UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

KEY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Maryland		04-2648081
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1301 McKinney Street, Suite 1800, Houston, Texas 77010
(Address of principal executive offices) (Zip Code)

(713) 651-4300
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o      No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

          As of April 30, 2009, the number of outstanding shares of common stock of the registrant was 123,587,563.

 

 

KEY ENERGY SERVICES, INC.

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2009

Part I—Financial Information			4
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
Part II—Other Information
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			43
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 5. Other Information			43
Item 6. Exhibits			43
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

          In addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These “forward-looking statements” are based on our current expectations, estimates and projections about Key Energy Services, Inc. and its subsidiaries, our industry and management’s beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “predicts,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions and are subject to substantial risks and uncertainties. In evaluating those statements, you should carefully consider the information above as well as the risks outlined in “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2008. Actual performance or results may differ materially and adversely.

          We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)

		March 31,				December 31,
		2009				2008
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	174,174			$	92,691
Accounts receivable, net of allowance for doubtful accounts of $12,301 and $11,468, respectively			258,674				377,353
Inventories			32,535				34,756
Prepaid expenses			13,806				15,513
Deferred tax assets			25,603				26,623
Income taxes receivable			8,076				4,848
Other current assets			9,246				7,338
Total current assets			522,114				559,122
Property and equipment, gross			1,898,966				1,858,307
Accumulated depreciation			(842,841	)			(806,624	)
Property and equipment, net			1,056,125				1,051,683
Goodwill			320,954				320,992
Other intangible assets, net			38,928				42,345
Deferred financing costs, net			9,999				10,489
Notes and accounts receivable — related parties			482				336
Equity method investments			22,196				24,220
Other assets			7,849				7,736
TOTAL ASSETS		$	1,978,647			$	2,016,923
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	36,731			$	46,185
Accrued liabilities			168,966				197,116
Accrued interest			12,758				4,368
Current portion of capital lease obligations			9,134				9,386
Current portion of notes payable — related parties, net of discount			14,350				14,318
Current portion of long-term debt			2,011				2,000
Total current liabilities			243,950				273,373
Capital lease obligations, less current portion			12,294				13,763
Notes payable — related parties, less current portion			6,000				6,000
Long-term debt, less current portion			613,322				613,828
Workers’ compensation, vehicular, health and other insurance claims			41,216				43,151
Deferred tax liabilities			187,623				188,581
Other non-current accrued liabilities			17,379				17,495
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.10 par value; 200,000,000 shares authorized, 123,478,544 and 121,305,289 shares issued and outstanding, respectively			12,348				12,131
Additional paid-in capital			602,106				601,872
Accumulated other comprehensive loss			(51,774	)			(46,550	)
Retained earnings			294,183				293,279
Total stockholders’ equity attributable to common stockholders			856,863				860,732
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,978,647			$	2,016,923

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

		Three Months Ended March 31,
		2009				2008
REVENUES		$	331,989			$	456,399
COSTS AND EXPENSES:
Direct operating expenses			227,227				281,641
Depreciation and amortization expense			44,756				39,976
General and administrative expenses			48,706				67,732
Interest expense, net of amounts capitalized			9,648				10,040
Loss (gain) on sale of assets, net			689				(266	)
Interest income			(248	)			(508	)
Other expense, net			82				877
Total costs and expenses, net			330,860				399,492
Income before income taxes			1,129				56,907
Income tax expense			(225	)			(22,457	)
NET INCOME			904				34,450
Loss attributable to noncontrolling interest			—				34
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	904			$	34,484
Earnings per share attributable to common stockholders:
Basic		$	0.01			$	0.27
Diluted		$	0.01			$	0.27
Weighted average shares outstanding:
Basic			120,665				127,966
Diluted			121,436				129,307

See the accompanying notes which are an integral part of these condensed consolidated financial statements.
 

Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

		Three Months Ended March 31,
		2009				2008
NET INCOME		$	904			$	34,450
Other comprehensive (loss) income, net of tax:
Foreign currency translation loss, net of tax of $471 and $0, respectively			(5,254	)			(548	)
Deferred gain (loss) from available for sale investments, net of tax of $0 and $0, respectively			30				(7	)
Total other comprehensive loss, net of tax			(5,224	)			(555	)
Comprehensive (loss) income, net of tax			(4,320	)			33,895
Comprehensive loss attributable to noncontrolling interest			—				59
Comprehensive (loss) income attributable to common stockholders		$	(4,320	)		$	33,954

 
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
 

Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Three Months Ended March 31,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to common stockholders		$	904			$	34,484
Adjustments to reconcile net income to net cash provided by operating activities:
Noncontrolling interest			—				(34	)
Depreciation and amortization expense			44,756				39,976
Accretion of asset retirement obligations			139				173
Loss (income) from equity method investments			262				(4	)
Amortization of deferred financing costs and discount			522				542
Deferred income tax expense (benefit)			524				(110	)
Capitalized interest			(1,945	)			(1,658	)
Loss (gain) on sale of assets, net			689				(266	)
Share-based compensation			489				2,913
Excess tax benefits from share-based compensation			—				(108	)
Changes in working capital:
Accounts receivable, net			115,869				(13,040	)
Other current assets			649				(4,179	)
Accounts payable, accrued interest and accrued expenses			(31,471	)			14,054
Share-based compensation liability awards			(730	)			(1,225	)
Other assets and liabilities			(1,274	)			(1,207	)
Net cash provided by operating activities			129,383				70,311
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(44,797	)			(30,375	)
Proceeds from sale of fixed assets			797				2,088
Acquisitions, net of cash acquired			—				(993	)
Acquisition of intangible assets			—				(1,086	)
Net cash used in investing activities			(44,000	)			(30,366	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt			(513	)			—
Repayments of capital lease obligations			(2,635	)			(3,006	)
Repurchases of common stock			(38	)			(65,376	)
Proceeds from exercise of stock options			—				353
Proceeds paid for deferred financing costs			—				(314	)
Excess tax benefits from share-based compensation			—				108
Net cash used in financing activities			(3,186	)			(68,235	)
Effect of changes in exchange rates on cash			(714	)			(342	)
Net increase (decrease) in cash and cash equivalents			81,483				(28,632	)
Cash and cash equivalents, beginning of period			92,691				58,503
Cash and cash equivalents, end of period		$	174,174			$	29,871

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

Key Energy Services, Inc., and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 

NOTE 1. GENERAL  

          Key Energy Services, Inc., its wholly-owned subsidiaries and its controlled subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” and “our”) provide a complete range of services to major oil companies, foreign national oil companies and independent oil and natural gas production companies, including rig-based services, fluid management services, pressure pumping services, fishing services, rental services, and cased-hole electric wireline services. We operate in most major oil and natural gas producing regions of the United States as well as internationally in Argentina and Mexico. We also own a technology development company based in Canada and have equity interests in oilfield service companies in Canada and the Russian Federation.

