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 1-02199

ALLIS-CHALMERS ENERGY INC.

(Exact name of registrant as specified in its charter)

DELAWARE		39-0126090
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS		77056
(Address of principal executive offices)		(Zip Code)

(713) 369-0550

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 (Section 232.405 of this chapter) 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:

Large accelerated filer o		Accelerated filer þ		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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At August 1, 2009 there were 71,369,635 shares of common stock, par value $0.01 per share, outstanding.

 

 

ALLIS-CHALMERS ENERGY INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2009

TABLE OF CONTENTS

		PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2009 and December 31, 2008			3
Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2009 and 2008			4
Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2009 and 2008			5
Notes to Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			41
Item 4. Controls and Procedures			42
PART II OTHER INFORMATION
Item 1A Risk Factors			43
Item 6. Exhibits			43
Signatures			44
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIS-CHALMERS ENERGY INC.

(in thousands, except for share and per share amounts)

		June 30,				December 31,
		2009				2008
		(unaudited)
Assets
Cash and cash equivalents		$	59,359			$	6,866
Trade receivables, net			99,027				157,871
Inventories			36,561				39,087
Deferred income tax asset			6,642				6,176
Prepaid expenses and other			14,109				15,238
Total current assets			215,698				225,238
Property and equipment, net			767,665				760,990
Goodwill			43,273				43,273
Other intangible assets, net			34,997				37,371
Debt issuance costs, net			10,611				12,664
Deferred income tax asset			9,577				3,993
Other assets			21,700				31,522
Total assets		$	1,103,521			$	1,115,051
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	15,559			$	14,617
Trade accounts payable			35,257				62,078
Accrued salaries, benefits and payroll taxes			19,156				20,192
Accrued interest			15,669				18,623
Accrued expenses			21,506				26,642
Total current liabilities			107,147				142,152
Long-term debt, net of current maturities			483,210				579,044
Deferred income tax liability			8,215				8,253
Other long-term liabilities			1,588				2,193
Total liabilities			600,160				731,642
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value; liquidation value $1,000 per share (25,000,000 shares authorized, 36,393 shares issued and outstanding at June 30, 2009 and no shares issued at December 31, 2008)			34,183				—
Common stock, $0.01 par value (100,000,000 shares authorized; 71,369,635 issued and outstanding at June 30, 2009 and 35,674,742 issued and outstanding at December 31, 2008)			714				357
Capital in excess of par value			422,775				334,633
Retained earnings			45,689				48,419
Total stockholders’ equity			503,361				383,409
Total liabilities and stockholders’ equity		$	1,103,521			$	1,115,051

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

(in thousands, except per share amounts)

(unaudited)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues		$	112,505			$	163,135			$	257,608			$	316,317
Operating costs and expenses Direct costs			87,239				104,329				190,373				202,840
Depreciation			19,181				15,225				38,552				29,727
Selling, general and administrative			15,525				14,842				29,165				30,313
Loss on asset disposition			1,916				—				1,916				—
Amortization			1,187				1,071				2,374				2,187
Total operating costs and expenses			125,048				135,467				262,380				265,067
Income (loss) from operations			(12,543	)			27,668				(4,772	)			51,250
Other income (expense):
Interest expense			(13,221	)			(12,036	)			(26,728	)			(24,077	)
Interest income			9				1,538				14				2,690
Gain on debt extinguishment			26,365				—				26,365				—
Other			(485	)			369				(268	)			476
Total other income (expense)			12,668				(10,129	)			(617	)			(20,911	)
Income (loss) before income taxes			125				17,539				(5,389	)			30,339
Provision for income taxes			(215	)			(6,981	)			2,694				(11,731	)
Net income (loss)			(90	)			10,558				(2,695	)			18,608
Preferred stock dividend			(35	)			—				(35	)			—
Net income (loss) attributed to common stockholders		$	(125	)		$	10,558			$	(2,730	)		$	18,608
Net income (loss) per common share:
Basic		$	0.00			$	0.30			$	(0.08	)		$	0.53
Diluted		$	0.00			$	0.30			$	(0.08	)		$	0.53
Weighted average shares outstanding:
Basic			36,959				35,018				36,087				34,928
Diluted			36,959				35,534				36,087				35,386

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

(in thousands)

(unaudited)

