Key Energy Services Inc. Annual Report 2009

Plain-text annual report

Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934Commission file number 001-08038KEY ENERGY SERVICES, INC.(Exact name of registrant as specified in its charter)Maryland 04-2648081(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)1301 McKinney StreetSuite 1800Houston, Texas 77010(Address of principal executive offices, including Zip Code)(713) 651-4300(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Exchange on Which RegisteredCommon Stock, $0.10 par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:Title of Each ClassNoneIndicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes  No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the ExchangeAct. Yes o No 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 Actof 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 tosuch filing requirements for the past 90 days. Yes  No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post such files.) Yes o No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer Accelerated filer oNon-accelerated filer oSmaller reporting company o(Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of June 30, 2009, based on the $5.76per share closing price for the registrant’s common stock as quoted on the New York Stock Exchange on such date, was $583,410,649 (forpurposes of calculating these amounts, only directors, officers and beneficial owners of 10% or more of the outstanding capital stock of the registranthave been deemed affiliates).As of February 17, 2010, the number of outstanding shares of common stock of the registrant was 125,430,259.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 withrespect to the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. KEY ENERGY SERVICES, INC.ANNUAL REPORT ON FORM 10-KFor the Year Ended December 31, 2009INDEX Page NumberPART I ITEM 1. Business 4 ITEM 1A. Risk Factors 11 ITEM 1B. Unresolved Staff Comments 17 ITEM 2. Properties 17 ITEM 3. Legal Proceedings 18 ITEM 4. Submission of Matters to a Vote of Security Holders 18 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 18 ITEM 6. Selected Financial Data 21 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 53 ITEM 8. Financial Statements and Supplementary Data 54 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 119 ITEM 9A. Controls and Procedures 119 ITEM 9B. Other Information 120 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 120 ITEM 11. Executive Compensation 120 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 120 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 120 ITEM 14. Principal Accountant Fees and Services 121 PART IV ITEM 15. Exhibits, Financial Statement Schedules 121 EX-21 EX-23 EX-31.1 EX-31.2 EX-322Table of ContentsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSIn addition to statements of historical fact, this report contains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, ormay be deemed to be, forward-looking statements. These “forward-looking statements” are based on our current expectations, estimatesand projections about Key Energy Services, Inc. and its wholly-owned and controlled subsidiaries, our industry and management’sbeliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In somecases, you can identify these statements by terminology such as “may,” “expects,” “believes,” “anticipates,” “will,” “predicts,”“projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are onlypredictions and are subject to substantial risks and uncertainties. In evaluating those statements, you should carefully consider theinformation above as well as the risks outlined in “Item 1A. Risk Factors.” Actual performance or results may differ materially andadversely.We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this reportexcept as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statementsand any other cautionary statements that may accompany such forward-looking statements.3Table of ContentsPART IITEM 1. BUSINESSGeneral Description of BusinessKey Energy Services, Inc. (NYSE: KEG) is a Maryland corporation and is one of the world’s leading onshore, rig-based wellservicing contractors. References to “Key,” the “Company,” “we,” “us” or “our” refer to Key Energy Services, Inc., its wholly-ownedsubsidiaries and its controlled subsidiaries. We were organized in April 1977 and commenced operations in July 1978 under the nameNational Environmental Group, Inc. In December 1992, we became Key Energy Group, Inc. and changed our name to Key EnergyServices, Inc. in December 1998.We provide a complete range of services to major oil companies, foreign national oil companies and independent oil and natural gasproduction companies, including rig-based well maintenance and workover services, well completion and recompletion services, fluidmanagement services, pressure pumping services, fishing and rental services, wireline services and other ancillary oilfield services. Weoperate in most major oil and gas producing regions of the continental United States, and have operations based in Mexico, Argentina andthe Russian Federation. Additionally, we have a technology development group based in Canada and have ownership interests in twooilfield service companies based in Canada.The following is a description of the various products and services that we provide and our major competitors for those productsand services.Service OfferingsWe operate in two business segments, Well Servicing and Production Services. Our Well Servicing segment includes rig-basedservices and fluid management services. Our Production Services segment includes pressure pumping services, fishing and rentalservices and wireline services. The following discussion provides a description of the major service lines offered by our businesssegments. With the exception of our rig-based services, all of our major service lines are provided primarily in the continental UnitedStates. Our rig-based services are provided in the continental United States as well as in Mexico, Argentina and the Russian Federation.See “Note 21. Segment Information” in “Item 8. Financial Statements and Supplementary Data” for additional financial informationabout our reportable business segments and the various geographical areas where we operate.Well Servicing SegmentRig-Based ServicesOur 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 drilling services to oil and naturalgas producers with certain of our larger well servicing rigs that are capable of providing conventional and/or 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 andcapabilities, allowing us to work on all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietaryKeyView® technology, which captures and reports well site operating data. We believe that this technology allows our customers and ourcrews 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 ensureefficient and continuous production. Examples of the maintenance services provided by our rigs include routine mechanical repairs to thepumps, tubing and other equipment on a well, removing debris from the well bore, and pulling the rods and other downhole equipmentout of the well bore to identify 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.4Table of ContentsThe workover services provided by our rig fleet are performed to enhance the production of existing wells, and generally are morecomplex and time consuming than normal maintenance services. Workover services can include deepening or extending well bores intonew formations by drilling horizontal or lateral well bores, sealing off depleted production zones and accessing previously bypassedproduction zones, converting former production wells into injection wells for enhanced recovery operations and conducting majorsubsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexityof the workover. Demand for these services is closely related to capital spending by oil and natural gas producers, which in turn is afunction of oil and natural gas prices. As commodity prices increase, producers tend to increase their capital spending for workoverprojects in order to increase their production. Conversely, as commodity prices decline, demand for workover projects tends to decrease.The completion and recompletion services provided by our rigs prepare a newly drilled well, or a well that was recently extendedthrough a workover, for production. The completion process may involve selectively perforating the well casing to access productionzones, stimulating and testing these zones, and installing downhole equipment. We typically provide a well service rig and may alsoprovide 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. The demand for completion and recompletion services is directly related to drilling activitylevels, which are highly sensitive to expectations about, and reactions to changes in, commodity prices. As the number of newly drilledwells decreases, the number of completion jobs correspondingly decreases. During periods of weak demand, some drilling contractorsmay use drilling rigs for completion work.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. Theseplugging and abandonment services also generally require auxiliary equipment in addition to a well servicing rig. The demand forplugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators arerequired by state regulations to plug wells that are no longer productive.We believe that the largest competitors for our U.S. rig-based services include Nabors Industries Ltd., Basic Energy Services, Inc.,Complete Production Services, Inc., Bronco Drilling Company, Inc., Forbes Energy Services Ltd. and Pioneer Drilling Company. Inaddition, there are numerous small companies that compete in our rig-based markets in the United States. In Argentina, we believe ourmajor competitors are San Antonio International (formerly Pride International), Nabors Industries Ltd. and Allis-Chalmers Energy Inc. InMexico, San Antonio International and Forbes Energy Services Ltd. are our largest competitors. In the Russian Federation, our majorcompetitors are Weatherford International Ltd. and Integran Technologies Inc.Fluid Management ServicesWe provide fluid management services, including oilfield transportation and produced water disposal services, with a very large fleetof heavy- and medium-duty trucks. The specific services offered include vacuum truck services, fluid transportation services anddisposal services for operators whose wells produce saltwater or other fluids. We also supply frac tanks which are used for temporarystorage of fluids associated with fluid hauling operations. In addition, we provide equipment trucks that are used to move large pieces ofequipment 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 toclear soluable restrictions in a well bore.Fluid hauling trucks are utilized in connection with drilling and workover projects, which tend to use large amounts of variousfluids. In connection with drilling, maintenance or workover activity at a well site, we transport fresh water to the well site and providetemporary storage and disposal of produced saltwater and drilling or workover fluids. These fluids are removed from the well site andtransported for disposal in a saltwater disposal (“SWD”) well. Key owned or leased 57 active SWD wells at December 31, 2009.Demand and pricing for these services generally correspond to demand for our well service rigs.We believe that the largest competitors for our domestic fluid management services include Basic Energy Services, Inc., CompleteProduction Services, Inc., Nabors Industries Ltd. and Stallion Oilfield Services Ltd.5Table of ContentsIn addition, there are numerous small companies that compete in our fluid management services markets in the United States.Production Services SegmentPressure Pumping ServicesOur pressure pumping services include fracturing, nitrogen, acidizing, cementing and coiled tubing services. We haveapproximately 212,000 stimulation pressure pumping horsepower and a fleet of coiled tubing units. These services (which may be utilizedduring the completion or workover of a well) are provided to oil and natural gas producers and are used to enhance the production of oiland natural gas wells from formations which exhibit restricted flow of oil and natural gas. In the fracturing process, we typically pumpfluid and sized sand, or proppants, into a well at high pressure in order to fracture the formation and thereby increase the flow of oil andnatural gas. With our cementing services, we pump cement into a well between the casing and the well bore. Coiled tubing services involvethe use of a continuous metal pipe spooled on a large reel for oil and natural gas well applications, such as well bore clean-outs, nitrogenjet lifts, and through tubing fishing and formation stimulations utilizing acid, chemical treatments and sand fracturing. Coiled tubing isalso used for a number of horizontal well applications, including “stiff wireline” services, in which a wireline is placed in the coiled tubeand then fed into a well to carry the wireline to a desired depth.Demand for our pressure pumping services is primarily influenced by current and anticipated oil and natural gas prices and theresulting impact on the willingness of our customers to make operating and capital expenditures. The pressure pumping services marketis dominated by three major competitors: Schlumberger Ltd., Halliburton Company and BJ Services Company. Other competitors for ourpressure pumping services include Weatherford International Ltd., Superior Well Services, Inc., Basic Energy Services, Inc., CompleteProduction Services, Inc., Frac-Tech Services, Ltd. and RPC, Inc.Fishing and Rental ServicesWe offer a full line of services and rental equipment designed for use both onshore and offshore for drilling and workover services.Fishing services involve recovering lost or stuck equipment in the well bore utilizing a “fishing tool.” Our rental tool inventory consists ofdrill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment,power swivels and foam air units. Demand for our fishing and rental services is also closely related to capital spending by oil and naturalgas producers, which is generally a function of oil and natural gas prices. Our primary competitors for our fishing and rental servicesinclude Baker Oil Tools, Smith International, Inc., Weatherford International Ltd., Basic Energy Services, Inc., Superior EnergyServices, Inc., Quail Tools (owned by Parker Drilling Company) and Knight Oil Tools.Wireline ServicesWe 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 well bore is cased and cemented, we can provide a numberof services. Perforating creates the flow path between the reservoir and the well bore. Production logging can be performed throughout thelife of the well to measure temperature, fluid type, flow rate, pressure and other reservoir characteristics. This service helps the operatoranalyze and monitor well performance and determine when a well may need a workover or further stimulation.In addition, wireline services may involve well bore remediation, which could include the positioning and installation of variousplugs and packers to maintain production or repair well problems, and casing inspection for internal or external abnormalities in thecasing string. Wireline services are provided from surface logging units, which lower tools and sensors into the well bore. We useadvanced wireline instruments to evaluate well integrity and perform cement evaluations and production logging. Demand for our wirelineservices is correlated to current and anticipated oil and natural gas prices and the resulting effect on the willingness of our customers tomake operating and capital expenditures. The major competitors for our wireline services are6Table of ContentsBaker Hughes Incorporated, Schlumberger Ltd., Wood Group Logging Services and Kuykendall Wireline Service Co., Inc.Other Business DataRaw MaterialsWe purchase a wide variety of raw materials, parts and components that are made by other manufacturers and suppliers for our use.We are not dependent on any single source of supply for those parts, supplies or materials. However, there are a limited number ofvendors for some specialized types of sand our pressure pumping operations use in frac jobs. See “Item 1A. Risk Factors.”CustomersOur customers include major oil companies, foreign national oil companies, and independent oil and natural gas productioncompanies. During the year ended December 31, 2009, the Mexican national oil company Petróleos Mexicanos (“PEMEX”) accounted forapproximately 11% of our consolidated revenues. No other customer accounted for more than 10% of our consolidated revenues for theyear ended December 31, 2009, and no single customer accounted for more than 10% of our consolidated revenues for the years endedDecember 31, 2008 and 2007.Competition and Other External FactorsThe markets in which we operate are highly competitive. Competition is influenced by such factors as price, capacity, availabilityof work crews, and reputation and experience of the service provider. We believe that an important competitive factor in establishing andmaintaining long-term customer relationships is having an experienced, skilled and well-trained work force. We devote substantialresources toward employee safety and training programs. In addition, we believe that the KeyView® system provides important safetyenhancements. In recent years, many of our larger customers have placed increased emphasis on the safety performance and quality of thecrews, equipment and services provided by their contractors. Although we believe customers consider all of these factors, price is oftenthe primary factor in determining which service provider is awarded the work. However, in numerous instances, we secure and maintainwork for large customers for which efficiency, safety, technology, size of fleet and availability of other services are of equal importance toprice. Due, in part, to the general economic downturn and declines in the price of oil and natural gas since the first half of 2008, pricingfor our services has become increasingly competitive. Further, as demand drops for oilfield services, the market is left with excesssupply, placing additional pressure on our pricing.The demand for our services fluctuates, primarily, in relation to the price (or anticipated price) of oil and natural gas, which, inturn, is driven by the supply of, and demand for, oil and natural gas. Generally, as supply of those commodities decreases and demandincreases, service and maintenance requirements increase as oil and natural gas producers attempt to maximize the productivity of theirwells in a higher priced environment. However, in a lower oil and natural gas price environment, such as the one we experienced duringthe first half of 2009, demand for service and maintenance decreases as oil and natural