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

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

Commission file number: 001-08038

KEY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Maryland		04-2648081
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 þ 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 October 27, 2010, the number of outstanding shares of common stock of the registrant was 141,427,042.

 

 

KEY ENERGY SERVICES, INC.

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2010

Part I—Financial Information	4
Item 1. Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	46
Item 4. Controls and Procedures	46
Part II—Other Information	48
Item 1. Legal Proceedings	48
Item 1A. Risk Factors	48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3. Defaults Upon Senior Securities	49
Item 5. Other Information	49
Item 6. Exhibits	49
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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,” “expects,” “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 this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2009, in our Quarterly Report on Form 10-Q for the periods ended March 31, 2010 and June 30, 2010, in our recent Current Reports on Form 8-K and in our other filings with the Securities and Exchange Commission. 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)

		September 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	34,053			$	37,394
Accounts receivable, net of allowance for doubtful accounts of $6,996 and $5,441, respectively			301,592				214,662
Inventory			22,064				23,478
Other current assets			48,342				104,624
Current assets held for sale			9,251				3,974
Total current assets			415,302				384,132
Property and equipment			1,650,025				1,647,718
Accumulated depreciation			(863,173	)			(853,449	)
Property and equipment, net			786,852				794,269
Goodwill			349,779				346,102
Other intangible assets, net			33,365				41,048
Deferred financing costs, net			8,460				10,421
Equity method investments			6,146				5,203
Other noncurrent assets			13,807				12,896
Noncurrent assets held for sale			67,264				70,339
TOTAL ASSETS		$	1,680,975			$	1,664,410
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	54,227			$	46,086
Current portion of capital leases, notes payable and long-term debt			4,397				10,152
Other current liabilities			158,395				133,531
Total current liabilities			217,019				189,769
Capital leases, notes payable and long-term debt			515,876				523,949
Other noncurrent liabilities			200,654				207,552
Commitments and contingencies
Equity:
Common stock, $0.10 par value; 200,000,000 shares authorized, 125,618,228 and 123,993,480 shares issued and outstanding, respectively			12,562				12,399
Additional paid-in capital			619,151				608,223
Accumulated other comprehensive loss			(51,511	)			(50,763	)
Retained earnings			134,114				137,158
Total equity attributable to Key			714,316				707,017
Noncontrolling interest			33,110				36,123
Total equity			747,426				743,140
TOTAL LIABILITIES AND EQUITY		$	1,680,975			$	1,664,410

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								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
REVENUES		$	283,739			$	215,349			$	803,483			$	718,059
COSTS AND EXPENSES:
Direct operating expenses			198,158				156,444				583,531				497,091
Depreciation and amortization expense			32,565				38,680				98,367				114,685
General and administrative expenses			46,833				39,350				130,726				129,815
Asset retirements and impairments			—				97,035				—				97,035
Interest expense, net of amounts capitalized			10,626				9,137				31,614				29,240
Other, net			(780	)			1,534				(1,556	)			(688	)
Total costs and expenses, net			287,402				342,180				842,682				867,178
Loss from continuing operations before tax			(3,663	)			(126,831	)			(39,199	)			(149,119	)
Income tax benefit			1,383				47,751				14,979				56,228
Loss from continuing operations			(2,280	)			(79,080	)			(24,220	)			(92,891	)
Income (loss) from discontinued operations, net of tax (expense) benefit of $(5,515), $25,438, $(11,044) and $27,394, respectively			8,283				(45,937	)			18,360				(49,695	)
Net income (loss)			6,003				(125,017	)			(5,860	)			(142,586	)
Loss attributable to noncontrolling interest			769				75				2,816				75
INCOME (LOSS) ATTRIBUTABLE TO KEY		$	6,772			$	(124,942	)		$	(3,044	)		$	(142,511	)
Basic and diluted (loss) income per share:
Loss per share from continuing operations attributable to Key		$	(0.01	)		$	(0.65	)		$	(0.17	)		$	(0.77	)
Income (loss) per share from discontinued operations			0.06				(0.38	)			0.15				(0.41	)
Income (loss) per share attributable to Key		$	0.05			$	(1.03	)		$	(0.02	)		$	(1.18	)
Loss from continuing operations attributable to Key:
Loss from continuing operations		$	(2,280	)		$	(79,080	)		$	(24,220	)		$	(92,891	)
Loss attributable to noncontrolling interest			769				75				2,816				75
Loss from continuing operations attributable to Key		$	(1,511	)		$	(79,005	)		$	(21,404	)		$	(92,816	)
Weighted average shares outstanding:
Basic and diluted			125,637				121,277				125,336				120,983

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								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
LOSS FROM CONTINUING OPERATIONS		$	(2,280	)		$	(79,080	)		$	(24,220	)		$	(92,891	)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)			446				(1,026	)			(945	)			(5,516	)
Deferred gain from available for sale investments			—				—				—				30
Total other comprehensive income (loss), net of tax			446				(1,026	)			(945	)			(5,486	)
COMPREHENSIVE LOSS FROM CONTINUING OPERATIONS, NET OF TAX			(1,834	)			(80,106	)			(25,165	)			(98,377	)
Comprehensive income (loss) from discontinued operations			8,283				(45,937	)			18,360				(49,695	)
COMPREHENSIVE INCOME (LOSS)			6,449				(126,043	)			(6,805	)			(148,072	)
Comprehensive (income) loss attributable to noncontrolling interest			(189	)			206				3,013				206
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO KEY		$	6,260			$	(125,837	)		$	(3,792	)		$	(147,866	)

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)