		For the Six Months Ended
		June 30,
		2009				2008
Cash Flows from Operating Activities:
Net income (loss)		$	(2,695	)		$	18,608
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			40,926				31,914
Amortization and write-off of debt issuance costs			1,151				1,038
Stock-based compensation			2,345				4,385
Allowance for bad debts			3,565				636
Deferred taxes			(6,088	)			4,309
Gain on sale of property and equipment			(602	)			(537	)
Loss on asset disposition			1,916				—
Gain on debt extinguishment			(26,365	)			—
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in trade receivable			55,279				(13,887	)
Decrease (increase) in inventories			2,526				(4,498	)
Decrease (increase) in prepaid expenses and other current assets			7,411				(178	)
Decrease (increase) in other assets			1,120				(3,657	)
Increase (decrease) in trade accounts payable			(27,170	)			8,667
Increase (decrease) in accrued interest			(2,954	)			319
Increase (decrease) in accrued expenses			(5,760	)			4,533
Increase (decrease) in accrued salaries, benefits and payroll taxes			(1,036	)			5,012
(Decrease) in other long-term liabilities			(605	)			(249	)
Net Cash Provided By Operating Activities			42,964				56,415
Cash Flows from Investing Activities:
Investment in note receivable			—				(40,000	)
Deposits on asset commitments			10,032				(3,447	)
Proceeds from sale of property and equipment			6,693				3,578
Purchase of property and equipment			(57,993	)			(74,663	)
Net Cash Used In Investing Activities			(41,268	)			(114,532	)
Cash Flows from Financing Activities:
Proceeds from issuance of stock, net			120,337				—
Proceeds from exercises of options			—				609
Proceeds from long-term debt			25,000				17,946
Net borrowings (repayments) under line of credit			(36,500	)			10,000
Payments on long-term debt			(57,396	)			(4,102	)
Tax benefits on stock-based compensation plans			—				72
Debt issuance costs			(644	)			(21	)
Net Cash Provided By Financing Activities			50,797				24,504
Net change in cash and cash equivalents			52,493				(33,613	)
Cash and cash equivalents at beginning of period			6,866				43,693
Cash and cash equivalents at end of period		$	59,359			$	10,080

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Allis-Chalmers Energy Inc. and subsidiaries (“Allis-Chalmers”, “we”, “our” or “us”) is a multi-faceted oilfield service company that provides services and equipment to oil and natural gas exploration and production companies, throughout the United States including Texas, Oklahoma, Louisiana, Arkansas, Pennsylvania, New Mexico, offshore in the Gulf of Mexico, and internationally, primarily in Argentina, Brazil, Bolivia and Mexico. We operate in three sectors of the oil and natural gas service industry: Oilfield Services; Drilling and Completion and Rental Services.

We derive operating revenues from rates per day and rates per job that we charge for the labor and equipment required to provide a service and rates per day for equipment and tools that we rent to our customers. The price we charge for our services depends upon several factors, including the level of oil and natural gas drilling activity and the competitive environment in the particular geographic regions in which we operate. Contracts are awarded based on price, quality of service and equipment and general reputation and experience of our personnel. The principal operating costs are direct and indirect labor and benefits, repairs and maintenance of our equipment, insurance, equipment rentals, fuel, depreciation and general and administrative expenses.

Basis of Presentation

Our unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. These unaudited consolidated condensed financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be perceived with certainty. Accordingly, our accounting estimates require the exercise of judgment. While management believes that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts, recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, income taxes and valuation allowances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.

We have evaluated subsequent events through August 6, 2009, up to the time of filing this Form 10-Q with the SEC.

Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable and payable, and debt. The carrying value of cash and cash equivalents and accounts receivable and payable approximate fair value due to their short-term nature. We believe the fair values and the carrying value of our debt, excluding the senior notes, would not be materially different due to the instruments’ interest rates approximating market rates for similar borrowings at June 30, 2009. Our senior notes, in the approximate aggregate amount of $430.2 million, trade “over the counter” in limited amounts and on an infrequent basis. Based on those trades we estimate the fair value of our senior notes to be approximately $297 million at June 30, 2009. The price at which our senior notes trade is based on many factors such as the level of interest rates, the economic environment, the outlook for the oilfield services industry and the perceived credit risk. Additionally, due to the turmoil in the financial markets of 2008 and 2009, and its impact on investors of our senior notes, the price at which our senior notes trade may be affected by the investors’ financial distress and need for liquidity.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassification

Certain reclassifications have been made to the prior year’s consolidated condensed financial statements to conform with the current period presentation.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS No. 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. As allowed under SFAS No. 157, we adopted all requirements of SFAS No. 157 on January 1, 2008, except as they relate to nonfinancial assets and liabilities, which were adopted on January 1, 2009 and neither adoption had any impact on our financial position or results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, or SFAS No. 141(R). SFAS No. 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and the liabilities assumed in a business combination. Additionally, SFAS No. 141(R) requires that acquisition-related costs, including restructuring costs, be recognized as expense separately from the acquisition. We adopted SFAS No. 141(R) on January 1, 2009 and there was no impact on our financial position or results of operations.