          The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed December 31, 2008 balance sheet was prepared from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

          Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. The Company revised its reportable business segments effective in the first quarter of 2009 and, in connection with the revision, has restated the corresponding items of segment information for earlier periods. The new operating segments are Well Servicing and Production Services. The Company revised its segments to reflect changes in management’s resource allocation and performance assessment in making decisions regarding the Company. Our rig services and our fluid management services are aggregated within our Well Servicing segment. Our pressure pumping, fishing, rental and cased-hole electric wireline operations, as well as our Canadian technology development group, are now aggregated within our Production Services segment. These changes reflect the Company’s current operating focus in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). See “Note 14. Segment Information” for a full description of our segment realignment.

          The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the three month period ended March 31, 2009 are not necessarily indicative of the results expected for the full year or any other interim period, due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
 

          The preparation of these condensed consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our commitments and contingencies. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets and (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves. Our actual results may differ materially from these estimates. We believe that our estimates are reasonable.

          We apply Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51 (Revised 2003) (“FIN 46(R)”) when determining whether or not to consolidate a Variable Interest Entity (“VIE”). FIN 46(R) requires that an equity investor in a VIE have significant equity at risk (generally a minimum of 10%) and hold a controlling interest, evidenced by voting rights, and absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected returns, or both. If the equity investor is unable to evidence these characteristics, the entity that retains these ownership characteristics will be required to consolidate the VIE. We have determined that we do not have an interest in a VIE and as such we are not the primary beneficiary of a variable interest in a VIE and we are not the holder of a significant variable interest in a VIE.

          The Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”), on January 1, 2008. SFAS 159 permits companies to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Companies choosing such an election report unrealized gains and losses on items for which the Fair Value Option has been elected in earnings at each subsequent reporting period. As of March 31, 2009, we have not elected to measure any of our financial assets or liabilities using the Fair Value Option. We will assess at each measurement date whether to use the Fair Value Option on any future financial assets or liabilities as permitted pursuant to the provisions of SFAS 159.

          There have been no material changes or developments in the Company’s evaluation of accounting estimates and underlying assumptions or methodologies that the Company believes to be Critical Accounting Policies and Estimates, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.

New Accounting Standards Adopted in this Report  

          SFAS 141(R). In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from previous practice resulting from SFAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the provisions of SFAS 141(R) on January 1, 2009, but did not consummate any business combinations during the three months ended March 31, 2009. SFAS 141(R) may have an impact on our consolidated financial statements in the future. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of any acquisitions consummated after the effective date.

          SFAS 160. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No. 51 (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires the consolidated statement of income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. We adopted the provisions of SFAS 160 on January 1, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.

          FSP 157-2. In February 2008, the FASB issued FASB Staff Position (“FSP”) SFAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), to partially defer SFAS No. 157, Fair Value Measurements (“SFAS 157”). FSP 157-2 deferred the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We adopted the provisions of FSP SFAS 157-2 on January 1, 2009. The adoption of this statement did not have a material impact on our financial position, results of operations, or cash flows.

          SFAS 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. We adopted the provisions of SFAS 161 on January 1, 2009. The Company currently has no financial instruments that qualify as derivatives, and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations, or cash flows.

           FSP 142-3. In April 2008, the FASB issued FSP SFAS 142-3, Determination of Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). FSP 142-3 also requires expanded disclosure regarding the determination of intangible asset useful lives. We adopted the provisions of FSP 142-3 on January 1, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.  

Accounting Standards Not Yet Adopted in this Report

          FSP 157-4. In April 2009, the FASB issued FSP SFAS 157-4, Determining the Fair Value of a Financial Asset When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 clarified the application of SFAS 157 by providing additional guidance for estimating fair value in accordance with SFAS 157, when the volume and level of activity for an asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. We did not elect early adoption, and we are currently evaluating the potential impact of the adoption of this standard.

          FSP 115-2. In April 2009, the FASB issued FSP 115-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP 115-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We did not elect early adoption and are currently evaluating the potential impact of the adoption of this standard.

          FSP 107-1. In April 2009, the FASB issued FSP SFAS 107-1, Interim Disclosures about Fair Value of Financial Instruments, which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. FSP 107-1 also amends Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information for interim reporting periods. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We did not elect early adoption and are currently evaluating the potential impact of the adoption of this standard.

          FSP 141(R)-1. In April 2009, the FASB issued FSP SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP 141(R)-1”). FSP 141(R)-1 amends and clarifies SFAS 141(R) to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We did not complete any acquisitions during the first quarter of 2009, but this standard may impact our financial statements in the future if we complete a business combination.

NOTE 3. ACQUISITIONS  

          From time to time, the Company acquires businesses or assets that are consistent with its long-term growth strategy. Results of operations for acquisitions are included in the Company’s financial statements beginning on the date of acquisition. Acquisitions prior to January 1, 2009 are accounted for using the purchase method of accounting and the purchase price is allocated to the net assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The purchase price allocations related to acquisitions made after March 31, 2008 are based on preliminary information and are subject to change when final fair value determinations are made for the assets acquired and liabilities assumed. Acquisitions made after January 1, 2009 are accounted for using the acquisition method pursuant to SFAS 141(R). Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year from the date of the acquisition. The Company made no acquisitions during the quarter ended March 31, 2009.

Western Drilling, LLC

          On April 3, 2008, the Company, through a wholly-owned subsidiary, purchased all of the outstanding equity interests of Western Drilling, LLC (“Western”), a privately-owned company based in California that operated twenty-two working well service rigs, three stacked well service rigs, and equipment used in the workover and rig relocation process. The purchase price was $51.5 million in cash and was paid on April 3, 2008. The purchase price was subject to a working capital adjustment 45 days from the closing date of the acquisition and resulted in additional consideration paid of $0.1 million in May 2008. The Company also incurred direct transaction costs of approximately $0.4 million. The acquisition was funded from borrowings of $50.0 million under the Company’s Senior Secured Credit Facility (see “Note 7. Long-Term Debt” below) and cash on hand. Western was incorporated into our Well Servicing segment.

