Company Overview
Pioneer Energy Services Corp. provides land-based drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies in the United States and internationally in Colombia. We also provide two of our services (coiled tubing and wireline services) offshore in the Gulf of Mexico.
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 and enable us to meet multiple needs of our clients.
|
|
•
|
Drilling Services Segment—
From 1999 to 2011, we significantly expanded our fleet through acquisitions and the construction of new drilling rigs.
As our industry changed with the evolution of shale drilling, we began a transformation process in 2011, by selectively disposing of our older, less capable rigs, while we continued to invest in our rig building program to construct more technologically advanced, pad-optimal rigs to meet the changing needs of our clients.
|
As of
December 31, 2016
,
our drilling rig fleet is
100%
pad-capable
.
We offer the latest advancements in pad drilling with our fleet of
16
AC rigs in the US and
eight
SCR rigs in Colombia
, all of which have 1,500 horsepower or greater drawworks
.
The removal of older, less capable rigs from our fleet and the recent investments in the construction of new drilling rigs has transformed our fleet into a highly capable, pad optimal fleet focused on the horizontal drilling market.
We believe this positions us to compete well, grow our presence in the significant shale basins in the US, and improve profitability as the recovery of our industry continues.
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 a daywork basis, and sometimes on a turnkey 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.
The drilling rigs in our fleet are currently assigned to the following divisions:
|
|
|
|
|
Drilling Division
|
|
Rig Count
|
South Texas
|
|
1
|
|
West Texas
|
|
7
|
|
North Dakota
|
|
2
|
|
Appalachia
|
|
6
|
|
Colombia
|
|
8
|
|
|
|
24
|
|
|
|
•
|
Production Services Segment—
In 2008, we acquired two production services companies which significantly expanded our service offerings to include well servicing and wireline services. At the end of 2011, we acquired a coiled tubing services business to further expand our production services offerings. Since the acquisitions of these businesses, we continued to invest in their organic growth and significantly expanded all our production services fleets. However, we temporarily suspended organic growth of our production services fleets during the recent downturn, and continue to selectively update our fleets.
|
Our Production Services Segment provides a range of services
to a diverse group of exploration and production companies, with our operations concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore.
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
December 31, 2016
,
we have a fleet of
114
rigs with 550 horsepower
and
11
rigs with 600 horsepower
with operations in
10
locations, mostly in the Gulf Coast states, as well as in Arkansas and North Dakota.
|
|
|
•
|
Wireline
Services. Oil and gas exploration and production companies require wireline services to better understand the reservoirs they are drilling or producing, and use logging services to accurately characterize reservoir rocks and fluids. To complete a cased-hole 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 in addition to a range of other mechanical services that are needed in order to
place equipment in or retrieve equipment or debris from the wellbore, install bridge plugs and control pressure.
As of
December 31, 2016
,
we have a fleet of
114
wireline units in
17
operating locations in the Gulf Coast, Mid-Continent and Rocky Mountain states.
|
|
|
•
|
Coiled Tubing Services.
Coiled tubing is also an important element of the well servicing industry that allows operators to continue production during service operations on a well under pressure 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
December 31, 2016
,
our coiled tubing business consists of
12
onshore and
five
offshore coiled tubing units which are deployed through
three
locations in Texas and Louisiana.
|
Pioneer Energy Services Corp. (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. Over the last 15 years, we have significantly expanded and transformed our business through acquisitions and organic growth.
We conduct our operations through two operating segments: our Drilling Services Segment and our Production Services Segment. Financial information about our operating segments is included in Note
10
,
Segment Information
, of the Notes to
Consolidated
Financial Statements, included in
Part II, Item 8
,
Financial Statements and Supplementary Data
, of this
Annual
Report on
Form 10-K
.
Pioneer Energy Services Corp.’s 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 through 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.
Industry Overview
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 is primarily driven by current and expected oil and natural gas prices.
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 an 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 months or years. As such, capital expenditure economics often require the use of commodity price forecasts which may prove inaccurate over the amount of time necessary to plan and execute a capital expenditure project (such as a drilling program for a number of wells in a certain area). When commodity prices are depressed for longer periods of time, capital expenditure projects are routinely deferred until prices are forecasted to 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 less dependent on commodity price forecasts.
Capital expenditures by exploration and production companies for the drilling of exploratory wells or new wells in proven areas are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices. In contrast, operating expenditures by exploration and production companies for the maintenance of existing wells, for which a range of production services are required in order to maintain production, are relatively more stable and predictable.
Drilling and production services have historically trended similarly in response to fluctuations in commodity prices. However, because exploration and production companies often adjust their budgets for exploratory drilling first in response to a shift in commodity prices, the demand for drilling services is generally impacted first and to a greater extent than the demand for production services which is more dependent on ongoing expenditures that are necessary to maintain production. Additionally, within the range of production services businesses, those that derive more revenue from production related activity, as opposed to completion of a new well, tend to be less affected by fluctuations in commodity prices and temporary reductions in industry activity.
However, in a severe downturn that is prolonged, both operating and capital expenditures are significantly reduced, and the demand for all our service offerings is significantly impacted.
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 three years are illustrated in the graphs below.
As shown in the charts above, the trends in industry rig counts are influenced primarily by fluctuations in oil prices, which affect the levels of capital and operating expenditures made by our clients.
Colombian oil prices have historically trended in line with West Texas Intermediate (WTI) oil prices. Demand for drilling and production services in Colombia is largely dependent upon its national oil company’s long-term exploration and production programs, and to a lesser extent, additional activity from other producers in the region.
Technological advancements and trends in our industry also affect the demand for certain types of equipment, and can affect the overall demand for equipment in our industry.
For several years, prior to late 2014, higher oil prices drove industry equipment utilization and revenue rates up, particularly in oil-producing regions and certain shale regions. However, advancements in technology improved the efficiency of drilling rigs and overall demand remained steady, while
the demand for certain drilling rigs decreased, particularly in vertical well markets. The decline was a result of higher demand for drilling rigs that are able to drill horizontally and the increased use of “pad drilling” which enables a series of horizontal wells to be drilled in succession by walking or skidding a drilling rig at a single pad-site location, thereby improving the productivity of exploration and production activities. This trend, then coupled with the downturn, resulted in significantly reduced demand for drilling rigs that do not have the ability to walk or skid and to drill horizontal wells
.
For additional information concerning the effects of the volatility in oil and gas prices and the effects of technological advancements and trends in our industry, see Item 1A – “Risk Factors” in Part I of
this Annual Report on Form 10-K
.
Competitive Strengths
Our competitive strengths include:
|
|
•
|
High Quality Assets.
As of
December 31, 2016
,
our drilling rig fleet is
100%
pad-capable
.
We offer the latest advancements in pad drilling with our fleet of
16
AC rigs in the US and
eight
SCR rigs in Colombia
, all of which have 1,500 horsepower or greater drawworks
.
Our well servicing fleet is 100% tall-masted, 550 to 600 horsepower rigs, and 75% of our onshore coiled tubing units offer larger diameter coil.
We also currently have commitments to purchase four new wireline units and 20 new-model well servicing rigs, for which we will trade in 20 of our older well servicing rigs. We believe that our modern and well maintained fleet allows us to realize higher utilization and pricing because we are able to offer our clients technologically advanced equipment that allows them to operate with less downtime and greater efficiency.
|
|
|
•
|
One of the Leading Providers in the Prominent Domestic Regions.
Our drilling and production services fleets operate in many of the most attractive producing regions in the United States, including the
Marcellus, Eagle Ford, Permian Basin and the Bakken
. Our drilling rigs are currently located in
four
divisions throughout the United States and Colombia. We believe the varied capabilities of our drilling rigs make them particularly well suited to these areas where the optimal rig configuration is dictated by local geology and market conditions. In addition, the expansion of our production services fleets has been focused on those regions with the most opportunity for growth. All our fleet equipment is mobile between domestic regions, diversifying our geographic exposure and limiting the impact of any regional slowdown.
|
|
|
•
|
Provide Services Throughout the Well Life Cycle
. By offering our clients both drilling and production services, we capture revenue throughout the life cycle of a well and diversify our business. Our Drilling Services Segment performs work prior to initial production, and our Production Services Segment provides services such as logging, completion, perforation, workover and maintenance throughout the productive life of a well. We also provide certain end-of-well-life activities such as plugging and abandonment. Drilling and production services activity have historically exhibited different degrees of demand fluctuation, and we believe the diversity of our services reduces our exposure to decreases in demand for any single service activity. Further, the diversity of our service offerings enables us to cross-sell our services, which has allowed us to generate more business from existing clients and increase our profits as we expand our services within existing markets.
|
|
|
•
|
Industry-Leading Safety Record.
Our safety program called “LiveSafe” focuses on creating an environment where everyone is committed to and recognizes the possibility of always working without incident or injury. The commitment to LiveSafe helps keep our employees safe and reduces our business risk.
In 2015, we were recognized by the International Association of Drilling Contractors as the safest land contract driller of the 15 busiest contractors
with a total recordable incident rate
46%
lower than the industry average, and our
2016 lost time incident rate is the lowest in company history, which was also the third year in a row with improving rates
. Our excellent safety record and reputation are critical to winning new business and expanding our relationships with existing clients.
|
|
|
•
|
Skilled Management Team.
We believe that an important competitive factor in achieving long-term client relationships includes having an experienced and skilled management team, with a focus on the growth and development of our leadership team, maintaining employee continuity and effective succession planning. Our CEO, Wm. Stacy Locke, joined Pioneer in 1995 as President and has
over 35
years of industry experience. Our management team has operated through numerous oilfield services cycles and provides us with valuable long-term experience and a detailed understanding of client requirements.
We seek to minimize employee turnover, invest in the growth of our employees, and recruit new talent through our focus on employee training and development, safety and competitive compensation.
|
|
|
•
|
Longstanding and Diversified Clients.
