senior secured debtor-in-possession credit facility with total commitments of $100.0 million.

On the Effective Date, by operation of the Plan, the DIP Facility was amended and restated, and the outstanding obligations pursuant thereto were converted to obligations under the New ABL Credit Facility.

New ABL Credit Facility

On the Effective Date, by operation of the Plan, certain of our domestic subsidiaries as borrowers entered into a five-year senior secured revolving credit facility with total commitments of $100.0 million. The maximum amount that we may borrow under the New ABL Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable, subject to reserves and other adjustments.

All obligations under the New ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by the Company and all of our other present and future direct and indirect material domestic subsidiaries. Borrowings under the New ABL Credit Facility are secured by liens on substantially all of our personal property, and bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the rate of interest publicly announced by Wells Fargo Bank, National Association, as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR Rate plus 1.00%, each of which is subject to an applicable margin, or (ii) LIBOR, plus, in each case, an applicable margin. The applicable margin ranges from 1.00% to 1.50% per annum for Base Rate loans and 2.00% to 2.50% per annum for LIBOR loans. The unused portion of the New ABL Credit Facility is subject to a commitment fee that varies from 0.375% to 0.50% per annum, according to average unused amounts. Interest on LIBOR loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on Base Rate loans is payable monthly in arrears.

The New ABL Credit Facility contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. The New ABL Credit Facility also requires maintenance of a fixed charge coverage ratio based on the ratio of consolidated EBITDA to fixed charges, in each case as defined in the New ABL Credit Facility. If we fail to perform our obligations under the agreement that results in an event of default, the commitments under the New ABL Credit Facility could be terminated and any outstanding borrowings under the New ABL Credit Facility may be declared immediately due and payable. The New ABL Credit Facility also contains cross default provisions that apply to our other indebtedness.

As of September 30, 2016, no borrowings were outstanding under the New ABL Credit Facility.

12. Other Current Liabilities

Other current liabilities as of September 30, 2016 and December 31, 2015 are detailed below (in thousands):

	Successor		Predecessor
	September 30, 2016		December 31, 2015
Payroll-related accruals	$	14,100	$	21,561
Accrued operating expenses		9,814		29,760
Self-insurance reserves		9,011		9,718
Income, property, sales, use and other taxes		4,347		8,336
Accrued capital expenditures		4,019		5,993
Interest		3,752		22,950
Total Other Current Liabilities	$	45,043	$	98,318

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13. Commitments and Contingencies

Operating Leases

As of September 30, 2016, we were party to five lease agreements with various third parties to utilize 724 lease rail cars for initial terms of five to seven years. Additional rental payments are required for the use of rail cars in excess of the allowable mileage stated in the respective agreement.

As of September 30, 2016, we were also party to various lease agreements for other property and equipment with varying terms.

Aggregate undiscounted minimum future lease payments under our operating leases at September 30, 2016 are presented below:

	Rail Cars		Other		Total
	(In thousands)
Remainder of 2016	$	1,006	$	206	$	1,212
2017		3,290		373		3,663
2018		2,165		240		2,405
2019		1,331		30		1,361
2020		490		—		490
Total	$	8,282	$	849	$	9,131

Rent expense for real property, rail cars and other property and equipment was $1.0 million, $0.7 million and $4.1 million, for the Current Successor Quarter, Current Predecessor Quarter and Current Predecessor Period, respectively, and $2.2 million and $6.2 million for the Prior Predecessor Quarter and Prior Predecessor Period, respectively. These expenses are included in operating costs in our condensed consolidated statements of operations.

Other Commitments

Much of the equipment we purchase requires long production lead times. As a result, we usually have outstanding orders and commitments for such equipment. As of September 30, 2016, we had $2.6 million of purchase commitments related to future capital expenditures that we expect to incur in the fourth quarter of 2016.

Litigation

While the filing of the Bankruptcy Petitions automatically stayed certain actions against the Company, including actions to collect pre-petition indebtedness or to exercise control over the property of its bankruptcy estates, the Company received an order from the Bankruptcy Court allowing it to pay all general claims, including claims of litigation counterparties, in the ordinary course of business in accordance with applicable non-bankruptcy laws notwithstanding the commencement of the Chapter 11 cases. The Plan confirmed in the Chapter 11 cases provides for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that have not otherwise been satisfied or addressed during the Chapter 11 cases.

On the Effective Date, by operation of the Plan, the Company, on its behalf and on behalf of its subsidiaries, entered into a Litigation Trust Agreement (the “Litigation Trust Agreement”) with Alan Carr (the “Trustee”), pursuant to which the Litigation Trust (the “Trust”) was established for the benefit of specified holders of allowed claims. Pursuant to the Plan and the Confirmation Order, the Company transferred specified claims and causes of action to the Trust with title to such claims and causes of action being free and clear of all liens, claims, encumbrances, and interests. In addition, pursuant to the Plan and Confirmation Order, the Company transferred $50,000 in cash to the Trust to pay the reasonable costs and expenses associated with the administration of the Trust. The Trustee may prosecute the transferred claims and causes of action and conduct such other action as described in and authorized by the Plan, make timely and appropriate distributions to the beneficiaries of the Trust, and otherwise carry out the provisions of the Litigation Trust Agreement. The Company is not a beneficiary of the Trust.

We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, property damage claims and contract actions. We record an associated liability when a loss is probable and the amount can be reasonably estimated. Although the outcome of litigation cannot be

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predicted with certainty, management is of the opinion that no pending or threatened lawsuit or dispute incidental to our business operations is likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued and actual results could differ materially from management’s estimates.

Self-Insured Reserves

We are self-insured up to certain retention limits with respect to workers’ compensation and general liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history. Included in operating costs is workers’ compensation expense (credits) of $0.5 million, $0.3 million and $2.4 million for the Current Successor Quarter, Current Predecessor Quarter and Current Predecessor Period, respectively, and ($0.6) million and $4.1 million for the Prior Predecessor Quarter and Prior Predecessor Period, respectively.

14. Stock-Based Compensation

2014 Incentive Plan

Upon the Company’s emergence from bankruptcy on August 1, 2016, as discussed in Note 2, the Company’s common stock was canceled and New Common Stock was issued. SSE’s existing stock-based compensation awards under the stock-based compensation program prior to emergence from bankruptcy (the “2014 Incentive Plan”) were also either vested or canceled upon the Company’s emergence from bankruptcy. Accelerated vesting and cancellation of these stock-based compensation awards resulted in the recognition of expense, on the date of vesting or cancellation, to record any previously unamortized expense related to the awards. During the Current Predecessor Quarter, the Company recognized expense of $25.1 million as a result of the vestings and cancellations, which is included in reorganization items, net in the statement of operations.

The 2014 Incentive Plan consisted of restricted stock available to employees and stock options. The restricted stock awards and stock options were equity-classified awards. Included in operating costs and general and administrative expenses is stock-based compensation expense of $1.3 million, $12.3 million, $9.9 million and $32.4 million for the Current Predecessor Quarter, Current Predecessor Period, Prior Predecessor Quarter and Prior Predecessor Period, respectively, related the to 2014 Incentive Plan.

2016 Omnibus Incentive Plan

In accordance with the Plan, on September 20, 2016, the Company adopted the 2016 Omnibus Incentive Plan. Our stock-based compensation program currently consists of restricted stock units available to employees and directors, which are equity-classified awards. The aggregate number of shares of common stock reserved for issuance pursuant to the 2016 Omnibus Incentive Plan is 2,200,000.

The fair value of the restricted stock units is determined based on the fair market value of SSE common shares on the date of grant. This value is amortized over the vesting period. Included in operating costs and general and administrative expenses is stock-based compensation expense of $8.2 million for the Current Successor Quarter related to the 2016 Omnibus Incentive Plan.