		Nine Months Ended September 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(5,860	)		$	(142,586	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense			105,125				132,424
Asset retirements and impairments			—				159,802
Bad debt expense			452				3,293
Accretion of asset retirement obligations			388				405
(Income) loss from equity method investments			(723	)			796
Amortization of deferred financing costs and discount			1,967				1,568
Deferred income tax benefit			(5,953	)			(55,359	)
Capitalized interest			(3,055	)			(3,556	)
Loss on disposal of assets, net			492				1,284
Loss on sale of available for sale investments, net			—				30
Share-based compensation			9,001				4,881
Excess tax benefits from share-based compensation			(1,966	)			—
Changes in working capital:
Accounts receivable			(86,530	)			195,976
Other current assets			51,532				11,798
Accounts payable, accrued interest and accrued expenses			26,809				(113,069	)
Share-based compensation liability awards			733				517
Other assets and liabilities			(1,985	)			(623	)
Net cash provided by operating activities			90,427				197,581
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(101,065	)			(102,971	)
Proceeds from sale of fixed assets			20,502				5,184
Acquisitions, net of cash acquired of $0 and $28,362			—				12,007
Dividend from equity method investments			165				199
Net cash used in investing activities			(80,398	)			(85,581	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt			(6,970	)			(1,539	)
Repayments of capital lease obligations			(6,891	)			(8,505	)
Proceeds from borrowings on revolving credit facility			30,000				—
Repayments on revolving credit facility			(30,000	)			(100,000	)
Repurchases of common stock			(2,357	)			(248	)
Proceeds from exercise of stock options			2,248				1,192
Excess tax benefits from share-based compensation			1,966				—
Net cash used in financing activities			(12,004	)			(109,100	)
Effect of changes in exchange rates on cash			(1,366	)			(2,508	)
Net (decrease) increase in cash and cash equivalents			(3,341	)			392
Cash and cash equivalents, beginning of period			37,394				92,691
Cash and cash equivalents, end of period		$	34,053			$	93,083

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

Key Energy Services, Inc., and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED 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 well intervention services to major oil companies, foreign national oil companies and independent oil and natural gas production companies to complete, maintain and enhance the flow of oil and natural gas throughout the life of a well. These services include rig-based services, fluid management services, pressure pumping services, coiled tubing services, fishing and rental services, and wireline services. On October 1, 2010, we completed the sale of our pressure pumping and wireline businesses to Patterson-UTI Energy (“Patterson-UTI”), which significantly reduced our involvement in these lines of business in the United States. We operate in most major oil and natural gas producing regions of the United States as well as internationally in Latin America, and the Russian Federation. We also own a technology development company based in Canada and have ownership interests in two oilfield service companies based in Canada.

     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, 2009 balance sheet was prepared from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. Certain information relating to our 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 our Annual Report on Form 10-K for the year ended December 31, 2009.

     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 our financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the three and nine month periods ended September 30, 2010 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.

     We have evaluated events occurring after the balance sheet date included in this Quarterly Report on Form 10-Q for possible disclosure as a subsequent event. Management monitored for subsequent events through the date these financial statements were issued. After the balance sheet date included in this Quarterly Report on Form 10-Q but before the financial statements were issued, we closed the sale of our pressure pumping and wireline business to Patterson-UTI that required disclosure as a subsequent event. In addition, we closed the acquisition of certain subsidiaries of OFS Energy Services, LLC (“OFS ES”) and related assets. See “Note 17. Subsequent Events” for further discussion.

     Certain reclassifications have been made to prior period information contained in this report in order to conform to current year presentation. As a result of the sale of our pressure pumping and wireline businesses, we now show the results of operations of these businesses as discontinued operations for all periods presented. The reclassifications had no effect on total assets or the income or loss attributable to Key for any period. See further discussion in “Note 16. Discontinued Operations” and “Note 17. Subsequent Events.”

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

     The preparation of these unaudited 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 may also impact the nature and extent of our disclosure, if any, of our contingent liabilities. 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, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii)

provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that the estimates used in the preparation of these interim financial statements are reasonable.

     There have been no material changes or developments in our evaluation of accounting estimates and underlying assumptions or methodologies that we believe to be a “Critical Accounting Policy or Estimate” as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

New Accounting Standards Adopted in this Report

     ASU 2009-16. In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. ASU 2009-16 revises the provisions of former FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, and requires more disclosure regarding transfers of financial assets. ASU 2009-16 also eliminates the concept of a “qualifying special purpose entity,” changes the requirements for derecognizing financial assets, and increases disclosure requirements about transfers of financial assets and a reporting entity’s continuing involvement in transferred financial assets. We adopted the provisions of ASU 2009-16 on January 1, 2010 and the adoption of this standard did not have a material effect on our financial condition, results of operations, or cash flows.

     ASU 2009-17. In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 replaces the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities. We adopted ASU 2009-17 on January 1, 2010 and the adoption of this standard did not have a material effect on our financial position, results of operations, or cash flows.

     ASU 2010-02. In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) – Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope Clarification. ASU 2010-02 clarifies that the scope of previous guidance in the accounting and disclosure requirements related to decreases in ownership of a subsidiary apply to (i) a subsidiary or a group of assets that is a business or nonprofit entity; (ii) a subsidiary that is a business or nonprofit entity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. ASU 2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of any continuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in the deconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. We adopted the provisions of ASU 2010-02 on January 1, 2010 and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.

     ASU 2010-06. In January 2010 the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures About Fair Value Measurements. ASU 2010-06 clarifies the requirements for certain disclosures around fair value measurements and also requires registrants to provide certain additional disclosures about those measurements. The new disclosure requirements include (i) the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during the period, along with the reason for those transfers, and (ii) separate presentation of information about purchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. We adopted the provisions of ASU 2010-06 on January 1, 2010 and the adoption of this standard had a disclosure only impact on our financial statements.

