News Column

PIONEER ENERGY SERVICES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

April 29, 2014

Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including general economic and business conditions and industry trends, levels and volatility of oil and gas prices, decisions about exploration and development projects to be made by oil and gas exploration and production companies, economic cycles and their impact on capital markets and liquidity, the continued demand for drilling services or production services in the geographic areas where we operate, the highly competitive nature of our business, our future financial performance, including availability, terms and deployment of capital, future compliance with covenants under our senior secured revolving credit facility and our senior notes, the supply of marketable drilling rigs, well servicing rigs, coiled tubing and wireline units within the industry, changes in technology and improvements in our competitors' equipment, the continued availability of drilling rig, well servicing rig, coiled tubing and wireline unit components, the continued availability of qualified personnel, the success or failure of our acquisition strategy, including our ability to finance acquisitions, manage growth and effectively integrate acquisitions, and changes in, or our failure or inability to comply with, governmental regulations, including those relating to the environment. We have discussed many of these factors in more detail elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2013, including under the headings "Special Note Regarding Forward-Looking Statements" in the Introductory Note to Part I and "Risk Factors" in Item 1A. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report or in our Annual Report on Form 10-K for the year ended December 31, 2013 could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. All forward-looking statements speak only as of the date on which they are made and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We advise our shareholders that they should (1) be aware that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements. Company Overview Pioneer Energy Services (formerly called "Pioneer Drilling Company") was incorporated under the laws of the State of Texas in 1979 as the successor to a business that had been operating since 1968. Since September 1999, we have significantly expanded our drilling rig fleet through acquisitions and through the construction of rigs from new and used components. In March 2008, we acquired two production services companies which significantly expanded our service offerings to include well servicing, wireline services and fishing and rental services. We have continued to invest in the growth of all our service offerings through acquisitions and organic growth. On December 31, 2011, we acquired the coiled tubing services business of Go-Coil, L.L.C. ("Go-Coil") to expand our existing production services offerings. Pioneer Energy Services provides drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies throughout much of the onshore oil and gas producing regions of the United States and internationally in Colombia. We also provide coiled tubing and wireline services offshore in the Gulf of Mexico. Drilling services and production services are fundamental to establishing and maintaining the flow of oil and natural gas throughout the productive life of a well site and enable us to meet multiple needs of our clients. 21 -------------------------------------------------------------------------------- Business Segments We currently conduct our operations through two operating segments: our Drilling Services Segment and our Production Services Segment. The following is a description of these two operating segments. Financial information about our operating segments is included in Note 6, Segment Information, of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q. • Drilling Services Segment-Our Drilling Services Segment provides contract land drilling services to a diverse group of oil and gas exploration and production companies with its fleet of 62 drilling rigs which are currently assigned to the following divisions: Drilling Division Rig Count South Texas 14 West Texas 18 North Dakota 11 Utah 7 Appalachia 4 Colombia 8 62 As of March 31, 2014, 54 of our 62 drilling rigs are earning revenues under drilling contracts, 43 of which are under term contracts, and we are actively marketing all of our idle drilling rigs. All eight of our drilling rigs in Colombia are currently under term contracts that extend through the end of 2014, six of which are currently earning revenues with the remaining two rigs expected to be operating by early May 2014. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We obtain our contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with existing or potential clients. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed. • Production Services Segment-Our Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services, coiled tubing services, and fishing and rental services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore. We provide our services to a diverse group of oil and gas exploration and production companies. The primary production services we offer are the following:



• Well Servicing. A range of services are required in order to establish

production in newly-drilled wells and to maintain production over the useful lives of active wells. We use our well servicing rig fleet to provide these necessary services, including the completion of newly-drilled wells, maintenance and workover of active wells, and



plugging and abandonment of wells at the end of their useful lives. As

of March 31, 2014, we operate ninety-nine 550 horsepower rigs and ten

600 horsepower rigs through 11 locations, mostly in the Gulf Coast and

ArkLaTex regions, though we also have 14 rigs in North Dakota.