We maintain long-standing, high quality client relationships with a diverse group of large independent oil and gas exploration and production companies including Apache Corporation, Whiting Petroleum Corporation, and PDC Energy. Our largest two clients,
Apache Corporation
and
Whiting Petroleum Corporation
, accounted for approximately
12%
and
10%
, respectively, of our
2016
consolidated revenues. We believe our relationships with our clients are strong and the diversity of our client base offers numerous opportunities for growth as our industry continues to improve.
|
Strategy
Our strategy has been to become a premier land drilling and production services company through steady and disciplined growth, which we executed through the acquisition and building of our high quality drilling rig fleet and production services businesses. In 2011, we shifted our approach to accommodate changes in the industry, which resulted in a period of combined growth and rejuvenation through the disposition of assets which use older technology. Today, we provide drilling and production services in many of the most attractive drilling markets throughout the United States, and provide drilling services in Colombia.
With the decline in oil prices that began in 2014 and the resulting reductions in our utilization and revenue rates, our near-term efforts have been focused on:
|
|
•
|
Cost Reductions.
Since
the beginning of 2015
, we have reduced our total headcount by
over 50%
, reduced wage rates for our operations personnel, reduced incentive compensation, eliminated certain employment benefits and closed
ten
field
offices to reduce overhead and reduce associated lease payments.
In 2016, we lowered our capital expenditures by
77%
, limiting our capital spending to primarily routine expenditures to maintain our equipment and deferring discretionary upgrades and additions except those that we committed to in 2014 before the market slowdown.
We continue to evaluate opportunities to lower our cost structure in response to reduced revenues and to improve profitability.
|
|
|
•
|
Liquidating Nonstrategic Assets.
Since the beginning of 2015, we have sold
35
drilling rigs and other drilling equipment for aggregate net proceeds of
$65.5 million
.
As of
December 31, 2016
, we have
six
additional
domestic mechanical and SCR drilling rigs
held for sale, along with other drilling equipment,
13
wireline units,
20
older well servicing rigs that will be traded in for
20
new-model rigs in the first quarter of 2017, and certain coiled tubing equipment.
We will continue to evaluate our domestic and international fleets for additional drilling rigs or equipment for which a near term sale would be favorable.
|
|
|
•
|
Maintaining Liquidity and Financial Flexibility.
We most recently amended our revolving credit facility on June 30, 2016, to maintain access to capital but with more flexible financial covenants.
In December 2016, we sold
12,075,000
shares of common stock in a public offering, and applied the net proceeds to reduce our outstanding debt under our revolving credit facility.
Since the beginning of 2015, we have paid down
$105.3 million
of debt through
January 2017
. We currently have availability for equity or debt offerings up to
$234.6 million
under our shelf registration statement
, subject to the limitations imposed by our Revolving Credit Facility and Senior Notes, as well as our Restated Articles of Incorporation which currently limits our issuance of common stock to 100 million shares.
|
|
|
•
|
Performance of our Core Businesses.
We continue to focus on maintaining our relationships with our clients and vendors through the downturn, and remain committed to our safety and service quality goals.
In 2015, we were recognized by the International Association of Drilling Contractors as the safest land contract driller of the 15 busiest contractors
, and our
2016 lost time incident rate is the lowest in company history, which was also the third year in a row with improving rates
.
With the expectation of a modest recovery ahead
, we are allocating our resources to the markets with the best opportunities for increased activity and reactivating units in those areas with increasing demand.
|
We continue to evaluate our business and look for opportunities to further achieve these goals, which we believe will position us to take advantage of future business opportunities and maintain our long-term growth strategy.
Our long-term strategy as a leading land drilling and production services company is to further leverage 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:
|
|
•
|
Investments in Our Business.
We have historically invested in the growth and technological advancement of our business by engaging in select rig building opportunities and acquisitions, strategically upgrading our existing assets and disposing of assets which use older technology.
|
Since the beginning of 2010, we have added significant capacity to our production services offerings through the addition of
51
wireline units,
51
well servicing rigs and
17
coiled tubing units.
From 2011 to 2015, we constructed 15 walking AC drilling rigs, five of which were completed in 2015.
During 2015 and 2016, we removed all
31
of our mechanical and lower horsepower electric drilling rigs from our fleet, which were the most negatively impacted by the industry downturn, as well as all
12
domestic SCR rigs in our fleet. We achieved this by selling a total of
35
drilling rigs, retiring
two
, and placing the remaining
six
as held for sale.
As of
December 31, 2016
,
our drilling rig fleet is
100%
pad-capable
.
We offer the latest advancements in pad drilling with our fleet of
16
AC rigs in the US and
eight
SCR rigs in Colombia
, all of which have 1,500 horsepower or greater drawworks
.
The removal of older, less capable rigs from our fleet and the recent investments in the construction of new drilling rigs has transformed our fleet into a highly capable, pad optimal fleet focused on the horizontal drilling market.
We believe this positions us to compete well, grow our presence in the significant shale basins in the US, and improve profitability as the recovery of our industry continues.
|
|
•
|
Competitive Position in the Prominent 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. Our pad-optimal domestic fleet was designed for operation in the
Marcellus, Eagle Ford, Permian Basin and the Bakken
. Additionally, the added capacity in our production services fleets was focused on increasing our presence in those regions where demand benefits from 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. When natural gas prices fell to low levels, we increased our exposure to oil-related activities by redeploying certain of our assets into predominately oil-producing regions. As our industry continues to recover from the downturn that began in late 2014, we believe our fleets are highly capable and well positioned for deployment to whichever markets offer the most opportunity.
|
Overview of Our Segments and Services
Drilling Services Segment
A land drilling rig consists of power generation system(s), a hoisting system, a rotating system, pumps and related equipment to circulate and clean drilling fluid, blowout preventers, and other related equipment. Generally, our land drilling rigs operate with crews of five to six persons, and
100%
of our drilling rigs have the ability to drill multiple well bores from a single surface location as discussed in more detail below.
There are numerous factors that differentiate land drilling rigs such as the type of power used, drilling depth capabilities or drawworks horsepower, mud pump pressure rating, and the ability to drill multiple well bores from a single surface location or pad.
Regarding the type of power used, mechanical rigs are generally less expensive than their electric counterparts. Mechanical rigs use torque converters, clutches, chains, belts, and transmissions to couple engines directly to various types of equipment. Mechanical rigs are considered less efficient and less precise as the main drives are more challenging to control. SCR rigs and AC rigs are considered electric rigs. Both generate electrical power through one or more engine generator sets. SCR rigs utilize direct current to supply and control DC motors coupled to the various drilling equipment, while AC rigs utilize alternating current and AC motors. Both types of electric rigs are considered safer, more reliable, and more efficient than mechanical rigs. AC rigs are considered to be more energy efficient and provide more precise control of equipment than their SCR counterparts which enhances rig safety and reduces drilling time.
The following table summarizes our current rig fleet composition:
|
|
|
|
|
|
|
|
Multi-well, Pad-capable
|
|
SCR rigs
|
AC rigs
|
Total
|
Domestic rigs
|
—
|
|
16
|
|
16
|
Colombia rigs
|
8
|
|
—
|
|
8
|
|
|
|
24
|
Technological advancements and trends in our industry affect the demand for certain types of equipment.
Every drilling rig in our fleet is equipped with at least 1,500 horsepower drawworks, a top drive, an iron roughneck, an automatic catwalk, and a walking or skidding system.
This equipment, which is described in more detail below, provides our clients with drilling rigs that have more varied capabilities for drilling in unconventional plays, and improves our efficiency and safety.
In horizontal well drilling, operators can utilize top drives to reach formations that may not be accessible with conventional rotary drilling. Top drives provide maximum torque and rotational control, improved well control and better hole conditioning. An iron roughneck is a remotely operated pipe handling feature on the rig floor, which is used to help reduce the occurrence of repetitive motion injuries and decrease drill pipe tripping time. An automated catwalk is a drill pipe handling feature used to raise drill pipe, drill collars, casing, and other necessary items to the drilling rig floor. Its function has significant safety advantages and can reduce the overall time required to complete the well.
In recent years, oil and gas exploration and production companies have increased the use of “pad drilling” whereby a series of horizontal wells are drilled in succession by walking or skidding a drilling rig at a single pad-site location. Walking systems increase efficiency by allowing multiple wells to be drilled on the same pad site and permitting the drilling rig to move between wells while drill pipe remains in the derrick and ancillary systems such as engines and mud tanks remain stationary, thus reducing move times and costs. Our omnidirectional walking systems enable the drilling rig to move forward, backward, and side to side which affords the operator additional flexibility.
The following table sets forth historical information regarding utilization for our drilling rig fleet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
Average number of operating rigs for the period
|
30.9
|
|
|
39.1
|
|
|
62.0
|
|
|
68.2
|
|
|
65.0
|
|
Average utilization rate
|
43
|
%
|
|
63
|
%
|
|
87
|
%
|
|
84
|
%
|
|
87
|
%
|
The utilization of our AC fleet was
74%
during both of the years ended December 31, 2016 and 2015.
As our industry changed with the evolution of shale drilling, we began a transformation process in 2011, by selectively disposing of our older, less capable rigs, while we continued to invest in our rig building program to construct more technologically advanced, pad-optimal rigs to meet the changing needs of our clients.
From 2011 to 2015, we constructed 15 walking AC drilling rigs, five of which were completed in 2015.
During 2015 and 2016, we removed all
31
of our mechanical and lower horsepower electric drilling rigs from our fleet, which were the most negatively impacted by the industry downturn, as well as all
12
domestic SCR rigs in our fleet. We achieved this by selling a total of
35
drilling rigs, retiring
two
, and placing the remaining
six
as held for sale.
The removal of older, less capable rigs from our fleet and the recent investments in the construction of new drilling rigs has transformed our fleet into a highly capable, pad optimal fleet focused on the horizontal drilling market.
We believe that our drilling rigs and other related equipment are in good operating condition. Our employees perform periodic maintenance and minor repair work on our drilling rigs. We rely on various oilfield service companies for major repair work and overhaul of our drilling equipment when needed. We also engage in periodic improvement and upgrades of our drilling equipment. In the event of major breakdowns or mechanical problems, our rigs could be subject to significant idle time and a resulting loss of revenue if the necessary repair services are not immediately available.