     ASU 2010-09. In February 2010 the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to

Certain Recognition and Disclosure Requirements. This update provides amendments to Subtopic 855-10 as follows: (i) an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter-market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued; (ii) the glossary of Topic 855 is amended to include the definition of SEC filer. An SEC filer is an entity that is required to file or furnish its financial statements with either the SEC or, with respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section; (iii) an entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated; (iv) the glossary of Topic 855 is amended to remove the definition of public entity. The definition of a public entity in Topic 855 was used to determine the date through which subsequent events should be evaluated; and (v) the scope of the reissuance disclosure requirements is refined to include revised financial statements only. The term revised financial statements is added to the glossary of Topic 855. Revised financial statements include financial statements revised either as a result of correction of an error or retrospective application of U.S. generally accepted accounting principles. We adopted the provisions of ASU 2010-09 on March 1, 2010 and 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

     ASU 2009-13. In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. ASU 2009-13 addresses the accounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit, and addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Existing GAAP requires an entity to use objective and reliable evidence of fair value for the undelivered items or the residual method to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU 2009-13, multiple-deliverable arrangements will be separated in more circumstances than under current guidance. ASU 2009-13 establishes a hierarchy for determining the selling price of a deliverable. The selling price will be based on Vendor-Specific Objective Evidence (“VSOE”) if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price if neither VSOE nor third-party evidence is available. ASU 2009-13 also requires that an entity determine its best estimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis, and increases the disclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU 2009-13 must be prospectively applied to all revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We expect to prospectively adopt the provisions of ASU 2009-13 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.

NOTE 3. OTHER BALANCE SHEET INFORMATION

     The table below presents comparative detailed information about other current assets at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
		(in thousands)
Other Current Assets:
Deferred tax assets		$	20,410			$	25,323
Prepaid current assets			10,313				14,212
Income tax refund receivable			1,055				50,025
Reinsurance receivable			8,904				8,136
Other			7,660				6,928
Total		$	48,342			$	104,624

     The table below presents comparative detailed information about other current liabilities at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
		(in thousands)
Other Current Liabilities:
Accrued payroll, taxes and employee benefits		$	42,490			$	33,953
Accrued operating expenditures			38,511				24,194
Income, sales, use and other taxes			21,470				30,447
Self-insurance reserve			32,238				24,366
Accrued interest			12,247				3,014
Insurance premium financing			1,602				7,282
Unsettled legal claims			2,240				2,665
Share-based compensation liabilities			1,581				1,518
Other			6,016				6,092
Total		$	158,395			$	133,531

     The table below presents comparative detailed information about other noncurrent assets at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
		(in thousands)
Other Noncurrent Assets:
Deposits		$	1,117			$	1,008
Reinsurance receivable			8,896				9,050
Other			3,794				2,838
Total		$	13,807			$	12,896

     The table below presents comparative detailed information about other noncurrent liabilities at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
		(in thousands)
Other Noncurrent Liabilities:
Deferred tax liabilities		$	138,171			$	146,980
Accrued insurance costs			33,868				40,855
Asset retirement obligations			10,118				10,045
Environmental liabilities			3,035				3,353
Income, sales, use and other taxes			9,090				2,813
Accrued rent			2,107				2,399
Share-based compensation liabilities			713				508
Other			3,552				599
Total		$	200,654			$	207,552

NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS

     The changes in the carrying amount of goodwill for the nine months ended September 30, 2010 are as follows:

						Production
		Well Servicing				Services				Total
		(in thousands)
December 31, 2009		$	342,023			$	4,079			$	346,102
Purchase price and other adjustments, net			3,750				—				3,750
Impact of foreign currency translation			(151	)			78				(73	)
September 30, 2010		$	345,622			$	4,157			$	349,779

     The components of our other intangible assets as of September 30, 2010 and December 31, 2009 are as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
Noncompete agreements:
Gross carrying value		$	14,009			$	14,010
Accumulated amortization			(7,559	)			(5,618	)
Net carrying value		$	6,450			$	8,392
Patents, trademarks and tradename:
Gross carrying value		$	10,606			$	10,481
Accumulated amortization			(891	)			(917	)
Net carrying value		$	9,715			$	9,564
Customer relationships and contracts:
Gross carrying value		$	41,371			$	41,389
Accumulated amortization			(25,180	)			(19,947	)
Net carrying value		$	16,191			$	21,442
Developed technology:
Gross carrying value		$	2,976			$	3,073
Accumulated amortization			(2,160	)			(1,724	)
Net carrying value		$	816			$	1,349
Customer backlog:
Gross carrying value		$	722			$	724
Accumulated amortization			(529	)			(423	)
Net carrying value		$	193			$	301

     The changes in the carrying amount of other intangible assets are as follows (in thousands):

December 31, 2009		$	41,048
Additions			246
Amortization expense			(8,043	)
Impact of foreign currency translation			114
September 30, 2010		$	33,365

     The weighted average remaining amortization periods and expected amortization expense for the next five years for our intangible assets are as follows:

		Weighted
		average
		remaing amortization				Expected Amortization Expense
		period (years)				Q4 2010				2011				2012				2013				2014				2015
														(In thousands)
Noncompete agreements			2.7			$	660			$	2,620			$	2,423			$	406			$	338			$	—
Patents, trademarks and tradename			4.8				84				289				183				127				120				105
Customer relationships and contracts			7.7				1,481				4,224				3,056				2,208				1,670				1,299
Customer backlog			0.9				76				122				—				—				—				—
Developed technology			0.9				312				499				—				—				—				—
Total intangible asset amortization expense						$	2,613			$	7,754			$	5,662			$	2,741			$	2,128			$	1,404

     Certain of our goodwill and other 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. Amortization expense for our intangible assets was $2.9 million and $3.1 million for the three months ended September 30, 2010 and 2009, respectively, and $8.0 million and $9.9 million for the nine months ended September 30, 2010 and 2009, respectively. The purchase price allocation for our 2009 acquisition of Geostream Services Group (“Geostream”) was finalized in 2010.

Goodwill Impairment Test

     On September 1, 2009, we acquired an additional 24% interest in Geostream for $16.4 million. This was our second investment in Geostream, bringing our total investment in Geostream to 50% of the outstanding equity interests. Upon increasing our ownership interest to 50%, we also obtained majority representation on Geostream’s board of directors and a controlling interest, and we now fully consolidate the assets, liabilities and results of operations of Geostream, with the 50% that remains outside our control representing a noncontrolling interest. We accounted for this transaction as an acquisition performed in stages. Prior to the date we increased our ownership interest in Geostream to 50%, we accounted for our 26% interest in Geostream as an equity-method investment. On the date we increased our ownership interest in Geostream to 50%, we recorded $23.9 million of goodwill, which represented the difference between the fair value of the total consideration transferred to acquire the 50% interest and the fair value of the assets acquired and liabilities assumed on the acquisition date. We perform an annual goodwill impairment test for our Russian reporting unit on September 30 of each year, or more frequently if circumstances warrant.