          The acquisition of Western was accounted for as a business combination. The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. During the first quarter of 2009, we adjusted the fair values of the assets acquired and liabilities assumed by approximately $0.2 million, with a corresponding decrease to goodwill. The purchase price allocation was finalized during the first quarter of 2009.

Hydra-Walk, Inc.

          On May 30, 2008, the Company, through a wholly-owned subsidiary, purchased all of the outstanding stock of Hydra-Walk, Inc. (“Hydra-Walk”) for approximately $10.3 million in cash and a performance earn-out potential of up to $2.0 million over two years from the acquisition date, if certain financial and operational performance measures are met. Additionally, during the third quarter of 2008 the Company paid approximately $0.2 million in additional consideration related to a holdback amount that was withheld from the seller pending the completion of a seller closing requirement. The purchase price was also subject to a post-closing working capital adjustment of less than $0.1 million that was paid during the third quarter of 2008. The Company incurred direct transaction costs of approximately $0.1 million. The Company retained approximately $1.1 million of Hydra-Walk’s net working capital as a result of the transaction and did not assume any of the debt of Hydra-Walk. Hydra-Walk was incorporated into our Production Services segment.

          The acquisition of Hydra-Walk was accounted for as a business combination and the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. The allocation of the purchase price was based upon preliminary valuations and estimates, and is subject to change as valuations are finalized. The primary area of the purchase price allocation that is not yet finalized relates to pre-merger contingencies. The final valuation is expected to be completed no later than the second quarter of 2009. During the quarter ended March 31, 2009, the Hydra-Walk operations met performance earn-out requirements that resulted in the Company paying additional consideration of $0.3 million, which has been recorded as additional goodwill.

Leader Energy Services, Ltd.

          On July 22, 2008, the Company acquired all of the United States-based assets of Leader Energy Services, Ltd. (“Leader”), a Canadian company, for consideration of $34.6 million in cash. The assets acquired include nine coiled tubing units, seven nitrogen trucks, twelve pumping trucks and other ancillary equipment. Additionally, the Company paid approximately $0.7 million for supplies and inventory used in pressure pumping operations. The Company also incurred direct transaction costs of approximately $0.1 million. The purchase price was allocated to the tangible assets acquired. The acquisition of the Leader assets was accounted for as an asset purchase as the assets acquired did not constitute a business and therefore did not result in the establishment of goodwill. The Company did not identify any acquired intangible assets. The Leader assets were incorporated into our Production Services segment.

NOTE 4. OTHER CURRENT AND NON-CURRENT LIABILITIES  

          The table below presents comparative detailed information about current accrued liabilities at March 31, 2009 and December 31, 2008:

						December 31,
		March 31, 2009				2008
		(in thousands)
Current Accrued Liabilities:
Accrued payroll, taxes and employee benefits		$	50,132			$	67,408
Accrued operating expenditures			44,352				50,833
Income, sales, use and other taxes			38,957				41,003
Self-insurance reserve			25,904				25,724
Unsettled legal claims			4,565				4,550
Share-based compensation liability			260				902
Other			4,796				6,696
Total		$	168,966			$	197,116

          The table below presents comparative detailed information about other non-current accrued liabilities at March 31, 2009 and December 31, 2008:

						December 31.
		March 31. 2009				2008
		(in thousands)
Other Non-Current Accrued Liabilities:
Asset retirement obligations		$	9,484			$	9,348
Environmental liabilities			2,987				3,004
Accrued rent			2,414				2,497
Accrued income taxes			1,359				1,359
Share-based compensation liability			371				478
Other			764				809
Total		$	17,379			$	17,495

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

          The changes in the carrying amount of goodwill for the three months ended March 31, 2009 are as follows:

						Production
		Well Servicing				Services				Total
						(in thousands)
December 31, 2008		$	317,490			$	3,502			$	320,992
Purchase price allocation and other adjustments, net			(156	)			250				94
Impact of foreign currency translation			(57	)			(75	)			(132	)
March 31, 2009		$	317,277			$	3,677			$	320,954

          The components of our other intangible assets are as follows:

		March 31,				December 31,
		2009				2008
		(in thousands)
Noncompete agreements:
Gross carrying value		$	16,207			$	16,309
Accumulated amortization			(5,534	)			(4,699	)
Net carrying value		$	10,673			$	11,610
Patents, trademarks, and tradename:
Gross carrying value		$	3,628			$	4,391
Accumulated amortization			(2,511	)			(3,114	)
Net carrying value		$	1,117			$	1,277
Customer relationships:
Gross carrying value		$	39,225			$	39,225
Accumulated amortization			(14,387	)			(12,359	)
Net carrying value		$	24,838			$	26,866
Customer backlog:
Gross carrying value		$	609			$	622
Accumulated amortization			(241	)			(207	)
Net carrying value		$	368			$	415
Developed technology:
Gross carrying value		$	3,546			$	3,598
Accumulated amortization			(1,614	)			(1,421	)
Net carrying value		$	1,932			$	2,177

          Certain of our intangible assets are denominated in currencies other than U.S. dollars and, as such, the values of these assets are subject to fluctuations associated with changes in exchange rates. Additionally, certain of these assets are also subject to purchase accounting adjustments. The estimated fair values of intangible assets obtained through acquisitions consummated in the preceding twelve months are based on preliminary information which is subject to change until final valuations are obtained. Amortization expense for our intangible assets was $3.4 million and $3.8 million for the three months ended March 31, 2009 and March 31, 2008, respectively.

NOTE 6. EQUITY METHOD INVESTMENTS  

IROC Energy Services Corp.

          As of March 31, 2009 and December 31, 2008 we owned approximately 8.7 million shares of IROC Energy Services Corp. (“IROC”), an Alberta-based oilfield services company. This represented approximately 19.7% of IROC’s outstanding common stock on March 31, 2009 and December 31, 2008. IROC shares trade on the Toronto Venture Stock Exchange and had a closing price of $0.60 CDN and $0.54 CDN per share on March 31, 2009 and December 31, 2008, respectively. William M. Austin, our former Chief Financial Officer, and Newton W. Wilson III, our Chief Operating Officer, serve on the board of directors of IROC.