In April 2008, the FASB issued FASB Staff Position Statement of Financial Accounting Standards No. 142-3, Determination of the Useful Life of Intangible Assets, or FSP SFAS No. 142-3. FSP SFAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142. The objective of FSP SFAS No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R, and other U.S. GAAP principles. FSP SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008. We adopted FSP SFAS No. 142-3 on January 1, 2009 and there was no impact on our financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position Statement of Financial Accounting Standards No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP SFAS No. 141(R)-1. FSP SFAS No. 141(R)-1 amends the guidance in SFAS No. 141(R) to require contingent assets acquired and liabilities assumed in a business combination to be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the measurement period. If fair value cannot be reasonably estimated during the measurement period, the contingent asset or liability would be recognized in accordance with SFAS No. 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. Further, this FSP eliminated the specific subsequent accounting guidance for contingent assets and liabilities from SFAS No. 141(R), without significantly revising the guidance in SFAS No. 141. However, contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination would still be initially and subsequently measured at fair value in accordance with SFAS No. 141(R). FSP SFAS No. 141(R)-1 is effective for all business acquisitions occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted the provisions of FSP SFAS No. 141(R)-1 on January 1, 2009 and there was no impact on our financial position or results of operations.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In April 2009, the FASB issued FASB Staff Position Statement of Financial Accounting Standards No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP SFAS No. 157-4. FSP SFAS No. 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. This FSP re-emphasizes that regardless of market conditions the fair value measurement is an exit price concept as defined in SFAS No. 157. This FSP clarifies and includes additional factors to consider in determining whether there has been a significant decrease in market activity for an asset or liability and provides additional clarification on estimating fair value when the market activity for an asset or liability has declined significantly. The scope of this FSP does not include assets and liabilities measured under level 1 inputs. FSP SFAS No. 157-4 is applied prospectively to all fair value measurements where appropriate and will be effective for interim and annual periods ending after June 15, 2009. We adopted the provisions of FSP SFAS No. 157-4 on April 1, 2009 and there was no impact on our financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position Statement of Financial Accounting Standards No. 107-1 and Accounting Principles Board Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments or FSP SFAS 107-1 and APB 28-1. FSP SFAS No. 107-1 and APB No. 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require publicly-traded companies, as defined in APB Opinion No. 28, Interim Financial Reporting, to provide disclosures on the fair value of financial instruments in interim financial statements. FSP SFAS No. 107-1 and APB No. 28-1 is effective for interim periods ending after June 15, 2009. We adopted the additional disclosure requirements in our June 30, 2009 financial statements and there was no impact on our financial position or results of operations.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS No. 165. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted SFAS No. 165 for the period ending June 30, 2009, which did not have an impact on our financial position or results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), or SFAS No. 167. SFAS No. 167 amends FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under SFAS No. 167, an enterprise has a controlling financial interest when it has (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. SFAS No. 167 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. SFAS No. 167 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. SFAS No. 167 is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact the adoption of SFAS No. 167 will have on our financial position and operating results.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification^TM and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, or SFAS No. 168. SFAS No. 168 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification is not expected to change U.S. GAAP. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of SFAS No. 168 will require us to adjust references to authoritative accounting literature in our financial statements, but will not affect our financial position or operating results.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 2 — STOCK-BASED COMPENSATION

Our net income (loss) for the three months ended June 30, 2009 and 2008 includes approximately $1.3 million and $1.8 million, respectively of compensation costs related to share-based payments. Our net income (loss) for the six months ended June 30, 2009 and 2008 includes approximately $2.3 million and $4.4 million, respectively, of compensation costs related to share-based payments. As of June 30, 2009 there was $1.0 million of unrecognized compensation expense related to non-vested stock option grants. We expect approximately $456,000 to be recognized over the remainder of 2009 and approximately $538,000, $27,000 and $5,000 to be recognized during the years ended 2010, 2011 and 2012, respectively.

A summary of our stock option activity and related information is as follows:

						Weighted				Weighted
		Shares				Average				Average				Aggregate
		Under				Exercise				Contractual				Intrinsic Value
		Option				Price				Life (Years)				(millions)
Balance at December 31, 2008			901,732			$	10.95
Granted			120,000				1.23
Canceled			(207,000	)			21.58
Exercised			—
Outstanding at June 30, 2009			814,732			$	6.82				6.54			$	0.13
Exercisable at June 30, 2009			682,732			$	7.54				5.96			$	0.00

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of our common stock on the last trading day of the second quarter of 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2009.

We utilize the Black-Scholes model to determine fair value, which incorporates assumptions to value stock-based awards. The dividend yield on our common stock is assumed to be zero as we have historically not paid dividends and have no current plans to do so in the future. The expected volatility is based on historical volatility of our common stock. The risk-free interest rate is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. We estimate forfeiture rates based on our historical experience. The following summarizes the assumptions used for the options granted in the six months ended June 30, 2009 Black-Scholes model:

		For the Six Months Ended
		June 30, 2009
Expected dividend yield			—
Expected price volatility			77.32	%
Risk free interest rate			1.37	%
Expected life of options		5 years
Weighted average fair value of options granted at market value		$	0.77

No options were granted during the three months ended June 30, 2009 or for the six months ended June 30, 2008.