     Under the first step of the goodwill impairment test, we compared the fair value of the reporting unit to its carrying amount, including goodwill. The first step of the goodwill impairment test showed that the fair value of the reporting unit exceeded the carrying value by 10.8%. In determining the fair value of the reporting unit, we used a weighted-average approach of three commonly used valuation techniques — a discounted cash flow method, a guideline companies method, and a similar transactions method. We assigned a weight to the results of each of these methods based on the facts and circumstances in existence at the testing period. Because of our expansion into Russia and the overall economic downturn that affected most companies’ stock prices and market valuation in 2010, we assigned more weight to the discounted cash flow method. Our cash flow projections were based on financial forecasts developed by management and were discounted using a rate of 16%. A key assumption in our model is that revenue related to this reporting unit will increase in future years. Potential events that could affect this assumption are the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies in the Russian Federation, oil and natural gas production costs, government regulations and conditions in the worldwide oil and natural gas industry.

     This test concluded that the fair value of the Russian reporting unit exceeded its carrying value. Therefore, the second step of the goodwill impairment test was not required. Our remaining reporting units will be tested for potential impairment on December 31, 2010, the annual testing date.

     We also performed an impairment analysis for the $8.4 million of intangible assets related to Geostream that are not amortized. We performed an assessment of the fair value of these assets using an expected present value technique. We used a discounted cash flow model involving assumptions based on forecasted revenues, projected royalty expenses and applicable income taxes. Our cash flow projections were based on financial forecasts developed by management. Based on this assessment, these intangible assets were not impaired.

NOTE 5. EQUITY METHOD INVESTMENT

IROC Energy Services Corp.

     As of September 30, 2010, we owned 8.7 million shares of IROC Energy Services Corp. (“IROC”), an Alberta-based oilfield services company. The carrying value of our investment in IROC totaled $4.7 million and $4.0 million as of September 30, 2010 and December 31, 2009, respectively. The carrying value of our investment in IROC is less than our proportionate share of the book value of the net assets of IROC as of September 30, 2010. This difference is attributable to certain long-lived assets of IROC, and our proportionate share of IROC’s net income or loss for each period is being adjusted over the estimated remaining useful life of those long-lived assets. As of September 30, 2010, the difference between the carrying value of our investment in IROC and our proportionate share of the book value of IROC’s net assets was $4.6 million.

     We recorded $0.1 million and $0.2 million of equity losses related to our investment in IROC for the three months ended September 30, 2010 and 2009, respectively, and $0.8 million and $0.1 million of equity income for the nine months ended September 30, 2010 and 2009, respectively.

NOTE 6. LONG-TERM DEBT

     As of September 30, 2010 and December 31, 2009, the components of our long-term debt were as follows:

		September 30,				December 31,
		2010				2009
		(in thousands)
8.375% Senior Notes due 2014		$	425,000			$	425,000
Senior Secured Credit Facility revolving loans due 2012			87,813				87,813
Other long-term indebtedness			—				1,044
Notes payable -related parties, net of discount of $69			—				5,931
Capital lease obligations			7,460				14,313
			520,273				534,101
Less current portion			4,397				10,152
Total capital leases, notes payable and long-term debt		$	515,876			$	523,949

Related Party Note

     On May 13, 2010, we repaid the remaining $6.0 million principal balance of a promissory note, plus accrued and unpaid interest, that we entered into with related parties in connection with an acquisition in 2007 (the “Related Party Note”). No gain or loss on debt extinguishment was recognized in connection with the repayment.

8.375% Senior Notes due 2014

     We have $425.0 million aggregate principal amount of 8.375% Senior Notes due 2014 (the “Senior Notes”). The Senior Notes are general unsecured senior obligations and are 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.

     The indenture governing the Senior Notes contains various covenants. These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions tied to the covenants of our Senior Secured Credit

Facility (defined below). We were in compliance with these covenants at September 30, 2010.

Senior Secured Credit Facility

     We maintain a senior secured credit facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank of America, N.A. and Wells Fargo Bank, N.A. are the administrative agents (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility (which was amended October 27, 2009) consists of a revolving credit facility, letter of credit sub-facility and swing line facility, up to an aggregate principal amount of $300.0 million, all of which will mature no later than November 29, 2012.

     The interest rate per annum applicable to the Senior Secured Credit Facility (as amended) is, at our option, (i) LIBOR plus a margin of 350 to 450 basis points, depending on our consolidated leverage ratio, or (ii) the base rate (defined as the higher of (x) Bank of America’s prime rate and (y) the Federal Funds rate plus 0.5%), plus a margin of 250 to 350 basis points, depending on our consolidated leverage ratio. Unused commitment fees on the facility range from 0.50% to 0.75%, depending upon our consolidated leverage ratio.

     The Senior Secured Credit Facility contains certain financial covenants, which, among other things, require us to maintain certain financial ratios, limit our annual capital expenditures, restrict our ability to repurchase shares, and limit the assets owned by domestic subsidiaries that may be located outside the United States.

     The Senior Secured Credit Facility also contains certain other covenants, including restrictions related to (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments; (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders; (vii) prepaying, redeeming or repurchasing the Senior Notes or other unsecured debt incurred; (viii) granting negative pledges other than to the lenders; (ix) changes in the nature of our business; (x) amending organizational documents, or amending or otherwise modifying any debt if such amendment or modification would have a material adverse effect, or amending the Senior Notes or other unsecured debt incurred if the effect of such amendment is to shorten the maturity of the Senior Notes or such other unsecured debt; and (xi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions.