• Wireline Services. In order for oil and gas exploration and production

companies to better understand the reservoirs they are drilling or

producing, they require logging services to accurately characterize

reservoir rocks and fluids. To complete a well, the production casing must be perforated to establish a flow path between the reservoir and the wellbore. We use our fleet of wireline units to provide these important logging and perforating services. We provide both open and cased-hole logging services, including the latest pulsed-neutron technology. In addition, we provide services which allow oil and gas exploration and production companies to evaluate the integrity of



wellbore casing, recover pipe, or install bridge plugs. As of March 31,

2014, we operate a fleet of 120 wireline units through 24 locations in

the Gulf Coast, Mid-Continent and Rocky Mountain states. 22

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• Coiled Tubing Services. Coiled tubing is an important element of the

well servicing industry that allows operators to continue production

during service operations without shutting in the well, thereby

reducing the risk of formation damage. Coiled tubing services involve

the use of a continuous metal pipe spooled on a large reel for oil and

natural gas well applications, such as wellbore clean-outs, nitrogen

jet lifts, through-tubing fishing, formation stimulation utilizing

acid, chemical treatments and fracturing. Coiled tubing is also used

for a number of horizontal well applications such as milling temporary

plugs between frac stages. As of March 31, 2014, our coiled tubing business consists of nine onshore and four offshore coiled tubing units which are currently deployed through three locations in Texas and Louisiana. • Fishing and Rental Services. During drilling operations, oil and gas



exploration and production companies frequently rent unique equipment

such as power swivels, foam circulating units, blow-out preventers, air

drilling equipment, pumps, tanks, pipe, tubing and fishing tools. We

provide rental services out of three locations in Texas and Oklahoma.

As of March 31, 2014 our fishing and rental tools have a gross book value of $17.4 million. Pioneer Energy Services' corporate office is located at 1250 NE Loop 410, Suite 1000, San Antonio, Texas 78209. Our phone number is (855) 884-0575 and our website address is www.pioneeres.com. We make available free of charge though our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). Information on our website is not incorporated into this report or otherwise made part of this report. Market Conditions in Our Industry Demand for oilfield services offered by our industry is a function of our clients' willingness to make operating expenditures and capital expenditures to explore for, develop and produce hydrocarbons, which in turn is affected by current and expected oil and natural gas prices. With generally increasing oil prices in 2010 and 2011, exploration and production companies increased their exploration and production spending and industry equipment utilization and revenue rates improved, particularly in oil-producing regions and in certain shale regions. During 2012, modest increases in exploration and production spending resulted in modest increases in industry equipment utilization and revenue rates during 2012, as compared to 2011. Despite generally increasing oil prices during 2013 and 2014, industry equipment utilization levels have been slightly lower than industry levels during 2012 and 2011, partially due to the advancements in technology and efficiency of drilling rigs. If oil and natural gas prices decline, then industry equipment utilization and revenue rates could decrease domestically and in Colombia. Historically, Colombian oil prices have generally trended in line with West Texas Intermediate (WTI) oil prices. However, fluctuations in oil prices have a less significant impact on demand for drilling and production services in Colombia as compared to the impact on demand in North America. Demand for drilling and production services in Colombia is largely dependent upon the national oil company's long-term exploration and production programs. 23 -------------------------------------------------------------------------------- The trends in spot prices of WTI crude oil and Henry Hub natural gas, and the resulting trends in domestic land rig counts (per Baker Hughes) and domestic well servicing rig counts (per Guiberson/Association of Energy Service Companies) over the last five years are illustrated in the graphs below.



