| PIONEER DRILLING CO Item 1A Risk Factors Set forth below are various risks and uncertainties that could adversely impact our business, financial condition, results of operations and cash flows |
| Risks Relating to the Oil and Gas Industry We derive all our revenues from companies in the oil and gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and gas prices |
| As a provider of contract land drilling services, our business depends on the level of drilling activity by oil and gas exploration and production companies operating in the geographic markets where we operate |
| The oil and gas exploration and production industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities |
| Oil and gas prices, and market expectations of potential changes in those prices, significantly affect the levels of those activities |
| Worldwide political, economic and military events have contributed to oil and gas price volatility and are likely to continue to do so in the future |
| Any prolonged reduction in the overall level of exploration and development activities, whether resulting from changes in oil and gas prices or otherwise, can materially and adversely affect us in many ways by negatively impacting: • our revenues, cash flows and profitability; • the fair market value of our rig fleet; • our ability to maintain or increase our borrowing capacity; • our ability to obtain additional capital to finance our business and make acquisitions, and the cost of that capital; and • our ability to retain skilled rig personnel whom we would need in the event of an upturn in the demand for our services |
| Depending on the market prices of oil and gas, oil and gas exploration and production companies may cancel or curtail their drilling programs, thereby reducing demand for our services |
| Oil and gas prices have been volatile historically and, we believe, will continue to be so in the future |
| Many factors beyond our control affect oil and gas prices, including: • weather conditions in the United States and elsewhere; • economic conditions in the United States and elsewhere; • actions by OPEC, the Organization of Petroleum Exporting Countries; • political instability in the Middle East and other major oil and gas producing regions; • governmental regulations, both domestic and foreign; • domestic and foreign tax policy; • the pace adopted by foreign governments for the exploration, development and production of their national reserves; • the price of foreign imports of oil and gas; • the cost of exploring for, producing and delivering oil and gas; • the discovery rate of new oil and gas reserves; • the rate of decline of existing and new oil and gas reserves; • available pipeline and other oil and gas transportation capacity; • the ability of oil and gas companies to raise capital; and • the overall supply and demand for oil and gas |
| We have a history of losses during periods of reduced demand for drilling rigs |
| We incurred net losses of dlra1dtta8 million, dlra5dtta1 million and dlra0dtta4 million in the fiscal years ended March 31, 2004, 2003 and 2000, respectively |
| Our profitability in the future will depend on many factors, but largely on utilization rates and dayrates for our drilling rigs |
| Our current utilization rates and dayrates may decline and we may experience losses in the future |
| Our acquisition strategy involves various risks |
| As a key component of our business strategy, we have pursued and intend to continue to pursue acquisitions of complementary assets and businesses |
| For example, since March 31, 2003, our rig fleet has increased from 24 to 57 drilling rigs, primarily as a result of acquisitions |
| Certain risks are inherent in an acquisition strategy, such as increasing leverage and debt service requirements and combining disparate company cultures and facilities, which could adversely affect our operating results |
| The success of any completed acquisition will depend in part on our ability to integrate effectively the acquired business into our operations |
| The process of integrating an acquired business may involve unforeseen difficulties and may require a disproportionate amount of management attention and financial and other resources |
| Possible future acquisitions may be for purchase prices significantly higher than those we paid for previous acquisitions |
| We may be unable to continue to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on satisfactory terms or successfully acquire identified targets |
| Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations |
| Our strategy of constructing drilling rigs during periods of peak demand requires that we maintain an adequate supply of drilling rig components to complete our rig building program |
| Our suppliers may be unable to continue providing us the needed drilling rig components if their manufacturing sources are unable to fulfill their commitments |
| In addition, we may not have sufficient capital resources to complete additional acquisitions |
| Historically, we have funded the growth of our rig fleet through a combination of debt and equity financing |
| We may incur substantial additional indebtedness to finance future acquisitions and also may issue equity securities or convertible securities in connection with such acquisitions |
| Debt service requirements could represent a significant burden on our results of operations and financial condition and the issuance of additional equity could be dilutive to our existing stockholders |
| Furthermore, we may not be able to obtain additional financing on satisfactory terms |
| We operate in a highly competitive, fragmented industry in which price competition is intense |
| We encounter substantial competition from other drilling contractors |
| Our primary market areas are highly fragmented and competitive |
| The fact that drilling rigs are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry |
| The drilling contracts we compete for are usually awarded on the basis of competitive bids |
| In addition to pricing and rig availability, we believe the following factors are also important to our customers in determining which drilling contractor to select: • the type and condition of each of the competing drilling rigs; • the mobility and efficiency of the rigs; • the quality of service and experience of the rig crews; • the safety records of the rigs; • the offering of ancillary services; and • the ability to provide drilling equipment adaptable to, and personnel familiar with, new technologies and drilling techniques |