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 a daywork basis, and sometimes on a turnkey 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.
Spot market contracts generally provide for the drilling of a single well and typically permit the client to terminate on short notice. We typically enter into longer-term drilling contracts for our newly constructed rigs and/or during periods of high rig demand.
Our business and the profitability of our operations depend on the level of drilling activity by oil and gas exploration and production companies operating in the geographic markets where we operate. The oil and gas exploration and production industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities. During periods of reduced drilling activity or excess rig capacity, price competition tends
to increase and the profitability of daywork contracts tends to decrease, and in such a competitive price environment, we may be more inclined to enter into turnkey contracts that expose us to greater risk of loss but which offer higher potential contract profitability.
During the last three fiscal years, our drilling contracts have primarily been for daywork drilling. The following table presents, by type of contract, information about the total number of wells we completed for our clients during each of the last three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Types of Contracts
|
2016
|
|
2015
|
|
2014
|
Daywork
|
300
|
|
|
448
|
|
|
1,001
|
|
Turnkey
|
1
|
|
|
17
|
|
|
106
|
|
Total number of wells
|
301
|
|
|
465
|
|
|
1,107
|
|
Daywork Contracts
. Under daywork drilling contracts, we provide a drilling rig and required personnel to our client who supervises the drilling of the well. We are paid based on a negotiated fixed rate per day while the rig is used. Daywork drilling contracts specify the equipment to be used, the size of the hole and the depth of the well. Under a daywork drilling contract, the client bears a large portion of the out-of-pocket drilling costs and we generally bear no part of the usual risks associated with drilling, such as time delays and unanticipated costs.
Turnkey Contracts.
Under a typical turnkey drilling contract, we agree to drill a well for our client to a specified depth and under specified conditions for a fixed price.
We provide technical expertise and engineering services, as well as most of the equipment and drilling supplies required to drill the well. We often subcontract for related services, such as the provision of casing crews, cementing and well logging. Under typical turnkey drilling arrangements, we do not receive progress payments and are paid by our client only after we have performed the terms of the drilling contract in full.
For these reasons, the risk to us under a turnkey drilling contract is substantially greater than for a well drilled on a daywork basis because we must assume most of the risks associated with drilling operations that the operator generally assumes under a daywork contract, including the risks of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors’ services, supplies, cost escalations and personnel.
We believe that our experienced management team, our knowledge of geologic formations in our areas of operations, the condition of our drilling equipment and our experienced crews have previously enabled us to make reasonable cost estimates and complete contracts according to our drilling plan. While we do bear the risk of loss for cost overruns and other events that are not specifically provided for in our initial cost estimates, our pricing of turnkey contracts takes such risks into consideration, and we maintain insurance coverage against some, but not all, drilling hazards. During periods of reduced demand for drilling rigs, our overall profitability on turnkey contracts has historically exceeded our profitability on daywork contracts.
Production Services Segment
Our Production Services Segment provides a range of services
to a diverse group of exploration and production companies, with our operations concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore.
As of
December 31, 2016
, our production services fleets are as follows:
|
|
|
|
|
|
|
|
Production Services Fleets
|
|
|
|
|
550 HP
|
600 HP
|
Total
|
Well servicing rigs, by horsepower (HP) rating
|
114
|
|
11
|
|
125
|
|
|
|
|
|
|
Offshore
|
Onshore
|
Total
|
Wireline units
|
6
|
|
108
|
114
|
|
Coiled tubing units
|
5
|
|
12
|
|
17
|
|
Well Servicing
. Our well servicing rig fleet provides a range of services, including the completion of newly-drilled wells, maintenance and workover of existing wells, and plugging and abandonment of wells at the end of their useful lives.
Newly drilled wells require completion services to prepare the well for production. Well servicing rigs are frequently used to complete newly drilled wells to minimize the use of higher cost drilling rigs in the completion process. The completion process may involve selectively perforating the well casing in the productive zones to allow oil or gas to flow into the well bore, stimulating and testing these zones and installing the production string and other downhole equipment. The completion process typically requires a few days to several weeks, depending on the nature and type of the completion, and generally requires additional auxiliary equipment. Accordingly, completion services require less well-to-well mobilization of equipment and can provide higher operating margins than regular maintenance work. The demand for completion services is directly related to drilling activity levels, which are sensitive to changes in oil and gas prices.
Regular maintenance is required throughout the life of a well to sustain optimal levels of oil and gas production. Common maintenance services include repairing inoperable pumping equipment in an oil well and replacing defective tubing in a gas well. Our maintenance services involve relatively low-cost, short-duration jobs which are part of normal well operating costs. The need for maintenance does not directly depend on the level of drilling activity, although it is somewhat impacted by short-term fluctuations in oil and gas prices. Accordingly, maintenance services generally experience relatively stable demand; however, when oil or gas prices are too low to justify additional expenditures, operating companies may choose to temporarily shut in producing wells rather than incur additional maintenance costs.
In addition to periodic maintenance, producing oil and gas wells occasionally require major repairs or modifications called workovers, which are typically more complex and more time consuming than maintenance operations. Workover services include extensions of existing wells to drain new formations either through perforating the well casing to expose additional productive zones not previously produced, deepening well bores to new zones or the drilling of lateral well bores to improve reservoir drainage patterns. Our well servicing rigs are also used to convert former producing wells to injection wells through which water or carbon dioxide is then pumped into the formation for enhanced oil recovery operations. Workovers also include major subsurface repairs such as repair or replacement of well casing, recovery or replacement of tubing and removal of foreign objects from the well bore. These extensive workover operations are normally performed by a well servicing rig with additional specialized auxiliary equipment, which may include rotary drilling equipment, mud pumps, mud tanks and fishing tools, depending upon the particular type of workover operation. All of our well servicing rigs are designed to perform complex workover operations. A workover may require a few days to several weeks and generally requires additional auxiliary equipment. The demand for workover services is sensitive to oil and gas producers’ intermediate and long-term expectations for oil and gas prices.
Well servicing rigs are also used in the process of permanently closing oil and gas wells no longer capable of producing in economic quantities. Many well operators bid this work on a “turnkey” basis, requiring the service company to perform the entire job, including the sale or disposal of equipment salvaged from the well as part of the compensation received, and complying with state regulatory requirements. Plugging and abandonment work can provide favorable operating margins and is less sensitive to oil and gas pricing than drilling and workover activity since well operators must plug a well in accordance with state regulations when it is no longer productive. We perform plugging and abandonment work throughout our core areas of operation in conjunction with equipment provided by other service companies.
We typically bill clients for our well servicing on an hourly basis during the period that the rig is actively working. We operate through
10
locations, mostly in the Gulf Coast states, as well as in Arkansas and North Dakota.
We believe that our fleet is among the newest in the industry, consisting entirely of tall-masted rigs with at least 550 horsepower, capable of working at depths of 20,000 feet.
These specifications allow us to operate in areas with deeper well depths and perform jobs that rigs with lesser capabilities cannot.
In late 2016, we committed to
trade in 20 of our older 550 horsepower well servicing rigs for 20 new-model rigs to be delivered in the first quarter of 2017
, further improving the quality of our rig fleet, enhancing our ability to recruit crew talent and competitively positioning us for new service opportunities as the market improves. Our well servicing utilization rates for the years ended
December 31, 2016
and
2015
were
41%
and
65%
, respectively, based on total fleet count.
Wireline Services
. Wireline trucks, like well servicing rigs, are utilized throughout the life of a well. Wireline trucks are often used in place of a well servicing rig when there is no requirement to remove tubulars from the well in order to make repairs.
Wireline services typically utilize a single truck equipped with a spool of wireline that is used to lower and raise a variety of specialized tools in and out of the wellbore. Electric wireline contains a conduit that allows signals to be transmitted to or from tools located in the well. These tools can be used to measure pressures and temperatures as well
as the condition of the casing and the cement that holds the casing in place. 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. We provide both open and cased-hole logging services.
Other applications for wireline tools include placing equipment in or retrieving equipment (or debris) from the wellbore, installing bridge plugs, perforating the casing in order to prepare the well for production, or cutting off pipe that is stuck in the well so that the free section can be recovered.
Our wireline operations are deployed through
17
locations in Texas, Kansas, Colorado, Montana, North Dakota, Louisiana, Oklahoma and Wyoming. We are currently actively marketing approximately
65%
of our wireline fleet.
Coiled Tubing Services
.
Coiled tubing is also an important element of the well servicing industry that allows operators to continue production during service operations on a well under pressure 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.
Our coiled tubing operations are deployed through
three
locations in Texas and Louisiana.
Our coiled tubing utilization rates for the years ended
December 31, 2016
and
2015
were
22%
and
27%
, respectively, based on total fleet count.
Seasonality
All our production services operations are impacted by seasonal factors. Our business can be negatively impacted during the winter months due to inclement weather, fewer daylight hours, and holidays. Because our well servicing rigs, wireline units and coiled tubing units are mobile, during periods of heavy snow, ice or rain, we may not be able to move our equipment between locations.
Clients
We provide drilling and production services to numerous independent and large oil and gas exploration and production companies that are active in the geographic areas in which we operate. The following table shows our three largest clients as a percentage of our total revenue for each of our last three fiscal years.
|
|
|
|
|
Total Revenue
Percentage
|
Fiscal year ended December 31, 2016
|
|
Apache Corporation
|
11.9
|
%
|
Whiting Petroleum Corporation
|
10.1
|
%
|
PDC Energy, Inc
|
4.4
|
%
|
|
|
Fiscal year ended December 31, 2015
|
|
Whiting Petroleum Corporation
|
17.8
|
%
|
Ecopetrol
|
6.1
|
%
|
Apache Corporation
|
4.6
|
%
|
|
|
Fiscal year ended December 31, 2014
|
|
Whiting Petroleum Corporation
|
11.9
|
%
|
Ecopetrol
|
9.9
|
%
|
Penn Virginia Oil & Gas, LP
|
6.0
|
%
|
Competition
We encounter substantial competition from other drilling contractors and other oilfield service companies. Our primary market areas are highly fragmented and competitive. The fact that drilling and production services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry and may result in an oversupply of equipment in an area. Contract drilling companies and other oilfield service companies compete primarily on a regional basis, and the intensity of competition may vary significantly from
region to region at any particular time. If demand for drilling or production services improves in a region where we operate, our competitors might respond by moving in suitable rigs and production services equipment from other regions. An influx of equipment from other regions could rapidly intensify competition, reduce profitability and make any improvement in demand for our services short-lived.