Restricted stock awards, or RSAs, activity during the six months ended June 30, 2009 were as follows:

						Weighted Average
		Number of				Grant-Date Fair Value
		Shares				Per Share
Nonvested at December 31, 2008			953,102			$	15.34
Granted			17,000				1.23
Vested			(39,645	)			13.31
Forfeited			(5,795	)			16.69
Nonvested at June 30, 2009			924,662			$	15.16

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 2 — STOCK-BASED COMPENSATION (Continued)

We determine the fair value of RSAs based on the market price of our common stock on the date of grant. Compensation cost for RSAs is primarily recognized on a straight-line basis over the vesting or service period and is net of forfeitures. As of June 30, 2009, there was $6.8 million of total unrecognized compensation cost related to nonvested RSAs. We expect approximately $2.0 million to be recognized over the remainder of 2009 and approximately $3.4 million, $1.2 million and $195,000 to be recognized during the years ended 2010, 2011 and 2012, respectively.

NOTE 3 — INVENTORIES

Inventories consisted of the following (in thousands):

		June 30,				December 31,
		2009				2008
Manufactured
Finished goods		$	3,407			$	2,821
Work in process			1,972				1,654
Raw materials			2,169				2,499
Total manufactured			7,548				6,974
Hammers			2,157				2,257
Drive pipe			264				443
Rental supplies			2,615				3,023
Chemicals and drilling fluids			3,992				3,698
Rig parts and related inventory			10,675				13,097
Coiled tubing and related inventory			1,357				1,817
Shop supplies and related inventory			7,953				7,778
Total inventories		$	36,561			$	39,087

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

In accordance with SFAS No. 142, goodwill and indefinite-lived intangible assets are not permitted to be amortized. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or when there is reason to suspect that their values may have been diminished or impaired. Goodwill and indefinite-lived intangible assets listed on the balance sheet totaled $43.3 million at June 30, 2009 and December 31, 2008. Based on impairment testing performed during 2008 pursuant to the requirements of SFAS No. 142, these assets were impaired to their current carrying values.

Intangible assets with definite lives continue to be amortized over their estimated useful lives. Definite-lived intangible assets that continue to be amortized under SFAS No. 142 relate to our purchase of customer-related and marketing-related intangibles. These intangibles have useful lives ranging from five to twenty years. Amortization of intangible assets for the three and six months ended June 30, 2009 were $1.2 million and $2.4 million, respectively, compared to $1.1 million and $2.2 million for the same periods in the prior year. At June 30, 2009, intangible assets totaled $35.0 million, net of $11.6 million of accumulated amortization.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 5 — DEBT

Our long-term debt consisted of the following (in thousands):

		June 30,				December 31,
		2009				2008
Senior notes		$	430,238			$	505,000
Term loans			65,982				49,609
Revolving line of credit			—				36,500
Seller notes			—				750
Notes payable to former directors			32				32
Insurance premium financing			1,993				991
Capital lease obligations			524				779
Total debt			498,769				593,661
Less: current maturities			15,559				14,617
Long-term debt, net of current maturities		$	483,210			$	579,044

Senior notes, bank loans and line of credit agreements

On January 18, 2006 and August 14, 2006, we closed on private offerings, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $160.0 and $95.0 million aggregate principal amount of our senior notes, respectively. The senior notes are due January 15, 2014 and bear interest at 9.0%. The proceeds were used to fund the acquisitions of Specialty Rental Tools, Inc., or Specialty, and DLS Drilling, Logistics & Services Company, or DLS, to repay existing debt and for general corporate purposes. On June 29, 2009, we closed on a tender offer in which we purchased $30.6 million aggregate principal of our 9.0% senior notes for a total consideration of $650 per $1,000 principal amount.

In January 2007, we closed on a private offering, to qualified institutional buyers pursuant to Rule 144A under the Securities Act, of $250.0 million principal amount of 8.5% senior notes due 2017. The proceeds of the senior notes offering, together with a portion of the proceeds of our concurrent common stock offering, were used to repay the debt outstanding under our $300.0 million bridge loan facility which we incurred to finance our acquisition of substantially all the assets of Oil & Gas Rental Services, Inc, or OGR. On June 29, 2009, we closed on a tender offer in which we purchased $44.2 million aggregate principal of our 8.5% senior notes for a total consideration of $600 per $1,000 principal amount.