| While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment, the safety record of our rigs and the quality of service and experience of our rig crews to differentiate us from our competitors |
| This strategy is less effective as lower demand for drilling services intensifies price competition and makes it more difficult for us to compete on the basis of factors other than price |
| In all of the markets in which we compete, an over-supply of rigs can cause greater price competition |
| Contract drilling companies compete primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time |
| If demand for drilling services improves in a region where we operate, our competitors might respond by moving in suitable rigs from other regions |
| An influx of rigs from other regions could rapidly intensify competition and reduce profitability and make any improvement in demand for drilling rigs short-lived |
| 12 ______________________________________________________________________ [39]Table of Contents We face competition from many competitors with greater resources |
| Many of our competitors have greater financial, technical and other resources than we do |
| Their greater capabilities in these areas may enable them to: • better withstand industry downturns; • compete more effectively on the basis of price and technology; • retain skilled rig personnel; and • build new rigs or acquire and refurbish existing rigs so as to be able to place rigs into service more quickly than us in periods of high drilling demand |
| Unexpected cost overruns on our turnkey drilling jobs and our footage contracts could adversely affect our financial position and our results of operations |
| We have historically derived a significant portion of our revenues from turnkey drilling contracts and we expect that they will represent a significant component of our future revenues |
| The occurrence of uninsured or under-insured losses or operating cost overruns on our turnkey jobs could have a material adverse effect on our financial position and results of operations |
| Under a typical turnkey drilling contract, we agree to drill a well for our customer to a specified depth and under specified conditions for a fixed price |
| We provide technical expertise and engineering services, as well as most of the equipment and drilling supplies required to drill the well |
| We often subcontract for related services, such as the provision of casing crews, cementing and well logging |
| Under typical turnkey drilling arrangements, we do not receive progress payments and are paid by our customer only after we have performed the terms of the drilling contract in full |
| For these reasons, the risk to us under a turnkey drilling contract is substantially greater than for a well drilled on a daywork basis, because we must assume most of the risks associated with drilling operations that the operator generally assumes under a daywork contract, including the risks of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors’ services, supplies, cost escalations and personnel |
| Similar to our turnkey contracts, under a footage contract we assume most of the risks associated with drilling operations that the operator generally assumes under a daywork contract |
| Although we attempt to obtain insurance coverage to reduce certain of the risks inherent in our turnkey drilling operations, adequate coverage may be unavailable in the future and we might have to bear the full cost of such risks, which could have an adverse effect on our financial condition and results of operations |
| Our operations involve operating hazards, which if not insured or indemnified against, could adversely affect our results of operations and financial condition |
| Our operations are subject to the many hazards inherent in the contract land drilling business, including the risks of: • blowouts; • fires and explosions; • loss of well control; • collapse of the borehole; • lost or stuck drill strings; and • damage or loss from natural disasters |
| Any of these hazards can result in substantial liabilities or losses to us from, among other things: • suspension of drilling operations; • damage to, or destruction of, our property and equipment and that of others; • personal injury and loss of life; • damage to producing or potentially productive oil and gas formations through which we drill; and • environmental damage |
| 13 ______________________________________________________________________ [40]Table of Contents We seek to protect ourselves from some but not all operating hazards through insurance coverage |
| However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical |
| Those risks include pollution liability in excess of relatively low limits |
| Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our customers |
| However, customers who provide contractual indemnification protection may not in all cases maintain adequate insurance to support their indemnification obligations |
| Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations |
| The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition |
| Furthermore, we may be unable to maintain adequate insurance in the future at rates we consider reasonable |
| We face increased exposure to operating difficulties because we primarily focus on drilling for natural gas |
| Most of our drilling contracts are with exploration and production companies in search of natural gas |
| Drilling on land for natural gas generally occurs at deeper drilling depths than drilling for oil |
| Although deep-depth drilling exposes us to risks similar to risks encountered in shallow-depth drilling, the magnitude of the risk for deep-depth drilling is greater because of the higher costs and greater complexities involved in drilling deep wells |
| We generally do not insure risks related to operating difficulties other than blowouts |
| If we do not adequately insure the increased risk from blowouts or if our contractual indemnification rights are insufficient or unfulfilled, our profitability and other results of operation and our financial condition could be adversely affected in the event we encounter blowouts or other significant operating difficulties while drilling at deeper depths |
| Our current primary focus on drilling for natural gas could place us at a competitive disadvantage if we changed our primary focus to drilling for oil |
| Our rig fleet consists of rigs capable of drilling on land at drilling depths of 6cmam000 to 18cmam000 feet because most of our contracts are with customers drilling in search of natural gas, which generally occurs at deeper drilling depths than drilling in search of oil, which often occurs at drilling depths less than 6cmam000 feet |