          Through March 31, 2009, we had significant influence over the operations of IROC through our ownership interest and representation on IROC’s board of directors, but we do not control it. We account for our investment in IROC using the equity method. Our investment in IROC totaled $3.8 million and $3.7 million as of March 31, 2009 and December 31, 2008, respectively. The pro-rata share of IROC’s earnings and losses to which we are entitled is recorded in our consolidated statements of operations as a component of other income and expense, with an offsetting increase or decrease to the carrying value of our investment, as appropriate. Any earnings distributed back to us from IROC in the form of dividends would result in a decrease in the carrying value of our equity investment. In addition to our pro-rata share of IROC’s net income, the value of our investment changes based on the exchange rate between the U.S. and Canadian dollar. Changes in the value of our investment due to fluctuations in exchange rates are offset in accumulated other comprehensive income.

          We recorded $0.2 million and less than $0.1 million of equity income related to our investment in IROC for the quarters ended March 31, 2009 and 2008, respectively. During those time periods, no earnings were distributed to us by IROC. Only distributed earnings or any gains or losses arising from the disposal of our investment are reportable for income tax purposes. As a result, the amounts we record for our pro-rata share of IROC’s earnings or losses to which we are entitled result in a temporary difference between book and taxable income. Under the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), we record a deferred tax asset or liability, as appropriate, to account for these temporary differences.

Geostream Services Group

          On October 31, 2008, we acquired a 26% interest in OOO Geostream Services Group (“Geostream”) for $17.4 million. We incurred direct transaction costs of approximately $1.9 million associated with the transaction. Geostream is located in the Russian Federation and provides drilling and workover services and sub-surface engineering and modeling in the Russian Federation. In connection with our initial investment, three officers of the Company became board members of Geostream, representing 50% of the board membership. We can exert significant influence over the operations of Geostream, but do not control it; therefore we account for it using the equity method.

          The fair value of the amount we have invested in Geostream is in excess of the underlying book value of our investment. We are performing a valuation to determine the components of the difference in basis and have preliminarily allocated substantially all of the difference to goodwill. We recognized approximately $0.6 million of net loss associated with our investment in Geostream for the three months ended March 31, 2009. In addition to our pro-rata share of Geostream’s net income, the value of our investment changes based on the exchange rate between the U.S. dollar and the Euro. Changes in the value of our investment due to fluctuations in exchange rates are offset in accumulated other comprehensive income.

          Under the Geostream agreement, we were originally required to purchase an additional 24% of Geostream no later than March 31, 2009 for approximately €11.3 million (which at March 31, 2009 was equivalent to approximately $14.9 million). However, we entered into an amendment to the agreement on March 24, 2009 that extended this date from March 31, 2009 to June 30, 2009. For a period not to exceed six years subsequent to October 31, 2008, we have the option to increase our ownership percentage of Geostream to 100%. However, if we have not acquired 100% of Geostream on or before the end of the six-year period, we will be required to arrange an initial public offering for those shares.

Advanced Flow Technologies, Inc.

          In September 2007, we completed the acquisition of Advanced Measurements, Inc. (“AMI”), a privately-held Canadian company focused on oilfield technology. Prior to the acquisition, AMI owned a portion of another Canadian company, Advanced Flow Technologies, Inc. (“AFTI”). As part of the acquisition, AMI increased its ownership percentage of AFTI to 51.46% and, as a result, we consolidated AFTI and recorded a noncontrolling interest in our financial statements.

          Our ownership of AFTI declined to 48.73% as of December 31, 2008 due to the issuance of additional shares by AFTI. We deconsolidated AFTI results from our consolidated financial statements at December 31, 2008 and now account for that interest under the equity method. In addition to our pro-rata share of AFTI’s net income or loss, the value of our investment changes based on the exchange rate between the U.S. and Canadian dollar. Changes in the value of our investment due to fluctuations in exchange rates are offset in accumulated other comprehensive income.

 NOTE 7. LONG-TERM DEBT  

          The components of our long-term debt are as follows:

		March 31,				December 31,
		2009				2008
		(in thousands)
8.375% Senior Notes due 2014		$	425,000			$	425,000
Senior Secured Credit Facility revolving loans due 2012			187,813				187,813
Other long-term indebtedness			2,520				3,015
Notes payable — related parties, net of discount of $150 and $182, respectively			20,350				20,318
Capital lease obligations			21,428				23,149
		$	657,111			$	659,295
Less current portion			(25,495	)			(25,704	)
Total long-term debt and capital lease obligations, net of discount		$	631,616			$	633,591

8.375% Senior Notes due 2014

          On November 29, 2007, the Company issued $425.0 million aggregate principal amount of 8.375% Senior Notes due 2014 (the “Senior Notes”), under an Indenture, dated as of November 29, 2007, among us, the guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee. The Senior Notes were priced at 100% of their face value to yield 8.375%. Net proceeds, after deducting initial purchasers’ fees and offering expenses, were approximately $416.1 million. We used approximately $394.9 million of the net proceeds to retire then-existing term loans, including accrued and unpaid interest, with the balance used for general corporate purposes.

          The Senior Notes are general unsecured senior obligations of the Company. Accordingly, they rank effectively subordinate to all of our existing and future secured indebtedness. The Senior Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the Senior Notes is payable on June 1 and December 1 of each year. The Senior Notes mature on December 1, 2014.

Senior Secured Credit Facility

          The Company maintains a revolving credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the Administrative Agents (“Senior Secured Credit Facility”). The Senior Secured Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility of up to an aggregate principal amount of $400.0 million, all of which will mature no later than November 29, 2012. There were borrowings of $187.8 million and letters of credit of $53.6 million outstanding under the Senior Secured Credit Facility at March 31, 2009. The weighted-average interest rate on the outstanding borrowings of the Senior Secured Credit Facility was 2.03% at March 31, 2009. The Senior Secured Credit Facility requires the Company to maintain a consolidated interest coverage ratio of at least 3.0 to 1.0, maintain a consolidated leverage ratio of not more than 3.5 to 1.0, and to not exceed capital expenditures of $250.0 million in any fiscal year. The Company was in compliance with these covenants at March 31, 2009.