On January 18, 2006, we also executed an amended and restated credit agreement which provided for a $25.0 million revolving line of credit with a maturity of January 2010. On April 26, 2007, we entered into a Second Amended and Restated Credit Agreement, which increased our revolving line of credit to $62.0 million, and had a final maturity date of April 26, 2012. On December 3, 2007, we entered into a First Amendment to Second Amended and Restated Credit Agreement, which increased our revolving line of credit to $90.0 million. The amended and restated credit agreement contains customary events of default and financial covenants and limits our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. Our obligations under the amended and restated credit agreement are secured by substantially all of our assets located in the U.S. We were in compliance with all debt covenants as of June 30, 2009 and December 31, 2008. On April 9, 2009, we, along with certain of our subsidiaries, entered into a Third Amendment to our existing Second Amended and Restated Credit Agreement dated as of April 26, 2007, with Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto. The Third Amendment, among other things, modifies the leverage ratio and interest coverage ratio covenants of the Credit Agreement. In addition, permitted maximum capital expenditures were reduced to $85.0 million for 2009 compared to the previous limit of $120.0 million, which is consistent with our previously announced plans to limit capital expenditures for the year. As of June 30, 2009, we had no borrowings under the facility and at December 31, 2008 we had $36.5 million of borrowings outstanding. Availability under the facility was reduced by outstanding letters of credit of $5.1 million and $5.8 million at June 30, 2009 and December 31, 2008, respectively. The credit agreement loan rates are based on prime or LIBOR plus a margin. The weighted average interest rate was 4.6% at December 31, 2008.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 5 — DEBT (Continued)

As part of our acquisition of DLS, we assumed various bank loans with floating interest rates based on LIBOR plus a margin and terms ranging from 2 to 5 years. The weighted average interest rates on these loans was 3.3% and 5.1% as of June 30, 2009 and December 31, 2008, respectively. The bank loans are denominated in U.S. dollars and the outstanding amount due as of June 30, 2009 and December 31, 2008 was $1.8 million and $2.5 million, respectively.

On February 15, 2008, through our DLS subsidiary in Argentina, we entered into a $25.0 million import finance facility with a bank. Borrowings under this facility were used to fund a portion of the purchase price of the new drilling and service rigs ordered for our Drilling and Completion segment. Each drawdown shall be repaid over four years in equal semi-annual installments beginning one year after each disbursement with the final principal payment due not later than March 15, 2013. The import finance facility is unsecured and contains customary events of default and financial covenants and limits DLS’ ability to incur additional indebtedness, make capital expenditures, create liens and sell assets. We were in compliance with all debt covenants as of June 30, 2009 and December 31, 2008. The bank loan rates are based on LIBOR plus a margin. The weighted average interest rate was 5.5% and 6.9% at June 30, 2009 and December 31, 2008, respectively. The bank loans are denominated in U.S. dollars and the outstanding amount as of June 30, 2009 and December 31, 2008 was $23.0 million and $25.0 million, respectively.

As part of our acquisition of BCH Ltd, or BCH, we assumed a $23.6 million term loan credit facility with a bank. The credit agreement is dated June 2007 and contains customary events of default and financial covenants. Obligations under the facility are secured by substantially all of the BCH assets. The facility is repayable in quarterly principal installments plus interest with the final payment due not later than August 2012. We were in compliance with all debt covenants as of June 30, 2009 and December 31, 2008. The credit facility loan is denominated in U.S. dollars and interest rates are based on LIBOR plus a margin. At June 30, 2009 and December 31, 2008, the outstanding amount of the loan was $16.2 million and $22.1 million and the interest rate was 3.8% and 6.0%, respectively.

On May 22, 2009, we drew down $25.0 million on a new term loan credit facility with a lending institution. The facility was utilized to fund a portion of the purchase price of two new drilling rigs. The loan is secured by the equipment. The facility is repayable in quarterly installments of approximately $1.4 million of principal and interest and matures in May 2015. The loan bears interest at a fixed rate of 9.0%. At June 30, 2009, the outstanding amount of the loan was $25.0 million.

Notes payable

In connection with the acquisition of Rogers, we issued to the seller a note in the amount of $750,000. The note bore interest at 5.0% and was paid in full in April 2009 in accordance with its terms.

In 2000, we compensated directors, including current director Robert Nederlander, who served on the board of directors from 1989 to June 30, 1999 without compensation, by issuing promissory notes totaling $325,000. The notes bore interest at the rate of 5.0%. As of June 30, 2009 and December 31, 2008, the principal and accrued interest on these notes totaled approximately $32,000.

In April 2008 and August 2008, we obtained insurance premium financings in the aggregate amount of $3.0 million with a fixed average weighted interest rate of 4.9%. Under terms of the agreements, amounts outstanding are paid over 10 and 11 month repayment schedules. The outstanding balance of these notes was approximately $21,000 and $991,000 at June 30, 2009 and December 31, 2008, respectively. In April 2009 and June 2009, we obtained insurance premium financings in the aggregate amount of $2.4 million with a fixed average weighted interest rate of 4.9%. Under terms of the agreements, the amount outstanding is paid over 10 and 11 month repayment schedules. The outstanding balance of these notes was approximately $2.0 million as of June 30, 2009.