| Generally, larger drilling rigs capable of deep drilling generally incur higher mobilization costs than smaller drilling rigs drilling at shallower depths |
| If our primary focus shifts from drilling for customers in search of natural gas to drilling for customers in search of oil, the majority of our rig fleet would be disadvantaged in competing for new oil drilling projects as compared to competitors that primarily use shallower drilling depth rigs when drilling in search of oil |
| Our operations are subject to various laws and governmental regulations that could restrict our future operations and increase our operating costs |
| Many aspects of our operations are subject to various federal, state and local laws and governmental regulations, including laws and regulations governing: • environmental quality; • pollution control; • remediation of contamination; • preservation of natural resources; and • worker safety |
| Our operations are subject to stringent laws and regulations relating to containment, disposal and controlling the discharge of hazardous oilfield waste and other nonhazardous waste material into the environment, requiring removal and cleanup under certain circumstances, or otherwise relating to the protection of the environment |
| In addition, our operations are often conducted in or near ecologically sensitive areas, such as wetlands, which are subject to special protective measures and which may expose us to additional operating costs and liabilities for accidental discharges of oil, gas, drilling fluids or contaminated water or for noncompliance with other aspects of applicable laws |
| We are also subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable state statutes |
| The OSHA hazard communication standard, the Environmental Protection Agency “community right-to-know” regulations under Title III of the Federal Superfund Amendment and Reauthorization Act and comparable state statutes require us to organize and report information about the hazardous materials we use in our operations to employees, state and local government authorities and local citizens |
| Environmental laws and regulations are complex and subject to frequent change |
| In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and can impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them |
| We may also be exposed to environmental or other liabilities originating from businesses and assets which we purchased from others |
| Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination may require us to make material expenditures or subject us to liabilities that we currently do not anticipate |
| 14 ______________________________________________________________________ [41]Table of Contents In addition, our business depends on the demand for land drilling services from the oil and gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and gas industry generally, by changes in those laws and by changes in related administrative regulations |
| It is also possible that these laws and regulations may in the future add significantly to our operating costs or those of our customers or otherwise directly or indirectly affect our operations |
| We could be adversely affected if shortages of equipment, supplies or personnel occur |
| From time to time there have been shortages of drilling equipment and supplies during periods of high demand which we believe could reoccur |
| Shortages could result in increased prices for drilling equipment or supplies that we may be unable to pass on to customers |
| In addition, during periods of shortages, the delivery times for equipment and supplies can be substantially longer |
| Any significant delays in our obtaining drilling equipment or supplies could limit drilling operations and jeopardize our relations with customers |
| In addition, shortages of drilling equipment or supplies could delay and adversely affect our ability to obtain new contracts for our rigs, which could have a material adverse effect on our financial condition and results of operations |
| Our operations require the services of employees having the technical training and experience necessary to obtain the proper operational results |
| As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel |
| Shortages of qualified personnel are occurring in our industry |
| If we should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially and adversely affected |
| A significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both |
| The occurrence of either of these events for a significant period of time could have a material and adverse effect on our financial condition and results of operations |
| Risk Relating to Our Capitalization and Organizational Documents Under our existing dividend policy, we do not pay dividends on our common stock |
| We have not paid or declared any dividends on our common stock and currently intend to retain any earnings to fund our working capital needs and growth opportunities |
| Any future dividends will be at the discretion of our board of directors after taking into account various factors it deems relevant, including our financial condition and performance, cash needs, income tax consequences and the restrictions imposed by the Texas Business Corporation Act and other applicable laws and by our credit facilities |
| Our debt arrangements include provisions that generally prohibit us from paying dividends on our capital stock, including our common stock |
| We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock |
| Our articles of incorporation authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine |
| The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock |
| For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions |
| Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock |
| Provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our shareholders |
| The existence of some provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our shareholders |
| Our articles of incorporation and bylaws contain provisions that may make acquiring control of our company difficult, including: • provisions regulating the ability of our shareholders to bring matters for action at annual meetings of our shareholders; • limitations on the ability of our shareholders to call a special meeting and act by written consent; • provisions dividing our board of directors into three classes elected for staggered terms; and • the authorization given to our board of directors to issue and set the terms of preferred stock |