          On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Lehman Commercial Paper, Inc. (“LCPI”), a subsidiary of Lehman, was part of the syndicate of banks participating in our Senior Secured Credit Facility. LCPI’s commitment was approximately 11% of the Company’s total facility. As of March 31, 2009, the Company had approximately $139.3 million available under its Senior Secured Credit Facility. This availability does not include approximately $19.3 million of unfunded commitments by LCPI. Under the terms of the Senior Secured Credit Facility, committed letters of credit count against the Company’s borrowing capacity.

          All obligations under the Senior Secured Credit Facility are guaranteed by most of our subsidiaries and are secured by most of our assets, including our accounts receivable, inventory and equipment.

Seller Financing Arrangement in Moncla Purchase

          In connection with our acquisition of Moncla Well Service, Inc. and related entities (collectively, “Moncla”) on October 25, 2007, the Company entered into two promissory notes with the sellers. The first is an unsecured note in the

amount of $12.5 million, which is due and payable in lump-sum, together with accrued interest, on October 25, 2009. The second unsecured note in the amount of $10.0 million is payable in annual installments of $2.0 million, plus accrued interest, on each anniversary date through October 2012. Each of the notes bears interest at the Federal Funds rate, adjusted annually on the anniversary of the closing date. As of March 31, 2009, the interest rate on these notes was 1.5%.  

NOTE 8. INCOME TAXES  

          The Company’s effective tax rate for the three months ended March 31, 2009 and 2008 was 19.9% and 39.5%, respectively. The primary difference between the statutory rate of 35% and our effective tax rate relates to our projections of our full-year taxable income for 2009 and certain discrete items related to the release of prior reserves we recorded pursuant to FIN No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”).

          As of March 31, 2009 and December 31, 2008, we had approximately $5.0 million and $5.6 million, respectively, of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate. We recognized tax benefits of $0.7 million and zero due to statute expirations for the quarters ended March 31, 2009 and March 31, 2008 respectively. We are subject to U.S. Federal Income Tax as well as income taxes in multiple state and foreign jurisdictions. We have substantially concluded all U.S. federal and state tax matters through the year ended December 31, 2004.

          We record expense and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of approximately $1.6 million and $2.1 million for the payment of interest and penalties as of March 31, 2009 and December 31, 2008, respectively. We believe that it is reasonably possible that approximately $2.1 million of our currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized in the next twelve months as a result of a lapse of statute of limitations.

          No release of our deferred tax asset valuation allowance was made during the quarter ended March 31, 2009.

NOTE 9. COMMITMENTS AND CONTINGENCIES  

Litigation

          Various suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where we conduct business in the continental United States, we are often subject to jury verdicts and arbitration hearings that result in outcomes in favor of the plaintiffs. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. In accordance with SFAS No. 5, Accounting for Contingencies, we establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. As of March 31, 2009, the aggregate amount of our provisions for losses related to litigation that are deemed probable and reasonably estimable is approximately $4.6 million. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded. During the first quarter of 2009, we recorded a net increase in our reserves of less than $0.1 million related to the settlement of ongoing legal matters and the continued refinement of liabilities recognized for litigation deemed probable and estimable.

     Gonzales Matter

          In September 2005, a class action lawsuit, Gonzales v. Key Energy Services, Inc., was filed in Ventura County, California, Superior Court, alleging that Key did not pay its hourly employees for travel time between the yard and the wellhead and that certain employees were denied meal and rest periods. On September 17, 2008, we reached an agreement in principle, subject to court approval, to settle all claims related to this matter for $1.2 million. We anticipate receiving final approval of this settlement in the second quarter of 2009. In 2005, we recorded a liability for this lawsuit, and do not believe that the ultimate resolution of this matter will have a material impact on our financial position, results of operations or cash flows.

     Litigation with Former Officers and Employees

          We were named in a lawsuit by our former general counsel, Jack D. Loftis, Jr., filed in the U.S. District Court, District of New Jersey on April 21, 2006, in which he alleges a “whistle-blower” claim under the Sarbanes-Oxley Act, breach of contract, breach of duties of good faith and fair dealing, breach of fiduciary duty and wrongful termination. On August 17, 2007, the Company filed counterclaims against Mr. Loftis alleging attorney malpractice, breach of contract and

breach of fiduciary duties. In its counterclaims, the Company seeks repayment of all severance paid to Mr. Loftis to date (approximately $0.8 million) plus benefits paid during the period July 8, 2004 to September 21, 2004, and damages relating to the allegations of malpractice and breach of fiduciary duties. The case was transferred to and is now pending in the U.S. District Court for the Eastern District of Pennsylvania and is currently set for trial in the fourth quarter of 2009. We recorded a liability for this matter in the fourth quarter of 2008 and do not believe that the conclusion of this matter will have a material impact on our financial position, results of operations or cash flows.

          On October 17, 2006, Jane John, the ex-wife of our former chief executive officer, Francis John, filed a complaint in Bucks County, Pennsylvania against her ex-husband and the Company. Ms. John alleges breach of marital agreement, breach of options agreements, civil conspiracy and fraud. She alleges that Mr. John and the Company defrauded her with regard to Mr. John’s compensation, as well as in the disclosures of marital property. By virtue of assignments, Ms. John holds 375,000 stock options which expired unexercised during a period in which the Company was not current in its financial statements, when such options could not be exercised. In resolving a separate lawsuit between the Company and Mr. John, Mr. John agreed to indemnify the Company with respect to damages attributable to any and all of Ms. John’s claims, other than damages attributable to any alleged breach of Ms. John’s stock option agreements, for which the Company agreed to indemnify Mr. John. Discovery in the case remains ongoing, and there is currently not a trial setting. We initially recorded a liability for this matter for the third quarter of 2008, and do not believe that the ultimate conclusion of this matter will have a material impact on our financial position, results of operations or cash flows.

          On September 3, 2006, our former controller and former assistant controller filed a joint complaint against the Company in the 133rd District Court, Harris County, Texas, alleging constructive termination and breach of contract. Additionally, on January 11, 2008, our former chief operating officer, James Byerlotzer, filed a lawsuit in the 55th District Court, Harris County, Texas, alleging breach of contract based on his inability to exercise his stock options during the period that we were not current in our SEC filings, and based on our failure to provide him shares of restricted stock. We have not recorded a liability for these matters and do not believe that the conclusion of these matters will have a material impact on our financial position, results of operations or cash flows.