Other debt

As part of our acquisition of BCH, we assumed various capital leases with terms of two to three years. The outstanding balance under these capital leases was $524,000 at June 30, 2009 and $779,000 at December 31, 2008.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 6 — STOCKHOLDERS’ EQUITY

We recognized approximately $2.3 million of compensation expense related to share-based payments in the first six months of 2009 that was recorded as capital in excess of par value (see Note 2).

In June 2009, we closed our previously announced backstopped rights offering and private placement of convertible preferred stock and received proceeds of approximately $120.3 million net of $5.3 million offering expenses. Pursuant to an Investment Agreement, Lime Rock Partners V, L.P., or Lime Rock, agreed to backstop the rights offering by purchasing, at the subscription price, shares of common stock not purchased by our existing stockholders. We sold 15,794,644 shares of our common stock to existing stockholders who exercised their rights through the rights offering and 19,889,044 shares of common stock to Lime Rock, at a price of $2.50 per share.

We also issued 36,393 shares of 7.0% convertible perpetual preferred stock to Lime Rock and received proceeds of approximately $34.2 million net of $2.2 million offering expenses. The preferred stock has an initial liquidation preference of $1,000 per share and is adjusted to $3,000 per share solely upon ordinary liquidation events. Dividends on the preferred stock are declared quarterly if approved by our Board of Directors and dividends accumulate if not paid. The preferred stock is, with respect to dividend rights and rights upon liquidation, winding-up, or dissolution: (1) senior to common stock; (2) on a parity with any class of capital stock established after the original issue date when the terms of which provide that it will rank on a parity with the preferred stock; (3) junior to each class of capital stock or series of preferred stock established after the original issue date when the terms of such issuance expressly provide that it will rank senior to the preferred stock; and (4) junior to all our existing and future debt obligations and other liabilities, including claims of trade creditors.

Each share of the preferred stock is convertible at the holder’s option, at any time into 390.2439 shares of our common stock under certain conditions, subject to specified adjustments. This conversion rate represents an equivalent conversion price of approximately $2.56 per share. Conversion is limited to the earlier of June 26, 2012 or the date on which the transfer restrictions included in the Investment Agreement expire, unless immediately after giving effect to such conversion, such person or group would not beneficially own a number of shares of our common stock exceeding 35% of the total number of issued and outstanding shares of common stock, unless we have given prior written consent to such conversion. In addition, we will be able to cause the preferred stock to be converted into common stock five years after issuance if our common stock is trading at a premium of 300% to the conversion price for 30 consecutive trading days prior to our issuance of a press release announcing the mandatory conversion. Generally, the preferred stock vote together with the common stock on an as-converted basis, however, the preferred stock voting rights held by any person or group when aggregated with common stock would be limited to 35% of all the votes to be cast by all stockholders, including holders of common stock.

NOTE 7 — LOSS ON ASSET DISPOSITION

During the three months ended June 30, 2009, we recorded a $1.9 million loss on asset disposition in our Drilling and Completion segment. The insurance proceeds related to damages incurred on a blow-out which destroyed one of our drilling rigs were not sufficient to cover the book value of the rig and related assets.

NOTE 8 — GAIN ON DEBT EXTINGUISHMENT

We recorded a gain of $26.4 million as a result of a tender offer that we completed on June 29, 2009. We purchased $30.6 million aggregate principal of our 9.0% senior notes and $44.2 million aggregate principal of 8.5% senior notes for approximately $46.4 million. We also wrote-off $1.5 million of debt issuance costs related to the retired notes and we incurred approximately $466,000 in expenses related to the transactions.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 9 — INCOME PER COMMON SHARE

Basic earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible preferred stock, stock options, etc.) as if they had been converted. The components of basic and diluted earnings per share are as follows (in thousands, except per share amounts):

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Numerator:
Net income (loss)		$	(90	)		$	10,558			$	(2,695	)		$	18,608
Preferred stock dividend			(35	)			—				(35	)			—
Net income (loss) attributed to common stockholders		$	(125	)		$	10,558			$	(2,730	)		$	18,608
Denominator:
Weighted average common shares outstanding excluding nonvested restricted stock			36,959				35,018				36,087				34,928
Effect of potentially dilutive common shares:
Warrants and employee and director stock options and restricted shares							516				—				458
Weighted average common shares outstanding and assumed conversions			36,959				35,534				36,087				35,386
Net income (loss) per common share
Basic		$	0.00			$	.30			$	(0.08	)		$	0.53
Diluted		$	0.00			$	.30			$	(0.08	)		$	0.53
Potentially dilutive securities excluded as anti-dilutive			15,698				472				15,698				548

Convertible preferred stock and share based compensation shares of approximately 787,000 and 435,000 were excluded in the computation of diluted earnings per share for the three and six months ended June 30, 2009, respectively as the effect would have been anti-dilutive (e.g., those that increase income per share) due to the net loss for the period.