gas producers decrease their activity. Inparticular, the demand for new or existing field drilling and completion work is driven by available investment capital for such work.Because these types of services can be easily “started” and “stopped,” and oil and natural gas producers generally tend to be less risktolerant when commodity prices are low or volatile, we may experience a more rapid decline in demand for these types of well maintenanceservices compared with demand for other types of oilfield services. Further, in a lower-priced environment, fewer well service rigs areneeded for completions, as these activities are generally associated with drilling activity.The level of our revenues, earnings and cash flows are highly dependent upon, and affected by, the level of U.S. and internationaloil and natural gas exploration and development activity, as well as the equipment capacity in any particular region. For a more detaileddiscussion, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”7Table of ContentsSeasonalityOur operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the winter monthsdue to inclement weather, fewer daylight hours and holidays. During the summer months, our operations may be impacted by tropicalweather systems. During periods of heavy snow, ice or rain, we may not be able to move our equipment between locations, therebyreducing our ability to provide services and generate revenues. In addition, the majority of our equipment works only during daylighthours. In the winter months when days become shorter, this reduces the amount of time that our assets can work and therefore has anegative impact on total hours worked. Lastly, during the fourth quarter, we historically have experienced significant slowdown duringthe Thanksgiving and Christmas holiday seasons.Patents, Trade Secrets, Trademarks and CopyrightsWe own numerous patents, trademarks and proprietary technology that we believe provide us with a competitive advantage in thevarious markets in which we operate or intend to operate. We have devoted significant resources to developing technological improvementsin our well service business and have sought patent protection both inside and outside the United States for products and methods thatappear to have commercial significance. In the United States, as of December 31, 2009, we had 43 patents issued and 8 patents pending.In foreign countries, as of December 31, 2009, we had 30 patents issued and 145 patents pending. However, after evaluating theindividual market opportunities and our international patent portfolio last year, we have determined not to maintain approximately two-thirds of the 145 currently active foreign pending patents applications. All the issued patents have varying remaining durations and beginexpiring between 2013 and 2028. The most notable of our technologies include numerous patents surrounding the KeyView® system.We own several trademarks that are important to our business both in the United States and in foreign countries. In general,depending upon the jurisdiction, trademarks are valid as long as they are in use or their registrations are properly maintained and theyhave not been found to become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are inuse. While our patents and trademarks, in the aggregate, are of considerable importance to maintaining our competitive position, no singlepatent or trademark is considered to be of a critical or essential nature to our business.We also rely on a combination of trade secret laws, copyright and contractual provisions to establish and protect proprietary rightsin our products and services. We typically enter into confidentiality agreements with our employees, strategic partners and suppliers andlimit access to the distribution of our proprietary information.EmployeesAs of January 31, 2010, we employed approximately 6,200 persons in our United States operations and approximately 1,900additional persons in Argentina, Mexico and Canada. In addition, OOO Geostream Services Group (“Geostream”), a company in theRussian Federation in which we own a 50% controlling interest, employed (together with its wholly-owned subsidiaries) approximately370 persons as of January 31, 2010. Our domestic employees are not represented by a labor union and are not covered by collectivebargaining agreements. Many of our employees in Argentina are represented by labor unions. In Mexico, we have entered into a collectivebargaining agreement that applies to our workers in Mexico performing work under the PEMEX contracts.As noted below in “Item 1A. Risk Factors,” we have historically experienced a high employee turnover rate, and during the pastseveral years have experienced labor-related issues in Argentina. Other than with respect to the labor situation in Argentina, we have notexperienced any significant work stoppages associated with labor disputes or grievances and consider our relations with our employees tobe generally satisfactory.8Table of ContentsGovernmental RegulationsOur operations are subject to various federal, state and local laws and regulations pertaining to health, safety and the environment.We cannot predict the level of enforcement of existing laws or regulations or how such laws and regulations may be interpreted byenforcement agencies or court rulings in the future. We also cannot predict whether additional laws and regulations affecting our businesswill be adopted, or the effect such changes might have on us, our financial condition or our business. The following is a summary of themore significant existing environmental, health and safety laws and regulations to which our operations are subject and for whichcompliance may have a material adverse impact on our results of operations, financial position or cash flows.Environmental RegulationsOur operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil,contaminants and other regulated substances. Various environmental laws and regulations require prevention, and where necessary,cleanup of spills and leaks of such materials, and some of our operations must obtain permits that limit the discharge of materials.Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocationof permits.Hazardous Substances and WasteThe Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as “CERCLA” or the“Superfund” law, and comparable state laws, impose liability without regard to fault or the legality of the original conduct on certaindefined persons, including current and prior owners or operators of a site where a release of hazardous substances occurred and entitiesthat disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons”may be liable for the costs of cleaning up the hazardous substances, for damages to natural resources and for the costs of certain healthstudies.In the course of our operations, we occasionally generate materials that are considered “hazardous substances” and, as a result, mayincur CERCLA liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by therelease of hazardous substances or other pollutants. We also generate solid wastes that are subject to the requirements of the ResourceConservation and Recovery Act, as amended, or “RCRA,” and comparable state statutes.Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have beenreleased at properties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken fortreatment or disposal. Under CERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property(including contaminated groundwater), or to perform remedial activities to prevent future contamination.Air EmissionsThe Clean Air Act, as amended, or “CAA,” and similar state laws and regulations restrict the emission of air pollutants and alsoimpose various monitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits forconstruction, modification or operation of certain projects or facilities and may require use of emission controls.Global Warming and Climate ControlSome scientific studies suggest that emissions of greenhouse gases (including carbon dioxide and methane) may contribute towarming of the Earth’s atmosphere. While we do not believe our operations raise climate control issues different from those generallyraised by commercial use of fossil fuels, legislation or regulatory programs that restrict greenhouse gas emissions in areas where weconduct business could increase our costs in order to stay compliant with any new laws. See “Item 1A. Risk Factors.”9Table of ContentsWater DischargesWe operate facilities that are subject to requirements of the Clean Water Act, as amended, or “CWA,” and analogous state laws thatimpose restrictions and controls on the discharge of pollutants into navigable waters. Spill prevention, control and counter-measurerequirements under the CWA require implementation of measures to help prevent the contamination of navigable waters in the event of ahydrocarbon spill. Other requirements for the prevention of spills are established under the Oil Pollution Act of 1990, as amended, or“OPA”, which amends the CWA and applies to owners and operators of vessels, including barges, offshore platforms and certainonshore facilities. Under OPA, regulated parties are strictly liable for oil spills and must establish and maintain evidence of financialresponsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorily responsible.Occupational Safety and Health ActWe are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or “OSHA”, and comparablestate laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that informationabout hazardous materials used or produced in our operations be maintained and provided to employees, state and local governmentauthorities and citizens. We believe that our operations are in substantial compliance with OSHA requirements.Marine EmployeesCertain of our employees who perform services on our barge rigs or work offshore may be covered by the provisions of the JonesAct, the Death on the High Seas Act, the Longshore and Harbor Workers’ Compensation Act and general maritime law. These lawsoperate to make the liability limits established under state workers’ compensation laws inapplicable to these employees. Instead, theseemployees or their representatives are permitted to pursue actions against us for damages resulting from job related injuries, generally withno limitations on our potential liability.Saltwater Disposal WellsWe operate SWD wells that are subject to the CWA, Safe Drinking Water Act, and state and local laws and regulations, includingthose established by the Underground Injection Control Program of the Environmental Protection Agency (“EPA”), which establishes theminimum program requirements. Most of our SWD wells are located in Texas. We also operate SWD wells in Arkansas, Louisiana andNew Mexico. Regulations in these states require us to obtain a permit to operate each of our SWD wells. The applicable regulatory agencymay suspend or modify one of our permits if our well operation is likely to result in pollution of freshwater, substantial violation ofpermit conditions or applicable rules, or if the well leaks into the environment.WirelineWe conduct wireline logging, which may entail the use of radioactive isotopes along with other nuclear, electrical, acoustic andmechanical devices to evaluate downhole formation. Our activities involving the use of isotopes are regulated by the U.S. NuclearRegulatory Commission and specified agencies of certain states. Additionally, we may use high explosive charges for perforating casingand formations, and various explosive cutters to assist in well bore cleanout. Such operations are regulated by the U.S. Department ofJustice Bureau of Alcohol, Tobacco, Firearms, and Explosives and require us to obtain licenses or other approvals for the use ofdensitometers as well as explosive charges.Access to Company ReportsOur web site address is www.keyenergy.com, and we make available free of charge through our web site our Annual Reports onForm 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, as soon as reasonablypracticable after such materials are electronically filed with the Securities and Exchange Commission (the “SEC”). We have filed therequired certifications under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this Annual Report onForm 10-K.10Table of ContentsIn 2009, we submitted to the New York Stock Exchange (the “NYSE”) the CEO certification required by Section 303A.12(a) of theNYSE’s Listed Company Manual. Our web site also includes general information about us, including our Corporate GovernanceGuidelines and charters for the committees of our board of directors. Information on our web site or any other web site is not a part of thisreport.ITEM 1A. RISK FACTORSIn addition to the other information in this report, the following factors should be considered in evaluating us and our business.BUSINESS-RELATED RISK FACTORSOur business is dependent on conditions in the oil and natural gas industry, especially oil and natural gas prices and capitalexpenditures by oil and natural gas companies. Volatility in oil and natural gas prices, tight credit markets and disruptionsin the U.S. and global financial systems may adversely impact our business.Prices for oil and natural gas historically have been extremely volatile and have reacted to changes in the supply of, and demand for,oil and natural gas. These include changes resulting from, among other things, the ability of the Organization of Petroleum ExportingCountries to support oil prices, domestic and worldwide economic conditions and political instability in oil-producing countries.Weakness in oil and natural gas prices (or the perception by our customers that oil and natural gas prices will decrease in the future)could result in a reduction in the utilization of our equipment and result in lower rates for our services. In addition, when oil and naturalgas prices are weak, or when our customers expect oil and natural gas prices to decrease, fewer wells are drilled, resulting in lesscompletion and maintenance work for us. Additional factors that affect demand for our services include: • the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gascompanies; • oil and natural gas production costs; • government regulations; and • conditions in the worldwide oil and natural gas industry.Demand for our services is primarily influenced by current and anticipated oil and natural gas prices, and the significant decline inoil and natural gas prices beginning in the third quarter of 2008 caused our customers to reduce their spending on exploration anddevelopment drilling throughout 2009. This reduction in our customers’ spending could continue through 2010 and beyond. Furtherdecline in demand for our oil and natural gas services could have a material adverse effect on our revenue and profitability. Alsoimpacting demand are the global economic conditions. While appearing to have stabilized, the disruptions in the global credit marketsduring 2009 could continue to negatively impact the exploration and production expenditures by our customers throughout 2010 andbeyond. Additionally, even as economic conditions appear to have begun to stabilize, it remains uncertain whether our customers,vendors and suppliers will be able to access financing necessary to return to their previous level of operations or to avoid further deceasesin their level of operations, fulfill their commitments and fund future operations and obligations.We may be unable to maintain pricing on our core services.During the period from 2006 to 2008, we periodically increased the prices on our services to offset rising costs and to generate higherreturns for our stockholders. However, as a result of pressures stemming from deteriorating market conditions and falling oil and naturalgas prices beginning in the third quarter of 2008 and continuing through the first half of 2009, it became increasingly difficult tomaintain our prices. We have and will likely continue to face pricing pressure from our competitors. We have made price concessions,and may be compelled to make further price concessions, in order to maintain market share.11Table of ContentsIn addition, we expect our costs to rise if demand for our services increases with a recovering market, due in part to tighter labormarkets and similar economic developments that would likely result from an improving market. In addition to the recent difficulty wehave experienced maintaining prices as described above, even if we are able to increase our prices as market conditions improve, we maynot be able to do so at a rate that would be sufficient to cover such rising costs.The inability to maintain our pricing, to increase our pricing as costs increase, or a reduction in our pricing, may have a continuingand material negative impact on our operating results in the future.Industry capacity may adversely affect our business.Between 2006 and 2008, a significant amount of new capacity, including new well service rigs, new pressure pumping equipmentand new fishing and rental equipment, entered the market. In some cases, the new capacity was attributable to start-up oilfield servicecompanies and, in other cases, the new capacity was deployed by existing service providers to increase their service capacity. Thecombination of overcapacity and declining demand exacerbated the pricing pressure for our services in 2009. Although oilfield servicecompanies are not likely to add significant new capacity under current market conditions, the overcapacity could cause us to experiencecontinued pressure on the pricing of our services and experience lower utilization. This could continue to have a material negative impacton our operating results.Our future financial results could be adversely impacted by asset impairments or other charges.We have recorded goodwill impairment charges and asset impairment charges in the past. We evaluate our long-lived assets,including our property and equipment, indefinite-lived intangible assets, and goodwill for impairment. In performing these assessments,we project future cash flows on a discounted basis for goodwill, and on an undiscounted basis for other long-lived assets, and comparethese cash flows to the carrying amount of the related assets. These cash flow projections are based on our current operating plans,estimates and judgmental assumptions. We perform the assessment of potential impairment on our goodwill and indefinite-lived intangibleassets at least annually, or more often if events and circumstances warrant. We perform the assessment of potential impairment for ourproperty and equipment whenever facts and circumstances indicate that the carrying value of those assets may not be recoverable due tovarious external or internal factors. If we determine that our estimates of future cash flows were inaccurate or our actual results for 2010are materially different than we have predicted, we could record additional impairment