     We were in compliance with these covenants on September 30, 2010. We may prepay the Senior Secured Credit Facility in whole or in part at any time without premium or penalty, subject to our obligation to reimburse the lenders for breakage and redeployment costs. As of September 30, 2010, we had borrowings of $87.8 million and committed letters of credit of $58.8 million outstanding, leaving $153.4 million of available borrowing capacity under the Senior Secured Credit Facility. On October 1, 2010 we borrowed $80.0 million under the credit facility to acquire certain subsidiaries of OFS ES (see “Note 17. Subsequent Events”). We subsequently repaid the entire $167.8 million outstanding balance of the revolving credit facility as of October 4, 2010 with a portion of the proceeds from the Patterson-UTI transaction (see “Note 17. Subsequent Events”). The weighted average interest rate on the outstanding borrowings under the Senior Secured Credit Facility at September 30, 2010 was 4.12%.

Capital Leases

     During the third quarter of 2010, we repaid $1.3 million of capital leases that we had incurred to acquire vehicles pursuant to the terms of the Patterson-UTI sale agreement. See further discussion of the Patterson-UTI transaction in “Note 16. Discontinued Operations” and “Note 17. Subsequent Events”.

NOTE 7. OTHER INCOME AND EXPENSE

     The table below presents comparative detailed information about our other income and expense, shown on the condensed consolidated statements of operations as “other, net” for the periods indicated:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(in thousands)								(in thousands)
(Gain) loss on disposal of assets, net		$	(146	)		$	1,942			$	509			$	566
Interest income			(5	)			(42	)			(41	)			(459	)
Foreign exchange loss (gain), net			30				(1,305	)			(479	)			(1,358	)
Other (income) expense, net			(659	)			939				(1,545	)			563
Total		$	(780	)		$	1,534			$	(1,556	)		$	(688	)

NOTE 8. INCOME TAXES

     We recorded $1.4 million and $47.8 million of tax benefit on pretax losses of $3.7 million and $126.8 million for continuing operations for the three months ended September 30, 2010 and 2009, respectively. Our effective tax rates for our continuing operations for the three months ended September 30, 2010 and 2009 were 37.8% and 37.6%, respectively. We recorded $15.0 million and $56.2 million of tax benefit on pretax losses of $39.2 million and $149.1 million from our continuing operations for the nine months ended September 30, 2010 and 2009, respectively. Our effective tax rates for our continuing operations for the nine months ended September 30, 2010 and 2009 were 38.2% and 37.7%, respectively. The variance quarter over quarter is due to the mix of pre-tax profit between the U.S. and international taxing jurisdictions with varying statutory rates, differences in permanent items impacting mainly the U.S. effective rate, and differences between discrete items, including accrual to return adjustments, increases or decreases to valuation allowances, and tax expense or benefits recognized for uncertain tax positions.

     As of September 30, 2010 and December 31, 2009, we had $2.4 million and $3.2 million, respectively, of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate. We recognized tax benefit of $0.9 million in the quarter ended September 30, 2010 and a tax benefit of $1.1 million for the quarter ended September 30, 2009 related to these items. 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, 2006.

     We record expense and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of $1.0 million and $1.1 million for the payment of interest and penalties as of September 30, 2010 and December 31, 2009, respectively. We believe that it is reasonably possible that $0.8 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 and settlement of ongoing audits.

     During the quarter ended March 31, 2010, we filed our 2009 tax return reflecting a net operating loss of $153.5 million. We also filed a claim for refund of federal income taxes paid in prior years and on March 31, 2010, we received remittances from the Internal Revenue Service totaling $53.2 million.

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. 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 September 30, 2010, the aggregate amount of our liabilities related to litigation that are deemed probable and reasonably estimable is $2.2 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 third quarter of 2010, we increased our reserves by $0.5 million, associated with our assessment of the ultimate liability related to ongoing legal matters. We paid $0.3 million during the quarter related to the settlement of legal matters for a net increase to our reserve of $0.2 million during the quarter.

Litigation with a Former Officer

     Our former general counsel, Jack D. Loftis, Jr., filed a lawsuit against us in the U.S. District Court, District of New Jersey, on April 21, 2006, in which he alleged 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. Following the transfer of the case to the District of Pennsylvania, on August 17, 2007, we filed counterclaims against Mr. Loftis alleging attorney malpractice, breach of contract and breach of fiduciary duties. In our counterclaims, we sought repayment of all severance paid to Mr. Loftis (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. On September 2, 2010, we reached a settlement with Mr. Loftis regarding the alleged claims, and recorded an additional charge related to the settlement. The resolution of this claim did not have a material effect on our results of operations for the nine months ended September 30, 2010.

UMMA Verdict

     On May 3, 2010, a jury returned a verdict in the case of UMMA Resources, LLC v. Key Energy Services, Inc. The lawsuit involved pipe recovery and workover operations performed between September 2003 through December 2004. The plaintiff alleged that we breached an oral contract and negligently performed the work. We countersued for our unpaid invoices for work performed. The jury found that Key was in breach of contract, that Key was negligent in performing the work, and that Key was not entitled to damages under its counterclaims. We believe that, as a matter of law, the jury erred in its decision. The judge in this case delayed rendering his judgment and requested both parties to file motions on the jury’s verdict. Our motion for judgment notwithstanding the verdict has been filed and is pending final ruling by the court. Because the court has not yet rendered judgment in this case, the ultimate outcome of this litigation and our potential liability, if any, cannot be predicted at this time. As of September 30, 2010, we have not taken any provision for this matter. We believe the range of possible damage awards, if the matter is decided adversely to us, could be between zero and $13.0 million, plus attorney’s fees. We currently expect to receive the court’s judgment during the fourth quarter of 2010.

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 September 30, 2010 and December 31, 2009, we have recorded $66.1 million and $65.2 million, respectively, of self-insurance liabilities related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had $17.8 million of insurance receivables as of September 30, 2010 and $17.2 million as of December 31, 2009. 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 September 30, 2010 and December 31, 2009, we have recorded $3.0 million and $3.4 million, respectively, 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.

NOTE 10. EARNINGS PER SHARE

     Basic earnings per common share is determined by dividing net earnings attributable to Key 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.