Self-Insurance Reserves

          We maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation, vehicle liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. As of March 31, 2009 and December 31, 2008, we have recorded $67.1 million and $68.9 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $10.8 million of insurance receivables as of March 31, 2009 and December 31, 2008 respectively. We feel that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.

Environmental Remediation Liabilities

          For environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. As of March 31, 2009 and December 31, 2008, we have recorded approximately $3.0 million for our environmental remediation liabilities. We feel that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.

          We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our saltwater disposal (“SWD”) properties, in order to comply with environmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required to divest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance). 

NOTE 10. SHARE REPURCHASE PROGRAM  

          On October 26, 2007, the Company’s board of directors authorized a share repurchase program, in which the Company could spend up to $300.0 million to repurchase shares of its common stock on the open market. During the first

three months of 2009, the Company did not repurchase shares on the open market. Over the course of the program from November 2007 through March 31, 2009, the Company repurchased an aggregate of approximately 13.4 million shares for a total cost of approximately $167.3 million. The program’s authorization expired on March 31, 2009.

NOTE 11. EARNINGS PER SHARE

          We present earnings per share information in accordance with the provisions of SFAS No. 128, Earnings Per Share (“SFAS 128”). Under SFAS 128, basic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of potentially dilutive outstanding securities using the treasury stock and “as if converted” methods.

		Three Months Ended March 31,
		2009				2008
		(in thousands, except per share data)
Basic EPS Computation:
Numerator
Net income attributable to common stockholders		$	904			$	34,484
Denominator
Weighted average shares outstanding			120,665				127,966
Basic earnings per share		$	0.01			$	0.27
Diluted EPS Computation:
Numerator
Net income attributable to common stockholders		$	904			$	34,484
Denominator
Weighted average shares outstanding			120,665				127,966
Stock options			24				580
Restricted Stock			747				269
Warrants			—				492
			121,436				129,307
Diluted earnings per share		$	0.01			$	0.27

          The diluted earnings per share calculation for the quarters ended March 31, 2009 and 2008 exclude the potential exercise of 4.5 million and 1.9 million stock options, respectively, because the effects of such exercises on earnings per share in those periods would be anti-dilutive. The diluted earnings per share calculation for the quarter ended March 31, 2009 exclude the potential exercise of 0.6 million stock appreciation rights (“SARs”) because the effects of such exercise on earnings per share in this period would be anti-dilutive. These options and SARs would be anti-dilutive because the exercise prices for those awards exceeded the average stock price for the Company during the respective periods. None of our SARs were anti-dilutive for the quarter ended March 31, 2008.

NOTE 12. SHARE-BASED COMPENSATION 

          The Company recognized employee share-based compensation expense of $0.3 million and $3.7 million during the three months ended March 31, 2009 and 2008, respectively. The related income tax benefit recognized for employee share-based compensation was $0.1 million and $1.0 million for the three months ended March 31, 2009 and 2008, respectively. The Company did not capitalize any share-based compensation during the three month periods ended March 31, 2009 and 2008.

          During March 2009, we issued a total of approximately 2.3 million shares of restricted common stock to certain of our employees and officers, which vest in equal installments over the next three to four years depending on the terms of the award. These shares had a weighted-average issuance price of $2.76 per share. The unrecognized compensation cost related to the Company’s unvested stock options, restricted shares and phantom shares as of March 31, 2009 was $0.1 million, $10.2 million and $0.7 million, respectively and is expected to be recognized over a weighted-average period of 2.2 years, 1.8 years and 1.4 years, respectively.

NOTE 13. TRANSACTIONS WITH RELATED PARTIES

Transactions with Employees

          In connection with our acquisition of Western, the former owner of Western became an employee of the Company. At the time of and subsequent to the acquisition, the employee also owns an exploration and production company, Holmes Western Oil Corporation (“HWOC”), which was a customer of Western. Subsequent to the acquisition, the Company continued to provide services to HWOC. The prices charged for these services are at rates that are an average of the prices charged to our other customers in the California market. As of March 31, 2009, our receivables with HWOC totaled approximately $0.3 million and for the three months ended March 31, 2009, revenues from HWOC totaled approximately $1.8 million.

Board of Director Relationship with Customer

          In October 2007, we added a member to the Company’s Board of Directors who is the Senior Vice President, General Counsel and Chief Administrative Officer of Anadarko Petroleum Corporation (“Anadarko”), which is one of our customers. Sales to Anadarko comprised less than 2% of our total revenues for the quarters ended March 31, 2009 and 2008, respectively. Transactions with Anadarko for our services are made at market prices.

NOTE 14. SEGMENT INFORMATION

          The Company revised its reportable business segments effective in the first quarter of 2009. The new operating segments are Well Servicing and Production Services. Financial results as of and for the three months ended March 31, 2008 have been restated to reflect the change in operating segments. The company revised its segments to reflect changes in management’s resource allocation and performance assessment in making decisions regarding the Company. Our rig services and fluid management operations are aggregated within our Well Servicing segment. Our pressure pumping, fishing, rental and cased-hole electric wireline operations, as well as our technology development group in Canada, are now aggregated within our Production Services segment. These changes reflect the Company’s current operating focus in compliance with SFAS 131. We aggregate services that create our reportable segments in accordance with SFAS 131, and the accounting policies for our segments are the same as those described in “Note 1. Organization and Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2008 and filed with the SEC on February 27, 2009. We evaluate the performance of our operating segments based on revenue and Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which is a non-GAAP measure and is not disclosed below. All inter-segment sales pricing is based on current market conditions. The following is a description of the segments:

Well Servicing

     Rig Services

          This segment includes the maintenance of existing wells, workover of existing wells, completion of newly drilled wells, drilling of horizontal wells, recompletion of existing wells (re-entering a well to complete the well in a new geologic zone or formation) and plugging and abandonment of wells at the end of their useful lives.

          Workover services are performed to enhance the production of existing wells. Such services include extensions of existing wells to drain new formations either by deepening wellbores to new zones or by drilling horizontal or lateral wellbores to improve reservoir drainage. In less extensive workovers, our rigs are used to seal off depleted zones in existing wellbores or to access a previously bypassed productive zone.

          Our completion services prepare a newly drilled oil or natural gas well for production. We typically provide a well service rig and may also provide other equipment such as a workover package to assist in the completion process.