Most drilling services contracts and production services contracts are awarded on the basis of competitive bids, which also results in price competition. In addition to pricing and equipment availability, we believe the following factors are also important to our clients in determining which drilling services or production services provider to select:
|
|
•
|
the type, capability and condition of each of the competing drilling rigs, well servicing rigs, wireline units and coiled tubing units;
|
|
|
•
|
the mobility and efficiency of the equipment;
|
|
|
•
|
the quality of service and experience of the crews;
|
|
|
•
|
the reputation and safety record of the company providing the services;
|
|
|
•
|
the offering of ancillary services; and
|
|
|
•
|
the ability to provide drilling and production services equipment adaptable to, and personnel familiar with, new technologies and drilling and production techniques.
|
While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment, our safety record, our ability to offer ancillary services, the experience of our crews and the quality of service we provide to differentiate us from our competitors. This strategy is less effective when lower demand for drilling and production services intensifies price competition and makes it more difficult for us to compete on the basis of factors other than price. In all of the markets in which we compete, an oversupply of drilling rigs or production services equipment generally causes greater price competition and reduced profitability.
We believe that an important competitive factor in establishing and maintaining long-term client relationships is having an experienced, skilled and well-trained work force. In recent years, many of our larger clients have placed increased emphasis on the safety performance and quality of the crews, equipment and services provided by their contractors. We have devoted, and will continue to devote, substantial resources toward employee safety and training programs. Although we believe clients consider all of these factors, price is generally the primary factor in determining which service provider is awarded the work. However, we believe that many clients are willing to pay a slight premium for the quality and safe, efficient service we provide.
The drilling contracts we compete for are usually awarded on the basis of competitive bids. Our principal drilling competitors are Helmerich & Payne, Inc., Precision Drilling Corporation, Patterson-UTI Energy, Inc. and Nabors Industries, Ltd.
The largest well servicing providers that we compete with are Key Energy Services, Basic Energy Services, C&J Energy Services, Superior Energy Services, Inc. and CC Forbes. As compared to the other large competitors in this industry, we believe our fleet is one of the youngest, most uniform fleets, which in addition to our safety performance and service quality, has historically allowed us to operate at utilization and hourly rates that are among the highest of our peers.
The wireline market in the United States is dominated by a small number of companies, including ourselves. These competitors include Allied-Horizontal Wireline Services, Renegade Services, C&J Energy Services, KLX Energy Services and Archer Ltd. Additional competitors include Schlumberger Ltd., Halliburton Company and other independents. The market for wireline services is very competitive, but historically we have competed effectively with our competitors because of the diversified services we provide, our performance and strong client service.
The market for coiled tubing has expanded within the oilfield services market over recent years due to technological advances which increased the number of applications for the coiled tubing unit, and the increase in deep well and horizontal drilling. Our primary competitors in the coiled tubing services market currently include C&J Energy Services, Superior Energy Services, Key Energy Services and RPC Inc.
In addition, there are numerous smaller companies that compete in all of our services markets.
Some of our competitors have greater financial, technical and other resources than we do. Their greater capabilities in these areas may enable them to:
|
|
•
|
better withstand industry downturns;
|
|
|
•
|
compete more effectively on the basis of price and technology;
|
|
|
•
|
retain skilled personnel; and
|
|
|
•
|
build new rigs or acquire and refurbish existing rigs and place them into service more quickly than us in periods of high drilling demand.
|
The need for our services fluctuates primarily in relation to the price (or anticipated price) of oil and natural gas, which in turn is driven by the supply of and demand for oil and natural gas. The level of our revenues, earnings and cash flows are substantially dependent upon, and affected by, the level of domestic and international oil and gas exploration and development activity, as well as the equipment capacity in any particular region. For a more detailed discussion, see Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Raw Materials
The materials and supplies we use in our drilling and production services operations include fuels to operate our equipment, drilling mud, drill pipe, drill collars, drill bits, cement and other job materials such as explosives, perforating guns and coiled tubing. We do not rely on a single source of supply for any of these items. While we are not currently experiencing any shortages, from time to time
there have been shortages of drilling and production services equipment and supplies during periods of high demand
.
Shortages could result in increased prices for equipment or supplies that we may be unable to pass on to clients. In addition, during periods of shortages, the delivery times for equipment and supplies can be substantially longer. Any significant delays in our obtaining equipment or supplies could limit our operations and jeopardize our relations with clients. In addition, shortages of equipment or supplies could delay and adversely affect our ability to obtain new contracts for our rigs, which could have a material adverse effect on our financial condition and results of operations.
Operating Risks and Insurance
Our operations are subject to the many hazards inherent in exploration and production activity, including the risks of:
|
|
•
|
collapse of the borehole;
|
|
|
•
|
damaged or lost drilling equipment; and
|
|
|
•
|
damage or loss from natural disasters.
|
Any of these hazards can result in substantial liabilities or losses to us from, among other things:
|
|
•
|
suspension of operations;
|
|
|
•
|
damage to, or destruction of, our property and equipment and that of others;
|
|
|
•
|
personal injury and loss of life;
|
|
|
•
|
damage to producing or potentially productive oil and gas formations through which we drill; and
|
We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Those risks include, among other things, pollution liability in excess of relatively low limits. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our clients. However, clients who provide contractual indemnification protection may not in all cases maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a client to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may be unable to maintain adequate insurance in the future at rates we consider reasonable.
Our current insurance coverage includes property insurance on our rigs, drilling equipment, production services equipment and real property. Our insurance coverage for property damage to our rigs, drilling equipment and production services equipment is based on our estimates of the cost of comparable used equipment to replace the insured property. The policy provides for a deductible of no more than
$750,000
per drilling rig and a deductible on production services equipment of
$250,000
per occurrence. Our third-party liability insurance coverage is
$101 million
per occurrence and
in the aggregate, with a deductible of
$250,000
per occurrence. We also carry insurance coverage for pollution liability up to
$20 million
with a deductible of
$500,000
. We believe that we are adequately insured for public liability and property damage to others with respect to our operations. However, such insurance may not be sufficient to protect us against liability for all consequences of well disasters, extensive fire damage or damage to the environment.
In addition, we generally carry insurance coverage to protect against certain hazards inherent in our turnkey contract drilling operations. This insurance covers “control-of-well,” including blowouts above and below the surface, redrilling, seepage and pollution. This policy provides coverage of $3 million to $20 million, subject to a deductible of $150,000 or $250,000, depending on the area in which the well is drilled and its target depth. This policy also provides care, custody and control insurance, with a limit of
$1 million
, subject to a
$100,000
deductible.
Employees
We have approximately
1,800
employees, which is down by
over 50% from the beginning of 2015.
The majority of our employees work in operations for our Drilling Services Segment and Production Services Segment and are primarily compensated on an hourly basis. The number of employees in operations fluctuates depending on the utilization of our drilling rigs, well servicing rigs, wireline units and coiled tubing units at any particular time. None of our employment arrangements are subject to collective bargaining arrangements.
Our operations require the services of employees having the technical training and experience necessary to achieve proper operational standards. As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel. Although we have not encountered material difficulty in hiring and retaining employees in our operations, shortages of qualified personnel have occurred in our industry. If we should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially and adversely affected. While we believe our wage rates are competitive and our relationships with our employees are satisfactory, a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both. The occurrence of either of these events for a significant period of time could have a material adverse effect on our financial condition and results of operations.
Facilities
We lease our corporate office facilities located at 1250 N.E. Loop 410, Suite 1000 San Antonio, Texas 78209. We conduct our business operations through
53
other real estate locations, of which we own
12
, in the United States (Texas, Oklahoma, Colorado, Montana, North Dakota, Pennsylvania, Wyoming, Mississippi, Arkansas, Louisiana and Kansas) and internationally in Colombia. These real estate locations are primarily used for regional offices and storage and maintenance yards.
Governmental Regulation
Many aspects of our operations are subject to various federal, state and local laws and governmental regulations, including laws and regulations governing:
|
|
•
|
remediation of contamination;
|
|
|
•
|
preservation of natural resources;
|
Our operations are subject to stringent federal, state and local laws, rules and regulations governing the protection of the environment and human health and safety. Some of those laws, rules and regulations relate to the disposal of hazardous substances, oilfield waste and other waste materials and restrict the types, quantities and concentrations of those substances that can be released into the environment. Several of those laws also require removal and remedial action and other cleanup under certain circumstances, commonly regardless of fault. Our operations routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous substances. Planning, implementation and maintenance of protective measures are required to prevent accidental discharges. Spills of oil, natural gas liquids, drilling fluids and other substances may subject us to penalties and cleanup requirements. Handling, storage and disposal of both hazardous and non-hazardous wastes are also subject to these regulatory requirements. In addition, our operations are often conducted in or near ecologically sensitive areas, such as wetlands, which are subject
to special protective measures and which may expose us to additional operating costs and liabilities for accidental discharges of oil, gas, drilling fluids, contaminated water or other substances, or for noncompliance with other aspects of applicable laws and regulations.
Environmental laws and regulations are complex and subject to frequent change. Failure to comply with governmental requirements or inadequate cooperation with governmental authorities could subject a responsible party to administrative, civil or criminal action. We may also be exposed to environmental or other liabilities originating from businesses and assets which we acquired from others. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination or regulatory noncompliance may require us to make material expenditures or subject us to liabilities that we currently do not anticipate.