     The components of our earnings per share are as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(in thousands, except per share amounts)
Basic EPS Calculation:
Numerator
Loss from continuing operations attributable to Key		$	(1,511	)		$	(79,005	)		$	(21,404	)		$	(92,816	)
Income (loss) from discontinued operations, net of tax			8,283				(45,937	)			18,360				(49,695	)
Income (loss) attributable to Key		$	6,772			$	(124,942	)		$	(3,044	)		$	(142,511	)
Denominator
Weighted average shares outstanding			125,637				121,277				125,336				120,983
Basic loss per share from continuing operations attributable to Key		$	(0.01	)		$	(0.65	)		$	(0.17	)		$	(0.77	)
Basic income (loss) per share from discontinued operations			0.06				(0.38	)			0.15				(0.41	)
Basic income (loss) per share attributable to Key		$	0.05			$	(1.03	)		$	(0.02	)		$	(1.18	)
Diluted EPS Calculation:
Numerator
Loss from continuing operations attributable to Key		$	(1,511	)		$	(79,005	)		$	(21,404	)		$	(92,816	)
Income (loss) from discontinued operations, net of tax			8,283				(45,937	)			18,360				(49,695	)
Income (loss) attributable to Key		$	6,772			$	(124,942	)		$	(3,044	)		$	(142,511	)
Denominator
Weighted average shares outstanding			125,637				121,277				125,336				120,983
Diluted loss per share from continuing operations attributable to Key		$	(0.01	)		$	(0.65	)		$	(0.17	)		$	(0.77	)
Diluted income (loss) per share from discontinued operations			0.06				(0.38	)			0.15				(0.41	)
Diluted income (loss) per share attributable to Key		$	0.05			$	(1.03	)		$	(0.02	)		$	(1.18	)

     Because of our loss from continuing operations for the three and nine months ended September 30, 2010 and 2009, all potentially dilutive securities were excluded from the calculation of our diluted earnings per share, as the potential exercise of those securities would be anti-dilutive. On October 1, 2010 we completed the acquisition of certain subsidiaries and related assets of OFS ES. Upon the closing of this transaction, we issued approximately 15.8 million shares of our common stock (the “Consideration Shares”) as part of the total purchase price. The Consideration Shares will impact our basic and diluted weighted average shares outstanding beginning in the fourth quarter of 2010. See “Note 17. Subsequent Events” for further discussion.

NOTE 11. SHARE-BASED COMPENSATION

     We recognized employee share-based compensation expense of $3.2 million and $2.4 million during the three months ended September 30, 2010 and 2009, respectively, and the related income tax benefit recognized was $1.2 million and $0.8 million, respectively. We recognized employee share-based compensation expense of $9.7 million and $5.3 million for the nine months ended September 30, 2010 and 2009, respectively, and the related income tax benefit recognized was $3.8 million and $1.9 million, respectively. We did not capitalize any share-based compensation during the three or nine month periods ended September 30, 2010 and 2009.

     The unrecognized compensation cost related to our unvested stock options, restricted shares and phantom shares as of September 30, 2010 is estimated to be $0.1 million, $13.3 million and $0.5 million, respectively, and is expected to be recognized over a weighted-average period of 1.2 years, 1.2 years and 0.7 years, respectively.

     During March 2010, we issued a total of 0.6 million performance units to certain of our employees and officers. Performance units provide a cash incentive award, the unit value of which is determined with reference to our common stock. The performance units are measured based on two performance periods. One half of the performance units are measured based on a performance period consisting of the first year after the grant date, and the other half are measured based on a performance period consisting of the second year after the grant date. At the end of each performance period, 100%, 50%, or 0% of an individual’s performance units for that period will vest, based on the relative placement of our total shareholder return within a peer group consisting of Key and five other companies. If we are in the top third of the peer group, 100% of the performance units will vest; if we are in the middle third, 50% will vest; and if we are in the bottom third, the performance units will expire unvested and no payment will be made. If any performance units vest for a given performance period, the award holder will be paid a cash amount equal to the vested percentage of the performance units multiplied by the closing price of our common stock on the last trading day of the performance period. We account for the performance units as a liability-type award as they are settled in cash. As of September 30, 2010, the fair value of outstanding performance units issued in March 2010 was $2.2 million, and is being accreted to compensation expense over the vesting terms of the awards. During the three and nine months ended September 30, 2010, we recognized $0.2 million and $0.9 million, respectively, of pre-tax compensation expense associated with these awards. As of September 30, 2010, the unrecognized compensation cost related to our unvested performance units is estimated to be $1.3 million and is expected to be recognized over a weighted-average period of 1.1 years.

     In October 2010, pursuant to the terms of the sale agreement, we accelerated the vesting period of 0.1 million shares of restricted stock held by certain of our employees who became employees of Patterson-UTI as part of this transaction. Compensation expense of $1.2 million was recognized related to this accelerated vesting. See “Note 17. Subsequent Events” for further discussion.

NOTE 12. TRANSACTIONS WITH RELATED PARTIES

Related Party Notes Payable

     On May 13, 2010, we repaid the outstanding principal balance of $6.0 million of the Related Party Note, plus accrued and unpaid interest. This note was repaid concurrently with the sale of six operational barge rigs and related equipment to the holders of the note for total consideration of $17.9 million. We received net proceeds, after repayment of the note, of $11.9 million and recorded a $0.6 million loss on the sale of these assets.

Transactions with Employees

     In connection with an acquisition in 2008, the former owner of the acquiree became one of our employees. At the time of the acquisition, the employee owned, and continues to own, an exploration and production company. Subsequent to the acquisition, we continued to provide services to this company. 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 where the services are provided. As of September 30, 2010, our receivables with this company totaled $0.4 million.

Board of Director Relationship with Customer

     One member of our board of directors 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 were approximately 4% and 2% of our total revenues for the nine months ended September 30, 2010 and 2009, respectively. Sales to Anadarko were approximately 6% and 2% of our total revenues for the three months ended September 30, 2010 and 2009, respectively. Receivables outstanding from Anadarko were approximately 6% and 1% of our total accounts receivable as of September 30, 2010 and December 31, 2009, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.

NOTE 13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

          The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of September 30, 2010 and December 31, 2009:

          Cash, cash equivalents, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date.