charges for interim periods during 2010 or infuture years, which could have a material adverse effect on our financial position and results of operations.Our business involves certain operating risks, which are primarily self-insured, and our insurance may not be adequate tocover all losses or liabilities we might incur in our operations.Our operations are subject to many hazards and risks, including the following: • accidents resulting in serious bodily injury and the loss of life or property; • liabilities from accidents or damage by our fleet of trucks, rigs and other equipment; • pollution and other damage to the environment; • reservoir damage; • blow-outs, the uncontrolled flow of natural gas, oil or other well fluids into the atmosphere or an underground formation; and • fires and explosions.If any of these hazards occur, they could result in suspension of operations, damage to or destruction of our equipment and theproperty of others, or injury or death to our or a third party’s personnel.We self-insure a significant portion of these liabilities. For losses in excess of our self-insurance limits, we maintain insurance fromunaffiliated commercial carriers. However, our insurance may not be adequate to12Table of Contentscover all losses or liabilities that we might incur in our operations. Furthermore, our insurance may not adequately protect us againstliability from all of the hazards of our business. We also are subject to the risk that we may not be able to maintain or obtain insurance ofthe type and amount we desire at a reasonable cost. If we were to incur a significant liability for which we were uninsured or for which wewere not fully insured, it could have a material adverse effect on our financial position, results of operations and cash flows.We are subject to the economic, political and social instability risks of doing business in certain foreign countries.We currently have operations in Argentina, Mexico and the Russian Federation, a technology development group based in Canada,as well as investments in oilfield service companies based in Canada. In the future, we may expand our operations into other foreigncountries as well. As a result, we are exposed to risks of international operations, including: • increased governmental ownership and regulation of the economy in the markets where we operate; • inflation and adverse economic conditions stemming from governmental attempts to reduce inflation, such as imposition ofhigher interest rates and wage and price controls; • increased trade barriers, such as higher tariffs and taxes on imports of commodity products; • exposure to foreign currency exchange rates; • exchange controls or other currency restrictions; • war, civil unrest or significant political instability; • restrictions on repatriation of income or capital; • expropriation, confiscatory taxation, nationalization or other government actions with respect to our assets located in the marketswhere we operate; • governmental policies limiting investments by and returns to foreign investors; • labor unrest and strikes, including the significant labor-related issues we have experienced in Argentina; • deprivation of contract rights; and • restrictive governmental regulation and bureaucratic delays.The occurrence of one or more of these risks may: • negatively impact our results of operations; • restrict the movement of funds and equipment to and from affected countries; and • inhibit our ability to collect receivables.We historically have experienced a high employee turnover rate. Any difficulty we experience replacing or adding workerscould adversely affect our business.We historically have experienced an annual employee turnover rate of almost 50%. We believe that the high turnover rate isattributable to the nature of the work, which is physically demanding and performed outdoors. As a result, workers may choose topursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. We cannot assurethat at times of high demand we will be able to retain, recruit and train an adequate number of workers. Potential inability or lack ofdesire by workers to commute to our facilities and job sites and competition for workers from competitors or other industries are factorsthat could affect our ability to attract and retain workers. We believe that our wage rates are competitive with the wage rates of ourcompetitors and other potential employers. A significant increase in the wages other employers pay could result in a reduction in ourworkforce, increases in our wage rates, or both. Either of these events could diminish our profitability and growth potential.13Table of ContentsAdditionally, in response to the downturn in market conditions beginning in the second quarter of 2008 and continuing through thethird quarter of 2009, we made significant reductions in the size of our workforce. Excluding the reductions in workforce during 2009 inresponse to market conditions, our turnover rate in 2009 was 33%. As market conditions and our activity levels improve, we will berequired to expand our workforce to accommodate these increases. We may encounter difficulties in adding new headcount with therequisite experience levels, which could negatively impact our ability to take advantage of improving market conditions.We may not be successful in implementing technology development and enhancements.A component of our business strategy is to incorporate our technology into our well service rigs, primarily through the KeyView®system. The inability to successfully develop and integrate the technology could: • limit our ability to improve our market position; • increase our operating costs; and • limit our ability to recoup the investments made in technology initiatives.We may incur significant costs and liabilities as a result of environmental, health and safety laws and regulations thatgovern our operations.Our operations are subject to U.S. federal, state and local, and foreign laws and regulations that impose limitations on the dischargeof pollutants into the environment and establish standards for the handling, storage and disposal of waste materials, including toxic andhazardous wastes. To comply with these laws and regulations, we must obtain and maintain numerous permits, approvals andcertificates from various governmental authorities. While the cost of such compliance has not been significant in the past, new laws,regulations or enforcement policies could become more stringent and significantly increase our compliance costs or limit our futurebusiness opportunities, which could have a material adverse effect on our operations.Failure to comply with environmental, health and safety laws and regulations could result in the assessment of administrative, civilor criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, and, to a lesser extent, orders tolimit or cease certain operations. Certain environmental laws impose strict and/or joint and several liability, which could cause us tobecome liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the timeof those actions. For additional information, see the discussion under “Governmental Regulations” in “Item 1. Business.”We rely on a limited number of suppliers for certain materials used in providing our pressure pumping services.We rely on a limited number of suppliers for sized sand, a principal raw material that is critical for our pressure pumpingoperations. While the materials are generally available, if we were to have a problem sourcing raw materials or transporting these materialsfrom these suppliers, our ability to provide pressure pumping services could be limited.We may not be successful in identifying, making and integrating our acquisitions.A component of our growth strategy is to make geographic-focused acquisitions that will strengthen our presence in selected regionalmarkets. Pursuit of this strategy may be restricted by the deterioration of credit markets, which may significantly limit the availability offunds for such acquisitions. In addition to restricted funding availability, the success of this strategy will depend on our ability toidentify suitable acquisition candidates and to negotiate acceptable financial and other terms. There is no assurance that we will be able todo so. The success of an acquisition depends on our ability to perform adequate due diligence before the acquisition and on our ability tointegrate the acquisition after it is completed. While we commit significant resources to ensure that we conduct comprehensive duediligence, there can be no assurance that all potential risks and liabilities will be identified in connection with an acquisition. Similarly,while we expect to commit14Table of Contentssubstantial resources, including management time and effort, to integrating acquired businesses into ours, there is no assurance that wewill be successful integrating these businesses. In particular, it is important that we be able to retain both key personnel of the acquiredbusiness and its customer base. A loss of either key personnel or customers could negatively impact the future operating results of theacquired business.The loss of a significant customer could cause our revenue to decline.For the year ended December 31, 2009, one customer of our Well Servicing segment comprised approximately 11% of our totalconsolidated revenues. The work that we perform for this customer is done under contracts that expire in the near term and are subject torenewal through a bidding process. We can provide no assurance that we will be able to secure renewals of these contracts, and if we areunable to do so, the loss of this customer could have a material negative impact on our revenues and profitability.Compliance with climate change legislation or initiatives could negatively impact our business.The U.S. Congress is considering legislation to mandate reductions of greenhouse gas emissions and certain states have alreadyimplemented, or are in the process of implementing, similar legislation. Additionally, the U.S. Supreme Court has held in its decisionsthat carbon dioxide can be regulated as an “air pollutant” under the CAA, which could result in future regulations even if theU.S. Congress does not adopt new legislation regarding emissions. At this time, it is not possible to predict how legislation or new federalor state government mandates regarding the emission of greenhouse gases could impact our business; however, any such future laws orregulations could require us or our customers to devote potentially material amounts of capital or other resources in order to comply withsuch regulations. These expenditures could have a material adverse impact on our financial condition, results of operations, or cashflows.DEBT-RELATED RISK FACTORSWe may not be able to generate sufficient cash flow to meet our debt service obligations.Our ability to make payments on our indebtedness, and to fund planned capital expenditures, will depend on our ability to generatecash in the future. This, to a certain extent, is subject to conditions in the oil and gas industry, general economic and financial conditions,competition in the markets where we operate, the impact of legislative and regulatory actions on how we conduct our business and otherfactors, all of which are beyond our control. This risk would be exacerbated by any economic downturn or instability in the U.S. andglobal credit markets.We cannot assure you that our business will generate sufficient cash flow from operations to service our outstanding indebtedness,or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other capitalneeds. If our business does not generate sufficient cash flow from operations to service our outstanding indebtedness, we may have toundertake alternative financing plans, such as: • refinancing or restructuring our debt; • selling assets; • reducing or delaying acquisitions or capital investments, such as remanufacturing our rigs and related equipment; or • seeking to raise additional capital.We cannot assure you that we would be able to implement alternative financing plans, if necessary, on commercially reasonableterms or at all, or that implementing any such alternative financing plans would allow us to meet our debt obligations. Our inability togenerate sufficient cash flow to satisfy our debt obligations, or to obtain alternative financings, could materially and adversely affect ourbusiness, financial condition, results of operations and future prospects for growth.15Table of ContentsIn addition, a downgrade in our credit rating could become more likely if poor market conditions persist or worsen. Although such acredit downgrade would not have an effect on our currently outstanding senior debt under our indenture or senior secured credit facility,such a downgrade would make it more difficult for us to raise additional debt financing in the future.The amount of our debt and the covenants in the agreements governing our debt could negatively impact our financialcondition, results of operations and business prospects.Our level of indebtedness, and the covenants contained in the agreements governing our debt, could have important consequences forour operations, including: • making it more difficult for us to satisfy our obligations under our indebtedness and increasing the risk that we may default onour debt obligations; • requiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, therebyreducing the availability of cash flow for working capital, capital expenditures and other general business activities; • limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and generalcorporate and other activities; • limiting management’s flexibility in operating our business; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • diminishing our ability to withstand successfully a downturn in our business or the economy generally; • placing us at a competitive disadvantage against less leveraged competitors; and • making us vulnerable to increases in interest rates, because certain debt will vary with prevailing interest rates.We may be required to repay all or a portion of our debt on an accelerated basis in certain circumstances. If we fail to comply withthe covenants and other restrictions in the agreements governing our debt, it could lead to an event of default and the consequentacceleration of our obligation to repay outstanding debt. Our ability to comply with debt covenants and other restrictions may be affectedby events beyond our control, including general economic and financial conditions.In particular, under the terms of our indebtedness, we must comply with certain financial ratios and satisfy certain financialcondition tests, several of which become more restrictive over time and could require us to take action to reduce our debt or take someother action in order to comply with them. Our ability to satisfy required financial ratios and tests can be affected by events beyond ourcontrol, including prevailing economic, financial and industry conditions, and we cannot assure you that we will continue to meet thoseratios and tests in the future. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness. If wedefault, our credit facility lenders will no longer be obligated to extend credit to us and they, as well as the trustee for our outstandingnotes, could elect to declare all amounts outstanding under the indenture or senior secured credit facility, as applicable, together withaccrued interest, to be immediately due and payable. The results of such actions would have a significant negative impact on our resultsof operations, financial condition and cash flows.Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increasesignificantly.Borrowings under our senior secured credit facility bear interest at variable rates, exposing us to interest rate risk. If interest ratesincrease, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained thesame, and our net income and cash available for servicing our indebtedness would decrease.16Table of ContentsTAKEOVER PROTECTION-RELATED RISKSOur bylaws contain provisions that may prevent or delay a change in control.Our Amended and Restated Bylaws contain certain provisions designed to enhance the ability of the board of directors to respond tounsolicited attempts to acquire control of the Company. These provisions: • establish a classified board of directors, providing for three-year staggered terms of office for all members of our board ofdirectors; • set limitations on the removal of directors; • provide our board of directors the ability to set the number of directors and to fill vacancies on the board of directors occurringbetween stockholder meetings; and • set limitations on who may call a special meeting of stockholders.These provisions may have the effect of entrenching management and may deprive investors of the opportunity to sell their shares topotential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of ourcommon stock.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESWe lease office space in both Houston, Texas and Midland, Texas (our principal executive office is in Houston, Texas). We own orlease numerous rig yards, storage yards, truck yards and sales and administrative offices throughout the geographic regions in which weoperate. Also, in connection with our fluid management services, we operate a number of SWD facilities, and brine and freshwaterstations. Our leased properties are subject to various lease terms and expirations.We believe all properties that we currently occupy are suitable for their intended uses. We believe that we have sufficient facilities toconduct our operations. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of ourproperties, as our business requires.The following table shows our active owned and leased properties, as well as active SWD facilities, categorized by business segmentand geographic region: Office, Repair & SWDs, and Brine and Operational Field Service and Other Freshwater Stations Services Facilities Marketplace (1) (2) (3) United States Owned 15 37 90 Leased 30 28 56 International Owned 0 0 3 Leased 22 0 5 TOTAL 67 65 154 (1)Includes ten apartments leased in the United States and twelve apartments leased in Argentina for Key employees to use foroperational support and business purposes only. Also includes three properties in Russia leased by Geostream and its subsidiaries.(2)Includes SWD facilities as “leased” if we own the well bore for the SWD but lease the land. In other cases, we lease both the well boreand the land. Lease terms vary among different sites, but with respect to some of the SWD facilities for which we lease the land andown the well bore, the land owner has an option under the land lease to retain the well bore at the termination of the lease.