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As shown in the charts above, the trends in industry rig counts are influenced by fluctuations in oil and natural gas prices, which affect the levels of capital and operating expenditures made by our clients. Our business is influenced substantially by both operating and capital expenditures by exploration and production companies. Exploration and production spending is generally categorized as either a capital expenditure or operating expenditure. Capital expenditures by oil and gas exploration and production companies tend to be relatively sensitive to volatility in oil or natural gas prices because project decisions are tied to a return on investment spanning a number of years. As such, capital expenditure economics often require the use of commodity price forecasts which may prove inaccurate in the amount of time required to plan and execute a capital expenditure project (such as the drilling of a deep well). When commodity prices are depressed for long periods of time, capital expenditure projects are routinely deferred until prices return to an acceptable level. In contrast, both mandatory and discretionary operating expenditures are more stable than capital expenditures for exploration as these expenditures are less sensitive to commodity price volatility. Mandatory operating expenditure projects involve activities that cannot be avoided in the short term, such as regulatory compliance, safety, contractual obligations and certain projects to maintain the well and related infrastructure in operating condition. Discretionary operating expenditure projects may not be critical to the short-term viability of a lease or field and are generally evaluated according to a simple short-term payout criterion that is far less dependent on commodity price forecasts. Because existing oil and natural gas wells require ongoing spending to maintain production, expenditures by exploration and production companies for the maintenance of existing wells are relatively stable and predictable. In contrast, capital expenditures by exploration and production companies for exploration and drilling are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices. Technological advancements and trends in our industry also affect the demand for certain types of equipment. During 2013, the demand for traditional drilling rigs in vertical markets has softened due to increased demand for drilling rigs that are able to drill horizontally. In addition, oil and gas exploration and production companies have increased the use of "pad drilling" in recent years whereby a series of horizontal wells are drilled in succession by a walking or skidding drilling rig at a single pad-site location. Pad drilling has improved the productivity of exploration and production activities which could reduce the demand for drilling rigs, particularly those that do not have the ability to walk or skid and to drill horizontal wells. 24 -------------------------------------------------------------------------------- For additional information concerning the effects of the volatility in oil and gas prices and the effects of technological advancements and trends, see Item 1A - "Risk Factors" in Part I of our Annual Report on Form 10-K for the year ended December 31, 2013. Strategy In past years, our strategy was to become a premier land drilling and production services company through steady and disciplined growth. We executed this strategy by acquiring and building a high quality drilling rig fleet and production services business which we operate in the most attractive drilling markets throughout the United States and in Colombia. Our long-term strategy is to maintain and leverage our position as a leading land drilling and production services company, continue to expand our relationships with existing clients, expand our client base in the areas where we currently operate and further enhance our geographic diversification through selective expansion. The key elements of this long-term strategy are focused on our: • Competitive Position in the Most Attractive Domestic Markets. Shale plays



and non-shale oil or liquid rich environments are increasingly important

to domestic hydrocarbon production and not all drilling rigs are capable

of successfully drilling in these unconventional opportunities. We are currently operating in unconventional areas in the Bakken, Marcellus and



Eagle Ford shales and Permian and Uintah Basins. All of the ten drilling

rigs we recently constructed are currently operating in domestic shale and

unconventional plays. Additionally, in recent years, we have added

significant capacity to our production services fleets, which we believe

are well positioned to capitalize on increased shale development.

• Exposure to Oil and Liquids Rich Natural Gas Drilling Activity. We believe

that our flexible drilling and production services fleets allow us to pursue varied opportunities, enabling us to focus on a favorable mix of



natural gas, oil and liquids rich natural gas activity. In recent years,

we have intentionally increased our exposure to oil-related activities by

redeploying certain of our assets into predominately oil-producing regions

and we continue to actively seek contracts with oil-focused producers. As

of March 31, 2014, approximately 98% of our working drilling rigs and 79%

of our production services assets are operating on wells that are

targeting or producing oil or liquids rich natural gas.

• International Presence. In 2007, we began operating in Colombia after a

comprehensive review of international opportunities wherein we determined

that Colombia offered an attractive mix of favorable business conditions,

political stability, and a long-term commitment to expanding national oil

and gas production. All eight of our drilling rigs in Colombia are

currently under term contracts that extend through the end of 2014, six of

which are currently earning revenues with the remaining two rigs expected

to be operating by early May 2014.

• Growth Through Select Capital Deployment. We have historically invested in

the growth of our business by strategically upgrading our existing assets,

selectively engaging in new-build opportunities, and through selective

acquisitions. We have continued to make significant investments in the

growth of our business over the past several years. For example, on

December 31, 2011, we acquired a coiled tubing services business to expand

our existing production services offerings. We have also added significant

capacity to our other production services fleets through the addition of

57 wireline units and 35 well servicing rigs since the beginning of 2010.