There are a variety of regulatory developments, proposals or requirements and legislative initiatives that have been introduced in the United States and international regions in which we operate that are focused on restricting the emission of carbon dioxide, methane and other greenhouse gases.
Hydraulic fracturing of wells and subsurface water disposal are also under public and governmental scrutiny due to concerns regarding potential environmental and physical impacts, including groundwater and drinking water impacts, as well as whether such activities may cause earthquakes.
Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil and gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural gas, including from the developing shale plays, incurred by our clients. The adoption of any federal, state or local laws or the implementation of regulations or ordinances restricting or increasing the costs of hydraulic fracturing could cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our drilling and well servicing activities, any or all of which could adversely affect our financial position, results of operations and cash flows.
Our wireline operations involve the use of radioactive isotopes along with other nuclear, electrical, acoustic, and mechanical devices. Our activities involving the use of isotopes are regulated by the U.S. Nuclear Regulatory Commission and specified agencies of certain states. Additionally, we use high explosive charges for perforating casing and formations, and we use various explosive cutters to assist in wellbore cleanout. Such operations are regulated by the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms, and Explosives and require us to obtain licenses or other approvals for the use of densitometers as well as explosive charges. We have obtained these licenses and approvals when necessary and believe that we are in substantial compliance with these federal requirements.
In addition, our business depends on the demand for land drilling and production services from the oil and gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and gas industry generally, by changes in those laws and by changes in related administrative regulations. It is possible that these laws and regulations may in the future add significantly to our operating costs or those of our clients, or otherwise directly or indirectly affect our operations.
Among the services we provide, we operate as a motor carrier for the transportation of our own equipment and therefore are subject to regulation by the U.S. Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations and regulatory safety. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period, onboard black box recorder devices or limits on vehicle weight and size.
Interstate motor carrier operations are subject to safety requirements prescribed by the U.S. Department of Transportation. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations.
From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.
See Item 1A—“
Risk Factors
” in Part I of
this Annual Report on Form 10-K
for a detailed discussion of risks we face concerning laws and governmental regulations.
Available Information
Our Website address is
www.pioneeres.com
. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, are available free of charge through our Website as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission. The public may read and copy these materials at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. For additional information on the operations of the Securities and Exchange Commission’s Public Reference Room, please call 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an Internet site at
www.sec.gov
that contains reports, proxy and information statements and other information regarding issuers that file electronically. We have also posted on our Website our: Charters for the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board; Code of Business Conduct and Ethics; Corporate Governance Guidelines; and Company Contact Information. Information on our website is not incorporated into this report or otherwise made part of this report.
The information set forth in this Item 1A should be read in conjunction with the rest of the information included in this report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the financial statements and related notes this report contains. While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Additional risks and uncertainties that are not presently known to us or that we currently believe are immaterial also may negatively impact our business, financial condition or operating results.
Set forth below are various risks and uncertainties that could adversely impact our business, financial condition, results of operations and cash flows.
Risks Relating to the Oil and Gas Industry
We derive all our revenues from companies in the oil and gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and gas prices.
As a provider of contract land drilling services and oil and gas production services, our business depends on the level of exploration and production activity in the geographic markets where we operate. The oil and gas exploration and production industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities.
Oil and gas prices, and market expectations of potential changes in those prices, significantly affect the levels of those activities. Oil and gas prices have been volatile historically and, we believe, will continue to be so in the future. Worldwide political, economic, and military events as well as natural disasters have contributed to oil and gas price volatility historically, and are likely to continue to do so in the future. Many factors beyond our control affect oil and gas prices, including:
|
|
•
|
the worldwide supply and demand for oil and gas;
|
|
|
•
|
the cost of exploring for, producing and delivering oil and gas;
|
|
|
•
|
the discovery rate of new oil and gas reserves;
|
|
|
•
|
the rate of decline of existing and new oil and gas reserves;
|
|
|
•
|
available pipeline and other oil and gas transportation capacity;
|
|
|
•
|
the levels of oil and gas storage;
|
|
|
•
|
the ability of oil and gas exploration and production companies to raise capital;
|
|
|
•
|
economic conditions in the United States and elsewhere;
|
|
|
•
|
actions by the Organization of Petroleum Exporting Countries, which we refer to as OPEC;
|
|
|
•
|
political instability in the Middle East and other major oil and gas producing regions;
|
|
|
•
|
governmental regulations, both domestic and foreign;
|
|
|
•
|
domestic and foreign tax policy;
|
|
|
•
|
weather conditions in the United States and elsewhere;
|
|
|
•
|
the pace adopted by foreign governments for the exploration, development and production of their national reserves; and
|
|
|
•
|
the price of foreign imports of oil and gas.
|
As a result of the decline in oil prices that began in late 2014, our clients maintained minimal spending on exploration and production projects in 2015 and 2016, resulting in a continued decrease in demand for our services.
Oil and natural gas prices, and market expectations of potential changes in these prices, significantly impact the level of worldwide drilling and production services activities. Reduced demand for oil and natural gas generally results in lower prices for these commodities and often impacts the economics of planned drilling projects and ongoing production projects, resulting in the curtailment, reduction, delay or postponement of such projects for an indeterminate period of time. When drilling and production activity and spending declines, both dayrates and utilization historically decline as well.
Beginning in October 2014, oil prices worldwide dropped significantly.
Our clients significantly reduced both their operating and capital expenditures during 2015 and 2016, but increases are expected for 2017.
If the depressed oil and natural gas prices persist for a prolonged period, or further decline, oil and gas exploration and production companies are likely to continue to cancel or curtail their drilling programs and further reduce production spending on existing wells, thereby reducing demand for our services.
The reduction in spending and activity levels adversely affected our business during 2015 and 2016
. If the reduction in the overall level of exploration and development activities, whether resulting from changes in oil and gas prices or otherwise, continues, it could materially and adversely affect us further by negatively impacting:
|
|
•
|
our revenues, cash flows and profitability;
|
|
|
•
|
the fair market value of our drilling rig fleet and production services equipment;
|
|
|
•
|
our ability to maintain or increase our borrowing capacity;
|
|
|
•
|
our ability to obtain additional capital to finance our business or make acquisitions, and the cost of that capital;
|
|
|
•
|
the collectability of our receivables; and
|
|
|
•
|
our ability to retain skilled operations personnel whom we would need in the event of an upturn in the demand for our services.
|
Risks Relating to Our Business
Reduced demand for or excess capacity of drilling services or production services could adversely affect our profitability.
Our profitability in the future will depend on many factors, but largely on pricing and utilization rates for our drilling and production services. A reduction in the demand for drilling rigs or an increase in the supply of drilling rigs, whether through new construction or refurbishment, could decrease the dayrates and utilization rates for our drilling services, which would adversely affect our revenues and profitability. An increase in supply of well servicing rigs, wireline units and coiled tubing units, without a corresponding increase in demand, could similarly decrease the pricing and utilization rates of our production services, which would adversely affect our revenues and profitability.
We operate in a highly competitive, fragmented industry in which price competition could reduce our profitability.
We encounter substantial competition from other drilling contractors and other oilfield service companies. Our primary market areas are highly fragmented and competitive. The fact that drilling and production services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry and may result in an oversupply of equipment in an area. Contract drilling companies and other oilfield service companies compete primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time. If demand for drilling or production services improves in a region where we operate, our competitors might respond by moving in suitable rigs and production services equipment from other regions. An influx of equipment from other regions could rapidly intensify competition, reduce profitability and make any improvement in demand for our services short-lived.
Most drilling services contracts and production services contracts are awarded on the basis of competitive bids, which also results in price competition. In addition to pricing and equipment availability, we believe the following factors are also important to our clients in determining which drilling services or production services provider to select:
|
|
•
|
the type, capability and condition of each of the competing drilling rigs, well servicing rigs, wireline units and coiled tubing units;
|
|
|
•
|
the mobility and efficiency of the equipment;
|
|
|
•
|
the quality of service and experience of the crews;
|
|
|
•
|
the reputation and safety record of the company providing the services;
|
|
|
•
|
the offering of ancillary services; and
|
|
|
•
|
the ability to provide drilling and production services equipment adaptable to, and personnel familiar with, new technologies and drilling and production techniques.
|
While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment, our safety record, our ability to offer ancillary services, the experience of our crews and the quality of service we provide to differentiate us from our competitors. This strategy is less effective when lower demand for drilling and production services intensifies price competition and makes it more difficult for us to compete on the basis of factors other than price. In all of the markets in which we compete, an oversupply of drilling rigs or production services equipment generally causes greater price competition and reduced profitability.
We face competition from many competitors with greater resources.
Some of our competitors have greater financial, technical and other resources than we do. Their greater capabilities in these areas may enable them to:
|
|
•
|
better withstand industry downturns;
|
|
|
•
|
compete more effectively on the basis of price and technology;
|
|
|
•
|
retain skilled personnel; and
|
|
|
•
|
build new rigs or acquire and refurbish existing rigs and place them into service more quickly than us in periods of high drilling demand.
|
Technological advancements and trends in our industry also affect the demand for certain types of equipment, and can affect the overall demand for equipment in our industry.
Technological advancements and trends in our industry also affect the demand for certain types of equipment, and can affect the overall demand for equipment in our industry.
For several years, prior to late 2014, higher oil prices drove industry equipment utilization and revenue rates up, particularly in oil-producing regions and certain shale regions. However, advancements in technology improved the efficiency of drilling rigs and overall demand remained steady, while
the demand for certain drilling rigs decreased, particularly in vertical well markets. The decline was a result of higher demand for drilling rigs that are able to drill horizontally and the increased use of “pad drilling” which enables a series of horizontal wells to be drilled in succession by walking or skidding a drilling rig at a single pad-site location, thereby improving the productivity of exploration and production activities. This trend, then coupled with the downturn, resulted in significantly reduced demand for drilling rigs that do not have the ability to walk or skid and to drill horizontal wells
, and could further reduce the overall demand for all drilling rigs.