NOTE 10 — SUPPLEMENTAL CASH FLOW INFORMATION

		For the Six Months Ended
		June 30,
		2009				2008
Cash paid for interest and income taxes:
Interest		$	28,329			$	23,087
Income taxes			1,354				12,595
Non-cash activities:
Insurance premium financed			2,381				2,767
Assets transferred to joint venture investment			1,330				—
Preferred stock dividend			35				—

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Set forth on the following pages are the condensed consolidating financial statements of (i) Allis-Chalmers Energy Inc., (ii) its subsidiaries that are guarantors of the senior notes and revolving credit facility and (iii) the subsidiaries that are not guarantors of the senior notes and revolving credit facility (in thousands, except for share and per share amounts).

CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2009 (unaudited)

		Allis-Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Assets
Cash and cash equivalents		$	—			$	51,929			$	7,430			$	—			$	59,359
Trade receivables, net			—				47,898				53,497				(2,368	)			99,027
Inventories			—				18,751				17,810				—				36,561
Intercompany receivables			—				37,423				—				(37,423	)			—
Note receivable from affiliate			23,495				—				—				(23,495	)			—
Prepaid expenses and other			477				8,032				12,242				—				20,751
Total current assets			23,972				164,033				90,979				(63,286	)			215,698
Property and equipment, net			—				513,150				254,515				—				767,665
Goodwill			—				23,251				20,022				—				43,273
Other intangible assets, net			483				27,182				7,332				—				34,997
Debt issuance costs, net			10,460				151				—				—				10,611
Note receivable from affiliates			7,230				—				—				(7,230	)			—
Investments in affiliates			938,127				—				—				(938,127	)			—
Other assets			9,455				19,279				2,543				—				31,277
Total assets		$	989,727			$	747,046			$	375,391			$	(1,008,643	)		$	1,103,521
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	32			$	5,290			$	10,237			$	—			$	15,559
Trade accounts payable			—				14,858				22,767				(2,368	)			35,257
Accrued salaries, benefits and payroll taxes			—				2,136				17,020				—				19,156
Accrued interest			15,101				243				325				—				15,669
Accrued expenses			4,733				7,431				9,342				—				21,506
Intercompany payables			36,262				—				1,161				(37,423	)			—
Note payable to affiliate			—				—				23,495				(23,495	)			—
Total current liabilities			56,128				29,958				84,347				(63,286	)			107,147
Long-term debt, net of current maturities			430,238				21,703				31,269				—				483,210
Note payable to affiliate			—				—				7,230				(7,230	)			—
Deferred income tax liability			—				—				8,215				—				8,215
Other long-term liabilities			—				26				1,562				—				1,588
Total liabilities			486,366				51,687				132,623				(70,516	)			600,160
Commitments and contingencies
Stockholders’ Equity
Preferred Stock			34,183				—				—				—				34,183
Common stock			714				3,526				42,963				(46,489	)			714
Capital in excess of par value			422,775				570,512				136,839				(707,351	)			422,775
Retained earnings			45,689				121,321				62,966				(184,287	)			45,689
Total stockholders’ equity			503,361				695,359				242,768				(938,127	)			503,361
Total liabilities and stockholders equity		$	989,727			$	747,046			$	375,391			$	(1,008,643	)		$	1,103,521

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2009 (unaudited)

		Allis-Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Revenues		$	—			$	110,705			$	148,173			$	(1,270	)		$	257,608
Operating costs and expenses
Direct costs			—				72,243				119,400				(1,270	)			190,373
Depreciation			—				28,222				10,330				—				38,552
Selling, general and administrative			1,986				19,956				7,223				—				29,165
Loss on asset disposition			—				—				1,916				—				1,916
Amortization			23				1,961				390				—				2,374
Total operating costs and expenses			2,009				122,382				139,259				(1,270	)			262,380
Income (loss) from operations			(2,009	)			(11,677	)			8,914				—				(4,772	)
Other income (expense):
Equity earnings in affiliates, net of tax			(2,600	)			—				—				2,600				—
Interest, net			(24,486	)			(21	)			(2,207	)			—				(26,714	)
Gain on debt extinguishment			26,365				—				—				—				26,365
Other			35				(106	)			(197	)			—				(268	)
Total other income (expense)			(686	)			(127	)			(2,404	)			2,600				(617	)
Net income (loss)before income taxes			(2,695	)			(11,804	)			6,510				2,600				(5,389	)
Provision for income taxes			—				4,046				(1,352	)			—				2,694
Net income (loss)			(2,695	)			(7,758	)			5,158				2,600				(2,695	)
Preferred stock dividend			(35	)			—				—				—				(35	)
Net income (loss) attributed to common stockholders		$	(2,730	)		$	(7,758	)		$	5,158			$	2,600			$	(2,730	)

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2009 (unaudited)