		September 30, 2010								December 31, 2009
		Carrying Value				Fair Value				Carrying Value				Fair Value
						(in thousands)
Financial assets:
Notes and accounts receivable - related parties		$	588			$	588			$	281			$	281
Financial liabilities:
8.375% Senior Notes		$	425,000			$	449,438			$	425,000			$	422,875
Senior Secured Credit Facility revolving loans			87,813				87,813				87,813				87,813
Note payable — related parties			—				—				5,931				5,931

          Notes and accounts receivable – related parties. The amounts reported relate to notes receivable from certain of our employees related to relocation agreements, and certain trade accounts receivable with affiliates. The carrying values of these items approximate their fair values as of the applicable balance sheet dates.

          8.375% Senior Notes due 2014. The fair value of our Senior Notes is based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of September 30, 2010 was $425.0 million and the fair value was $449.4 million (105.75% of carrying value).

          Senior Secured Credit Facility Revolving Loans. Because of their variable interest rates and the amendment of the Senior Secured Credit Facility during the fourth quarter of 2009, the fair values of the revolving loans borrowed under our Senior Secured Credit Facility approximate their carrying values. The carrying and fair values of these loans as of September 30, 2010 were $87.8 million.

          Note payable – related parties. The amounts reported relate to the Related Party Note in connection with a seller financing arrangement entered into in connection with an acquisition made in 2007. The outstanding balance of this note was repaid on May 13, 2010.

NOTE 14. SEGMENT INFORMATION

     As of September 30, 2010, we operate in two business segments, Well Servicing and Production Services. Our rig services and fluid management services are aggregated within our Well Servicing segment. Our pressure pumping services, fishing and rental services, and wireline services, as well as our technology development group in Canada, are aggregated within our Production Services segment. 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, 2009. All inter-segment sales pricing is based on current market conditions. As mentioned in “Note 1. General,” on October 1, 2010, we completed the sale of our pressure pumping and wireline businesses to Patterson-UTI, which significantly reduced our involvement in these lines of business. We anticipate revising our reportable segments in the fourth quarter of 2010 to realign our current business and management structure. The following is a description of our segments as of September 30, 2010:

Well Servicing Segment

     Rig-Based Services

          Our rig-based services include the maintenance, workover, and recompletion of existing oil and gas wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger Well Servicing rigs that are capable of

providing conventional and horizontal drilling services. Based on current industry data, we have the largest land-based Well Servicing rig fleet in the world. Our rigs consist of various sizes and capabilities, allowing us to work on all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietary KeyView^® technology, which captures and reports well site operating data. We believe that this technology allows our customers and our crews to better monitor well site operations, to improve efficiency and safety, and to add value to the services that we offer.

          The maintenance services provided by our rig fleet are generally required throughout the life cycle of an oil or gas well to ensure efficient and continuous production. Examples of the maintenance services provided by our rigs include routine mechanical repairs to the pumps, tubing and other equipment in a well, removing debris from the wellbore, and pulling the rods and other downhole equipment out of the wellbore to identify and resolve a production problem. Maintenance services generally take less than 48 hours to complete and, in general, the demand for these services is closely related to the total number of producing oil and gas wells in a given market.

          The workover services provided by our rig fleet are performed to enhance the production of existing wells, and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbore sections, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.

          The completion and recompletion services provided by our rigs prepare a newly drilled well, or a well that was recently extended through a workover, for production. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. The completion process typically takes a few days to several weeks, depending on the nature of the completion.

          Our rig fleet is also used in the process of permanently shutting-in an oil or gas well that is at the end of its productive life. These plugging and abandonment services generally require auxiliary equipment in addition to a Well Servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.

     Fluid Management Services

          We provide fluid management services, including oilfield transportation and produced water disposal services, with a very large fleet of heavy- and medium-duty trucks. The specific services offered include vacuum truck services, fluid transportation services and disposal services for operators whose wells produce saltwater or other fluids. We also supply frac tanks which are used for temporary storage of fluids associated with fluid hauling operations. In addition, we provide equipment trucks that are used to move large pieces of equipment from one well site to the next, and we operate a fleet of hot oilers which are capable of pumping heated fluids that are used to clear soluble restrictions in a wellbore.

          Fluid hauling trucks are utilized in connection with drilling and workover projects, which tend to use large amounts of various fluids. In connection with drilling, maintenance or workover activity at a well site, we transport fresh water to the well site and provide temporary storage and disposal of produced saltwater and drilling or workover fluids. These fluids are removed from the well site and transported for disposal in a saltwater disposal well that is either owned by us or a third party.

Production Services Segment

     Pressure Pumping Services

          Our pressure pumping services include fracturing, nitrogen, acidizing, cementing and coiled tubing services. These services (which may be utilized during the completion or workover of a well) are provided to oil and natural gas producers and are used to enhance the production of oil and natural gas from formations which exhibit restricted flow. 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. 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, and through tubing fishing and formation stimulations utilizing acid, chemical treatments and sand fracturing. Coiled tubing is also used for a number of horizontal well applications.

          On October 1, 2010, we closed the sale of our U.S. based pressure pumping and wireline businesses to Patterson-UTI. For the periods presented in this report, we show these assets as held for sale and the results of operations for pressure pumping operations as discontinued operations for all periods presented. See “Note 16. Discontinued Operations” and “Note 17. Subsequent Events”. Our coiled tubing operations were not sold as part of this transaction, and are still reported in the Production Services segment.

     Fishing and Rental Services

          We offer a full line of services and rental equipment designed for use both onshore and offshore drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” 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.

     Wireline Services

          We have a fleet of wireline units that perform services 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.

          In addition, wireline services may involve wellbore remediation, which could include the positioning and installation of various plugs and packers to maintain production or repair well problems, and casing inspection for internal or external abnormalities in the casing string. Wireline services are provided from surface logging units, which lower tools and sensors into the wellbore. We use advanced wireline instruments to evaluate well integrity and perform cement evaluations and production logging. As discussed above and in “Note 16. Discontinued Operations” and “Note 17. Subsequent Events,” we closed the sale of our U.S. based pressure pumping and wireline businesses to Patterson-UTI. For the periods presented in this report, we show these assets as held for sale and the results of operations for our wireline operations as discontinued operations for all periods presented.