In 2011, we began construction, based on term contracts, of ten new-build

AC drilling rigs, all of which are currently operating in domestic shale or unconventional plays. With these capital projects recently completed, we have shifted our near-term focus toward reducing capital expenditures and using excess cash flows from operations to reduce outstanding debt balances. Management efforts are currently focused on stringent cost control measures, the evaluation of nonstrategic or under-performing assets for potential liquidation and continued emphasis on the execution and performance of our core businesses. We are also currently planning for some organic growth through select fleet additions, but this growth will be balanced with our plans for continued debt reduction. We believe this near-term strategy will position us to take advantage of future business opportunities and continue our long-term growth strategy. 25 -------------------------------------------------------------------------------- Liquidity and Capital Resources Sources of Capital Resources Our principal liquidity requirements have been for working capital needs, debt service, capital expenditures and selective acquisitions. Our principal sources of liquidity consist of cash and cash equivalents (which equaled $20.8 million as of March 31, 2014), cash generated from operations and the unused portion of our senior secured revolving credit facility (the "Revolving Credit Facility"). In May 2012, we filed a registration statement that permits us to sell equity or debt in one or more offerings up to a total dollar amount of $300 million. As of March 31, 2014, the entire $300 million under the shelf registration statement is available for equity or debt offerings. In the future, we may consider equity and/or debt offerings, as appropriate, to meet our liquidity needs. On March 11, 2010, we issued $250 million of senior notes with a coupon interest rate of 9.875% that are due in 2018 (the "2010 Senior Notes"). We received $234.8 million of net proceeds from the issuance of the 2010 Senior Notes that were used to repay a portion of the borrowings outstanding under our Revolving Credit Facility. On November 21, 2011, we issued an additional $175 million of senior notes (the "2011 Senior Notes") with the same terms and conditions as the 2010 Senior Notes. We received $172.7 million of net proceeds from the issuance of the 2011 Senior Notes, a portion of which were used to fund the acquisition of our coiled tubing business in December 2011. On March 18, 2014, we issued $300 million of unregistered senior notes with a coupon interest rate of 6.125% that are due in 2022 (the "2014 Senior Notes"). The 2014 Senior Notes were sold at 100% of their face value. On March 18, 2014, we received $293.9 million of net proceeds from the issuance of the 2014 Senior Notes after deductions were made for the $6.1 million for underwriters' fees and other debt offering costs. The net proceeds were partially used to fund the tender of $99.5 million of aggregate principal amount of 2010 and 2011 Senior Notes in March 2014. We intend to use the remaining net proceeds to fund a portion of the redemption of $200.5 million of 2010 and 2011 Senior Notes on May 1, 2014. The $210.4 million of funds which are committed for the redemption, including the redemption premium, are classified as restricted cash on our condensed consolidated balance sheet at March 31, 2014. Our Revolving Credit Facility provides for a senior secured revolving credit facility, with sub-limits for letters of credit and swing-line loans, of up to an aggregate principal amount of $250 million, all of which matures on June 30, 2016. As of March 31, 2014, we had $80.0 million outstanding under our Revolving Credit Facility and $14.0 million in committed letters of credit, which resulted in borrowing availability of $156.0 million under our Revolving Credit Facility. There are no limitations on our ability to access the full borrowing availability under the Revolving Credit Facility other than maintaining compliance with the covenants in the Revolving Credit Facility. Additional information regarding these covenants is provided in the Debt Requirements section below. Borrowings under the Revolving Credit Facility are available for selective acquisitions, working capital and other general corporate purposes. We currently expect that cash and cash equivalents, cash generated from operations and available borrowings under our Revolving Credit Facility are adequate to cover our liquidity requirements for at least the next 12 months. Uses of Capital Resources During the three months ended March 31, 2014, we spent $31.7 million on purchases of property and equipment and placed into service property and equipment of $36.9 million. Currently, we expect to spend approximately $135 million to $145 million on capital expenditures during 2014. We expect the total capital expenditures for 2014 will be allocated approximately 50% for our Drilling Services Segment and approximately 50% for our Production Services Segment. Our planned capital expenditures for the year ending December 31, 2014 include nine well servicing rigs, three coiled tubing units, three wireline units, upgrades to certain drilling rigs and routine capital expenditures. Actual capital expenditures may vary depending on the timing of commitments and payments, as well as the level of new-build and other expansion opportunities that meet our strategic and return on capital employed criteria. We expect to fund the remaining capital expenditures in 2014 from operating cash flow in excess of our working capital requirements. 26 -------------------------------------------------------------------------------- Working Capital Our working capital was $129.5 million at March 31, 2014, compared to $118.5 million at December 31, 2013. Our current ratio, which we calculate by dividing current assets by current liabilities, was 1.4 at March 31, 2014 compared to 2.0 at December 31, 2013, due to the increase in restricted cash and current debt obligations associated with the redemption of Senior Notes which will be redeemed on May 1, 2014. Our operations have historically generated cash flows sufficient to meet our requirements for debt service and normal capital expenditures. However, our working capital requirements could increase during periods when higher percentages of our drilling contracts are turnkey and footage contracts and when new-build rig construction projects are in progress. With the completion of our new-build drilling rig program in the first quarter of 2013, we shifted our near-term focus toward reducing capital expenditures and using excess cash flows from operations to reduce outstanding debt balances. The changes in the components of our working capital were as follows (amounts in thousands): March 31, December 31, 2014 2013 Change Cash and cash equivalents $ 20,810$ 27,385$ (6,575 ) Restricted cash 210,401 - 210,401 Receivables: Trade, net of allowance for doubtful accounts 121,790 115,908 5,882 Unbilled receivables 44,792 49,535 (4,743 ) Insurance recoveries 9,657 8,607 1,050 Income taxes and other 6,493 2,310 4,183 Deferred income taxes 11,569 13,092 (1,523 ) Inventory 13,750 13,232 518 Prepaid expenses and other current assets 6,610 9,311 (2,701 ) Current assets 445,872 239,380 206,492 Accounts payable 53,969 43,718 10,251 Current portion of long-term debt 202,166 2,847