In drilling, all rig classes were severely impacted by the industry downturn.
However, AC drilling rigs equipped with either a walking or skidding system are the best suited for horizontal pad drilling
and we believe they are the most desirable rig design available.
Although we take measures to ensure that we use advanced technologies for drilling and production services equipment, changes in technology or improvements in our competitors’ equipment could make our equipment less competitive or require significant capital investments to keep our equipment competitive, which could have an adverse effect on our financial condition and operating results.
We derive a significant portion of our revenue from a limited number of major clients, and our business, financial condition and results of operations could be materially adversely affected if we are unable to maintain relationships with these clients, or if their demand for our services decreases.
In the past, we have derived a significant portion of our revenue from a limited number of major clients. For the years ended
December 31, 2016
,
2015
and
2014
, our drilling and production services to our top three clients accounted for approximately
26%
,
29%
, and
28%
, respectively, of our revenue. The loss of one or more of our major clients, or their decrease in demand for our services, could have a material adverse effect on our business, financial condition and results of operations. We experienced significantly reduced demand for our services during 2015 and 2016, from all clients, including these major clients.
For a detail of our three largest clients as a percentage of our total revenues during the last three fiscal years, see Item 1—“Business” in Part I of
this Annual Report on Form 10-K
.
Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.
Our indebtedness is primarily a result of the two production services businesses that we acquired in 2008 and the acquisition of Go-Coil in 2011, as well as organic growth investments. At
January 31, 2017
, our total debt balance of
$349.7 million
consists of
$300 million
outstanding under our Senior Notes and
$49.7 million
outstanding under our Revolving Credit Facility. At
January 31, 2017
, we had borrowing availability of
$88.5 million
under our Revolving Credit Facility.
Our current and future indebtedness could have important consequences, including:
|
|
•
|
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness;
|
|
|
•
|
making us more vulnerable to a downturn in our business, our industry or the economy in general as a substantial portion of our operating cash flow could be required to make principal and interest payments on our indebtedness, making it more difficult to react to changes in our business, industry and market conditions;
|
|
|
•
|
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
|
|
|
•
|
impairing our ability to make investments and obtain additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes;
|
|
|
•
|
limiting our ability to obtain additional financing that may be necessary to operate or expand our business;
|
|
|
•
|
putting us at a competitive disadvantage to competitors that have less debt; and
|
|
|
•
|
increasing our vulnerability to rising interest rates.
|
We currently expect that cash and cash equivalents, cash generated from operations
, proceeds from sales of certain non-strategic assets
and available borrowings under our Revolving Credit Facility are adequate to cover our liquidity requirements for at least the next 12 months.
However, our ability to make payments on our indebtedness, and to fund planned capital expenditures, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to conditions in the oil and gas industry, general economic and financial conditions, competition in the markets where we operate, the impact of legislative and regulatory actions on how we conduct our business and other factors, all of which are beyond our control. If our business does not generate sufficient cash flow from operations to service our outstanding indebtedness, we may have to undertake alternative financing plans, such as:
|
|
•
|
refinancing or restructuring our debt;
|
|
|
•
|
reducing or delaying acquisitions or capital investments, such as refurbishments of our rigs and related equipment; or
|
|
|
•
|
seeking to raise additional capital.
|
However, we may be unable to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, and any such alternative financing plans might be insufficient to allow us to meet our debt obligations. If we are unable to generate sufficient cash flow or are otherwise unable to obtain the funds required to make principal and interest payments on our indebtedness, or if we otherwise fail to comply with the various covenants in our Revolving Credit Facility or other instruments governing any future indebtedness, we could be in default under the terms of our Revolving Credit Facility or such instruments. In the event of a default, the lenders under our Revolving Credit Facility could elect to declare all the loans made under such facility to be due and payable together with accrued and unpaid interest and terminate their commitments thereunder and we or one or more of our subsidiaries could be forced into
bankruptcy or liquidation. Any of the foregoing consequences could materially and adversely affect our business, financial condition, results of operations and prospects.
Our Revolving Credit Facility and our Senior Notes impose significant covenants on us that may affect our ability to successfully operate our business.
Our Revolving Credit Facility limits our ability to take various actions, such as:
|
|
•
|
incur additional debt or make prepayments of existing debt;
|
|
|
•
|
create liens on or dispose of our assets;
|
|
|
•
|
pay dividends on stock or repurchase stock;
|
|
|
•
|
enter into acquisitions, mergers, consolidations, sale leaseback transactions, or hedging contracts;
|
|
|
•
|
make capital expenditures;
|
|
|
•
|
make other restricted investments;
|
|
|
•
|
conduct transactions with affiliates; and
|
|
|
•
|
limits our use of the net proceeds of any offering of our equity securities to the repayment of debt outstanding under the Revolving Credit Facility.
|
In addition, our Revolving Credit Facility requires us to maintain certain financial covenants and to satisfy certain financial conditions, which may require us to reduce our debt or take some other action in order to comply with them.
The Indenture governing our Senior Notes
limits us and certain of our subsidiaries in 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 or their assets
;
|
|
|
•
|
enter into sale and leaseback transactions;
|
|
|
•
|
sell or transfer assets;
|
|
|
•
|
borrow, pay dividends, 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
.
|
The failure to comply with any of these covenants would cause an event of default under our Revolving Credit Facility or our Senior Notes. An event of default, if not waived, could result in acceleration of the outstanding indebtedness, in which case the debt would become immediately due and payable. If this occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be available on terms that are acceptable to us. These covenants could also limit our ability to obtain future financing, make needed capital expenditures, withstand a downturn in our business or the economy in general, or otherwise conduct necessary corporate activities. We also may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our Revolving Credit Facility and our Senior Notes.
Unexpected cost overruns on our turnkey drilling jobs could adversely affect our financial position and our results of operations.
We have historically derived a portion of our revenues from turnkey drilling contracts,
although we do not expect turnkey contracts to represent a significant amount of our revenues in the current industry environment.
Under a typical turnkey drilling contract, we agree to drill a well for our client to a specified depth and under specified conditions for a fixed price.
We provide technical expertise and engineering services, as well as most of the equipment and drilling supplies required to drill the well. We often subcontract for related services, such as the provision of casing crews, cementing and well logging. Under typical turnkey drilling arrangements, we do not receive progress payments and are paid by our client only after we have performed the terms of the drilling contract in full.
For these reasons, the risk to us under a turnkey drilling contract is substantially greater than for a well drilled on a daywork basis because we must assume most of the risks associated with drilling operations that the operator generally assumes under a daywork contract, including the risks of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors’ services, supplies, cost escalations and personnel.
In addition, since we are only paid by our clients after we have performed the terms of the drilling contract in full, our liquidity can be affected by the number of turnkey contracts that we enter into.
The occurrence of uninsured or under-insured losses or operating cost overruns on our turnkey jobs could have a material adverse effect on our financial position and results of operations. Although we attempt to obtain insurance coverage to reduce certain of the risks inherent in our turnkey drilling operations, adequate coverage may be unavailable in the future and we might have to bear the full cost of such risks, which could have an adverse effect on our financial condition and results of operations.
Our operations involve operating hazards, which, if not insured or indemnified against, could adversely affect our results of operations and financial condition.
Our operations are subject to the many hazards inherent in exploration and production activity, including the risks of:
|
|
•
|
collapse of the borehole;
|
|
|
•
|
damaged or lost drilling equipment; and
|
|
|
•
|
damage or loss from natural disasters.
|
Any of these hazards can result in substantial liabilities or losses to us from, among other things:
|
|
•
|
suspension of operations;
|
|
|
•
|
damage to, or destruction of, our property and equipment and that of others;
|
|
|
•
|
personal injury and loss of life;
|
|
|
•
|
damage to producing or potentially productive oil and gas formations through which we drill; and
|
We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Those risks include, among other things, pollution liability in excess of relatively low limits. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our clients. However, clients who provide contractual indemnification protection may not in all cases maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a client to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may be unable to maintain adequate insurance in the future at rates we consider reasonable.
We could be adversely affected if shortages of equipment, supplies or personnel occur.
From time to time
there have been shortages of drilling and production services equipment and supplies during periods of high demand
which we believe could recur.
Shortages could result in increased prices for equipment or supplies that we may be unable to pass on to clients. In addition, during periods of shortages, the delivery times for equipment and supplies can be substantially longer. Any significant delays in our obtaining equipment or supplies could limit our operations and jeopardize our relations with clients. In addition, shortages of equipment or supplies could delay and adversely affect our ability to obtain new contracts for our rigs, which could have a material adverse effect on our financial condition and results of operations.
Our strategy of constructing drilling rigs during periods of peak demand requires that we maintain an adequate supply of drilling rig components to complete our rig building program. Our suppliers may be unable to continue providing us the needed drilling rig components if their manufacturing sources are unable to fulfill their commitments.
Our operations require the services of employees having the technical training and experience necessary to achieve the proper operational results. As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel. Shortages of qualified personnel have occurred in our industry. If we should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially and adversely affected. A significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in
wage rates, or both. The occurrence of either of these events for a significant period of time could have a material adverse effect on our financial condition and results of operations.
Our acquisition strategy exposes us to various risks, including those relating to difficulties in identifying suitable acquisition opportunities and integrating businesses, assets and personnel, as well as difficulties in obtaining financing for targeted acquisitions and the potential for increased leverage or debt service requirements.
A component of our long-term business strategy is a pursuit of acquisitions of complementary assets and businesses. This acquisition strategy in general involves numerous inherent risks, including:
|
|
•
|
unanticipated costs and assumption of liabilities and exposure to unforeseen liabilities of acquired businesses, including environmental liabilities;
|
|
|
•
|
difficulties in integrating the operations and assets of the acquired business and the acquired personnel;
|
|
|
•
|
limitations on our ability to properly assess and maintain an effective internal control environment over an acquired business in order to comply with applicable periodic reporting requirements;
|
|
|
•
|
potential losses of key employees and clients of the acquired businesses;
|
|
|
•
|
risks of entering markets in which we have limited prior experience; and
|
|
|
•
|
increases in our expenses and working capital requirements.
|
The process of integrating an acquired business may involve unforeseen costs and delays or other operational, technical and financial difficulties that may require a disproportionate amount of management attention and financial and other resources. Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations.