(3)Includes two properties in Russia owned by Geostream and its subsidiaries.17Table of ContentsITEM 3. LEGAL PROCEEDINGSOn September 3, 2006, our former controller and former assistant controller filed suit against us in Harris County, Texas, allegingconstructive termination and breach of contract. We reached an agreement to resolve the matter through arbitration that included anobligation to pay a minimum amount to the claimants regardless of the outcome. In the fourth quarter of 2009, the matter went to trial andthe arbitrator found in favor of Key.In addition to various other suits and claims that have arisen in the ordinary course of business, we continue to be involved inlitigation with one of our former executive officers. We do not believe that the disposition of any of these items, including litigation withformer management, will result in a material adverse effect on our consolidated financial position, results of operations or cash flows. Foradditional information on legal proceedings, see “Note 14. Commitments and Contingencies” in “Item 8. Financial Statements andSupplementary Data.”ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone.PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESMarket and Share PricesOur common stock is traded on the NYSE under the symbol “KEG.” As of February 17, 2010, there were 812 registered holders of125,430,259 issued and outstanding shares of common stock. This number of registered holders does not include holders that haveshares of common stock held for them in “street name,” meaning that the shares are held for their accounts by a broker or other nominee.In these instances, the brokers or other nominees are included in the number of registered holders, but the underlying holders of thecommon stock that have shares held in “street name” are not. The following table sets forth the reported high and low closing price of ourcommon stock for the periods indicated: High Low Year Ended December 31, 2009 1st Quarter $5.47 $2.12 2nd Quarter 7.01 2.79 3rd Quarter 9.58 4.82 4th Quarter 9.50 7.00 High Low Year Ended December 31, 2008 1st Quarter $14.47 $11.23 2nd Quarter 19.75 13.36 3rd Quarter 18.94 11.33 4th Quarter 11.14 3.58 The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with theSEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or theSecurities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing.The following performance graph compares the performance of our common stock to the PHLX Oil Service Sector, the Russell 1000Index, the Russell 2000 Index and to a peer group established by management. During 2008, we moved from the Russell 2000 Index to theRussell 1000 Index and, during18Table of Contents2009, we moved back from the Russell 1000 Index to the Russell 2000 Index. For comparative purposes, both the Russell 2000 and theRussell 1000 Indices are reflected in the following performance graph. The peer group is comprised of five other companies with a similarmix of operations and includes Nabors Industries Ltd., Weatherford International Ltd., Basic Energy Services, Inc., Complete ProductionServices, Inc. and RPC, Inc. The graph below compares the cumulative five-year total return to holders of our common stock with thecumulative total returns of the PHLX Oil Service Sector, the listed Russell Indices and our peer group. The graph assumes that the valueof the investment in our common stock and each index (including reinvestment of dividends) was $100 at December 31, 2004 and tracksthe return on the investment through December 31, 2009.COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Key Energy Services, Inc., The PHLX Oil Service Sector, The Russell 1000 Index, The Russell 2000 Index, and the Peer Group*$100 invested on December 31, 2004 in stock or index, including reinvestment of dividends.Dividend PolicyThere were no dividends declared or paid on our common stock for the years ended December 31, 2009, 2008 and 2007. Under theterms of our current credit facility, we must meet certain financial covenants before we may pay dividends. We do not currently intend topay dividends.Stock RepurchasesOn October 26, 2007, our board of directors authorized a share repurchase program, in which we could spend up to $300.0 millionto repurchase shares of our common stock on the open market. The program expired March 31, 2009. We did not make any purchasesunder this program during 2009.19Table of ContentsDuring the fourth quarter of 2009, we repurchased an aggregate 26,819 shares of our common stock. The repurchases were tosatisfy tax withholding obligations that arose upon vesting of restricted stock. Set forth below is a summary of the share repurchases:Issuer Purchases of Equity Securities Total Number of Shares Purchased as Part of Total Number Weighted Publicly Announced of Shares Average Price Plans or Period Purchased Paid Per Share Programs October 1, 2009 to October 31, 2009 3,528 $8.34(1) — November 1, 2009 to November 30, 2009 — — — December 1, 2009 to December 31, 2009 23,291 $9.03(2) — (1)The price paid per share on the vesting date with respect to the tax withholding repurchases was determined using the closing priceson October 2, 2009 and October 30, 2009, respectively, as quoted on the NYSE.(2)The price paid per share on the vesting date with respect to the tax withholding repurchases was determined using the closing priceson December 4, 2009 and December 22, 2009, respectively, as quoted on the NYSE.Equity Compensation Plan InformationThe following table sets forth information as of December 31, 2009 with respect to equity compensation plans (including individualcompensation arrangements) under which our common stock is authorized for issuance: Number of Securities Weighted Average Number of Securities Remaining to be Issued Upon Exercise Price of Available for Future Issuance Exercise of Outstanding Under Equity Compensation Outstanding Options, Options, Warrants Plans (Excluding Securities Warrants And Rights And Rights Reflected in Column (a)) Plan Category (a) (b) (c) (In thousands) (In thousands) Equity compensation plans approved bystockholders(1) 4,215 $13.19 4,082 Equity compensation plans not approvedby stockholders(2) 120 $8.07 — Total 4,335 4,082 (1)Represents options and other stock-based awards granted under the Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan(the “2009 Incentive Plan”), the Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan (the “2007 Incentive Plan”), and theKey Energy Group, Inc. 1997 Incentive Plan (the “1997 Incentive Plan”). The 1997 Incentive Plan expired in November 2007.(2)Represents non-statutory stock options granted outside the 1997 Incentive Plan, the 2007 Incentive Plan, and the 2009 Incentive Plan.The options have a ten-year term and other terms and conditions as those options granted under the 1997 Incentive Plan. Theseoptions were granted during 2000 and 2001.20Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe following historical selected financial data as of and for the years ended December 31, 2005 through December 31, 2009 hasbeen derived from our audited financial statements. The historical selected financial data should be read in conjunction with “Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financialstatements and related notes thereto included in “Item 8. Financial Statements and Supplementary Data.”RESULTS OF OPERATIONS DATA Year Ended December 31, 2009 2008 2007 2006 2005 (In thousands, except per share amounts) Revenues $1,078,665 $1,972,088 $1,662,012 $1,546,177 $1,190,444 Direct operating expenses 779,457 1,250,327 985,614 920,602 780,243 Depreciation and amortization expense 169,562 170,774 129,623 126,011 111,888 General and administrative expenses 178,696 257,707 230,396 195,527 151,303 Asset retirements and impairments 159,802 75,137 — — — Interest expense, net of amounts capitalized 39,069 41,247 36,207 38,927 50,299 Other, net (120) 2,840 4,232 (9,370) 12,313 (Loss) income from continuing operations beforeincome taxes and noncontrolling interest (247,801) 174,056 275,940 274,480 84,398 Income tax benefit (expense) 91,125 (90,243) (106,768) (103,447) (35,320)(Loss) income from continuing operations (156,676) 83,813 169,172 171,033 49,078 Loss from discontinued operations, net of tax — — — — (3,361)Net (loss) income (156,676) 83,813 169,172 171,033 45,717 Noncontrolling interest (555) (245) (117) — — (Loss) income attributable to common stockholders $(156,121) $84,058 $169,289 $171,033 $45,717 (Loss) earnings per share from continuing operations: Basic $(1.29) $0.68 $1.29 $1.30 $0.37 Diluted $(1.29) $0.67 $1.27 $1.28 $0.37 Loss per share from discontinued operations: Basic $— $— $— $— $(0.03)Diluted $— $— $— $— $(0.03)(Loss) earnings per share attributable to commonstockholders: Basic $(1.29) $0.68 $1.29 $1.30 $0.34 Diluted $(1.29) $0.67 $1.27 $1.28 $0.34 21Table of ContentsCASH FLOW DATA Year Ended December 31, 2009 2008 2007 2006 2005 (In thousands) Net cash provided by operating activities $184,837 $367,164 $249,919 $258,724 $218,838 Net cash used in investing activities (110,636) (329,074) (302,847) (245,647) (33,218)Net cash (used in) provided by financing activities (127,475) (7,970) 23,240 (18,634) (111,213)Effect of changes in exchange rates on cash (2,023) 4,068 (184) (238) (662)SELECTED BALANCE SHEET DATA Year Ended December 31, 2009 2008 2007 2006 2005 (In thousands) Working capital $194,363 $285,749 $253,068 $265,498 $169,022 Property and equipment, gross 1,728,174 1,858,307 1,595,225 1,279,980 1,089,826 Property and equipment, net 864,608 1,051,683 911,208 694,291 610,341 Total assets 1,664,410 2,016,923 1,859,077 1,541,398 1,329,244 Long-term debt and capital leases, net of currentmaturities 523,949 633,591 511,614 406,080 410,781 Total liabilities 921,270 1,156,191 969,828 810,887 775,187 Equity 743,140 860,732 889,249 730,511 554,057 Cash dividends per common share — — — — — ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunction withour consolidated financial statements and related notes thereto in “Item 8. Financial Statements and Supplementary Data.” Thediscussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertaintyand changes in circumstances including those identified in “Cautionary Note Regarding Forward-Looking Statements” above.Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks anduncertainties. Such forward-looking statements should be read in conjunction with our disclosures under “Item 1A. Risk Factors.”OverviewWe provide a complete range of services to major oil companies, foreign national oil companies and independent oil and natural gasproduction companies, including rig-based services, fluid management services, pressure pumping services, fishing and rental services,and wireline services. We operate in most major oil and natural gas producing regions of the United States as well as internationally inMexico, Argentina and the Russian Federation. We also own a technology development company based in Canada and have equityinterests in oilfield service companies in Canada.During 2009, we operated in two business segments, Well Servicing and Production Services. We also have a Functional Supportsegment associated with managing all of our reportable operating segments. For a full description of our operating segments, see “ServiceOfferings” in “Item 1. Business.”22Table of ContentsBusiness and Growth StrategiesOur strategy is to improve results through acquisitions, controlling spending, maintenance and growth of our market share in coresegments, expansion internationally, investments in technology and new service offerings, enhancement of safety and quality, andmaintenance of a strong balance sheet and good liquidity.Acquisition StrategyOur strategy contemplates that from time to time we may acquire businesses or assets that are consistent with our long-term growthstrategy. During 2009, we acquired an additional 24% interest in Geostream and gained 50% ownership and a controlling interest.Geostream is an oilfield services company in the Russian Federation providing drilling services, workover services and sub-surfaceengineering and modeling. As a result of this investment, we expect to expand our international presence, specifically in Russia where thewells are shallow and suited to the services that we perform.Our investment in Geostream was made using cash generated by our operations, and our objective is to use cash for futureacquisitions. We may, from time to time, access our availability under our revolving credit facility to fund future acquisitions. Dependingon future market conditions, however, we may elect to use equity as a financing tool for acquisitions.Controlling SpendingThrough most of 2009, market conditions for oilfield services continued the downward trend that began in the latter part of 2008.This downturn in the market for our services resulted from the disruption in the credit markets that caused many of our customers tobegin to slow down their capital spending, as well as from declines in the prices of oil and natural gas. In response to the downturn, webegan taking steps during the latter part of 2008, which continued through 2009, to decrease our spending levels and control costs. Thesesteps included targeted reductions in our workforce, reductions in pay and benefits, and other reductions in our cost structure. We believethat the actions we took resulted in significant cost savings during the year. We continue to focus on the rationalization of ourinfrastructure, including facility consolidations and continued cost reductions efforts.Maintain and Grow in Core SegmentsFrom 2006 to 2008, we significantly increased our capital expenditures compared to prior years, devoting more capital to organicgrowth. Excluding acquisitions, we have cumulatively spent approximately $560.0 million on capital expenditures since the beginning of2007, including capital expenditures of $128.4 million in 2009. These expenditures include purchases to expand our operations in Mexicoand Russia, drill strings and nitrogen units for our rental operations, and capitalized costs for new information system projects. With theoverall downturn in the economy that began in late 2008 and persisted through 2009, we reduced our capital expenditure program in 2009in order to maintain liquidity and provide flexibility for the use of our capital. However, we continue to evaluate our capital spending inthe current environment and could increase spending for growth opportunities or if we are awarded additional international work orrecognize an opportunity to expand our services in a particular market.International ExpansionWe are evaluating expansion into a number of international markets. One of our objectives is to redeploy underutilized assets intointernational markets. We continue to grow our presence and service capabilities in Mexico and Russia. During 2009, we increased thenumber of working rigs we had positioned in Mexico. We also have deployed other oilfield service equipment to this region to expand ourservice offerings. In Russia, we sold drilling and workover rigs and other equipment to Geostream to enhance our presence. We willconsider strategic international acquisitions and joint ventures in order to establish a presence in a particular market.23Table of ContentsInvesting in TechnologyWe have invested, and will continue to invest, in technologies which will improve our operational and safety performance. Webelieve these investments will continue to differentiate Key as a premium energy service provider and provide opportunities for higherpricing.KeyView® TechnologyThe KeyView® system is our proprietary rig data acquisition, control and information system which began deployment in 2003.The KeyView® system measures selected rig sensor data and rig activity data which provides visibility into the performance and safety ofwell site operations. In 2009, we continued to upgrade the KeyView® system with enhanced data mining, reporting and safety capabilitiesto enhance the operational and safety benefits of these systems. We believe measuring performance is critical to providing a premiumservice to our customer base and differentiates us from our competitors. As of December 31, 2009, we had 299 KeyView® systemsdeployed.Advanced Measurements, Inc. (“AMI”)Our technology initiative was expanded with the acquisition of AMI in 2007. AMI designs and produces oilfield service dataacquisition, control and information systems. AMI’s technology platform and application facilitate the collection of job performance andrelated information and digitally distributes the information to customers. AMI contributed to the development of the KeyView® systemand assists in the advancement of this technology.SmartTongsm ServicesDuring 2009, we introduced “SmartTongsm Rod Connection Services” to the market. The development of this technology was drivenby high sucker rod connection failure rates and the additional associated repair costs incurred by our clients. SmartTongsm systems arecomputer-controlled and fully automated hydraulic sucker rod tong systems that make up a sucker rod connection to the manufacturer’sor American Petroleum Institute (“API”) specifications. We believe that it is the only technology of its kind that provides this level ofprecision. As of December 31, 2009, we had two SmartTongsm systems deployed. We anticipate deploying additional SmartTongsmsystems over the course of 2010.Safety and QualityWe devote significant resources to the training and professional development of our employees, with a special emphasis on safety.We currently own and operate training centers in Texas, California, Oklahoma, New Mexico and Louisiana. In addition, in conjunctionwith local community colleges, we have cooperative training centers in Wyoming, New Mexico and Texas. The training centers are used toenhance our employees’ understanding of operating and safety procedures. We recognize the historically high turnover rate in the industryin which we operate. We are committed to offering competitive compensation, benefits and incentive programs for our employees in orderto ensure we have qualified, safety-conscious personnel who are able to provide quality service to our customers.Maintain Strong Balance Sheet and LiquidityWe believe that our ability to maintain a strong balance sheet and exercise sound capital discipline is critical to position Key tosustain itself through the current market conditions. We also believe that our ability to maintain liquidity and borrowing capacity isimportant in order to enable us to maintain operational flexibility, as well as to take advantage of business opportunities as they arise. Asof December 31, 2009, we had $37.4 million in cash and cash equivalents and $156.9 million of availability under the revolving portionof our senior secured credit agreement (the “Senior Secured Credit Facility”). We do not have any material indebtedness repaymentobligations in 2010. We have no maturities under our 8.375% Senior Notes (the “Senior Notes”) until 2014 and no required repayments ofborrowings on