199,319

Deferred revenues 2,159 699



1,460

Accrued expenses: Payroll and related employee costs 24,586 30,020 (5,434 ) Insurance premiums and deductibles 10,896 10,940 (44 ) Insurance claims and settlements 9,657 8,607 1,050 Interest 2,057 12,275 (10,218 ) Other 10,898 11,727 (829 ) Current liabilities 316,388 120,833 195,555 Working capital $ 129,484$ 118,547$ 10,937 The decrease in cash and cash equivalents during the three months ended March 31, 2014 is primarily due to $31.7 million used for purchases of property and equipment and $21.7 million of cash used in our financing activities, which were mostly offset by $41.2 million of cash provided by operating activities and $5.5 million of proceeds from the sale of assets. On April 1, 2014, we announced that we will redeem $200.5 million in aggregate principal amount of the 2010 and 2011 Senior Notes on May 1, 2014 at a redemption price equal to 104.938% of the principal amount thereof, plus accrued and unpaid interest. The redemption of these notes will be primarily funded by the remaining net proceeds from the issuance of our 2014 Senior Notes described below, and through cash on hand, for which the total redemption amount has been classified as restricted cash on our condensed consolidated balance sheet. 27 -------------------------------------------------------------------------------- The net increase in our total trade and unbilled receivables as of March 31, 2014 as compared to December 31, 2013 is primarily due to the timing of billing and collection cycles and partially due to the increase in our Production Services Segment revenues for the quarter ended March 31, 2014 as compared to the quarter ended December 31, 2013. The increase in both our insurance recoveries receivables and our insurance claims and settlements accrued expenses as of March 31, 2014 as compared to December 31, 2013 is primarily due to an increase in our insurance company's reserve for workers compensation claims in excess of our deductibles. The increase in income taxes and other receivables as of March 31, 2014 as compared to December 31, 2013 is primarily due to the movement of prepaid taxes associated with our Colombian operations from noncurrent to current receivables, as we expect to utilize them in the near term. The decrease in current deferred income taxes as of March 31, 2014 as compared to December 31, 2013 is primarily due to a movement of net operating losses for our Colombian operations to noncurrent deferred tax assets as we currently expect to utilize prepaid taxes rather than net operating losses to offset income taxes payable within the next year, as well as a decrease in current deferred income tax assets for 2013 annual bonuses accruals which were paid in the first quarter of 2014. The overall decrease in current deferred income taxes was partially offset by a movement of domestic net operating losses from noncurrent to current deferred tax assets, as we expect to realize them in the near term. The decrease in prepaid expenses and other assets as of March 31, 2014 as compared to December 31, 2013 is primarily due to a decrease in prepaid insurance costs because most of the insurance premiums are paid in late October of each year, and therefore we had amortization of five months of these October premiums at March 31, 2014, as compared to two months at December 31, 2013. The increase in accounts payable as of March 31, 2014 as compared to December 31, 2013 is primarily due to a $5.2 million increase in our accruals for capital expenditures as of March 31, 2014 as compared to December 31, 2013. The current portion of our long-term debt primarily represents the aggregate principal amount of our 2010 and 2011 Senior Notes which will be redeemed on May 1, 2014. The increase in deferred revenues as of March 31, 2014 as compared to December 31, 2013 is primarily related to revenues collected but not yet earned for two turnkey jobs which were in progress at March 31, 2014. The decrease in accrued payroll and employee related costs as of March 31, 2014 as compared to December 31, 2013 is primarily due to the payment of our 2013 annual bonuses in February 2014, which were fully accrued for as of December 31, 2013. The decrease in accrued interest expense as of March 31, 2014 as compared to December 31, 2013 is primarily due to the payment of interest on our Senior Notes which is due semi-annually on March 15 and September 15. The decrease in other accrued expenses as of March 31, 2014 as compared to December 31, 2013 is primarily due to the timing of payments for property taxes, which was partially offset by an increase in our sales tax accrual. 28 --------------------------------------------------------------------------------