In addition, we may not have sufficient capital resources to complete additional acquisitions. Historically, we have funded business acquisitions and the growth of our rig fleet through a combination of debt and equity financing. We may incur substantial additional indebtedness to finance future acquisitions and also may issue equity securities or convertible securities in connection with such acquisitions. Debt service requirements could represent a significant burden on our results of operations and financial condition and the issuance of additional equity or convertible securities could be dilutive to our existing shareholders. Furthermore, we may not be able to obtain additional financing on satisfactory terms or at all.
Even if we have access to the necessary capital, we may be unable to continue to identify additional suitable acquisition opportunities, negotiate acceptable terms or successfully acquire identified targets.
Our cash and cash equivalents and short term investments could be adversely affected if the financial institutions in which we hold our cash and cash equivalents fail.
We maintain cash balances at third-party financial institutions in excess of the Federal Deposit Insurance Corporation insurance limit. While we monitor the cash balances in the operating accounts and adjust the balances as appropriate, we may incur a loss to the extent such loss exceeds the insurance limitation, and there could be a material impact on our business, if one of more of the financial institutions with which we deposit fails or is subject to other adverse conditions in the financial or credit markets and bank regulators elect to impose losses on uninsured depositors. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents. However, in the future, our invested cash and cash equivalents could be adversely affected by adverse conditions in the financial and credit markets.
Our international operations are subject to political, economic and other uncertainties not generally encountered in our domestic operations.
Our international operations are subject to political, economic and other uncertainties not generally encountered in our U.S. operations which include, among potential others:
|
|
•
|
risks of war, terrorism, civil unrest and kidnapping of employees;
|
|
|
•
|
employee strikes, work stoppages, labor disputes and other slowdowns;
|
|
|
•
|
expropriation, confiscation or nationalization of our assets;
|
|
|
•
|
renegotiation or nullification of contracts;
|
|
|
•
|
foreign taxation,
such as the tax for equality and the net-worth tax in Colombia;
|
|
|
•
|
the inability to repatriate earnings or capital due to laws limiting the right and ability of foreign subsidiaries to pay dividends and remit earnings to affiliated companies;
|
|
|
•
|
changing political conditions and changing laws and policies affecting trade and investment;
|
|
|
•
|
concentration of clients;
|
|
|
•
|
regional economic downturns;
|
|
|
•
|
the overlap of different tax structures;
|
|
|
•
|
the burden of complying with multiple and potentially conflicting laws;
|
|
|
•
|
the risks associated with the assertion of foreign sovereignty over areas in which our operations are conducted;
|
|
|
•
|
the risks associated with any lack of compliance with the Foreign Corrupt Practices Act of 1977 (“FCPA”) or other anti-corruption laws;
|
|
|
•
|
the risks associated with fluctuating currency values, hard currency shortages and controls of foreign currency exchange, and higher rates of inflation as compared to our domestic operations;
|
|
|
•
|
difficulty in collecting international accounts receivable; and
|
|
|
•
|
potentially longer payment cycles.
|
Additionally, we may be subject to foreign governmental regulations
favoring or requiring the awarding of contracts to local contractors or requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These regulations could adversely affect our ability to compete.
We are committed to doing business in accordance with applicable anti-corruption laws and our code of conduct and ethics. We are subject, however, to the risk that our employees and agents may take action determined to be in violation of anti-corruption laws, including the FCPA or other similar laws. Any violation of the FCPA or other applicable anti-corruption laws could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and might materially adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Further, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
Our operations are subject to various laws and governmental regulations that could restrict our future operations and increase our operating costs.
Many aspects of our operations are subject to various federal, state and local laws and governmental regulations, including laws and regulations governing:
|
|
•
|
remediation of contamination;
|
|
|
•
|
preservation of natural resources;
|
Our operations are subject to stringent federal, state and local laws, rules and regulations governing the protection of the environment and human health and safety. Some of those laws, rules and regulations relate to the disposal of hazardous substances, oilfield waste and other waste materials and restrict the types, quantities and concentrations of those substances that can be released into the environment. Several of those laws also require removal and remedial action and other cleanup under certain circumstances, commonly regardless of fault. Our operations routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous substances. Planning, implementation and maintenance of protective measures are required to prevent accidental discharges. Spills of oil, natural gas liquids, drilling fluids and other substances may subject us to penalties and cleanup requirements. Handling, storage and disposal of both hazardous and non-hazardous wastes are also subject to these regulatory requirements. In addition, our operations are often conducted in or near ecologically sensitive areas, such as wetlands, which are subject to special protective measures and which may expose us to additional operating costs and liabilities for accidental discharges of oil, gas, drilling fluids, contaminated water or other substances, or for noncompliance with other aspects of applicable laws and regulations.
The federal Clean Water Act, the Oil Pollution Act (and interpreted by EPA through regulations, including the Clean Water Rule issued in May 2015); the federal Clean Air Act; the federal Resource Conservation and Recovery Act; the federal Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA; the Safe
Drinking Water Act, or SDWA; the federal Outer Continental Shelf Lands Act; the Occupational Safety and Health Act, or OSHA; and their state counterparts and similar statutes are the primary statutes that impose the requirements described above and provide for civil, criminal and administrative penalties and other sanctions for violation of their requirements. The OSHA hazard communication standard, the Environmental Protection Agency “community right-to-know” regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require us to organize and report information about the hazardous materials we use in our operations to employees, state and local government authorities and local citizens. In addition, CERCLA, also known as the “Superfund” law, and similar state statutes impose strict liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered responsible for the release or threatened release of hazardous substances into the environment. These persons include the current owner or operator of a facility where a release has occurred, the owner or operator of a facility at the time a release occurred, and companies that disposed of or arranged for the disposal of hazardous substances found at a particular site. This liability may be joint and several. Such liability, which may be imposed for the conduct of others and for conditions others have caused, includes the cost of removal and remedial action as well as damages to natural resources. Few defenses exist to the liability imposed by many environmental laws and regulations. It is also common for third parties to file claims for personal injury and property damage caused by substances released into the environment.
Environmental laws and regulations are complex and subject to frequent change. Failure to comply with governmental requirements or inadequate cooperation with governmental authorities could subject a responsible party to administrative, civil or criminal action. We may also be exposed to environmental or other liabilities originating from businesses and assets which we acquired from others. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination or regulatory noncompliance may require us to make material expenditures or subject us to liabilities that we currently do not anticipate.
There are a variety of regulatory developments, proposals or requirements and legislative initiatives that have been introduced in the United States and international regions in which we operate that are focused on restricting the emission of carbon dioxide, methane and other greenhouse gases.
Among these developments at the international level is the United Nations Framework Convention on Climate Change, which produced the “Kyoto Protocol” (an internationally applied protocol, which has been ratified in Colombia, which is a location where we provide drilling services) in 1992. More recently, on December 12, 2015, 195 countries adopted under the Framework Convention a resolution known as the “Paris Agreement” to reduce emissions of greenhouse gases with a goal of limiting global warming to below 2 °C (3.6 °F). The Paris Agreement does not establish enforceable emissions reduction targets, but countries may establish greenhouse gas reduction measures pursuant to the agreement. The agreement went into effect on November 4, 2016.
The United States ratified the Paris Agreement in September 2016. In addition, the U.S. Congress has from time to time considered legislation to reduce emissions of greenhouse gases, primarily through the development of greenhouse gas cap and trade programs. Also, more than one-third of the states already have begun implementing legal measures to reduce emissions of greenhouse gases. There have been two multi-state organizations devoted to climate action. The Regional Greenhouse Gas Initiative, or “RGGI,” is located in the Northeastern and Mid-Atlantic United States. The Western Regional Climate Action Initiative once included multiple U.S. states and much of Canada but is now comprised of California, British Columbia, Manitoba, Ontario, and Quebec.
In 2007, the United States Supreme Court in Massachusetts, et al. v. EPA, held that carbon dioxide may be regulated as an “air pollutant” under the federal Clean Air Act. On December 7, 2009, the EPA responded to the Massachusetts, et al. v. EPA decision and issued a finding that the current and projected concentrations of greenhouse gases in the atmosphere threaten the public health and welfare of current and future generations, and that certain greenhouse gases from motor vehicles contribute to the atmospheric concentrations of greenhouse gases and hence to the threat of climate change.
Based on these findings, in 2010 the EPA adopted two sets of regulations that restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act, including one that requires a reduction in emissions of greenhouse gases from motor vehicles and another that requires certain construction and operating permit reviews for greenhouse gas emissions from certain large stationary sources. In June 2014, the U.S. Supreme Court invalidated elements of the greenhouse gas permitting rule; however, the EPA can still impose certain greenhouse gas control requirements for certain large stationary sources. In addition, the EPA adopted rules requiring the monitoring and
reporting of greenhouse gases from certain sources, including, among others, onshore oil and natural gas production facilities.
In April 2012, the EPA issued regulations specifically applicable to the oil and gas industry that will require operators to significantly reduce volatile organic compounds, or VOC, emissions from natural gas wells that are hydraulically fractured through the use of “green completions” to capture natural gas that would otherwise escape into the air. The EPA also issued regulations that establish standards for VOC emissions from several types of equipment at natural gas well sites, including storage tanks, compressors, dehydrators and pneumatic controllers.
On August 3, 2015, the EPA finalized rules to limit carbon dioxide emissions from new and existing electric utility generating units. New units must meet specified carbon dioxide emissions limitations. The rules for existing units, known as the “Clean Power Plan,” will require by 2030 an overall reduction in carbon dioxide emissions of 32% below the amount of carbon dioxide emitted in 2005.