A summary of the status of changes of unvested shares of restricted stock units under the 2016 Omnibus Incentive Plan is presented below:

	Number of Unvested Restricted Shares			Weighted Average Grant-Date Fair Value
	(In thousands)
Unvested shares as of September 20, 2016		—		$	—
Granted		1,945		$	17.31
Vested		(473	)	$	17.31
Forfeited		—		$	—
Unvested shares as of September 30, 2016		1,472		$	17.31

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As of September 30, 2016, there was $25.5 million of total unrecognized compensation cost related to the unvested restricted stock units. The cost is expected to be recognized over a period of 36 months.

Performance Share Units

We also recognize compensation expense (benefit) related to performance share units (“PSUs”) granted by Chesapeake Energy Corporation (“CHK”) to our chief executive officer. Following the spin-off, compensation expense is recognized through the changes in fair value of the PSUs over the vesting period with a corresponding adjustment to equity and any related cash obligations are the responsibility of CHK. We recognized (credits) of ($0.4) million, ($0.1) million and ($1.3) million related to these PSUs for the Current Predecessor Period, Prior Predecessor Quarter and Prior Predecessor Period, respectively.

15. Income Taxes

Our effective tax rate was 0%, 71% and 28% for the Current Successor Quarter, Current Predecessor Quarter and Current Predecessor Period, respectively, and 27% and 32% for the Prior Predecessor Quarter and Prior Predecessor Period, respectively. The decrease in the effective income tax rate for the Current Successor Quarter is primarily due to the tax benefit at expected rates being offset by a full valuation allowance. The increase in the effective income tax rate for the Current Predecessor Quarter was primarily the result of the tax effect of reorganization adjustments. Further, our effective tax rate can fluctuate as a result of state income taxes, permanent differences and changes in pre-tax income.

As of the bankruptcy emergence date of August 1, 2016, we are in a net deferred tax asset position and based on our anticipated operating results in subsequent quarters, we project being in a net deferred tax asset position at December 31, 2016. We believe it is more likely than not that these deferred tax assets will not be realized, and accordingly, have recorded a full valuation allowance against our net deferred tax assets. In connection with the Company’s emergence from Chapter 11 and subsequent application of fresh-start accounting, we recorded a valuation allowance of $219.6 million in the Current Predecessor Quarter. In the Current Successor Quarter we recorded a valuation allowance of $12.9 million, which reduced our income tax benefit to zero in the period.

A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry.

The benefit of an uncertain tax position taken or expected to be taken on an income tax return is recognized in the consolidated financial statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authority. Interest and penalties, if any, related to uncertain tax positions would be recorded in interest expense and other expense, respectively. There were no uncertain tax positions at September 30, 2016 and December 31, 2015.

As described in Note 2, elements of the Plan provided that our 2019 Notes and 2022 Notes were exchanged for New Common Stock. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Code provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI is approximately $625.3 million, which will reduce the value of the Company’s net operating losses. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year subsequent to the date of emergence, or January 1, 2017. The reduction of net operating losses is expected to be fully offset by a corresponding decrease in valuation allowance.

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The Code provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future taxable income in the event of a change in ownership. Emergence from Chapter 11 bankruptcy proceedings resulted in a change in ownership for purposes of the Code. The amount of remaining net operating loss carryforward available after the reduction for CODI will be subject to an annual limitation under Section 382 of the Code due to the change in ownership.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes,” which simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets be classified as noncurrent in the balance sheet. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We elected to adopt this change in accounting principle prospectively as of the bankruptcy emergence date of August 1, 2016, and therefore prior years are no longer comparable. The adoption of this standard had no immediate impact on our financial statements due to the full valuation allowance as of September 30, 2016.

16. Equity Method Investment

Effective June 6, 2016, we assigned our 49% ownership of the membership interest in Maalt Specialized Bulk, L.L.C. (“Maalt”) back to the majority owners. We use the equity method of accounting to account for our investment in Maalt, which had a zero value as of June 6, 2016. We recorded equity method adjustments to our investment of ($0.2) million and $0.9 million for our share of Maalt’s income (loss) for the Prior Predecessor Quarter and Prior Predecessor Period, respectively.

We reviewed our equity method investment for impairment whenever certain impairment indicators existed, including the absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. A loss in value of an investment which is other than a temporary decline should be recognized. We estimated that the fair value of our investment in Maalt was approximately zero as of December 31, 2015, which was below the carrying value of the investment and resulted in a non-cash impairment charge of $8.8 million during the year ended December 31, 2015. Estimated fair value for our investment in Maalt was determined using significant unobservable inputs (Level 3) based on an income approach.

17. Fair Value Measurements

The fair value measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Authoritative guidance on fair value measurements and disclosures clarifies that a fair value measurement for a liability should reflect the entity’s non-performance risk. In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:

Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2- Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3- Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources.

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Fair Value on Recurring Basis

The carrying values of cash, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.

Fair Value on Non-Recurring Basis

Fair value measurements were applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which consist primarily of long-lived asset impairments based on Level 3 inputs. See Note 10 for additional discussion.

Fair Value of Other Financial Instruments

The fair values of the Note Receivable and our debt are the estimated amounts that a market participant would pay to purchase the Note Receivable or our debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on quoted market prices or average valuations of similar debt instruments at the balance sheet date for those debt instruments for which quoted market prices are not available. Estimated fair values are determined by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

	Successor				Predecessor
	September 30, 2016				December 31, 2015
	Carrying Amount		Fair Value (Level 2)		Carrying Amount		Fair Value (Level 2)
Financial assets:
Note Receivable	$	20,827	$	20,723	$	27,000	$	17,842
Financial liabilities:
6.625% Senior Notes due 2019	$	—	$	—	$	642,713	$	221,975
6.5% Senior Notes due 2022	$	—	$	—	$	444,701	$	71,865
Term Loans	$	428,347	$	426,142	$	482,178	$	371,080
Less: Current portion of long-term debt	$	5,000			$	5,000
Total long-term debt	$	423,347			$	1,564,592

18. Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject us to concentrations of credit risk consist principally of trade receivables. Accounts receivable from CHK and its affiliates were $68.2 million and $109.6 million as of September 30, 2016 and December 31, 2015, representing 62% and 65%, respectively, of our total accounts receivable.

Revenues from CHK and its affiliates were $42.1 million, $22.3 million and $217.6 million for the Current Successor Quarter, Current Predecessor Quarter and Current Predecessor Period, or 53%, 55% and 65%, respectively, of our total revenues. Revenues from CHK and its affiliates were $136.0 million and $656.5 million for the Prior Predecessor Quarter and Prior Predecessor Period, or 64% and 70%, respectively, of our total revenues. We believe that the loss of this customer would have a material adverse effect on our operating results as there can be no assurance that replacement customers would be identified and accessed in a timely fashion.

Included in total revenues are amounts related to idle-but-contracted (“IBC”) payments of $16.5 million, $9.2 million and $80.7 million for the Current Successor Quarter, Current Predecessor Quarter and Current Predecessor Period, respectively, and $22.6 million and $49.6 million for the Prior Predecessor Quarter and Prior Predecessor Period, respectively. The Company has continued to diversify its customer base as, excluding IBC revenues, non-CHK revenue as a percentage of total revenue was 58%, 55% and 42% for the Current Successor Quarter, Current Predecessor Quarter and Current Predecessor Period, respectively, compared to 38% and 31% for the Prior Predecessor Quarter and Prior Predecessor Period, respectively. See Note 19 for further discussion of agreements entered into with CHK as part of the spin-off, including a services agreement and rig-specific daywork drilling contracts.

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19. Transactions with CHK

Prior to the completion of our spin-off on June 30, 2014, we were a wholly owned subsidiary of CHK, and transactions between us and CHK (including its subsidiaries) were considered to be transactions with affiliates. Subsequent to June 30, 2014, CHK and its subsidiaries are not considered affiliates of us or any of our subsidiaries. We have disclosed below agreements entered into between us and CHK prior to the completion of our spin-off.