     Fluid Management Services

          This segment also provides fluid management services, including oilfield transportation and produced-water disposal services. Our oilfield transportation and produced-water disposal services include vacuum truck services, fluid transportation services and disposal services for operators whose oil or natural gas wells produce saltwater and other fluids. In addition, we are a supplier of frac tanks which are used for temporary storage of fluids in conjunction with the fluid hauling operations. Our fluid management services will collect, transport and dispose of the saltwater. These fluids are removed from the well site and transported for disposal in a SWD well.

Production Services

          This segment provides multiple services as described below:

     Pressure Pumping Services

          We provide well stimulation and cementing services to oil and natural gas producers. Well stimulation services include fracturing, nitrogen, coiled tubing and acidizing services. These services (which may be completion or workover services) are provided to oil and natural gas producers and are used to enhance the production of oil and natural gas wells from formations which exhibit restricted flow of oil and natural gas. In the fracturing process, we typically pump fluid and sized sand, or proppants, into a well at high pressure in order to fracture the formation and thereby increase the flow of oil and natural gas. With our cementing services, we pump cement into a well between the casing and the wellbore.

     Fishing Services

          We provide fishing services to major and independent oil and natural gas production companies in the Gulf Coast, Central and Permian Basin marketplaces, as well as in California. We also provided limited services offshore in the Gulf of Mexico. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a “fishing tool.”

     Rental Services

          We provide rental services to major and independent oil and natural gas production companies in the Gulf Coast, Central and Permian Basin marketplaces, as well as in California. We offer a full line of services and rental equipment designed for use both onshore and offshore for drilling and workover services. Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk^® pipe-handling units and services), pressure-control equipment, power swivels and foam air units.

     Cased-hole Electric Wireline Services

          We perform activities at various times throughout the life of the well including perforating, completion logging, production logging and casing integrity services. After the wellbore is cased and cemented, we can provide a number of services. Perforating creates the flow path between the reservoir and the wellbore. Production logging can be performed throughout the life of the well to measure temperature, fluid type, flow rate, pressure and other reservoir characteristics. This service helps the operator analyze and monitor well performance and determine when a well may need a workover or further stimulation.

Functional Support

          We have aggregated all of our operating segments that do not meet the aggregation criteria established in SFAS 131 to form a “Functional Support” segment. Functional Support expenses include expenses associated with managing all of our reportable operating segments. Functional Support assets consist primarily of cash and cash equivalents, accounts and notes receivable and investments in subsidiaries, our equity method investments in IROC and Geostream, and deferred income tax assets.

          The following tables set forth our segment information as of and for the three month periods ended March 31, 2009 and 2008 (in thousands):

As of and for the three months ended March 31, 2009:

						Production				Functional				Reconciling
		Well Servicing				Services				Support				Eliminations				Total
Revenues from external customers		$	256,261			$	75,728			$	—			$	—			$	331,989
Intersegment revenues			7				1,481				—				(1,488	)			—
Operating expenses			215,246				79,288				26,155				—				320,689
Operating income			41,015				(3,560	)			(26,155	)			—				11,300
Interest expense			(556	)			(618	)			10,822				—				9,648
Income (loss) before taxes			41,414				(3,851	)			(36,434	)			—				1,129
Total assets			1,579,905				368,854				2,125,948				(2,096,060	)			1,978,647
Capital expenditures, excluding acquisitions			24,200				17,789				2,808				—				44,797

As of and for the three months ended March 31, 2008:

						Production				Functional				Reconciling
		Well Servicing				Services				Support				Eliminations				Total
Revenues from external customers		$	338,513			$	117,886			$	—			$	—			$	456,399
Intersegment revenues			—				540				—				(540	)			—
Operating expenses			253,058				92,973				43,318				—				389,349
Operating income (loss)			85,455				24,913				(43,318	)			—				67,050
Interest expense			(590	)			(505	)			11,135				—				10,040
Income (loss) before taxes			85,142				25,537				(53,772	)			—				56,907
Total assets			1,496,476				404,080				515,533				(589,283	)			1,826,806
Capital expenditures, excluding acquisitions			25,513				3,687				1,175				—				30,375

          The following tables present information related to our operations on a geographical basis as of and for the three month periods ended March 31, 2009 and 2008:

		U.S.				Argentina				Mexico				Canada				Eliminations				Total
		(in thousands)
As of and for the three months ended March 31, 2009:
Revenue from external customers		$	284,743			$	19,336			$	27,696			$	214			$	—			$	331,989
Long-lived assets			2,243,792				24,434				56,568				7,184				(875,445	)			1,456,533
Capital expenditures, excluding acquisitions			31,028				1,566				12,203				—				—				44,797
As of and for the three months ended March 31, 2008:
Revenue from external customers		$	420,494			$	26,866			$	5,701			$	3,338			$	—			$	456,399
Long-lived assets			1,460,705				28,880				18,449				10,773				(152,791	)			1,366,016
Capital expenditures, excluding acquisitions			23,528				374				6,473				—				—				30,375

NOTE 15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS  

          During the fourth quarter of 2007, we issued the Senior Notes, which are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly-owned. These guarantees are joint and several, full, complete and unconditional. There are no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.

          As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information pursuant to SEC Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

CONDENSED CONSOLIDATING BALANCE SHEETS

		March 31, 2009
		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(in thousands)
		(unaudited)
Assets:
Current assets		$	32,920			$	395,641			$	93,951			$	(398	)		$	522,114
Property and equipment, net			—				1,029,894				26,231				—				1,056,125
Goodwill			—				316,764				4,190				—				320,954
Deferred financing costs, net			9,999				—				—				—				9,999
Intercompany notes and accounts receivable and investment in subsidiaries			1,926,575				433,098				1,382				(2,361,055	)			—
Other assets			20,956				44,924				3,575				—				69,455
TOTAL ASSETS		$	1,990,450			$	2,220,321			$	129,329			$	(2,361,453	)		$	1,978,647
Liabilities and equity:
Current liabilities		$	21,207			$	194,733			$	27,770			$	240			$	243,950
Capital lease obligations, less current portion			—				12,261				33				—				12,294
Notes payable — related parties, less current portion			—				6,000				—				—				6,000
Long-term debt			612,812				510				—				—				613,322
Intercompany notes and accounts payable			309,997				1,628,577				74,860				(2,013,434	)			—
Deferred tax liabilities			188,222				—				(599	)			—				187,623
Other long-term liabilities			1,349				56,986				260				—				58,595
Stockholders and members’ equity			856,863				321,254				27,005				(348,259	)			856,863
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,990,450			$	2,220,321			$	129,329			$	(2,361,453	)		$	1,978,647