our Senior Secured Credit Facility until 2012. Also, in the fourth quarter of 2009, we made principal payments totaling$14.5 million related to24Table of Contentsour Related Party Notes (as defined below under “Related Party Notes Payable” of “Liquidity and Capital Resources”). We funded ourobligations under the Related Party Notes with cash on hand.PERFORMANCE MEASURESIn determining the overall health of the oilfield service industry, we believe that the Baker Hughes U.S. land drilling rig count is thebest barometer of capital spending and activity levels, since this data is made publicly available on a weekly basis. Historically, ouractivity levels have been highly correlated to capital spending by oil and natural gas producers. When oil and natural gas prices arestrong, capital spending by our customers tends to be high, as indicated by the correlation of the Baker Hughes U.S. land drilling rigcount. Similarly, as oil and natural gas prices fall, notably in 2009, the Baker-Hughes U.S. land drilling rig count declines. WTI Cushing Crude NYMEX Henry Hub Average Baker Hughes Year Oil(1) Natural Gas(1) U.S. Land Drilling Rigs(2) 2002 $26.18 $3.37 717 2003 $31.08 $5.49 924 2004 $41.51 $6.18 1,095 2005 $56.64 $9.02 1,290 2006 $66.05 $6.98 1,559 2007 $72.34 $7.12 1,695 2008 $99.57 $8.90 1,814 2009 $61.95 $4.28 1,046 (1)Represents the average of the monthly average prices for each of the years presented. Source: EIA / Bloomberg(2)Source: www.bakerhughes.com25Table of ContentsInternally, we measure activity levels for our well servicing operations primarily through our rig and trucking hours. Generally, ascapital spending by oil and natural gas producers increases, demand for our services also rises, resulting in increased rig and truckingservices and more hours worked. Conversely, when activity levels decline due to lower spending by oil and natural gas producers, wegenerally provide fewer rig and trucking services, which results in lower hours worked. We publicly release our monthly rig and truckinghours and the following table presents our quarterly rig and trucking hours from 2007 through 2009. Rig Hours Trucking Hours 2009 First Quarter 489,819 499,247 Second Quarter 415,520 416,269 Third Quarter 416,810 398,027 Fourth Quarter 439,552 422,253 Total 2009: 1,761,701 1,735,796 2008 First Quarter 659,462 585,040 Second Quarter 701,286 603,632 Third Quarter 721,285 620,885 Fourth Quarter 634,772 607,004 Total 2008: 2,716,805 2,416,561 2007 First Quarter 625,748 571,777 Second Quarter 611,890 583,074 Third Quarter 597,617 570,356 Fourth Quarter 614,444 583,191 Total 2007: 2,449,699 2,308,398 MARKET CONDITIONS AND OUTLOOKMarket Conditions — Year Ended December 31, 2009During 2009, the overall demand and pricing for the services that we provide declined compared to 2008. The average Baker HughesU.S. land drilling rig count during 2009 was 1,046 rigs, which was a decrease of 42.4% from the 2008 average and 38.3% from the 2007average. The decrease in the average land drilling rig count was driven primarily by sharp declines in oil and natural gas prices; during2009 the West Texas Intermediate — Cushing crude oil price averaged $61.95 per barrel and natural gas at the Henry Hub averaged$4.28 per Mcf, decreases of 37.8% and 51.9%, respectively, from 2008 prices and 14.4% and 39.9%, respectively, from 2007 prices.Due to the decline in commodity prices, our prices, overall activity levels and asset utilization during 2009 decreased as ourcustomers reduced capital spending. For 2009, we had 1.8 million rig hours and 1.7 million trucking hours, which was a decrease of35.2% and 28.2%, respectively, from 2008 activity levels and 28.1% and 24.8%, respectively, from 2007 activity levels. Partiallyoffsetting the decline in rig hours was our expansion into Mexico and Russia during 2009, and the full year effect of acquisitionscompleted during 2008. Also impacting our activity levels was the disruption in the credit markets and general uncertainty in theU.S. and global economy. Reduced credit availability significantly curtailed the capital spending by our customers.As conditions deteriorated for most of 2009, driven by rapidly declining commodity prices in the first half of 2009, tight creditmarkets and overall uncertainty about market conditions, we responded by implementing an aggressive cost control program,implementing pricing changes in selected markets in an effort to maintain asset utilization and cutting our own capital spending plans.Our cost control program26Table of Contentsincluded targeted reductions in headcount, employee wage rates and benefits reductions, and controlled spending in overhead costs.Based on our assessment of conditions in the rig-based oilfield services market, we chose to retire a portion of our U.S. rig fleet andassociated equipment during the third quarter of 2009, which resulted in a pre-tax charge of $65.9 million. Included in this retirementwere approximately 250 of our older, less efficient rigs, leaving a remaining U.S. well service rig fleet of 743 rigs. During the third quarterof 2009, we also determined that market overcapacity, prolonged depression of natural gas prices, lower activity levels from our majorcustomer base related to stimulation work and consecutive quarterly operating losses in our Production Services segment, indicated thatthe carrying amounts of the asset groups under this segment were potentially not recoverable. We performed an assessment of the fairvalue of the asset groups in this segment, and the results of this assessment indicated that the carrying value of our pressure pumpingequipment exceeded its fair value. As a result, we recorded a pre-tax impairment charge of $93.4 million during the third quarter of 2009.We also recorded a pre-tax impairment charge of $0.5 million related to goodwill during the third quarter of 2009 in our ProductionServices segment.Market OutlookThe outlook for 2010 will remain largely dependent on the U.S. and global economies. However, as oil prices have graduallyrecovered to over $70 per barrel for most of the second half of 2009, we believe that the outlook for 2010 will be generally favorablerelative to the lows that we experienced during 2009. Our activity levels for the latter half of the fourth quarter improved over earlierperiods, even when considering the effects of the Thanksgiving and Christmas holidays, which historically have negatively impacted ourfourth quarter activity levels. This, coupled with signs that demand for oil and natural gas is increasing, provides encouragement on thenear term as well as the long term outlook. We believe that if oil prices are sustained at the levels that were seen at the end of the fourthquarter of 2009, our customers will increase capital spending in 2010 compared to 2009. This will be dependent on continued increasesin economic growth during 2010.We believe that we will see higher levels of workover and completion activity for our U.S. well servicing business, in 2010 asindustry activity levels increase. We expect that PEMEX will maintain their level of workover activity and that the rigs we have currentlyoperating in Mexico will be utilized for all of 2010. In Argentina, although we experienced significant labor-related issues during 2009,operating conditions and our activity levels and pricing in this country began to stabilize and improve in late 2009 and into 2010. During2010, we also expect our activity levels in Russia will increase significantly as the equipment that we have sold to the joint venture isdeployed and begins working.For our production services business, we are encouraged by the increased number and size of frac jobs that we saw during the latterhalf of the fourth quarter. Our production services business is highly correlated with drilling activity and as drilling activity hasincreased from the lows of 2009, we have seen signs that the pressure pumping business is beginning to stabilize relative to the sharpdecline it experienced in 2009. We currently believe that the market for our fishing and rental operations and wireline business will alsoimprove during 2010, as activity levels for these businesses have historically been directly correlated with drilling, completion andworkover activity.As we enter 2010, we will also continue to monitor our cost structure and focus on the rationalization of our infrastructure base.During the latter half of 2009, we closed several facilities and consolidated others in order to more efficiently serve our customers andreduce costs. Throughout 2010 we will continue to assess the size and compensation levels of our workforce to ensure that we can takeadvantage of any recovery that may occur during the near term, and we believe that this rationalization process will serve to better positionus to take advantage of those opportunities. However, some portion of the temporary cost cutting measures that we put into place during2009 may be discontinued as activity levels in the market increase, and the need to bring these costs back into our operations is required.Additionally, we are exploring several opportunities to expand our services internationally and feel that our liquidity will be sufficient totake advantage of any attractive acquisition opportunities, should those develop.27Table of ContentsImpact of Inflation on OperationsWe are of the opinion that inflation has not had a significant impact on our business.28Table of ContentsRESULTS OF OPERATIONSConsolidated Results of OperationsThe following table shows our consolidated results of operations for the years ended December 31, 2009, 2008 and 2007: Year Ended December 31, 2009 2008 2007 (In thousands) REVENUES $1,078,665 $1,972,088 $1,662,012 COSTS AND EXPENSES: Direct operating expenses 779,457 1,250,327 985,614 Depreciation and amortization expense 169,562 170,774 129,623 General and administrative expenses 178,696 257,707 230,396 Asset retirements and impairments 159,802 75,137 — Interest expense, net of amounts capitalized 39,069 41,247 36,207 Other, net (120) 2,840 4,232 Total costs and expenses, net (1,326,466) 1,798,032 1,386,072 (Loss) income before taxes and noncontrolling interest (247,801) 174,056 275,940 Income tax benefit (expense) 91,125 (90,243) (106,768)Net (Loss) Income (156,676) 83,813 169,172 Noncontrolling interest (555) (245) (117)(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $(156,121) $84,058 $169,289 Year Ended December 31, 2009 and 2008For the year ended December 31, 2009, our net loss was $156.1 million, compared to net income of $84.1 million for the yearended December 31, 2008. Our loss per diluted share for 2009 was $1.29 per share compared to earnings per diluted share of $0.67 pershare for 2008. Items contributing to the net loss and diluted loss per share during 2009 included the retirement of a portion of ourU.S. rig fleet and associated equipment ($65.9 million pre-tax, or $0.34 per diluted share) and an impairment of the carrying value of ourpressure pumping equipment ($93.4 million pre-tax or $0.49 per diluted share). Also contributing to the net loss was the dramatic andrapid decline in our activity levels and our inability to reduce costs at the same pace as the decline in our revenues.RevenuesOur revenues for the year ended December 31, 2009 decreased $893.4 million, or 45.3% to $1.1 billion from $2.0 billion for theyear ended December 31, 2008. See “Segment Operating Results — Year Ended December 31, 2009 and 2008” below for a moredetailed discussion of the change in our revenues.Direct operating expensesOur direct operating expenses decreased $470.9 million, or 37.7%, to $779.5 million (72.3% of revenues) for the year endedDecember 31, 2009, compared to $1.3 billion (63.4% of revenues) for the year ended December 31, 2008. See “Segment OperatingResults — Year Ended December 31, 2009 and 2008” below for a more detailed discussion of the change in our direct operatingexpenses.29Table of ContentsDepreciation and amortization expenseDepreciation and amortization expense decreased $1.2 million, or 0.7%, to $169.6 million (15.7% of revenue) during the yearended December 31, 2009, compared to $170.8 million (8.7% of revenue) for the year ended December 31, 2008. The decrease in ourdepreciation and amortization expense is primarily attributable to decreases in the carrying value of our fixed assets due to the rigretirement and asset impairment charges recorded in the third quarter of 2009. Partially offsetting this decline in depreciation are increasesdue to accelerated depreciation for assets that we removed from service during the first half of 2009 in response to the downturn in marketconditions, as well as a larger fixed asset base in 2009 due to our capital spending in 2008.General and administrative expensesGeneral and administrative expenses decreased $79.0 million, or 30.7%, to $178.7 million (16.6% of revenues) for the year endedDecember 31, 2009, compared to $257.7 million (13.1% of revenues) for the year ended December 31, 2008. Our general andadministrative expenses declined as a result of cost cutting measures that we put in place beginning in late 2008 and that continued into2009 related to reductions in headcount, employee wage rate and benefits reductions, and controlled spending in overhead costs. Equity-based compensation was also lower during the year ended December 31, 2009 as a result of our having accelerated the vesting period onthe majority of our stock option and Stock Appreciation Right (“SAR”) awards during the fourth quarter of 2008. As a result of theacceleration, no expense was recognized on these awards during the year ended December 31, 2009.Asset retirements and impairmentsDuring the year ended December 31, 2009, we recognized $159.8 million in pre-tax charges associated with asset retirements andimpairments, compared to $75.1 million for the year ended December 31, 2008. For 2009, our pre-tax charges included $65.9 millionrelated to the retirement of certain of our rigs and associated equipment. Additionally, we identified events and changes in circumstanceindicating that the carrying amounts of certain of our asset groups may not be recoverable. Accordingly, we performed a recoverabilityassessment by comparing the estimated future cash flows for these asset groups to the asset groups’ estimated carrying value. Thecompletion of this test indicated that the carrying value of our pressure pumping equipment was not recoverable and resulted in therecording of a $93.4 million pre-tax impairment charge in our Production Services segment. We also determined that the goodwill recordedin 2009 for contingent consideration paid related to a prior year acquisition in the fishing and rental services line of business within ourProduction Services segment was impaired, and as such we recorded a pre-tax impairment charge of $0.5 million during 2009.Upon completion of our annual goodwill impairment test in 2008, there were indicators that the goodwill of our pressure pumpingservices and fishing and rental services lines of business within our Production Services segment might be impaired. We calculated theimplied fair value of these lines of business and determined that the implied fair value was less than the carrying value of the goodwill,meaning that the goodwill was impaired. As a result, during the fourth quarter of 2008, we recorded a pre-tax charge of $69.8 million towrite off the goodwill balances of our pressure pumping services and fishing and rental services lines of business within our ProductionServices segment.During 2008, the fair value of our investment in IROC Energy Services Corp. (“IROC”), based on publicly available stock prices,remained below its book value. In the fourth quarter of 2008, management determined that, based on IROC’s continued depressed stockprice and the overall negative outlook for the general economy and oilfield services sector, the impairment was other than temporary andas a result we recorded a pre-tax charge of $5.4 million in order to write the carrying value of our investment in IROC down to fair value.Interest expense, net of amounts capitalizedInterest expense decreased $2.2 million for the year ended December 31, 2009, compared to the same period in 2008. The decline isprimarily attributable to lower average interest rates on our variable-rate debt30Table of Contentsinstruments, and the repayment of $100.0 million of our revolving credit facility during the second quarter of 2009.Other, netThe following table summarizes the components of other, net for the periods indicated: Year EndedDecember 31, 2009 2008 (In thousands) Loss on early extinguishment of debt $472 $— Loss (gain) on disposal of assets, net 401 (641)Interest income (499) (1,236)Foreign exchange (gain) loss (1,482) 3,547 Equity-method loss (income) 1,052 (166)Other expense, net (64) 1,336 Total $(120) $2,840 In connection with the amendment of our Senior Secured Credit Facility in the fourth quarter of 2009, we recorded a loss on the earlyextinguishment of debt of $0.5 million.Income tax benefit (expense)Our income tax benefit was $91.1 million (36.8% effective rate) on a pre-tax loss of $247.8 million for the year ended December 31,2009, compared to income tax expense of $90.2 million (51.8% effective rate) on pre-tax income of $174.1 million in 2008. Our effectivetax rates differ from the statutory rate of 35% primarily because of state, local and foreign income taxes, and the tax effects of permanentitems attributable to book-tax differences.Year Ended December 31, 2008 and 2007For the year ended December 31, 2008, our net income was $84.1 million, a 50.3% decrease from net income of $169.3 million forthe year ended December 31, 2007. Our earnings per diluted share for the year were $0.67 per share compared to $1.27 per share for thesame period in 2007. Items contributing to the decline in net income and diluted earnings per share during 2008 included an impairment ofour goodwill ($69.8 million pre- tax, or $0.54 per diluted share); a charge associated with the acceleration of the vesting of certain of ourequity awards ($10.9 million pre-tax, or $0.05 per diluted share); an impairment of our investment in IROC ($5.4 million pre-tax, or$0.03 per diluted share); severance charges associated with a reduction in our domestic and international workforce ($2.6 million pre-tax,or $0.01 per diluted share); and the impact of hurricanes and their after-effects along the U.S. Gulf Coast during the third quarter of 2008(estimated to have decreased our pre-tax earnings by $8.4 million, or $0.04 per diluted share). Partially offsetting these items were priceincreases implemented during the second and third quarters of 2008, incremental net income from acquisitions we completed during2008, the full-year effect of acquisitions completed during 2007, and expansion of our wireline operations and operations in Mexico.RevenuesOur revenues for the year ended December 31, 