On August 18, 2015, the EPA proposed a rule to reduce methane (a greenhouse gas) and VOC emissions from oil and gas operations. Among other requirements, the proposed rules would impose standards for hydraulically fractured oil wells and equipment leaks at oil and gas production sites and would extend certain existing standards to downstream oil and gas operations.
Although it is not possible at this time to predict whether proposed climate change initiatives will be adopted as initially written, if at all, or how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions. Any additional costs or operating restrictions associated with legislation or regulations regarding greenhouse gas emissions could have a material adverse effect on our operating results and cash flows. In addition, these developments could curtail the demand for fossil fuels such as oil and gas in areas of the world where our clients operate and thus adversely affect demand for our services, which may in turn adversely affect our future results of operations. Finally, we cannot predict with any certainty whether changes to temperature, storm intensity or precipitation patterns as a result of climate change will have a material impact on our operations.
In addition, our business depends on the demand for land drilling and production services from the oil and gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and gas industry generally, by changes in those laws and by changes in related administrative regulations. It is possible that these laws and regulations may in the future add significantly to our operating costs or those of our clients, or otherwise directly or indirectly affect our operations.
Our wireline operations involve the use of radioactive isotopes along with other nuclear, electrical, acoustic, and mechanical devices. Our activities involving the use of isotopes are regulated by the U.S. Nuclear Regulatory Commission and specified agencies of certain states. Additionally, we use high explosive charges for perforating casing and formations, and we use various explosive cutters to assist in wellbore cleanout. Such operations are regulated by the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms, and Explosives and require us to obtain licenses or other approvals for the use of densitometers as well as explosive charges. We have obtained these licenses and approvals when necessary and believe that we are in substantial compliance with these federal requirements.
Among the services we provide, we operate as a motor carrier for the transportation of our own equipment and therefore are subject to regulation by the U.S. Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations and regulatory safety. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period, onboard black box recorder devices or limits on vehicle weight and size.
Interstate motor carrier operations are subject to safety requirements prescribed by the U.S. Department of Transportation. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations.
From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.
Federal and state legislative and regulatory initiatives related to hydraulic fracturing could result in operating restrictions or delays in the completion of oil and natural gas wells that may reduce demand for our drilling and well servicing activities and could adversely affect our financial position, results of operations and cash flows.
Hydraulic fracturing is a commonly used process that involves injection of water, sand, and a minor amount of certain chemicals to fracture the hydrocarbon-bearing rock formation to allow flow of hydrocarbons into the wellbore. Federal agencies have adopted new rules, such as the Bureau of Land Management’s (BLM) hydraulic fracturing rule finalized in March 2015, that impose additional requirements on the practice of hydraulic fracturing. In October 2016, the BLM updated its rules to restrict flaring associated with the development of oil and natural gas on public lands, including through hydraulic fracturing. Additional federal regulations may also be developed. Several states are considering legislation to regulate hydraulic fracturing practices that could impose more stringent permitting, transparency, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether.
Hydraulic fracturing of wells and subsurface water disposal are also under public and governmental scrutiny due to concerns regarding potential environmental and physical impacts, including groundwater and drinking water impacts, as well as whether such activities may cause earthquakes.
The federal Energy Policy Act of 2005 amended the Underground Injection Control provisions of the federal Safe Drinking Water Act (SDWA) to exclude certain hydraulic fracturing practices from the definition of “underground injection.” The EPA has asserted regulatory authority over certain hydraulic fracturing activities involving diesel fuel and has developed guidance relating to such practices. In addition, repeal of the SDWA exclusion of hydraulic fracturing has been advocated by certain advocacy organizations and others in the public. Congress has from time to time considered legislation to repeal the exemption for hydraulic fracturing from the SDWA, which would have the effect of allowing the EPA to promulgate new regulations and permitting requirements for hydraulic fracturing, and to require the disclosure of the chemical constituents of hydraulic fracturing fluids to a regulatory agency, which would make the information public via the Internet. For example, in May 2014, the EPA responded to a petition by environmental groups by issuing an Advanced Notice of Proposed Rulemaking to solicit input regarding whether the agency should require manufacturers and processors of hydraulic fracturing chemicals to report composition and usage of such chemicals and and to disclose associated health and safety studies.
Scrutiny of hydraulic fracturing activities continues in other ways, with the EPA having completed a multi-year study of the potential environmental impacts of hydraulic fracturing. The Final Report issued by the EPA in December 2016, concluded that hydraulic fracturing activities can impact drinking water resources under some circumstances and identified conditions under which impacts can be more frequent or severe. In addition, in April 2012, the EPA issued the first federal air standards for natural gas wells that are hydraulically fractured, which will require operators to significantly reduce VOC emissions through the use of “green completions” to capture natural gas that would otherwise escape into the air. These new rules address emissions of various pollutants frequently associated with oil and natural gas production and processing activities by, among other things, requiring new or reworked hydraulically-fractured gas wells to control emissions through flaring until 2015, after which reduced emission (or “green”) completions must be used. The rules also establish specific new requirements, which were effective in 2012, for emissions from compressors, controllers, dehydrators, storage tanks, gas processing plants, and certain other equipment. On September 23, 2013, the EPA published amendments to the rule which would, among other things, provide additional time for recently constructed, modified or reconstructed storage tanks to install emission controls. On December 19, 2014, the EPA published a final rule clarifying certain aspects of the new rules. On May 12, 2016, the EPA finalized a rule to reduce methane (a greenhouse gas) and VOC emissions from oil and gas operations. It is also possible that the EPA will further amend its oil and gas regulations. In this regard, in September 2016, the EPA published notice that it would begin to collect information on methane emissions from 15,000 oil and gas operators relating to almost 700,000 oil and gas facilities. These rules may require a number of modifications to our clients’ and our own operations, including the installation of new equipment to control emissions. Compliance with such rules could result in additional costs for us and our clients, including increased capital expenditures and operating costs, which may adversely impact our cash flows and results of operations.
The EPA has also developed effluent limitations for the treatment and discharge of wastewater resulting from hydraulic fracturing activities to publicly owned treatment works (POTW). The agency’s final regulations, published on June 28, 2016, prohibited any discharge of wastewater pollutants from onshore unconventional oil and gas extraction
facilities to a POTW. The EPA will also be assessing whether oil and gas wastes should continue to be exempt from being considered hazardous waste under the federal Resource Conservation and Recovery Act, pursuant to a Consent Decree with environmental groups approved in federal court on December 28, 2016. The U.S. Department of the Interior has also finalized regulations relating to the use of hydraulic fracturing techniques on public lands and disclosure of fracturing fluid constituents (i.e. the BLM’s hydraulic fracturing rule issued in March 2015) and has conducted hearings on a rule to reduce flaring and venting associated with oil and gas operations on public lands. A final version of the flaring and venting rule was issued in October 2016.
In addition, some states and localities have adopted, and others are considering adopting, regulations or ordinances that could restrict hydraulic fracturing in certain circumstances, that would require, with some exceptions, disclosure of constituents of hydraulic fracturing fluids, or that would impose higher taxes, fees or royalties on natural gas production. Moreover, public debate over hydraulic fracturing and shale gas production continued to see strong public opposition, and has resulted in delays of well permits in some areas.
On June 30, 2014, the State of New York’s Court of Appeals upheld the right of individual municipalities in the State of New York to ban hydraulic fracturing using zoning restrictions. In December 2014, New York State Governor Cuomo announced that hydraulic fracturing will be permanently banned in the state. Similarly situated municipalities in other states may seek to ban or restrict resource extraction operations within their borders using zoning restrictions, which could adversely affect the ability of resource extraction enterprises to operate in certain parts of the country, and thus adversely affect demand for our services, which may in turn adversely affect our future results of operations.
Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil and gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural gas, including from the developing shale plays, incurred by our clients. The adoption of any federal, state or local laws or the implementation of regulations or ordinances restricting or increasing the costs of hydraulic fracturing could cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our drilling and well servicing activities, any or all of which could adversely affect our financial position, results of operations and cash flows.
Our operations are subject to the risk of cyber attacks that could have a material adverse effect on our consolidated results of operations and consolidated financial condition.
Our information technology systems are subject to possible breaches and other threats that could cause us harm. If our systems for protecting against cyber security risks prove not to be sufficient, we could be adversely affected by, among other things, loss or damage of intellectual property, proprietary information, customer or personnel data; interruption of business operations; or additional costs to prevent, respond to, or mitigate cyber security attacks. These risks could have a material adverse effect on our business, financial condition and result of operations.
Risks Relating to Our Capitalization and Organizational Documents
We do not intend to pay dividends on our common stock in the foreseeable future, and therefore only appreciation of the price of our common stock will provide a return to our shareholders.
We have not paid or declared any dividends on our common stock and currently intend to retain any earnings to fund our working capital needs, reduce debt and fund growth opportunities. Any future dividends will be at the discretion of our board of directors after taking into account various factors it deems relevant, including our financial condition and performance, cash needs, income tax consequences and restrictions imposed by the Texas Business Organizations Code and other applicable laws and by our Revolving Credit Facility and Senior Notes. Our debt arrangements include provisions that generally prohibit us from paying dividends on our capital stock, including our common stock.
We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
Our articles of incorporation authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.
Provisions in our organizational documents could delay or prevent a change in control of our company even if that change would be beneficial to our shareholders.
The existence of some provisions in our organizational documents could delay or prevent a change in control of our company even if that change would be beneficial to our shareholders. Our articles of incorporation and bylaws contain provisions that may make acquiring control of our company difficult, including:
|
|
•
|
provisions regulating the ability of our shareholders to nominate candidates for election as directors or to bring matters for action at annual meetings of our shareholders;
|
|
|
•
|
limitations on the ability of our shareholders to call a special meeting and act by written consent;
|
|
|
•
|
provisions dividing our board of directors into three classes elected for staggered terms; and
|
|
|
•
|
the authorization given to our board of directors to issue and set the terms of preferred stock.
|