On June 25, 2014, we entered into a master separation agreement and several other agreements with CHK as part of the spin-off. The master separation agreement entered into between CHK and us governs the separation of our businesses from CHK, the distribution of our shares to CHK shareholders and other matters related to CHK’s relationship with us, including cross-indemnities between us and CHK. In general, CHK agreed to indemnify us for any liabilities relating to CHK’s business and we agreed to indemnify CHK for any liabilities relating to our business.

On June 25, 2014, we entered into a tax sharing agreement with CHK, which governs the respective rights, responsibilities and obligations of CHK and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and certain other matters regarding taxes.

On June 25, 2014, we entered into an employee matters agreement with CHK providing that each company has responsibility for our own employees and compensation plans. The agreement also contains provisions concerning benefit protection for both SSE and CHK employees, treatment of holders of CHK stock options, restricted stock, restricted stock units and performance share units, and cooperation between us and CHK in the sharing of employee information and maintenance of confidentiality.

On June 25, 2014, we entered into a transition services agreement with CHK under which CHK provides or makes available to us various administrative services and assets for specified periods beginning on the distribution date. In consideration for such services, we pay CHK fees, a portion of which is a flat fee, generally in amounts intended to allow CHK to recover all of its direct and indirect costs incurred in providing those services. These charges from CHK were $8.3 million for the Prior Predecessor Period. This agreement was terminated during the second quarter of 2015.

We are party to a master services agreement with CHK pursuant to which we provide drilling and other services and supply materials and equipment to CHK. Drilling services are typically provided pursuant to rig-specific daywork drilling contracts similar to those we use for other customers. The specific terms of each request for other services are typically set forth in a field ticket, purchase order or work order. The master services agreement contains general terms and provisions, including minimum insurance coverage amounts that we are required to maintain and confidentiality obligations with respect to CHK’s business, and allocates certain operational risks between CHK and us through indemnity provisions. The master services agreement will remain in effect until we or CHK provides 30 days written notice of termination, although such agreement may not be terminated during the term of the services agreement described below.

Prior to the spin-off, we were party to a services agreement with CHK under which CHK guaranteed the utilization of a portion of our drilling rig and hydraulic fracturing fleets during the term of the agreement. In connection with the spin-off, we entered into new services agreements with CHK which supplements the master services agreement. Under the new services agreement, CHK is required to utilize the lesser of (i) seven, five and three of our pressure pumping crews in years one, two and three of the agreement, respectively, or (ii) 50% of the total number of all pressure pumping crews working for CHK in all its operating regions during the respective year. CHK is required to utilize our pressure pumping services for a minimum number of stages as set forth in the agreement. CHK is entitled to terminate the agreement in certain situations, including in the event we fail to materially comply with the overall quality of service provided by similar service providers. Additionally, CHK’s requirement to utilize our services may be suspended under certain circumstances, such as if we are unable to timely accept and supply services ordered by CHK or as a result of a force majeure event.

In connection with the spin-off, we entered into rig-specific daywork drilling contracts with CHK for the provision of drilling services. The drilling contracts had a commencement date of July 1, 2014 and terms ranging from three months to three years. CHK has the right to terminate the drilling contracts under certain circumstances.

27

20. Segment Information

As of September 30, 2016, our revenues, income (loss) before income taxes and identifiable assets are primarily attributable to three reportable segments. During the three months ended June 30, 2015, we sold the remaining business and assets included in the oilfield trucking segment. Our former oilfield trucking segment’s historical results for periods prior to the sales continue to be included in our historical financial results as a component of continuing operations as reflected in the tables below.

Each of these segments represents a distinct type of business. These segments have separate management teams which report to our chief operating decision maker. The results of operations in these segments are regularly reviewed by the chief operating decision maker for purposes of determining resource allocation and assessing performance. Management evaluates the performance of our segments based upon adjusted earnings before interest, taxes and depreciation and amortization.

Prior to 2016, the information that was regularly reviewed by our chief operating decision maker included general and administrative expenses that were allocated to each of our reportable segments for corporate overhead functions provided by the Other Operations segment on behalf of our reportable segments. Effective January 1, 2016, we no longer allocate general and administrative expenses to our reportable segments from the Other Operations segment in the information that is reviewed by our chief operating decision maker. For comparability purposes, this change has been reflected through retroactive revision of three and nine months ended September 30, 2015 segment information.

The following is a description of our segments and other operations:

Drilling. Our drilling segment provides land-based drilling services. As of September 30, 2016, we owned a fleet of 90 land drilling rigs.

Hydraulic Fracturing. Our hydraulic fracturing segment provides land-based hydraulic fracturing and other well stimulation services. As of September 30, 2016, we owned 13 hydraulic fracturing fleets with an aggregate of 500,000 horsepower.

Oilfield Rentals. Our oilfield rentals segment provides premium rental tools for land-based drilling, completion and workover activities.

Former Oilfield Trucking. Our oilfield trucking segment historically provided drilling rig relocation and logistics services as well as fluid handling services. During the three months ended June 30, 2015, we sold Hodges and sold our water hauling assets. As part of the spin-off, we sold our crude hauling assets to a third party. As of June 30, 2015, there were no remaining assets or operations in the oilfield trucking segment, although we do have ongoing liabilities, primarily related to insurance claims, whose income statement impact is charged to general and administrative expense. Our former oilfield trucking segment’s historical results for periods prior to the sale continue to be included in our historical financial results as a component of continuing operations as reflected in the tables below.

Other Operations. Our other operations consists primarily of our corporate functions, including our Term Loans and New ABL Credit Facility for the Successor period and 2019 Notes, 2022 Notes, Term Loans and ABL Credit Facility for the Predecessor periods.

	Drilling			Hydraulic Fracturing			Oilfield Rentals			Other Operations			Intercompany Eliminations			Consolidated Total
	(In thousands)
Successor
For the Two Months Ended September 30, 2016
Revenues	$	42,999		$	30,540		$	6,173		$	521		$	(577	)	$	79,656
Intersegment revenues		(30	)		—			(26	)		(521	)		577			—
Total revenues	$	42,969		$	30,540		$	6,147		$	—		$	—		$	79,656
Depreciation and amortization		11,710			14,002			3,966			1,530			—			31,208
(Gains) losses on sales of property and equipment, net		(77	)		40			(750	)		(11	)		—			(798	)
Interest expense		—			—			—			(6,185	)		—			(6,185	)
Other income		56			3			81			746			—			886
Reorganization items, net		—			—			—			(246	)		—			(246	)
Income (Loss) Before Income Taxes	$	12,477		$	(22,580	)	$	(2,704	)	$	(23,721	)	$	—		$	(36,528	)
As of September 30, 2016:
Total Assets	$	568,959		$	171,964		$	43,361		$	188,669		$	—		$	972,953

28

	Drilling			Hydraulic Fracturing			Oilfield Rentals			Former Oilfield Trucking		Other Operations			Intercompany Eliminations			Consolidated Total
	(In thousands)
Predecessor
For The One Month Ended July 31, 2016
Revenues	$	20,085		$	17,502		$	2,861		$	—	$	692		$	(702	)	$	40,438
Intersegment revenues		—			—			(10	)		—		(692	)		702			—
Total revenues	$	20,085		$	17,502		$	2,851		$	—	$	—		$	—		$	40,438
Depreciation and amortization		11,999			7,399			2,425			—		1,079			—			22,902
Losses on sales of property and equipment, net		243			19			9			—		14			—			285
Impairments and other		—			—			—			—		22			—			22
Interest expense		—			—			—			—		(2,374	)		—			(2,374	)
Other income		58			9			2			—		322			—			391
Reorganization items, net		(514,627	)		(45,046	)		(18,966	)		—		562,174			—			(16,465	)
(Loss) Income Before Income Taxes	$	(514,216	)	$	(58,609	)	$	(21,242	)	$	—	$	554,325		$	—		$	(39,742	)
For The Three Months Ended September 30, 2015:
Revenues	$	80,782		$	118,137		$	15,122		$	—	$	2,112		$	(2,612	)	$	213,541
Intersegment revenues		(434	)		—			(75	)		—		(2,103	)		2,612			—
Total revenues	$	80,348		$	118,137		$	15,047		$	—	$	9		$	—		$	213,541
Depreciation and amortization		38,197			17,833			8,912			—		3,912			—			68,854
Losses (gains) on sales of property and equipment, net		1,952			172			(329	)		—		9			—			1,804