2008 were $2.0 billion, an increase of $310.1 million, or 18.7%, from $1.7 billionfor the year ended December 31, 2007. See “Segment Operating Results — Year Ended December 31, 2008 and 2007” below for amore detailed discussion of the change in our revenues.31Table of ContentsDirect operating expensesOur direct operating expenses increased $264.7 million, or 26.9%, to $1.3 billion (63.4% of revenues) for the year endedDecember 31, 2008 compared to $985.6 million (59.3% of revenues) for the year ended December 31, 2007. See “Segment OperatingResults — Year Ended December 31, 2008 and 2007” below for a more detailed discussion of the change in our direct operatingexpenses.Depreciation and amortization expenseDepreciation and amortization expense increased $41.2 million, or 31.7%, to $170.8 million (8.7% of revenues) for the twelvemonths ended December 31, 2008 compared to $129.6 million (7.8% of revenues) for the same period in 2007. Acquisitions wecompleted during 2008 contributed $6.6 million to the increase and the full-year effect of acquisitions completed during 2007 during 2008contributed $24.1 million. The remaining $10.5 million increase can be attributed to a larger fixed asset base.General and administrative expensesGeneral and administrative expenses were $257.7 million (13.1% of revenues) for the year ended December 31, 2008, whichrepresented an increase of $27.3 million, or 11.9%, over $230.4 million (13.9% of revenues) for the same period in 2007. Our general andadministrative expenses increased as a result of increases in non-equity employee compensations costs due to pay rate increasesthroughout 2008, incremental costs from acquisitions completed during 2008, and the full-year effect of acquisitions completed in 2007.In addition, during the fourth quarter of 2008, we accelerated the vesting period on certain of our outstanding unvested stock option andSAR awards, resulting in a charge to general and administrative expenses. Partially offsetting this increase were declines in professionalfees as a result of our emerging from our delayed financial reporting process and becoming current with our SEC filings and being re-listed on a national stock exchange during 2007.Asset retirements and impairmentsUpon completion of our annual goodwill impairment test in 2008, there were indicators that the goodwill of our Production Servicessegment might be impaired. We calculated the implied fair value of the goodwill for the Production Services segment and determined thatthe implied fair value was less than the carrying value of the goodwill, meaning that the goodwill was impaired. As a result, during thefourth quarter of 2008 we recorded a pre-tax charge of $69.8 million to goodwill for the Production Services segment. Managementbelieved that the goodwill of these segments was impaired because of the economic downturn in the second half of 2008 and deteriorationin the global credit markets and specifically the downturn in the oilfield services sector, which resulted in a decline in our stock price andmarket valuation during this period.During 2008, the fair value of our investment in IROC, based on publicly available stock prices, remained below its book value. Inthe fourth quarter of 2008, management determined that, based on IROC’s continued depressed stock price and the overall negativeoutlook for the general economy and oilfield services sector, the impairment was other than temporary. As a result, we recorded a pre-taxcharge of $5.4 million in order to write the carrying value of our investment in IROC down to fair value.Interest expense, net of amounts capitalizedOur interest expense increased $5.0 million, or 13.9%, to $41.2 million for the twelve months ended December 31, 2008 comparedto $36.2 million for the same period in 2007. Higher overall debt levels led to the increase in interest expense.32Table of ContentsOther, netThe following table summarizes the components of other, net for the periods indicated: Year Ended December 31, 2008 2007 (In thousands) Loss on early extinguishment of debt $— $9,557 (Gain) loss on disposal of assets, net (641) 1,752 Interest income (1,236) (6,630)Foreign exchange (gain) loss 3,547 (458)Equity-method income (166) (391)Other expense, net 1,336 402 Total $2,840 $4,232 In the fourth quarter of 2007 we issued the Senior Notes (defined below). We used the proceeds of the Senior Notes to repay alloutstanding amounts under our previous credit facility, and replaced that facility with our current Senior Secured Credit Facility. Inconnection with these transactions, we wrote off the unamortized debt issuance costs associated with the previous credit facility, resultingin a loss on the early extinguishment of debt of $9.6 million.Income tax expenseOur income tax expense was $90.2 million (51.8% effective rate) for the year ended December 31, 2008, compared to$106.8 million (38.7% effective rate) for the year ended December 31, 2007. The decrease in income tax expense is primarily attributableto lower pre-tax income in 2008. The increase in our effective tax rate was primarily attributable to the portion of the impairment of ourgoodwill that was non-deductible for income tax purposes in 2008. The 2008 effective tax rate excluding the goodwill impairment wouldhave been 38.0%. Other differences in the effective tax rate and the statutory rate of 35.0% result primarily from the effect of state andcertain foreign income taxes and permanent items attributable to book-tax differences.Segment Operating ResultsWe revised our reportable business segments effective in the first quarter of 2009. The new operating segments are Well Servicingand Production Services. Financial results for the years ended December 31, 2008 and 2007 have been recast to reflect the change inreportable segments. We revised our segments to reflect changes in management’s resource allocation and performance assessment inmaking decisions regarding our operations. Our rig services and fluid management services operations are now aggregated within our WellServicing segment. Our pressure pumping services, fishing and rental services and wireline services operations, as well as our technologydevelopment group in Canada, are now aggregated within our Production Services segment. We also have a reportable segment titledFunctional Support that includes expenses associated with managing our operating segments. For a full description of our segments, see“Service Offerings” in “Item 1. Business.”33Table of ContentsYear Ended December 31, 2009 and 2008The following table shows operating results for each of our reportable segments for the twelve month periods ended December 31,2009 and 2008 (in thousands, except for percentages): Production Functional For The Year Ended December 31, 2009 Well Servicing Services Support Revenues $859,747 $218,918 $— Operating expenses 781,504 240,625 105,586 Asset retirements and impairments 65,869 93,933 — Operating income (loss) 12,374 (115,640) (105,586)Operating income (loss), as a percentage of revenue 1.4% —52.8% n/a Production Functional For The Year Ended December 31, 2008 Well Servicing Services Support Revenues $1,470,332 $501,756 $— Operating expenses 1,114,432 407,560 156,816 Asset retirements and impairments — 69,752 5,385 Operating income (loss) 355,900 24,444 (162,201)Operating income (loss), as a percentage of revenue 24.2% 4.9% n/a Well ServicingRevenues for our Well Servicing segment decreased $610.6 million, or 41.5%, to $859.7 million for the year ended December 31,2009, compared to $1.5 billion for the year ended December 31, 2008. The decline in revenues is attributable to lower activity levels andnegative pricing pressure as a result of the general downturn in the markets for our services. The demand for our services declined in2009 as a result of falling prices for oil and natural gas, the downturn in the U.S. and global economies, and tight credit markets, whichcombined to curtail capital spending by our customers. Partially offsetting this decline in activity were the expansion of our operations inMexico and incremental rig hours from our Russian joint venture in 2009. For much of the year ended December 31, 2009, the primaryfocus of activity for our U.S. rig services business shifted towards lower margin repair and maintenance work, and much of this workwas being performed for small and mid-sized independent operators. Our traditional customer base of major and large independentproducers decreased their activity levels during the period, which led to lower activity and pricing for our U.S. rig services business.Excluding charges for asset retirements, operating expenses for our Well Servicing segment were $781.5 million (90.9% of revenues)during the year ended December 31, 2009, which represented a decrease of $332.9 million, or 29.9%, compared to $1.1 billion (75.8%of revenues) in 2008. The decline in operating expenses during the year ended December 31, 2009 was attributable to lower employeecompensation, lower repairs and maintenance expenses, and lower fuel costs. These costs declined due to our lower activity levelsassociated with the lower demand for our services during 2009 compared to 2008. We also implemented cost control measures beginningin the fourth quarter of 2008 in response to the downturn in demand for our services, but the dramatic and rapid decline in our revenuesduring 2009 outpaced our ability to cut costs.Production ServicesRevenues for our Production Services segment decreased $282.8 million, or 56.4%, to $218.9 million for the year endedDecember 31, 2009, compared to $501.8 million for 2008. The overall decline in revenue for this segment is primarily attributable tolower asset utilization resulting from the decline in gas-directed land drilling activity in the continental United States because of thecontinued depression of natural gas prices, overall uncertainty about the economy, and tight credit markets. Pressure on pricing as otherservice providers attempted to maintain market share also impacted our revenues in 2009.34Table of ContentsExcluding charges for asset impairments, operating expenses for our Production Services segment decreased $166.9 million, or41.0%, to $240.6 million (109.9% of revenues) for the year ended December 31, 2009, compared to $407.6 million (81.2% of revenues)in 2008. Operating expenses declined due to reductions in activity, lower fuel prices, decreased expenses for frac sand, and cost controlmeasures we put in place beginning in the fourth quarter of 2008 in response to the downturn in demand for our services. Despite thedecline in operating expenses, the dramatic and rapid decline in our revenues outpaced our ability to cut operating expenses for thissegment during 2009, resulting in operating costs in excess of revenues.Functional SupportExcluding the impairment charge on our investment in IROC during the fourth quarter of 2008, operating expenses for FunctionalSupport declined $51.2 million to $105.6 million (9.8% of revenues) for the year ended December 31, 2009, compared to$156.8 million (8.0% of revenues) for 2008. Operating expenses declined as a result of cost cutting measures that we put in placebeginning in late 2008 and that continued into 2009 related to reductions in headcount, employee wage rates and benefits reductions, andcontrolled spending in overhead costs. Equity-based compensation was also lower during the year ended December 31, 2009 as a result ofour having accelerated the vesting period on the majority of our stock option and SAR awards during the fourth quarter of 2008. As aresult, no expense was recognized on these awards during 2009.Year Ended December 31, 2008 and 2007The following table shows operating results for each of our reportable segments for the twelve month periods ended December 31,2008 and 2007 (in thousands, except for percentages): Production Functional For The Year Ended December 31, 2008 Well Servicing Services Support Revenues $1,470,332 $501,756 $— Operating expenses 1,114,432 407,560 156,816 Asset retirements and impairments — 69,752 5,385 Operating income (loss) 355,900 24,444 (162,201)Operating income (loss), as a percentage of revenue 24.2% 4.9% n/a Production Functional For The Year Ended December 31, 2007 Well Servicing Services Support Revenues $1,240,126 $421,886 $— Operating expenses 879,270 315,919 150,444 Operating income 360,856 105,967 (150,444)Operating income (loss), as a percentage of revenue 29.1% 25.1% n/a Well ServicingRevenues for our Well Servicing segment increased $230.2 million, or 18.6%, to $1.5 billion for the year ended December 31, 2008,compared to $1.2 billion for the year ended December 31, 2007. The increase in revenues was primarily attributable to the Well Servingsegment acquisitions that we completed during 2008, the full year impact of the acquisitions we completed during 2007, the expansion ofour operations for PEMEX in Mexico, and price increases we implemented during the second and third quarters of 2008 across most ofthe markets in which we operate. Partially offsetting these increases in revenues for the Well Servicing segment during 2008 were theeffects of hurricanes Ike and Gustav during the third quarter, which restricted our well servicing operations in Texas, Louisiana, andOklahoma.Operating expenses for our Well Servicing segment were $1.1 billion (75.8% of revenues) during the year ended December 31, 2008,which represented an increase of $235.2 million, or 26.7%, compared to $0.9 million (70.9% of revenues) for 2007. Operating expensesfor our Well Servicing segment increased in 2008 compared to 2007 due to acquisitions we made in 2008 and the full year effect of theacquisitions we35Table of Contentscompleted during 2007, higher per-gallon prices for fuel, higher costs for self-insurance due to increased headcount, higher repair andmaintenance expenses due to higher activity levels in 2008, and the expansion of our operations in Mexico.Production ServicesRevenues for our Production Services segment increased $79.9 million, or 18.9%, to $501.8 million for the year endedDecember 31, 2008, compared to $421.9 million for 2007. The increase in revenues was driven primarily by incremental revenue fromacquisitions we made during 2008, organic growth of our pressure pumping equipment fleet, the expansion of our wireline operations,and price increases that we implemented during the second and third quarters of 2008. Partially offsetting the increase in revenues were theeffects of hurricanes along the U.S. Gulf Coast during the third quarter of 2008.Excluding charges for asset impairments, operating expenses for our Production Services segment increased $91.6 million, or29.0%, to $407.6 million (81.2% of revenues) for the year ended December 31, 2008, compared to $315.9 million (74.9% of revenues)for 2007. The increase in operating expenses for our Production Services segment was driven primarily by incremental operating expensesassociated with the acquisitions we made during 2008, increased costs for frac sand and chemicals used in our pressure pumpingoperations, additional employee compensation associated with the increase in the number of frac crews, and the expansion of our wirelineoperations.Functional SupportExcluding charges for asset impairments, operating expenses for Functional Support increased $6.4 million to $156.8 million, or(8.0% of revenues) for the year ended December 31, 2008, compared to $150.4 million (9.1% of revenues) for 2007. Functional Supportoperating expenses increased in 2008 due to headcount and pay rate increases we made during the first three quarters of 2008, the effectsof acquisitions we made during 2008, and increased equity-based compensation associated with the charge we took during the fourthquarter of 2008 in connection with the acceleration of the vesting period on the majority of our stock option and SAR awards.Liquidity and Capital ResourcesWe require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organicgrowth initiatives, investments and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, availablecash and cash equivalents, and availability under our Senior Secured Credit Facility. In addition, we expect to receive an income taxrefund of approximately $50.0 million in 2010. We intend to use these sources of liquidity to fund our working capital requirements,capital expenditures, strategic investments and acquisitions. As part of our business strategy, we regularly evaluate acquisitionopportunities, including equipment and businesses.We believe that our internally generated cash flows from operations and current reserves of cash and cash equivalents are sufficientto finance the majority of our cash requirements for operations, budgeted capital expenditures and debt service for the next twelve months.As we have historically done, we may, from time to time, access available funds under our Senior Secured Credit Facility to meet ourcash requirements for day-to-day operations and in times of peak needs throughout the year. Our planned capital expenditures, as well asany acquisitions we choose to pursue, could be financed through a combination of cash on hand, cash flow from operations, borrowingsunder our Senior Secured Credit Facility and, in the case of acquisitions, equity.As of December 31, 2009, we had working capital of $204.5 million, excluding the current portion of long-term debt, notes payableto related parties, and capital lease obligations totaling $10.2 million. Working capital at December 31, 2008 was $311.5 million,excluding the current portion of long-term debt, notes payable to related parties, and capital lease obligations totaling $25.7 million. Ourworking capital at December 31, 2009 decreased from 2008 as a result of decreased cash and cash equivalents, due primarily to therepayment of $100.0 million on our revolving credit facility, and decreased accounts receivable due to36Table of Contentslower revenues during the period. Partially offsetting these declines were higher income tax receivables due to our current taxable losses,lower accounts payable and lower accrued expenses due to the decline in our activity levels.As of December 31, 2009, we had $37.4 million of cash and cash equivalents. Of this amount, up to $0.9 million of our accountswere guaranteed by the Federal Deposit Insurance Corporation (“FDIC”), including under the FDIC’s Temporary Liquidity GuaranteeProgram. On January 1, 2010, the lending institution where this amount was held discontinued its participation in the FDIC TemporaryLiquidity Guarantee Program. As of December 31, 2009, approximately $18.6 million of our cash and cash equivalents was held in thebank accounts of our foreign subsidiaries. Of this amount, approximately $10.9 million was held by our Russian subsidiary, which issubject to a noncontrolling interest. Approximately $1.0 million of the cash held by our foreign subsidiaries was held in U.S. bankaccounts and