Long-term Debt and Other Contractual Obligations The following table includes information about the amount and timing of our contractual obligations at March 31, 2014 (amounts in thousands):

Payments Due by Period Contractual Obligations Total Within 1 Year 2 to 3 Years 4 to 5 Years Beyond 5 Years Debt $ 707,239$ 202,166$ 80,073$ 125,000$ 300,000 Redemption premium 9,901 9,901 - - - Interest on debt 204,118 35,546 64,353 49,094 55,125 Purchase commitments 27,606 27,606 - - - Operating leases 17,106 5,138 6,035 3,627 2,306 Other long-term liabilities 18,185 6,013 10,077 2,095 - Total $ 984,155$ 286,370$ 160,538$ 179,816$ 357,431 At March 31, 2014, debt obligations consist of $625.5 million of principal amount outstanding under our Senior Notes, $80.0 million outstanding under our Revolving Credit Facility and $1.7 million of other debt outstanding. The $80.0 million outstanding under our Revolving Credit Facility is due at maturity on June 30, 2016. However, we may make principal payments to reduce the outstanding balance prior to maturity when cash and working capital is sufficient. The debt obligations due within one year includes the $200.5 million under our 2010 and 2011 Senior Notes which will be redeemed in May 2014. The remaining $125.0 million principal amount outstanding under our 2010 and 2011 Senior Notes will mature on March 15, 2018 and the $300.0 million principal amount outstanding under our 2014 Senior Notes will mature on March 15, 2022. Our Senior Notes have a total carrying value of $621.6 million as of March 31, 2014, which represents the $625.5 million face value net of the $4.9 million of original issue discount and $0.9 million of original issue premium, net of amortization, based on the effective interest method. The redemption premium represents the redemption costs for the $200.5 million of 2010 and 2011 Senior Notes that will be redeemed on May 1, 2014. Interest payment obligations on our Revolving Credit Facility are estimated based on (1) the 2.9% interest rate that was in effect at March 31, 2014, and (2) the outstanding balance of $80.0 million at March 31, 2014 to be paid at maturity on June 30, 2016. Interest payment obligations on our Senior Notes are calculated based on the coupon interest rate of 9.875% for the 2010 and 2011 Senior Notes and 6.125% for the 2014 Senior Notes, both due semi-annually in arrears on March 15 and September 15 of each year. Interest payment obligations also reflect the interest associated with the $200.5 million of 2010 and 2011 Senior Notes that will be redeemed on May 1, 2014 as due within one year. Purchase commitments primarily relate to equipment upgrades and purchases of other new equipment. Operating leases consist of lease agreements for office space, operating facilities, equipment and personal property. Other long-term liabilities include the net equity tax payable to the Colombian tax authority and long-term incentive compensation which is payable to our employees, generally contingent upon their continued employment through the date of each respective award's payout. 29 -------------------------------------------------------------------------------- Debt Requirements The Revolving Credit Facility contains customary mandatory prepayments from the proceeds of certain asset dispositions or debt issuances, which are applied to reduce outstanding revolving and swing-line loans and letter of credit exposure. There are no limitations on our ability to access the $250 million borrowing capacity other than maintaining compliance with the covenants under the Revolving Credit Facility. At March 31, 2014, we were in compliance with our financial covenants under the Revolving Credit Facility. Our total consolidated leverage ratio was 2.8 to 1.0, our senior consolidated leverage ratio was 0.4 to 1.0, and our interest coverage ratio was 5.3 to 1.0. The financial covenants contained in our Revolving Credit Facility include the following: • A maximum total consolidated leverage ratio that cannot exceed 4.00 to 1.00; • A maximum senior consolidated leverage ratio, which excludes unsecured



and subordinated debt, that cannot exceed 2.50 to 1.00;