29

	Drilling			Hydraulic Fracturing			Oilfield Rentals			Former Oilfield Trucking			Other Operations			Intercompany Eliminations			Consolidated Total
	(In thousands)
Impairments and other		—			—			—			—			1,566			—			1,566
Interest expense		—			—			—			—			(25,480	)		—			(25,480	)
Gains on early extinguishment of debt		—			—			—			—			4,975			—			4,975
Loss from equity investee		—			(230	)		—			—			—			—			(230	)
Other income		402			102			27			—			411			—			942
Loss Before Income Taxes (as Previously Reported)	$	(8,703	)	$	(10,855	)	$	(10,028	)	$	—		$	(36,488	)	$	—		$	(66,074	)
Corporate overhead allocation		7,725			6,789			2,379			—			(16,893	)		—			—
Loss Before Income Taxes (as Adjusted)	$	(978	)	$	(4,066	)	$	(7,649	)	$	—		$	(53,381	)	$	—			(66,074	)
Predecessor
For The Seven Months Ended July 31, 2016
Revenues	$	154,813		$	160,723		$	18,597		$	—		$	4,842		$	(5,056	)	$	333,919
Intersegment revenues		(19	)		—			(195	)		—			(4,842	)		5,056			—
Total revenues	$	154,794		$	160,723		$	18,402		$	—		$	—		$	—		$	333,919
Depreciation and amortization		87,160			49,124			18,773			—			7,368			—			162,425
Losses (gains) on sales of property and equipment		1,211			66			(425	)		—			(4	)		—			848
Impairments and other		3,205			—			287			—			2,624			—			6,116
Interest expense		—			—			—			—			(48,116	)		—			(48,116	)
Other income		362			349			3			—			1,604			—			2,318
Reorganization items, net		(514,627	)		(45,046	)		(18,966	)		—			548,747			—			(29,892	)
Income (Loss) Before Income Taxes	$	(509,157	)	$	(91,966	)	$	(39,638	)	$	—		$	425,920		$	—		$	(214,841	)
For The Nine Months Ended September 30, 2015
Revenues	$	347,311		$	483,565		$	65,808		$	45,512		$	6,285		$	(10,025	)	$	938,456
Intersegment revenues		(465	)		—			(511	)		(2,773	)		(6,276	)		10,025			—
Total revenues	$	346,846		$	483,565		$	65,297		$	42,739		$	9		$	—		$	938,456

30

	Drilling			Hydraulic Fracturing			Oilfield Rentals			Former Oilfield Trucking			Other Operations			Intercompany Eliminations		Consolidated Total
	(In thousands)
Depreciation and amortization		125,936			51,915			31,659			8,787			8,482			—		226,779
Loss on sale of a business		—			—			—			—			34,989			—		34,989
Losses (gains) on sales of property and equipment		9,903			171			(777	)		5,728			(2	)		—		15,023
Impairments and other		12,417			—			—			2,737			1,566			—		16,720
Interest expense		—			—			—			—			(73,964	)		—		(73,964	)
Gains on early extinguishment of debt		—			—			—			—			18,061			—		18,061
Income from equity investee		—			877			—			—			—			—		877
Other income		395			1,099			33			16			346			—		1,889
Loss Before Income Taxes (as Previously Reported)	$	(22,984	)	$	(2,893	)	$	(30,008	)	$	(38,420	)	$	(140,950	)	$	—	$	(235,255	)
Corporate overhead allocation		24,246			19,551			6,483			4,182			(54,462	)		—		—
Income (Loss) Before Income Taxes (as Adjusted)	$	1,262		$	16,658		$	(23,525	)	$	(34,238	)	$	(195,412	)	$	—	$	(235,255	)
As of December 31, 2015:
Total Assets	$	1,144,144		$	291,584		$	92,588		$	—		$	374,302		$	—	$	1,902,618

21. Condensed Consolidating Financial Information

In October 2011, we issued the 2019 Notes with an aggregate principal amount of $650.0 million (see Note 11). On the Effective Date, by operation of the Plan, all outstanding obligations under the 2019 Notes were cancelled (see Note 2). Pursuant to the Indenture governing the 2019 Notes, such notes were fully and unconditionally and jointly and severally guaranteed by SSO’s parent, SSE, and all of SSO’s subsidiaries, other than SSF, which was a co-issuer of the 2019 Notes, and certain immaterial subsidiaries. Each of the subsidiary guarantors was 100% owned by SSO and there were no material subsidiaries of SSO other than the subsidiary guarantors. SSF and Western Wisconsin Sand Company, LLC were minor non-guarantor subsidiaries whose condensed consolidating financial information is included with the subsidiary guarantors. SSE and SSO had independent assets and operations. There were no significant restrictions on the ability of SSO or any subsidiary guarantor to obtain funds from its subsidiaries by dividend or loan.

Set forth below are condensed consolidating financial statements for SSE (“Parent”) and SSO (“Subsidiary Issuer”) on a stand-alone, unconsolidated basis, and their combined guarantor subsidiaries as of December 31, 2015 and for the three and nine months ended September 30, 2015. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

31

SEVENTY SEVEN ENERGY INC.

Condensed Consolidating Balance Sheet

	Predecessor
	December 31, 2015
	Parent		Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Assets:
Current Assets:
Cash	$	46	$	130,602		$	—		$	—		$	130,648
Accounts receivable, net		—		138			164,583			—			164,721
Inventory		—		—			18,553			—			18,553
Deferred income tax asset		—		376			1,123			—			1,499
Prepaid expenses and other		20		37,523			9,324			(29,726	)		17,141
Total Current Assets		66		168,639			193,583			(29,726	)		332,562
Property and Equipment:
Property and equipment, at cost		—		31,265			2,615,181			—			2,646,446
Less: accumulated depreciation		—		(4,958	)		(1,111,068	)		—			(1,116,026	)
Total Property and Equipment, Net		—		26,307			1,504,113			—			1,530,420
Other Assets:
Deferred financing costs, net		—		1,238			—			—			1,238
Other long-term assets		2,575		114,087			10,901			(89,165	)		38,398
Investments in subsidiaries and intercompany advances		575,089		1,415,997			—			(1,991,086	)		—
Total Other Assets		577,664		1,531,322			10,901			(2,080,251	)		39,636
Total Assets	$	577,730	$	1,726,268		$	1,708,597		$	(2,109,977	)	$	1,902,618
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	58	$	517		$	53,192		$	—		$	53,767
Current portion of long-term debt		—		5,000			—			—			5,000
Other current liabilities		14,131		25,276			88,637			(29,726	)		98,318
Total Current Liabilities		14,189		30,793			141,829			(29,726	)		157,085
Long-Term Liabilities:
Deferred income tax liabilities		—		—			149,788			(89,165	)		60,623
Long-term debt, less current maturities		444,701		1,119,891			—			—			1,564,592
Other long-term liabilities		—		495			983			—			1,478
Total Long-Term Liabilities		444,701		1,120,386			150,771			(89,165	)		1,626,693
Total Equity		118,840		575,089			1,415,997			(1,991,086	)		118,840
Total Liabilities and Stockholders’ Equity	$	577,730	$	1,726,268		$	1,708,597		$	(2,109,977	)	$	1,902,618

32

SEVENTY SEVEN ENERGY INC.