denominated in U.S. Dollars. We believe that the cash held by our wholly-owned foreign subsidiaries could be repatriatedfor general corporate use without material withholdings.As of December 31, 2009, $87.8 million of borrowings and $55.2 million of letters of credit were outstanding under our SeniorSecured Credit Facility. As of December 31, 2009, we had $156.9 million of availability under the facility. Under the terms of the SeniorSecured Credit Facility, committed letters of credit count against our borrowing capacity. All obligations under the Senior Secured CreditFacility are guaranteed by most of our subsidiaries and are secured by most of our assets, including our accounts receivable, inventoryand equipment. The weighted average interest rate on the outstanding borrowings of the Senior Secured Credit Facility was 3.73% atDecember 31, 2009. See further discussion under “Debt Service — Senior Secured Credit Facility.” As of February 17, 2010, we had$55.2 million of letters of credit issued under the letter of credit sub-facility and approximately $533.4 million of total debt, notes payableand capital leases. As of February 17, 2010 we had cash and cash equivalents of $27.2 million and available borrowing capacity of$156.9 million under our Senior Secured Credit facility. As of February 17, 2010, approximately $13.0 million of our cash and cashequivalents was held in the bank accounts of our foreign subsidiaries, with $0.6 million of that amount being held in U.S. bankaccounts and denominated in U.S. Dollars. Except for the amounts held by our Russian subsidiary, we believe that these balances couldbe repatriated for general corporate use without material withholdings.Cash FlowsDuring the year ended December 31, 2009, we generated cash flows from operating activities of $184.8 million, compared to$367.2 million for the year ended December 31, 2008. Operating cash inflows for 2009 primarily relate to the collection of accountsreceivable, partially offset by our overall net loss for the period, as well as by cash paid against accounts payable and other liabilities.Our operating cash flow declined primarily as a result of lower net income for the period, which is attributable to the decrease in ouractivity levels and pricing during 2009.Cash used in investing activities was $110.6 million and $329.1 million for year ended December 31, 2009 and 2008, respectively.Investing cash flows during the year ended December 31, 2009 consisted primarily of capital expenditures and our second investment inGeostream, which were financed through cash on hand and cash generated by our operations. Investing cash flows declined from 2008due to lower capital expenditures and lower net cash paid for acquisitions during the current period.Cash used in financing activities was $127.5 million during the year ended December 31, 2009 and $8.0 million for 2008.Financing cash flows during 2009 consisted primarily of the repayment of $100.0 million on the outstanding principal balance of ourSenior Secured Credit Facility during the second quarter, which was paid through the use of existing cash on hand and cash generated byour operations, and the lump sum repayment of a Related Party Note totaling $12.5 million in the fourth quarter. Financing cash outflowsincreased during the year ended December 31, 2009 as we did not borrow on our Senior Secured Credit Facility, partially offset by lowercash paid to repurchase our common stock as our share repurchase program expired on March 31, 2009.37Table of ContentsThe following table summarizes our cash flows for the year ended December 31, 2009 and 2008: Year Ended December 31, 2009 2008 (In thousands) Net cash provided by operating activities $184,837 $367,164 Cash paid for capital expenditures (128,422) (218,994)Acquisitions, net of cash acquired 12,007 (63,457)Acquisition of Leader fixed assets — (34,468)Investment in Geostream — (19,306)Other investing activities, net 5,779 7,151 Repayments of capital lease obligations (9,847) (11,506)Borrowings on revolving credit facility — 172,813 Payments on revolving credit facility (100,000) (35,000)Repurchases of common stock (488) (139,358)Other financing activities, net (17,140) 5,081 Effect of changes in exchange rates on cash (2,023) 4,068 Net (decrease) increase in cash and cash equivalents $(55,297) $34,188 Debt ServiceDuring the third quarter of 2009, we amended our Senior Secured Credit Facility to reduce total credit commitments under thefacility from $400.0 million to $300.0 million. See “Senior Secured Credit Facility” below for further detail. At December 31, 2009, ourannual debt maturities for our Senior Notes (defined below), borrowings under our Senior Secured Credit Facility, notes payable to relatedparties and other indebtedness are as follows: Principal Payments (In thousands) 2010 $3,044 2011 2,000 2012 89,813 2013 — 2014 425,000 Total principal payments $519,857 Our revolving Senior Secured Credit Facility matures in November 2012. In May 2009, we repaid $100.0 million on the outstandingbalance of the revolving credit facility. In October 2009, we made principal payments totaling $14.5 million, plus accrued interest, relatedto the Related Party Notes. These payments represent a lump sum repayment of one Related Party Note totaling $12.5 million and a$2.0 million annual installment payment on the second Related Party Note. Interest on our Senior Notes is due on June 1 and December 1of each year. Our Senior Notes mature in December 2014. Interest paid on the Senior Notes during 2009 was $35.6 million. Interest on theSenior Notes due in 2010 will be $35.6 million. We expect to fund interest payments from cash on hand and cash generated byoperations.8.375% Senior NotesOn November 29, 2007, we issued $425.0 million in Senior Notes under an indenture (the “Indenture”). The Senior Notes werepriced at 100% of their face value to yield 8.375%. Net proceeds, after deducting initial purchasers’ fees and offering expenses, wereapproximately $416.1 million. The Senior Notes were registered as public debt effective August 22, 2008.38Table of ContentsThe Senior Notes are general unsecured senior obligations of the Company. They rank effectively subordinate to all of our existingand future secured indebtedness. The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by certain of ourexisting and future domestic subsidiaries. The Senior Notes mature on December 1, 2014.On or after December 1, 2011, the Senior Notes will be subject to redemption at any time and from time to time at our option, inwhole or in part, at the redemption prices (expressed as percentages of the principal amount redeemed) below, plus accrued and unpaidinterest to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicatedbelow:Year Percentage 2011 104.19%2012 102.09%2013 100.00%In addition, at any time and from time to time before December 1, 2010, we have the option to redeem up to 35% of the aggregateprincipal amount of the outstanding Senior Notes at a redemption price of 108.375%, plus accrued and unpaid interest to the redemptiondate, with the net cash proceeds of one or more equity offerings, provided that at least 65% of the aggregate principal amount of the SeniorNotes issued under the Indenture remains outstanding immediately after each such redemption. These redemptions must occur within180 days of the date of the closing of the equity offering.In addition, at any time and from time to time prior to December 1, 2011, we may, at our option, redeem all or a portion of theSenior Notes at a redemption price equal to 100% of the principal amount, plus the Applicable Premium (as defined in the Indenture) withrespect to the Senior Notes plus accrued and unpaid interest to the redemption date. If we experience a change of control, subject to certainexceptions, we must give holders of the Senior Notes the opportunity to sell to us their Senior Notes, in whole or in part, at a purchaseprice equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.We are subject to certain negative covenants under the Indenture governing the Senior Notes. The Indenture limits our ability to,among other things: • sell assets; • pay dividends or make other distributions on capital stock or subordinated indebtedness; • make investments; • incur additional indebtedness or issue preferred stock; • create certain liens; • enter into agreements that restrict dividends or other payments from our subsidiaries to us; • consolidate, merge or transfer all or substantially all of our assets; • engage in transactions with affiliates; and • create unrestricted subsidiaries.These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions in connection with thecovenants of our Senior Secured Credit Facility. Substantially all of the covenants will terminate before the Senior Notes mature if one oftwo specified ratings agencies assigns the Senior Notes an investment grade rating in the future and no events of default exist under theIndenture. As of December 31, 2009, the Senior Notes were below investment grade and have never been assigned investment grade. Anycovenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the credit ratingassigned to the Senior Notes later falls below an investment grade rating.39Table of ContentsSenior Secured Credit FacilityWe maintain a Senior Secured Credit Facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank ofAmerica Securities LLC and Wells Fargo Bank, N.A. are the administrative agents. We entered into the Senior Secured Credit Facility onNovember 29, 2007, simultaneously with the offering of the Senior Notes, and entered into an amendment (the “Amendment”) to theSenior Secured Credit Facility on October 27, 2009. As amended, the Senior Secured Credit Facility consists of a revolving creditfacility, letter of credit sub-facility and swing line facility, up to an aggregate principal amount of $300.0 million, all of which will matureno later than November 29, 2012.The Amendment we entered into in the fourth quarter of 2009 reduced the total credit commitments under the facility from$400.0 million to $300.0 million, effected by a pro rata reduction of the commitment of each lender under the facility. We have the abilityto request increases in the total commitments under the facility by up to $100.0 million in the aggregate, with any such increases beingsubject to certain requirements as well as lenders’ approval. Pursuant to the Amendment, we also modified the applicable interest ratesand some of the financial covenants, among other changes.The interest rate per annum applicable to the Senior Secured Credit Facility (as amended) is, at our option, (i) LIBOR plus a marginof 350 to 450 basis points, depending on our consolidated leverage ratio, or, (ii) the base rate (defined as the higher of (x) Bank ofAmerica’s prime rate and (y) the Federal Funds rate plus 0.5%), plus a margin of 250 to 350 basis points, depending on our consolidatedleverage 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 certainfinancial ratios and limit our annual capital expenditures. In addition to covenants that impose restrictions on our ability to repurchaseshares, have assets owned by domestic subsidiaries located outside the United States and other such limitations, the amended SeniorSecured Credit Facility also requires: • that our consolidated funded indebtedness be no greater than 45% of our adjusted total capitalization; • that our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes,depreciation and amortization (as calculated pursuant to the terms of the Senior Secured Credit Facility, “EBITDA”) be no greaterthan (i) 2.50 to 1.00 for the fiscal quarter ended December 31, 2009 through and including the fiscal quarter endingDecember 31, 2010 and, (ii) thereafter, 2.00 to 1.00; • that we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least the followingamounts during each corresponding period:from the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending June 30, 2010 1.75 to 1.00through the fiscal quarter ending September 30, 2010 2.00 to 1.00for the fiscal quarter ending December 31, 2010 2.50 to 1.00thereafter 3.00 to 1.00; • that we limit our capital expenditures (not including any made by foreign subsidiaries that are not wholly-owned) to(i) $135.0 million during fiscal year 2009 and $120.0 million during each subsequent fiscal year if our consolidated leverageratio of total funded debt to trailing four quarters EBITDA is greater than 3.50 to 1.00; or (ii) $250.0 million if our consolidatedleverage ratio of total funded debt to trailing four quarters EBITDA is equal to or less than 3.50 to 1.00, subject to certainadjustments; • that we only make acquisitions that either (i) are completed for equity consideration, without regard to leverage, or (ii) arecompleted for cash consideration, but only (A) if the consolidated leverage ratio of total funded debt to trailing four quartersEBITDA is 2.75 to 1.00 or less, (x) there is an aggregate amount of $25.0 million in unused credit commitments under thefacility and (y) we are in pro forma40Table of Contents compliance with the financial covenants contained in the credit agreement; and (B) if the consolidated leverage ratio of totalfunded debt to trailing four quarters EBITDA is greater than 2.75 to 1.00, in addition to the requirements in subclauses (x) and(y) in clause (A) above, the cash amount paid with respect to acquisitions is limited to $25.0 million per fiscal year (subject topotential increase using amounts then available for capital expenditures and any net cash proceeds we receive after October 27,2009 in connection with the issuance or sale of equity interests or the incurrence or issuance of certain unsecured debt securitiesthat are identified as being used for such purpose); and • that we limit our investment in foreign subsidiaries (including by way of loans made by us and our domestic subsidiaries toforeign subsidiaries and guarantees made by us and our domestic subsidiaries of debt of foreign subsidiaries) to $75.0 millionduring any fiscal year or an aggregate amount after October 27, 2009 equal to (i) the greater of $200.0 million or 25% of ourconsolidated net worth, plus (ii) any net cash proceeds we receive after October 27, 2009, in connection with the issuance or saleof equity interests or the incurrence of certain unsecured debt securities that are identified as being used for such purpose.In addition, the amended Senior Secured Credit Facility contains certain affirmative covenants, including, without limitation,restrictions related to (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfersand other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments; (vi) dividends and otherdistributions to, and redemptions and repurchases from, equity holders; (vii) prepaying, redeeming or repurchasing the Senior Notes orother unsecured debt incurred pursuant to the sixth bullet point listed above; (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 suchamendment or modification would have a material adverse effect, or amending the Senior Notes or any other unsecured debt incurredpursuant to the sixth bullet point listed above if the effect of such amendment is to shorten the maturity of the Senior Notes or such otherunsecured debt; and (xi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions.We may prepay the Senior Secured Credit Facility in whole or in part at any time without premium or penalty, subject to ourobligation to reimburse the lenders for breakage and redeployment costs. In connection with the Amendment, we wrote off a proportionateamount of the unamortized deferred financing costs associated with the capacity reduction of the credit facility. During the year endedDecember 31, 2009, we recognized $0.5 million in pre-tax charges in losses on extinguishment of debt associated with the write-off ofunamortized deferred financing costs and capitalized $2.5 million in costs associated with the amendment of our Senior Secured CreditFacility.Related Party Notes PayableOn October 25, 2007, we entered into two notes payable with related parties (each, a “Related Party Note” and, collectively, the“Related Party Notes”). The first Related Party Note was an unsecured note in the amount of $12.5 million, which was due and paid in alump-sum, together with accrued interest, on October 25, 2009. The second Related Party Note is an unsecured note in the amount of$10.0 million and is payable in annual installments of $2.0 million, plus accrued interest, beginning October 25, 2008 through 2012.Each of the Related Party Notes bore or bears interest at the Federal Funds Rate adjusted annually on the anniversary date of October 25.The interest rate on the remaining outstanding Related Party Note at December 31, 2009 was 0.11%, and the outstanding principalamount was $6.0 million.Capital Lease AgreementsWe lease equipment, such as vehicles, tractors, trailers, frac tanks and forklifts, from financial institutions under master leaseagreements. As of December 31, 2009, there was approximately $14.3 million outstanding under such equipment leases.41Table of ContentsOff-Balance Sheet ArrangementsAt December 31, 2009, we did not, and we currently do not, have any off-balance sheet arrangements that have or are reasonablylikely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.Contractual ObligationsSet forth below is a summary of our contractual obligations as of December 31, 2009. The obligations we pay in future periodsreflect certain assumptions, including variability in interest rates on our variable-rate obligations and the duration of our obligations, andactual payments in future periods may vary. Payments Due by Period Less than 1 Year 1-3 Years 4-5 Years After 5 Years Total (2010) (2011-2013) (2014-2015) (2016+) (In thousands) 8.375% Senior Notes due 2014 $425,000 $— $— $425,000 $— Interest associated with 8.375% Senior Notes due 2014 178,073 35,595 106,883 35,595 — Borrowings under Senior Secured Credit Facility 87,813 — 87,813 — — Interest associated with Senior Secured Credit Facility(1) 9,667 3,276 6,391 — — Commitment and availability fees associated with SeniorSecured Credit Facility 1,821 607 1,214 — — Notes payable — related party, excluding discount 6,000 2,000 4,000 — — Interest associated with notes payable — related party(1) 81 42 39 — — Capital lease obligations, excluding interest and executorycosts 14,313 7,209 7,104 — — Interest and executory costs associated with capital leaseobligations(1) 647 308 339 — — Other long-term indebtedness 1,044 1,044 — — — Interest associated with other long-term indebtedness(1) 10 10 — — — Non-cancelable operating leases 24,533 7,230 11,684 3,982 1,637 Liabilities for uncertain tax positions 3,232 1,654 1,432 146 — Equity based compensation liability awards(2) 2,912 1,585 1,327 — — Earnout payments(3) 25,500 500 25,000 — — Total $780,646 $61,060 $253,226 $464,723 $1,637 (1)Based on interest rates in effect at December 31, 2009.