• A minimum interest coverage ratio that cannot be less than 2.50 to 1.00; and • If our senior consolidated leverage ratio is greater than 2.00 to 1.00 at the end of any fiscal quarter, our minimum asset coverage ratio cannot be less than 1.00 to 1.00. The Revolving Credit Facility does not restrict capital expenditures as long as (a) no event of default exists under the Revolving Credit Facility or would result from such capital expenditures, (b) after giving effect to such capital expenditures there is availability under the Revolving Credit Facility equal to or greater than $25 million and (c) the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is less than 2.00 to 1.00. If the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is equal to or greater than 2.00 to 1.00, then capital expenditures are limited to $100 million for the fiscal year. The capital expenditure threshold may be increased by any unused portion of the capital expenditure threshold from the immediate preceding fiscal year up to $30 million. At March 31, 2014, our senior consolidated leverage ratio was not greater than 2.00 to 1.00 and therefore, we were not subject to the capital expenditure threshold restrictions listed above. The Revolving Credit Facility has additional restrictive covenants that, among other things, limit the incurrence of additional debt, investments, liens, dividends, acquisitions, redemptions of capital stock, prepayments of indebtedness, asset dispositions, mergers and consolidations, transactions with affiliates, hedging contracts, sale leasebacks and other matters customarily restricted in such agreements. In addition, the Revolving Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, judgment defaults in excess of specified amounts, failure of any guaranty or security document supporting the credit agreement and change of control. Our obligations under the Revolving Credit Facility are secured by substantially all of our domestic assets (including equity interests in Pioneer Global Holdings, Inc. and 65% of the outstanding equity interests of any first-tier foreign subsidiaries owned by Pioneer Global Holdings, Inc., but excluding any equity interest in, and any assets of, Pioneer Services Holdings, LLC) and are guaranteed by certain of our domestic subsidiaries, including Pioneer Global Holdings, Inc. Effective October 1, 2012, Pioneer Coiled Tubing Services, LLC was added as a subsidiary guarantor under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are available for acquisitions, working capital and other general corporate purposes. 30 -------------------------------------------------------------------------------- In addition to the financial covenants under our Revolving Credit Facility, the Indentures governing our Senior Notes both contain certain restrictions generally on our ability to: • pay dividends on stock, repurchase stock, redeem subordinated indebtedness or make other restricted payments and investments;



• incur, assume or guarantee additional indebtedness or issue preferred

or disqualified stock;

• create liens on our assets;

• enter into sale and leaseback transactions;

• sell or transfer assets;

• pay dividends, engage in loans, or transfer other assets from certain

of our subsidiaries;

• consolidate with or merge with or into, or sell all or substantially

all of our properties to any other person;

• enter into transactions with affiliates; and

• enter into new lines of business.

Upon the occurrence of a change of control, holders of the Senior Notes will have the right to require us to purchase all or a portion of the Senior Notes at a price equal to 101% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase. Under certain circumstances in connection with asset dispositions, we will be required to use the excess proceeds of asset dispositions to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase. Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by our existing domestic subsidiaries, except for Pioneer Services Holdings, LLC, and by certain of our future domestic subsidiaries. Effective October 1, 2012, the 2010 and 2011 Indenture was supplemented to add Pioneer Coiled Tubing Services, LLC as a subsidiary guarantor. The subsidiaries that generally operate our non-U.S. business concentrated in Colombia do not guarantee our Senior Notes. The non-guarantor subsidiaries do not have any payment obligations under the Senior Notes, the guarantees or the Indenture. In the event of a bankruptcy, liquidation or reorganization of any non-guarantor subsidiary, such non-guarantor subsidiary will pay the holders of its debt and other liabilities, including its trade creditors, before it will be able to distribute any of its assets to us. In the future, any non-U.S. subsidiaries, immaterial subsidiaries and subsidiaries that we designate as unrestricted subsidiaries under the Indenture will not guarantee the Senior Notes. Our Senior Notes are not subject to any sinking fund requirements. However, we announced in April 2014 that we will redeem $200.5 million in aggregate principal amount of the 2010 and 2011 Senior Notes on May 1, 2014. As of March 31, 2014, there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company, and we were in compliance with all covenants pertaining to our Senior Notes. 31



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