Condensed Consolidating Statement of Operations

	Predecessor
	Three Months Ended September 30, 2015
	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Revenues:
Revenues	$	—		$	3		$	214,713		$	(1,175	)	$	213,541
Operating Expenses:
Operating costs		—			—			160,889			—			160,889
Depreciation and amortization		—			2,010			66,845			—			68,854
General and administrative		12			10,533			17,338			(1,175	)		26,709
Losses on sales of property and equipment, net		—			—			1,804			—			1,804
Impairments and other		—			—			1,566			—			1,566
Total Operating Expenses		12			12,543			248,442			(1,175	)		259,822
Operating Loss		(12	)		(12,540	)		(33,729	)		—			(46,281	)
Other (Expense) Income:
Interest expense		(7,583	)		(17,897	)		—			—			(25,480	)
Gains on early extinguishment of debt		4,975			—			—			—			4,975
Loss from equity investee		—			—			(230	)		—			(230	)
Other income		—			223			719			—			942
Equity in net loss of subsidiary		(47,142	)		(24,175	)		—			71,317			—
Total Other (Expense) Income		(49,750	)		(41,849	)		489			71,317			(19,793	)
Loss Before Income Taxes		(49,762	)		(54,389	)		(33,240	)		71,317			(66,074	)
Income Tax Benefit		(1,232	)		(7,247	)		(9,065	)		—			(17,544	)
Net Loss	$	(48,530	)	$	(47,142	)	$	(24,175	)	$	71,317		$	(48,530	)

33

SEVENTY SEVEN ENERGY INC.

Condensed Consolidating Statement of Operations

	Predecessor
	Nine Months Ended September 30, 2015
	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Revenues:
Revenues	$	—		$	3		$	941,302		$	(2,849	)	$	938,456
Operating Expenses:
Operating costs		—			—			731,627			—			731,627
Depreciation and amortization		—			2,872			223,907			—			226,779
General and administrative		39			36,505			61,741			(2,849	)		95,436
Loss on sale of a business		—			34,989			—			—			34,989
(Gains) losses on sales of property and equipment, net		—			(19	)		15,042			—			15,023
Impairments and other		—			—			16,720			—			16,720
Total Operating Expenses		39			74,347			1,049,037			(2,849	)		1,120,574
Operating Loss		(39	)		(74,344	)		(107,735	)		—			(182,118	)
Other (Expense) Income:
Interest expense		(24,134	)		(49,830	)		—			—			(73,964	)
Gains on early extinguishment of debt		18,061			—			—			—			18,061
Income from equity investee		—			—			877			—			877
Other income		—			170			1,719			—			1,889
Equity in net loss of subsidiary		(157,215	)		(73,895	)		—			231,110			—
Total Other (Expense) Income		(163,288	)		(123,555	)		2,596			231,110			(53,137	)
Loss Before Income Taxes		(163,327	)		(197,899	)		(105,139	)		231,110			(235,255	)
Income Tax Benefit		(2,527	)		(40,684	)		(31,244	)		—			(74,455	)
Net Loss	$	(160,800	)	$	(157,215	)	$	(73,895	)	$	231,110		$	(160,800	)

34

SEVENTY SEVEN ENERGY INC.

Condensed Consolidating Statements of Cash Flows

	Predecessor
	Nine Months Ended September 30, 2015
	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Cash Flows From Operating Activities:	$	(34,101	)	$	179,172		$	437,550		$	(318,959	)	$	263,662
Cash Flows From Investing Activities:
Additions to property and equipment		—			(11,060	)		(140,739	)		—			(151,799	)
Proceeds from sales of assets		—			(172	)		18,745			—			18,573
Proceeds from sale of a business		—			15,000			—			—			15,000
Additions to investments		—			—			(112	)		—			(112	)
Distributions from affiliates		65,407			—			—			(65,407	)		—
Other		—			—			3,434			—			3,434
Net cash provided by (used in) investing activities		65,407			3,768			(118,672	)		(65,407	)		(114,904	)
Cash Flows From Financing Activities:
Borrowings from revolving credit facility		—			160,100			—			—			160,100
Payments on revolving credit facility		—			(210,600	)		—			—			(210,600	)
Payments to extinguish senior notes		(31,305	)		—			—			—			(31,305	)
Proceeds from issuance of term loan, net of issuance costs		—			94,481			—			—			94,481
Payments on term loan		—			(3,500	)		—			—			(3,500	)
Deferred financing costs		—			(784	)		—			—			(784	)
Distributions to affiliates		—			(65,407	)		(318,959	)		384,366			—
Other		—			(1,822	)		—			—			(1,822	)
Net cash (used in) provided by financing activities		(31,305	)		(27,532	)		(318,959	)		384,366			6,570
Net increase (decrease) in cash		1			155,408			(81	)		—			155,328
Cash, beginning of period		77			733			81			—			891
Cash, end of period	$	78		$	156,141		$	—		$	—		$	156,219

35

22. Recently Issued Accounting Standards

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which amends eight specific cash flow issues with the objective of reducing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation,” which modifies several aspects of the accounting for 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. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall,” which requires separate presentation of financial assets and liabilities on the balance sheet and requires evaluation of the need for valuation allowance of deferred tax assets related to available-for-sale securities. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017 with early adoption not permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance will have a material effect on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern,” which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early application permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; the FASB also provided for early adoption for annual reporting periods beginning after December 15, 2016. We are currently evaluating what impact this standard, including related ASU Nos. 2016-08, 2016-10, and 2016-12, will have on our consolidated financial statements.

36

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2015 and for the nine months ended September 30, 2016 combine the historical consolidated statements of operations of Patterson-UTI and SSE, giving effect to the merger as if it had occurred on January 1, 2015. The unaudited pro forma condensed combined balance sheet as of September 30, 2016 combines the historical condensed consolidated balance sheets of Patterson-UTI and SSE, giving effect to the merger as if it had occurred on September 30, 2016. The historical condensed consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the merger, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial statements were based on and should be read in conjunction with the:

• separate historical financial statements of Patterson-UTI as of and for the year ended December 31, 2015 and the related notes included in Patterson-UTI’s Annual Report on Form 10-K for the year ended December 31, 2015, which are incorporated by reference into this Current Report on Form 8-K;

• separate historical financial statements of SSE as of and for the year ended December 31, 2015 and the related notes included in SSE’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2015, which are incorporated by reference into this Current Report on Form 8-K;

• separate historical financial statements of Patterson-UTI as of and for the nine months ended September 30, 2016 and for the seven months ended July 31, 2016 and the related notes included in Patterson-UTI’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, which are incorporated by reference into this Current Report on Form 8-K; and

• separate historical financial statements of SSE as of and for the two months ended September 30, 2016 and for the seven months ended July 31, 2016 and the related notes included in SSE’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, which are incorporated by reference into this Current Report on Form 8-K;

The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. Such pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the merger been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma condensed combined financial statements have been prepared using the acquisition method of accounting under U.S. generally accepted accounting principles, and the regulations of the SEC. All material transactions between Patterson-UTI and SSE during the periods presented in the unaudited pro forma condensed combined financial statements have been eliminated. Patterson-UTI will be considered the acquirer in the merger for accounting purposes. The acquisition accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing these unaudited pro forma condensed combined financial statements. Differences between these preliminary estimates and the final acquisition accounting will occur, and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position.

The unaudited pro forma condensed combined financial statements do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the merger, the costs to integrate the operations of Patterson-UTI and SSE, or the costs necessary to achieve any such cost savings, operating synergies or revenue enhancements.