		Allis-Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Revenues		$	—			$	44,738			$	68,384			$	(617	)		$	112,505
Operating costs and expenses
Direct costs			—				30,948				56,908				(617	)			87,239
Depreciation			—				13,913				5,268				—				19,181
Selling, general and administrative			1,044				10,788				3,693				—				15,525
Loss on asset disposition			—				—				1,916				—				1,916
Amortization			11				981				195				—				1,187
Total operating costs and expenses			1,055				56,630				67,980				(617	)			125,048
Income (loss) from operations			(1,055	)			(11,892	)			404				—				(12,543	)
Other income (expense):
Equity earnings in affiliates, net of tax			(13,212	)			—				—				13,212				—
Interest, net			(12,202	)			(13	)			(997	)			—				(13,212	)
Gain on debt extinguishment			26,365				—				—				—				26,365
Other			14				(75	)			(424	)			—				(485	)
Total other income (expense)			965				(88	)			(1,421	)			13,212				12,668
Net income (loss)before income taxes			(90	)			(11,980	)			(1,017	)			13,212				125
Provision for income taxes			—				(258	)			43				—				(215	)
Net income (loss)			(90	)			(12,238	)			(974	)			13,212				(90	)
Preferred stock dividend			(35	)			—				—				—				(35	)
Net income (loss) attributed to common stockholders		$	(125	)		$	(12,238	)		$	(974	)		$	13,212			$	(125	)

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Six Months Ended June 30, 2009 (unaudited)

		Allis-Chalmers								Subsidiaries
		(Parent/				Subsidiary				(Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors)				Adjustments				Total
Cash Flows from Operating Activities:
Net income (loss)		$	(2,695	)		$	(7,758	)		$	5,158			$	2,600			$	(2,695	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			23				30,183				10,720				—				40,926
Amortization and write-off of debt issuance costs			1,149				2				—				—				1,151
Stock based compensation			2,345				—				—				—				2,345
Allowance for bad debts			—				3,565				—				—				3,565
Equity earnings in affiliates			2,600				—				—				(2,600	)			—
Deferred taxes			(4,783	)			1				(1,306	)			—				(6,088	)
(Gain) on sale of equipment			—				(543	)			(59	)			—				(602	)
Loss on asset disposition			—				—				1,916				—				1,916
Gain on debt extinguishment			(26,365	)			—				—				—				(26,365	)
Changes in operating assets and liabilities, net of acquisitions:
Decrease in trade receivables			—				37,911				17,368				—				55,279
Decrease in inventories			—				631				1,895				—				2,526
(Increase) decrease in prepaid expenses and other current assets			7,520				2,422				(2,531	)			—				7,411
(Increase) decrease in other assets			(34	)			(902	)			2,056				—				1,120
(Decrease) in trade accounts payable			—				(13,747	)			(13,423	)			—				(27,170	)
(Decrease) increase in accrued interest			(2,831	)			243				(366	)			—				(2,954	)
(Decrease) increase in accrued expenses			3,951				(6,410	)			(3,301	)			—				(5,760	)
(Decrease) increase in accrued salaries, benefits and payroll taxes			—				(1,797	)			761				—				(1,036	)
(Decrease) in other long- term liabilities			—				(38	)			(567	)			—				(605	)
Net Cash Provided By (Used In) Operating Activities			(19,120	)			43,763				18,321				—				42,964
Cash Flows from Investing Activities:
Investment in affiliates			(3,500	)			—				—				3,500				—
Deposits on asset commitments			—				10,616				(584	)			—				10,032
Proceeds from sale of property and equipment			—				6,634				59				—				6,693
Purchase of property and equipment			—				(49,089	)			(8,904	)			—				(57,993	)
Net Cash Used in Investing Activities			(3,500	)			(31,839	)			(9,429	)			3,500				(41,268	)

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Six Months Ended June 30, 2009 (unaudited)

		Allis-Chalmers								Subsidiaries
		(Parent/				Subsidiary				(Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors)				Adjustments				Total
Cash Flows from Financing Activities:
Accounts receivable from affiliates			—				13,615				—				(13,615	)			—
Accounts payable to affiliates			(13,591	)			—				(24	)			13,615				—
Proceeds from parent contributions			—				—				3,500				(3,500	)			—
Proceeds from issuance of stock, net			120,337				—				—				—				120,337
Proceeds from long-term debt			—				25,000				—				—				25,000
Net repayment under line of credit			(36,500	)			—				—				—				(36,500	)
Payments on long-term debt			(47,135	)			(1,380	)			(8,881	)			—				(57,396	)
Debt issuance costs			(491	)			(153	)			—				—				(644	)
Net Cash Provided By (Used In) Financing Activities			22,620				37,082				(5,405	)			(3,500	)			50,797
Net change in cash and cash equivalents			—				49,006				3,487				—				52,493
Cash and cash equivalents at beginning of period			—				2,923				3,943				—				6,866
Cash and cash equivalents at end of period		$	—			$	51,929			$	7,430			$	—			$	59,359