Functional Support Segment

          We have aggregated all of our operating segments that do not meet the aggregation criteria to form a “Functional Support” segment. These services 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, deferred financing costs, our equity-method investments and deferred income tax assets.

          The following tables set forth our segment information as of and for the three and nine month periods ended September 30, 2010 and 2009:

For the three months ended September 30, 2010:

						Production				Functional				Reconciling
		Well Servicing				Services				Support				Eliminations				Total
Revenues from external customers		$	244,288			$	39,451			$	—			$	—			$	283,739
Intersegment revenues			82				2,834				—				(2,916	)			—
Depreciation and amortization			24,213				5,719				2,633				—				32,565
Operating income (loss)			25,348				9,660				(28,825	)			—				6,183
Interest expense, net of amounts capitalized			(21	)			(88	)			10,735				—				10,626
Income (loss) from continuing operations before tax			25,380				9,593				(38,636	)			—				(3,663	)
Total assets			1,350,262				325,242				223,055				(217,584	)			1,680,975
Capital expenditures, excluding acquisitions			17,520				6,889				8,733				—				33,142

For the three months ended September 30, 2009:

						Production				Functional				Reconciling
		Well Servicing				Services				Support				Eliminations				Total
Revenues from external customers		$	194,071			$	21,278			$	—			$	—			$	215,349
Intersegment revenues			—				2,014				—				(2,014	)			—
Depreciation and amortization			28,757				7,578				2,345				—				38,680
Asset retirements and impairments			65,869				31,166				—				—				97,035
Operating (loss) income			(57,953	)			(31,732	)			(26,475	)			—				(116,160	)
Interest expense, net of amounts capitalized			(607	)			(62	)			9,806				—				9,137
Loss from continuing operations before tax			(58,889	)			(31,487	)			(36,455	)			—				(126,831	)
Total assets			1,155,860				252,483				648,956				(388,472	)			1,668,827
Capital expenditures, excluding acquisitions			24,125				7,705				3,732				—				35,562

For the nine months ended September 30, 2010:

						Production				Functional				Reconciling
		Well Servicing				Services				Support				Eliminations				Total
Revenues from external customers		$	701,025			$	102,458			$	—			$	—			$	803,483
Intersegment revenues			233				5,825				—				(6,058	)			—
Depreciation and amortization			74,599				16,534				7,234				—				98,367
Operating income (loss)			56,882				15,494				(81,517	)			—				(9,141	)
Interest expense, net of amounts capitalized			(845	)			(154	)			32,613				—				31,614
Income (loss) from continuing operations before tax			57,947				15,046				(112,192	)			—				(39,199	)
Total assets			1,350,262				325,242				223,055				(217,584	)			1,680,975
Capital expenditures, excluding acquisitions			48,742				29,898				22,425				—				101,065

For the nine months ended September 30, 2009:

						Production				Functional				Reconciling
		Well Servicing				Services				Support				Eliminations				Total
Revenues from external customers		$	648,277			$	69,782			$	—			$	—			$	718,059
Intersegment revenues			6				3,910				—				(3,916	)			—
Depreciation and amortization			88,009				19,956				6,720				—				114,685
Asset retirements and impairments			65,869				31,166				—				—				97,035
Operating loss			(1,416	)			(38,888	)			(80,263	)			—				(120,567	)
Interest expense, net of amounts capitalized			(1,494	)			(390	)			31,124				—				29,240
Loss from continuing operations before tax			(617	)			(37,559	)			(110,943	)			—				(149,119	)
Total assets			1,155,860				252,483				648,956				(388,472	)			1,668,827
Capital expenditures, excluding acquisitions			56,709				36,532				9,730				—				102,971

     The following table presents information related to our operations on a geographical basis as of and for the three and nine month periods ended September 30, 2010 and 2009:

		U.S.				International				Eliminations				Total
		(in thousands)
As of and for the three months ended September 30, 2010
Revenue from external customers		$	242,142			$	41,597			$	—			$	283,739
Long-lived assets			1,158,994				106,679				—				1,265,673
As of and for the three months ended September 30, 2009
Revenue from external customers		$	168,601			$	46,748			$	—			$	215,349
Long-lived assets			1,240,845				131,940				(88,881	)			1,283,904
As of and for the nine months ended September 30, 2010
Revenue from external customers		$	662,671			$	140,812			$	—			$	803,483
Long-lived assets			1,158,994				106,679				—				1,265,673
As of and for the nine months ended September 30, 2009
Revenue from external customers		$	579,881			$	138,178			$	—			$	718,059
Long-lived assets			1,240,845				131,940				(88,881	)			1,283,904

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 guaranteed 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

		September 30, 2010
						Guarantor				Non-Guarantor
		Parent Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(in thousands) (unaudited)
Assets:
Current assets		$	19,232			$	294,348			$	101,722			$	—			$	415,302
Property and equipment, net			—				738,598				48,254				—				786,852
Goodwill			—				320,264				29,515				—				349,779
Deferred financing costs, net			8,460				—				—				—				8,460
Intercompany notes and accounts receivable and investment in subsidiaries			1,879,726				625,135				5,033				(2,509,894	)			—
Other assets			4,818				36,218				12,282				—				53,318
Noncurrent assets held for sale			—				67,264				—				—				67,264
TOTAL ASSETS		$	1,912,236			$	2,081,827			$	196,806			$	(2,509,894	)		$	1,680,975
Liabilities and equity:
Current liabilities			16,356				151,385				49,278				—				217,019
Long-term debt and capital leases, less current portion			512,813				3,053				10				—				515,876
Intercompany notes and accounts payable			481,207				1,583,966				103,323				(2,168,496	)			—
Deferred tax liabilities			153,037				—				(14,866	)			—				138,171
Other long-term liabilities			1,398				61,085				—				—				62,483
Equity			747,425				282,338				59,061				(341,398	)			747,426
TOTAL LIABILITIES AND EQUITY		$	1,912,236			$	2,081,827			$	196,806			$	(2,509,894	)		$	1,680,975