1

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of September 30, 2016

(in thousands)

	Patterson- UTI			SSE			Reclass Adjustments			Pro Forma Adjustments			Pro Forma Combined
ASSETS
Current assets:
Cash and cash equivalents	$	36,972		$	23,004								$	59,976
Accounts receivable, net		146,013			109,328									255,341
Federal and state income taxes receivable		3,838			—									3,838
Inventory		19,851			11,303			(8,284	) A					22,870
Deferred tax assets, net		34,897			—						680	B		35,577
Other		38,722			14,547			3,700	A					56,969
Total current assets		280,293			158,182			(4,584	)		680			434,571
Property and equipment, net		3,511,740			791,463			4,584	A		175,306	C		4,483,093
Goodwill		86,234			—						683,434	D		769,668
Intangibles, net		3,643			—						41,860	E		45,503
Deposits on equipment purchases		17,700			—									17,700
Note receivable		—			20,827									20,827
Other		9,263			2,481						(1,194	) F		10,550
Total assets	$	3,908,873		$	972,953		$	—		$	900,086		$	5,781,912
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	236,391		$	64,271					$	16,590	G	$	354,723
											35,161	H
											2,310	I
Current portion of long-term debt		—			5,000						(5,000	) J		—
Total current liabilities		236,391			69,271			—			49,061			354,723
Borrowings under revolving credit facility		15,000			—						382,022	J		397,022
Other long-term debt		598,351			423,347						(423,347	) J		598,351
Deferred tax liabilities, net		724,564									(37,948	) B		749,091
											62,475	K
Other		10,441			1,875									12,316
Total liabilities		1,584,747			494,493			—			32,263			2,111,503
Stockholders’ equity:
Common stock		1,036,683			514,988						(514,988	) L		2,399,556
											1,362,873	M
Retained earnings		2,197,424			(36,528	)					36,528	L		2,180,834
											(16,590	) G
Accumulated other comprehensive income (loss)		675			—									675
Treasury stock, at cost		(910,656	)		—									(910,656	)
Total stockholders’ equity		2,324,126			478,460			—			867,823			3,670,409
Total liabilities and stockholders’ equity	$	3,908,873		$	972,953		$	—		$	900,086		$	5,781,912

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

2

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2015

(in thousands, except per share amounts)

	Patterson- UTI			SSE Predecessor			Reclass Adjustments			Pro Forma Adjustments			Pro Forma Combined
Operating revenues:
Contract drilling	$	1,153,892		$	436,404								$	1,590,296
Pressure pumping		712,454			575,495									1,287,949
Oilfield rentals		—			76,587									76,587
Oilfield trucking		—			42,739									42,739
Oil and natural gas		24,931			—									24,931
Other		—			19			(19	) AA					—
Total operating revenues		1,891,277			1,131,244			(19	)		—			3,022,502
Operating costs and expenses:
Contract drilling		608,848			231,544									840,392
Pressure pumping		612,021			494,554			(954	) BB					1,083,718
								(21,903	) CC
Oilfield rentals		—			68,317									68,317
Oilfield trucking		—			54,674									54,674
Oil and natural gas		11,500			—									11,500
Other		—			6,781			(5,137	) DD					1,644
Depreciation, depletion, amortization and impairment		864,759			314,053			21,903	CC		(335,956	) EE		1,021,432
											32,970	FF
											123,703	GG
Impairment of goodwill		124,561			27,434									151,995
Selling, general and administrative		74,913			112,141			954	BB					193,145
								5,137	DD
Loss on sale of a business		—			35,027									35,027
Other operating expense, net		1,647			14,656									16,303
Total operating costs and expenses		2,298,249			1,359,181			—			(179,283	)		3,478,147
Operating (loss) income		(406,972	)		(227,937	)		(19	)		179,283			(455,645	)
Other income (expense):
Interest income		964			—									964
Interest expense, net of amount capitalized		(36,475	)		(99,267	)					99,267	HH		(46,386	)
											(9,911	) II
Other		34			13,185			19	AA					13,238
Total other income (expense)		(35,477	)		(86,082	)		19			89,356			(32,184	)
(Loss) income before income taxes		(442,449	)		(314,019	)		—			268,639			(487,829	)
Income tax (benefit) expense		(147,963	)		(92,628	)		—			94,024	JJ		(146,567	)
Net (loss) income	$	(294,486	)	$	(221,391	)	$	—		$	174,615		$	(341,262	)
Net loss per common share:
Basic and Diluted	$	(2.00	)	$	(4.42	)							$	(1.75	)
Weighted average number of common shares outstanding:
Basic and Diluted		145,416			50,096						(537	)		194,975	KK

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

3

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the nine months ended September 30, 2016

(in thousands, except per share amounts)

	Patterson- UTI			SSE Successor 2 months			SSE Predecessor 7 months			Reclass Adjustments			Pro Forma Adjustments			Pro Forma Combined
Operating revenues:
Contract drilling	$	407,578		$	42,969		$	154,794					$	—		$	605,341
Pressure pumping		248,428			30,540			160,723						—			439,691
Oilfield Rentals		—			6,147			18,402						—			24,549
Oil and natural gas		12,973			—			—						—			12,973
Total operating revenues		668,979			79,656			333,919			—			—			1,082,554
Operating costs and expenses:
Contract drilling		219,218			18,836			57,573									295,627
Pressure pumping		234,580			38,724			158,569			(654	) BB					421,862
											(9,357	) CC
Oilfield Rentals		—			5,688			20,172									25,860
Other		—			380			700									1,080
Oil and natural gas		5,586			—			—									5,586
Depreciation, depletion, amortization and impairment		511,209			31,208			168,541			9,357	CC		(209,106	) EE		607,337
														3,351	FF
														92,777	GG
Selling, general and administrative		51,671			16,601			66,667			654	BB					135,593
Other operating (income) expense, net		(10,285	)		(798	)		848									(10,235	)
Total operating costs and expenses		1,011,979			110,639			473,070			—			(112,978	)		1,482,710
Operating (loss) income		(343,000	)		(30,983	)		(139,151	)		—			112,978			(400,156	)
Other income (expense):
Interest income		273			—			—			—						273
Interest expense, net of amount capitalized		(31,722	)		(6,185	)		(48,116	)					54,301	HH		(40,566	)
														(8,844	) II
Other		52			640			(27,574	)								(26,882	)
Total other income (expense)		(31,397	)		(5,545	)		(75,690	)		—			45,457			(67,175	)
(Loss) income before income taxes		(374,397	)		(36,528	)		(214,841	)		—			158,435			(467,331	)
Income tax (benefit) expense		(133,885	)		—			(59,131	)		—			55,452	JJ		(137,564	)
Net (loss) income	$	(240,512	)	$	(36,528	)	$	(155,710	)	$	—		$	102,983		$	(329,767	)
Net loss per common share:
Basic and Diluted	$	(1.65	)	$	(1.66	)	$	(2.84	)							$	(1.69	)
Weighted average number of common shares outstanding:
Basic and Diluted		146,014			22,041			54,832						(27,314	)		195,573	KK

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

4

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Description of Transaction

On December 12, 2016, Patterson-UTI Energy, Inc., a Delaware corporation (“Patterson-UTI”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Seventy Seven Energy Inc., a Delaware corporation (“SSE”), and Pyramid Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Patterson-UTI (“Merger Sub”), pursuant to which Patterson-UTI will acquire SSE in exchange for newly issued shares of Patterson-UTI common stock, par value $0.01 per share (“Patterson-UTI Common Stock”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into SSE, with SSE continuing as the surviving entity and a wholly owned subsidiary of Patterson-UTI (the “Merger”).