		December 31, 2008
		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(in thousands)
		(unaudited)
Assets:
Current assets		$	29,673			$	440,758			$	88,534			$	157			$	559,122
Property and equipment, net			—				1,025,007				26,676				—				1,051,683
Goodwill			—				316,669				4,323				—				320,992
Deferred financing costs, net			10,489				—				—				—				10,489
Intercompany notes and accounts receivable and investment in subsidiaries			1,917,522				419,554				1,775				(2,338,851	)			—
Other assets			22,597				48,237				3,803				—				74,637
TOTAL ASSETS		$	1,980,281			$	2,250,225			$	125,111			$	(2,338,694	)		$	2,016,923
Liabilities and equity:
Current liabilities		$	13,792			$	231,528			$	28,054			$	(1	)		$	273,373
Capital lease obligations, less current portion			—				13,714				49				—				13,763
Notes payable — related parties, less current portion			—				6,000				—				—				6,000
Long-term debt			612,813				1,015				—				—				613,828
Intercompany notes and accounts payable			305,348				1,624,932				69,204				(1,999,484	)			—
Deferred tax liabilities			187,596				—				985				—				188,581
Other long-term liabilities			—				60,386				260				—				60,646
Stockholders and members’ equity			860,732				312,650				26,559				(339,209	)			860,732
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,980,281			$	2,250,225			$	125,111			$	(2,338,694	)		$	2,016,923

CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF OPERATIONS

		Three Months Ended March 31, 2009
		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(in thousands)
		(unaudited)
Revenues		$	—			$	294,273			$	48,203			$	(10,487	)		$	331,989
Costs and expenses:
Direct operating expenses			—				201,641				32,983				(7,397	)			227,227
Depreciation and amortization expense			—				43,256				1,500				—				44,756
General and administrative expenses			185				44,226				4,267				28				48,706
Interest expense, net of amounts capitalized			11,132				(1,556	)			72				—				9,648
Other, net			367				(395	)			3,011				(2,460	)			523
Total costs and expenses, net			11,684				287,172				41,833				(9,829	)			330,860
(Loss) income before income taxes			(11,684	)			7,101				6,370				(658	)			1,129
Income tax benefit (expense)			1,475				—				(1,700	)			—				(225	)
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(10,209	)		$	7,101			$	4,670			$	(658	)		$	904

		Three Months Ended March 31, 2008
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
		Company				Subsidiaries				Subsidiaries
		(in thousands)
		(unaudited)
Revenues		$	—			$	422,621			$	36,457			$	(2,679	)		$	456,399
Costs and expenses:
Direct operating expenses			—				257,771				25,666				(1,796	)			281,641
Depreciation and amortization expense			—				38,051				1,925				—				39,976
General and administrative expenses			185				62,874				4,782				(109	)			67,732
Interest expense, net of amounts capitalized			10,756				(1,007	)			43				248				10,040
Other, net			35				(664	)			1,497				(765	)			103
Total costs and expenses, net			10,976				357,025				33,913				(2,422	)			399,492
(Loss) income before income taxes			(10,976	)			65,596				2,544				(257	)			56,907
Income tax expense			(20,484	)			(561	)			(1,412	)			—				(22,457	)
NET (LOSS) INCOME			(31,460	)			65,035				1,132				(257	)			34,450
Noncontrolling interest			—				—				34				—				34
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(31,460	)		$	65,035			$	1,166			$	(257	)		$	34,484

CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF CASH FLOWS

		Three Months Ended March 31, 2009
		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(in thousands)
		(unaudited)
Net cash (used in) provided by operating activities		$	—			$	132,499			$	(3,116	)		$	—			$	129,383
Cash flows from investing activities:
Capital expenditures			—				(43,231	)			(1,566	)			—				(44,797	)
Intercompany notes and accounts			—				(7,679	)			393				7,286				—
Other investing activities, net			—				797				—				—				797
Net cash (used in) provided by investing activities			—				(50,113	)			(1,173	)			7,286				(44,000	)
Cash flows from financing activities:
Repayments on long-term debt			(513	)			—				—				—				(513	)
Repurchases of common stock			(38	)			—				—				—				(38	)
Intercompany notes and accounts			551				(393	)			7,128				(7,286	)			—
Other financing activities, net			—				(2,635	)			—				—				(2,635	)
Net cash provided by (used in) financing activities			—				(3,028	)			7,128				(7,286	)			(3,186	)
Effect of changes in exchange rates on cash			—				—				(714	)			—				(714	)
Net increase in cash and cash equivalents			—				79,358				2,125				—				81,483
Cash and cash equivalents at beginning of period			—				75,848				16,843				—				92,691
Cash and cash equivalents at end of period		$	—			$	155,206			$	18,968			$	—			$	174,174

		Three Months Ended March 31, 2008
		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(in thousands)
		(unaudited)
Net cash (used in) provided by operating activities		$	(108	)		$	67,550			$	2,869			$	—			$	70,311
Cash flows from investing activities:
Capital expenditures			—				(30,375	)			—				—				(30,375	)
Intercompany notes and accounts			(1,644	)			(66,981	)			—				68,625				—
Other investing activities, net			—				9				—				—				9
Net cash (used in) provided by investing activities			(1,644	)			(97,347	)			—				68,625				(30,366	)
Cash flows from financing activities:
Repurchases of common stock			(65,376	)			—				—				—				(65,376	)
Intercompany notes and accounts			67,020				—				1,605				(68,625	)			—
Other financing activities, net			108				(2,967	)			—				—				(2,859	)
Net cash provided by (used in) financing activities			1,752				(2,967	)			1,605				(68,625	)			(68,235	)
Effect of changes in exchange rates on cash			—				—				(342	)			—				(342	)
Net (decrease) increase in cash			—				(32,764	)			4,132				—				(28,632	)
Cash and cash equivalents at beginning of period			—				46,358				12,145				—				58,503
Cash and cash equivalents at end of period		$	—			$	13,594			$	16,277			$	—			$	29,871