Under the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of SSE common stock, other than shares owned by SSE and its wholly owned subsidiaries, shares owned by Patterson-UTI or Merger Sub and shares for which appraisal rights held by SSE stockholders have been perfected in compliance with Section 262 of the DGCL, will be converted into the right to receive a number of shares of Patterson-UTI common stock equal to the exchange ratio. The exchange ratio will be equal to 49,559,000 shares of Patterson-UTI common stock, divided by the total number of shares of SSE common stock outstanding or deemed outstanding immediately prior to the Effective Time (which includes (i) shares of SSE common stock outstanding as a result of the exercise of warrants to acquire SSE common stock, (ii) shares of SSE common stock deemed outstanding as a result of the vesting of SSE restricted stock unit awards that existed prior to the execution of the Merger Agreement, (iii) any shares of SSE common stock subject to perfected appraisal rights, (iv) shares of SSE common stock that underlie restricted stock unit awards that SSE issues on or after the execution of the Merger Agreement and (v) 50% of any shares of SSE common stock that have been tendered to SSE on or after August 1, 2016 for the purposes of satisfying tax withholding obligations upon the vesting of SSE restricted stock unit awards); provided that, in the event that any Series A warrants to acquire shares of SSE common stock are forfeited or net settled, such 49,559,000 shares of Patterson-UTI common stock will be reduced by a number equal to (i) the aggregate exercise price for the warrants that are forfeited or net settled, divided by (ii) the volume weighted average price of a share of Patterson-UTI common stock for the ten consecutive trading days immediately preceding the third business day prior to the closing. In no event will Patterson-UTI issue more than 49,559,000 shares of its common stock as Merger consideration.

In connection with the Merger, each SSE restricted stock unit award granted prior to December 12, 2016 that is outstanding as of the Effective Time will fully vest immediately prior to the closing of the Merger and be treated as shares of SSE common stock and receive the Merger consideration in respect of each share of SSE common stock subject to the award. In addition, at the Effective Time, each SSE restricted stock unit award granted on or following December 12, 2016 will be assumed by Patterson-UTI and converted into a restricted stock unit award, with the same terms and conditions as in effect immediately prior to the Effective Time, covering a number of shares of Patterson-UTI common stock equal to (i) the number of shares of SSE common stock subject to the award immediately prior to the Effective Time, multiplied by (ii) the exchange ratio, rounded to the nearest whole share.

Note 2—Basis of Presentation

The merger is reflected in the unaudited pro forma condensed combined financial statements pursuant to the acquisition method of accounting. Under the acquisition method, the total estimated purchase price as described in Note 3 will be measured at the closing date of the merger using the market price of Patterson-UTI common stock at that time. This may result in a merger consideration value that is different from that assumed for purposes of preparing these unaudited pro forma condensed combined financial statements. The assets and liabilities of SSE have been measured at fair value based on various preliminary estimates using assumptions that Patterson-UTI management believes are reasonable utilizing information currently available. Use of different estimates and assumptions could yield materially different results. There are limitations on the type of information that can be exchanged between Patterson-UTI and SSE at this time. As such until the merger is complete, Patterson-UTI will not have complete access to all relevant information.

The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows. The excess of the purchase price over the estimated amounts of identifiable assets and liabilities of SSE as of the effective date of the merger will be allocated to goodwill. The purchase price allocation is subject to finalization of Patterson-UTI’s analysis of the fair value of the assets and liabilities of SSE as of the effective date of the merger. Accordingly, the purchase price allocation in the unaudited pro forma condensed combined financial statements is preliminary and will be adjusted upon completion of the final analysis of the fair value of the assets and liabilities of SSE. Such adjustments could be material.

5

In accordance with the SEC’s rules and regulations, the unaudited pro forma condensed combined financial statements do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the merger or the costs to integrate the operations of Patterson-UTI and SSE or the costs necessary to achieve any such cost savings, operating synergies or revenue enhancements.

Upon completion of the merger, Patterson-UTI will perform a detailed review of SSE’s accounting policies. As a result of that review, Patterson-UTI may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the consolidated financial statements of the combined company.

Upon completion of the merger, further review of SSE’s financial statements may result in revisions to SSE’s historical presentation to conform to Patterson-UTI’s presentation.

Note 3—Estimate of Consideration Expected to be Transferred

The following is a preliminary estimate of the consideration expected to be transferred to effect the acquisition of SSE.

(in thousands, except exchange ratio and per share amounts)
Equity Consideration:
Number of shares of SSE common stock outstanding as of September 30, 2016		22,280
Number of SSE “in-the-money” warrants outstanding as of September 30, 2016		3,882
Number of SSE restricted stock unit awards vesting on change of control		1,528
Number of SSE retention restricted stock unit awards		270
		27,960
Multiplied by the exchange ratio		1.7725
Patterson-UTI shares of common stock to be issued in connection with the merger		49,559
Patterson-UTI common stock share price on January 19, 2017	$	27.50
Common stock equity consideration				1,362,873
Other Consideration
SSE Long-Term Debt to be repaid by Patterson-UTI				474,500
Estimate of consideration expected to be transferred(a)			$	1,837,373

(a) The estimated consideration expected to be transferred reflected in these unaudited pro forma condensed combined financial statements does not purport to represent what the actual consideration transferred will be when the merger is completed. The fair value of equity securities issued as part of the consideration transferred is required to be measured on the closing date of the merger at the then-current market price of Patterson-UTI common stock. This requirement will likely result in an equity component different from what has been assumed in these unaudited pro forma condensed combined financial statements, and that difference may be material.

Assuming a $1.00 change in the market price of Patterson-UTI’s common stock, the estimated consideration transferred would increase or decrease by approximately $49.6 million, which would be reflected in these unaudited pro forma condensed combined financial statements as an increase or decrease to goodwill. Furthermore, based on the Patterson-UTI common stock share price on January 19, 2017, for every 10% change in the market price of Patterson-UTI’s common stock, the estimated consideration transferred would increase or decrease by approximately $136 million, which would result in a corresponding increase or decrease in goodwill.

6

Note 4—Estimate of Assets to be Acquired and Liabilities to be Assumed

The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by Patterson-UTI, reconciled to the estimate of consideration expected to be transferred:

	(in thousands)
Book value of assets acquired at September 30, 2016	$	972,953
Less: SSE liabilities acquired at September 30, 2016		(66,146	)
Less: SSE deferred financing fees on loan facility not assumed by Patterson-UTI		(1,194	)
Less: SSE transaction costs		(35,161	)
Add: Proceeds on exercise of SSE warrants		92,478
Add: Deferred tax asset revaluation		38,628
Adjusted book value of the net assets acquired		1,001,558
Fair value adjustments to:
Fixed assets		175,306
Intangible assets		41,860
Intangible liabilities		(2,310	)
Deferred tax liabilities		(62,475	)
Goodwill		683,434
Total fair value adjustments		835,815
Estimate of consideration expected to be transferred	$	1,837,373

The following is a discussion of the adjustments made to SSE’s assets and liabilities in connection with the preparation of these unaudited pro forma condensed combined financial statements.

Fixed Assets: For purposes of these unaudited pro forma condensed combined financial statements, Patterson-UTI has estimated that the fair value adjustment to write-up fixed assets to fair value will be approximately $175 million. This estimate of fair value is preliminary and subject to change once Patterson-UTI has sufficient information as to the specific types, nature, age, condition and location of SSE’s fixed assets.

Intangible Assets and Liabilities: The fair value of identifiable intangible assets and liabilities was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows as the primary input into either the discounted cash flow method, the relief-from-royalty method or the multi-period excess earnings method. Some of the more significant assumptions inherent in the estimation of intangible asset values include: the amount and timing of projected future cash flows, the differential between contractual cash flows and market driven cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle and various other factors. For purposes of these unaudited pro forma condensed combined financial statements, using certain high-level assumptions, the fair value of the identifiable intangible assets, their weighted average useful lives and the resulting amortization expense for the periods presented have been estimated as follows:

					Amortization Expense
	Estimated Fair Value		Weighted Average Estimated Useful Life		Nine Months Ended September 30, 2016		Year Ended December 31, 2015
	(in thousands)		(in years)		(in thousands)		(in thousands)
Assets
Customer relationships	$	4,040		7	$	433	$	577
Favorable drilling contracts		37,430		2		2,820		34,573
Tradename		390		3		98		130
	$	41,860				3,351		35,280
Liabilities
Unfavorable drilling contracts	$	2,310		1		—		(2,310	)
					$	3,351	$	32,970

These preliminary estimates of fair value and estimated useful life will likely be different from the final acquisition accounting, and the difference could have a material impact on the accompanying unaudited pro forma

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condensed combined financial statements. A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in annual amortization expense of approximately $2.5 million, assuming an overall weighted average useful life of 1.7 years. Once Patterson-UTI has full access to the specifics of SSE’s intangible assets, additional insight will be gained that could impact: (i) the estimated total value assigned to intangible assets and (ii) the estimated weighted average useful life of each category of intangible assets. The estimated intangible asset values and related useful lives could be impacted by a variety of factors that may become known to Patterson-UTI only upon access to the additional information and/or changes in such factors that may occur prior to the effective time of the merger.

Deferred Tax Liabilities: As of the effective date of the merger, adjustments will be made for deferred taxes as part of the accounting for the acquisition. These adjustments reflect the estimated deferred tax liability impact of the acquisition on the pro forma condensed combined balance sheet, primarily relating to estimated fair value adjustments for acquired fixed assets and intangible assets. For purposes of these unaudited pro forma condensed combined financial statements, deferred taxes are provided at the 35% U.S. federal statutory income tax rate.

Goodwill: Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is subject to impairment testing on at least an annual basis.

Note 5—Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet

(A) Reclassification made to SSE’s historical balance sheet to conform to Patterson-UTI presentation. Patterson-UTI limits the inventory line item to items for sale and as such drilling supplies are treated as other current assets and fixed assets not yet in service are treated as property and equipment as opposed to SSE presentation.

(B) To record value to the deferred tax assets of SSE that Patterson-UTI will be able to benefit from as Patterson-UTI does not require a valuation allowance against its deferred tax assets. The non-current portion of the deferred tax asset has been shown as a contra liability as the pro forma entity has an overall non-current deferred tax liability.

(C) To adjust for the estimated differences between the carrying value and fair value of SSE’s fixed assets. See Note 4 for further details.

(D) To record the estimated goodwill created as a result of this transaction. See Note 4 for further details.

(E) To record the estimated fair value of identifiable intangible assets. See Note 4 for further details.

(F) To remove SSE deferred financing costs on a lending facility not assumed by Patterson-UTI.

(G) Reflects an estimate of Patterson-UTI’s transaction related costs. Transaction costs related to the merger with SSE, including advisory, legal fees, retention and severance payments. These amounts will be expensed as incurred and are not reflected in the unaudited pro forma condensed combined statements of operations because they will not have a continuing impact.

(H) Reflects an estimate of SSE’s merger-related transaction costs, including advisory and legal fees as well as amounts relating to employee benefits such as change in control payments and restricted stock unit vesting. These amounts will be expensed by SSE as incurred and, while not reflected in the unaudited pro forma condensed combined statements of operations because they will not have a continuing impact, they are reflected as a retained earnings adjustment on the pro forma balance sheet.

(I) To record the estimated fair value of identifiable intangible liabilities for unfavorable drilling contracts.

(J) To record the repayment of SSE long-term debt at gross value of $475 million with $92.5 million of proceeds from the exercise of SSE warrants and $382 million from borrowing on Patterson-UTI’s revolving credit facility. The difference between the gross value of the SSE long-term debt and the fair value reflected on SSE’s September 30, 2016 balance sheet increased goodwill.

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(K) Represents the estimated deferred tax liability related to the fair value adjustments made to assets acquired and liabilities assumed, excluding goodwill, as calculated below:

Establish deferred tax liabilities (assets) for the following (in thousands):

Identified intangible assets	$	41,860
Identified intangible liabilities		(2,310	)
Increase in the basis of fixed assets		175,306
Write-off of SSE deferred financing fees		(1,194	)
SSE transaction costs		(35,161	)
		178,501
U.S. federal statutory tax rate		35	%
	$	62,475

(L) Reflects adjustments to eliminate SSE’s historical equity balances.

(M) To record the fair value of the equity consideration to be issued. See Note 3 for further details.

Note 6—Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations

(AA) Certain reclassifications have been made to SSE’s historical statement of operations for the year ended December 31, 2015 to conform to SSE’s presentation income for the nine months ended September 30, 2016, which is consistent with Patterson-UTI’s presentation. In 2015, SSE reported rent income in operating revenue as opposed to other income.

(BB) Certain reclassifications have been made to SSE’s historical statement of operations to conform with Patterson-UTI’s presentation. SSE’s historical statement of operations includes certain selling expenses in operating costs whereas Patterson-UTI reports certain selling expenses in selling, general and administrative line item in the statement of operations.

(CC) Certain reclassifications have been made to SSE’s historical statement of operations to conform with Patterson-UTI’s presentation. Fluid ends, an integral component of a frac pump unit, are expensed by SSE when placed in service. Patterson-UTI treats a fluid end as a fixed asset and depreciates over the estimated useful life. The pro forma assumes that depreciation expense approximates the amount expensed by SSE. The cost of fluid pumps expensed by SSE as an operating expense has been reclassed to depreciation expense.

(DD) Certain reclassifications have been made to SSE’s historical statement of operations for the year ended December 31, 2015 to conform to SSE’s presentation for the nine months ended September 30, 2016, which is consistent with Patterson-UTI’s presentation. In 2015, SSE accounted for the costs to operate its supply chain function as an operating expense but in 2016 reported these expenses as general and administrative.

(EE) To eliminate SSE’s adjusted historical depreciation and intangible asset amortization expense.

(FF) Reflects amortization expense associated with intangible assets recorded in this transaction. See Note 4 for further details.

(GG) Represents depreciation expense associated with the estimated fair value of SSE’s fixed assets. Depreciation was calculated by asset class over an average estimated life relevant for that class of assets. The average estimated life on an aggregate basis was approximately 8 years.

(HH) To eliminate SSE’s historical interest expense under its previous capital structure as none of the historical debt of SSE can be assumed by Patterson-UTI in connection with the acquisition due to covenants under Patterson-UTI’s revolving credit facility.

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(II) To record the estimate of interest expense that Patterson-UTI would have incurred on the $382 million that Patterson-UTI would need to finance to complete the acquisition (See Note 5J). Interest was computed at Patterson-UTI’s applicable borrowing rate under Patterson-UTI’s revolving credit facility credit facility during the respective periods.

(JJ) Patterson-UTI has assumed a 35% tax rate when estimating the tax impacts of the appropriate pro forma adjustments, which represents the U.S. federal statutory tax rate. The effective tax rate of the combined company could be significantly different from what is presented in these unaudited pro forma condensed combined financial statements for a variety of reasons, including post-merger activities.

The tax impact of the pro forma adjustments has been calculated as follows ($ in thousands):

	Year Ended December 31, 2015			Nine Months Ended September 30, 2016
Elimination of SSE’s historical depreciation and amortization expense	$	335,956		$	209,106
Elimination of SSE’s historical interest expense		99,267			54,301
Assumed interest expense on replacement debt		(9,911	)		(8,844	)
Amortization expense associated with fair value SSE intangible assets		(32,970	)		(3,351	)
Depreciation expense associated with fair value SSE fixed assets		(123,703	)		(92,777	)
Pro forma reduction in expense		268,639			158,435
U.S. federal statutory tax rate		35	%		35	%
Tax expense relating to pro forma reduction in expenses	$	94,024		$	55,452

(KK) Represents the adjusted weighted-average shares outstanding calculated as follows (in thousands):

	Year Ended December 31, 2015		Nine Months Ended September 30, 2016
Patterson-UTI weighted average historical shares outstanding		145,416		146,014
New Patterson-UTI shares of common stock to be issued		49,559		49,559
Weighted average number of diluted common shares outstanding		194,975		195,573

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