(2)Based on our stock price at December 31, 2009.(3)Assumes performance targets are achieved.We believe that our internally generated cash flows from operations and current reserves of cash and cash equivalents are sufficientto finance the majority of our cash requirements for current and future operations, budgeted capital expenditures and debt service for2010. As we have historically done, we may, from time to time, access available funds under our Senior Secured Credit Facility tosupplement our liquidity to meet cash requirements for day to day operations and times of peak needs throughout the year. Our plannedcapital expenditures as well as any acquisitions we choose to pursue, are expected to be financed through a42Table of Contentscombination of cash on hand, cash flow from operations and borrowings under our Senior Secured Credit Facility.Debt ComplianceOur Senior Secured Credit Facility and Senior Notes contain numerous covenants that govern our ability to make domestic andinternational investments and to repurchase our stock. Even if we experience a more severe downturn in our business, we believe that thecovenants related to our capital spending and our investments in our foreign subsidiaries are within our control. Therefore, we believe wecan avoid a default of these covenants.At December 31, 2009, we were in compliance with all the financial covenants under the Senior Secured Credit Facility, asamended, and our Senior Notes. Based on management’s current projections, we expect to be in compliance with all the covenants underour Senior Secured Credit Facility and Senior Notes for the next twelve months. A breach of any of the covenants, ratios or tests underour debt could result in a default under our indebtedness. See “Item 1A. Risk Factors.”Capital ExpendituresDuring the year ended December 31, 2009, our capital expenditures totaled $128.4 million, mostly related to the expansion of ouroperations in Mexico and Russia, drill strings and nitrogen units for our rental operations, capitalized costs for new information systems,asset acquisitions for our fluids management operations, and maintenance of our existing fleet. Our capital expenditures program isexpected to total approximately $140.0 million during 2010, focusing mainly on the maintenance of our fleet. Our capital expenditureprogram for 2010 is subject to market conditions, including activity levels, commodity prices and industry capacity. Our focus for 2010will be the maximization of our current equipment fleet, but we may choose to increase our capital expenditures in 2010 to increase marketshare or expand our presence into a new market. We currently anticipate funding our 2010 capital expenditures through a combination ofcash on hand, operating cash flow, and borrowings under our Senior Secured Credit Facility. Should our operating cash flows or activitylevels prove to be insufficient to warrant our currently planned capital spending levels, management expects it will adjust our capitalspending plans accordingly. We may also incur capital expenditures for strategic investments and acquisitions.Geostream InvestmentOn September 1, 2009, we acquired an additional 24% interest in Geostream for approximately $16.4 million. Geostream is anoilfield services company in the Russian Federation providing drilling and workover services and sub-surface engineering and modelingin Russia. This was our second investment in Geostream pursuant to an agreement dated August 26, 2008, as amended. This secondinvestment brings our total investment in Geostream to 50%. Upon acquiring the 50% interest, we also obtained majority representationon Geostream’s board of directors and therefore a controlling interest. The results of Geostream have been included in our consolidatedfinancial statements since the acquisition date. As a result of this acquisition, we expect to expand our international presence in Russiawhere the wells are shallow and are suited to the services that we perform.The fair value of the consideration transferred for the 50% interest in Geostream totaled approximately $35.0 million, whichconsisted of cash consideration in the second investment on September 1, 2009 and the fair value of our previous equity interest. Inconjunction with the second investment, Geostream agreed to purchase from us a customized suite of equipment, including two workoverrigs, two drilling rigs, associated complementary support equipment, cementing equipment, and fishing tools for approximately$23.0 million, a portion of which will be financed by us. Concurrent with the second investment, Geostream paid us approximately$16.0 million in cash, representing a down payment on the equipment we will deliver to them. We began delivery of the equipment underthe purchase agreement during the fourth quarter of 2009.Under the Geostream agreement, as amended, for a period not to exceed six years subsequent to October 31, 2008, we have the optionto increase our ownership percentage of Geostream to 100%. However,43Table of Contentsif we have not acquired 100% of Geostream on or before the end of the six-year period, we will be required to arrange an initial publicoffering for those shares.Critical Accounting PoliciesOur Accounting Department is responsible for the development and application of our accounting policies and internal controlprocedures and reports to the Chief Financial Officer.The process and preparation of our financial statements in conformity with generally accepted accounting principles in the UnitedStates (“GAAP”) requires us to make certain estimates, judgments and assumptions, which may affect the reported amounts of ourassets and liabilities, disclosures of contingencies at the balance sheet date, the amounts of revenues and expenses recognized during thereporting period and the presentation of our statement of cash flows. We may record materially different amounts if these estimates,judgments and assumptions change or if actual results differ. However, we analyze our estimates, assumptions and judgments based onour historical experience and various other factors that we believe to be reasonable under the circumstances.We have identified the following critical accounting policies that require a significant amount of estimation and judgment toaccurately present our financial position, results of operations and cash flows: • Estimate of reserves for workers’ compensation, vehicular liability and other self-insurance; • Contingencies; • Income taxes; • Estimates of depreciable lives; • Valuation of indefinite-lived intangible assets; • Valuation of tangible and finite-lived intangible assets; and • Valuation of equity-based compensation.Workers’ Compensation, Vehicular Liability and Other Self-InsuranceOur operations expose our employees to hazards generally associated with the oilfield. Heavy lifting, moving equipment and slipperysurfaces can cause or contribute to accidents involving our employees and third parties who may be present at a site. Environmentalconditions in remote domestic oil and natural gas basins range from extreme cold to extreme heat, from heavy rain to blowing dust. Thoseconditions can also lead to or contribute to accidents. Our business activities involve the use of a significant number of fluid transporttrucks, other oilfield vehicles and supporting rolling stock that move on public and private roads. Vehicle accidents are a significant riskfor us. We also conduct limited contract drilling operations, which present additional hazards inherent in the drilling of wells, such asblowouts, explosions and fires, which could result in loss of hole, damaged equipment and personal injury. All of these hazards andaccidents could result in damage to our property or a third party’s property or injury or death to our employees or third parties. Althoughwe purchase insurance to protect against large losses, much of the risk is retained in the form of large deductibles or self-insuredretentions.As a contractor, we also enter into master service agreements with our customers. These agreements subject us to potentialcontractual liabilities common in the oilfield.The occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to meet itsindemnification or insurance obligations, could result in substantial losses. In addition, there can be no assurance that insurance will beavailable to cover any or all of these risks, or that, if available, it could be obtained without a substantial increase in premiums. It ispossible that, in addition to higher premiums, future insurance coverage may be subject to higher deductibles and coverage restrictions.Based on the risks discussed above, we estimate our liability arising out of potentially insured events, including workers’compensation, employer’s liability, vehicular liability, and general liability, and record44Table of Contentsaccruals in our consolidated financial statements. Reserves related to claims covered by insurance are based on the specific facts andcircumstances of the insured event and our past experience with similar claims. Loss estimates for individual claims are adjusted basedupon actual claim judgments, settlements and reported claims. The actual outcome of these claims could differ significantly fromestimated amounts.We are largely self-insured for physical damage to our equipment and automobiles. Our accruals that we maintain on ourconsolidated balance sheet relate to deductibles and self-insured retentions, which we estimate through the use of historical claims dataand trend analysis. The actual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in thecalculation of these accruals, based upon actual claim settlements and reported claims. Changes in our assumptions and estimates couldpotentially have a negative impact on our earnings.ContingenciesWe are periodically required to record other loss contingencies, which relate to lawsuits, claims, proceedings and tax-related audits inthe normal course of our operations, on our consolidated balance sheet. We record a loss contingency for these matters when it is probablethat a liability has been incurred and the amount of the loss can be reasonably estimated. We periodically review our loss contingencies toensure that we have appropriate liabilities recorded on the balance sheet. We adjust these liabilities based on estimates and judgments madeby management with respect to the likely outcome of these matters, including the effect of any applicable insurance coverage for litigationmatters. Our estimates and judgments could change based on new information, changes in laws or regulations, changes in management’splans or intentions, the outcome of legal proceedings, settlements or other factors. Actual results could vary materially from these reserves.We record liabilities when environmental assessment indicates that site remediation efforts are probable and the costs can bereasonably estimated. We measure environmental liabilities based, in part, on relevant past experience, currently enacted laws andregulations, existing technology, site-specific costs and cost-sharing arrangements. Recognition of any joint and several liability is basedupon our best estimate of our final pro-rata share of such liability or the low amount in a range of estimates. These assumptions involvethe judgments and estimates of management, and any changes in assumptions or new information could lead to increases or decreases inour ultimate liability, with any such changes recognized immediately in earnings.We record legal obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discountwhen we incur the liability. Significant judgment is involved in estimating our future cash flows associated with such obligations, as wellas the ultimate timing of the cash flows. If our estimates on the amount or timing of the cash flows change, the change may have amaterial impact on our results of operations.Income TaxesWe account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporarydifferences. Management determines our current tax liability as well as taxes incurred as a result of current operations, yet deferred untilfuture periods. Current taxes payable represent our liability related to our income tax return for the current year, while net deferred taxexpense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets.Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financial reportingpurposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makescertain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax and accountingpurposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local taxlaws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding thescope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood ofmore than 50%) that some or all of the deferred tax assets will not be realized in45Table of Contentsfuture periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction inwhich this taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our currentfinancial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planningstrategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at theirnet recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlementwith the tax authorities in the domestic and international tax jurisdictions in which we operate.If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could havepotentially material negative impacts on our earnings. See “Note 12. Income Taxes” in “Item 8. Financial Statements andSupplementary Data,” for further discussion of accounting for our income taxes, changes in our valuation allowance, components of ourtax rate reconciliation and realization of loss carryforwards.Estimates of Depreciable LivesWe use the estimated depreciable lives of our long-lived assets, such as rigs, heavy-duty trucks and trailers, to compute depreciationexpense, to estimate future asset retirement obligations and to conduct impairment tests. We base the estimates of our depreciable lives on anumber of factors, such as the environment in which the assets operate, industry factors including forecasted prices and competition,and the assumption that we provide the appropriate amount of capital expenditures while the asset is in operation to maintain economicaloperation of the asset and prevent untimely demise to scrap. The useful lives of our intangible assets are determined by the years overwhich we expect the assets to generate a benefit based on legal, contractual or other expectations.We depreciate our operational assets over their depreciable lives to their salvage value, which is 10% of the acquisition cost. Werecognize a gain or loss upon ultimate disposal of the asset based on the difference between the carrying value of the asset on the disposaldate and any proceeds we receive in connection with the disposal.We periodically analyze our estimates of the depreciable lives of our fixed assets to determine if the depreciable periods and salvagevalue continue to be appropriate. We also analyze useful lives and salvage value when events or conditions occur that could shorten theremaining depreciable life of the asset. We review the depreciable periods and salvage values for reasonableness, given current conditions.As a result, our depreciation expense is based upon estimates of depreciable lives of the fixed assets, the salvage value and economicfactors, all of which require management to make significant judgments and estimates. If we determine that the depreciable lives should bedifferent than originally estimated, depreciation expense may increase or decrease and impairments in the carrying values of our fixedassets may result, which could negatively impact our earnings.Valuation of Indefinite-Lived Intangible AssetsWe periodically review our intangible assets not subject to amortization, including our goodwill, to determine whether an impairmentof those assets may exist. These tests must be made on at least an annual basis, or more often if circumstances indicate that the assetsmay be impaired. These circumstances include, but are not limited to, significant adverse changes in the business climate.The test for impairment of indefinite-lived intangible assets is a two step test. In the first step, a fair value is calculated for each ofour reporting units, and that fair value is compared to the current carrying value of the reporting unit, including the reporting unit’sgoodwill. If the fair value of the reporting unit exceeds its carrying value, there is no potential impairment, and the second step is notperformed. If the carrying value exceeds the fair value of the reporting unit, then the second step is required.The second step of the test for impairment compares the implied fair value of the reporting unit’s goodwill to its current carryingvalue. The implied fair value of the reporting unit’s goodwill is determined in46Table of Contentsthe same manner as the amount of goodwill that would be recognized in a business combination, with the purchase price being equal tothe fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, noimpairment charge is recorded. If the carrying value of the reporting unit’s goodwill is in excess of its implied fair value, an impairmentcharge equal to the excess is recorded.We conduct our annual impairment test for goodwill and other intangible assets not subject to amortization as of December 31 ofeach year. In determining the fair value of our reporting units, we use a weighted-average approach of three commonly used valuationtechniques — a discounted cash flow method, a guideline companies method, and a similar transactions method. We assign a weight tothe results of each of these methods based on the facts and circumstances that are in existence for that testing period. During 2009,because of our international expansion in Russia, acquisitions we made in prior years, and the overall economic downturn that affected allcompanies’ stock prices and market valuation, we assigned more weight to the discounted cash flow method. We also weighted thediscounted cash flow method more heavily in 2008 for similar reasons. In prior years, we had assigned more weight to the guidelinecompanies method.In addition to the estimates made by management regarding the weighting of the various valuation techniques, the creation of thetechniques themselves requires that we make significant estimates and assumptions. The discounted cash flow method, which wasassigned the highest weight by management during the current year, requires us to make assumptions about future cash flows, futuregrowth rates, tax rates in future periods, book-tax differences in the carrying value of our assets in future periods, and discount rates. Theassumptions about future cash flows and growth rates are based on our current budgets for future periods, as well as our strategic plans,the beliefs of management about future activity levels, and analysts’ expectations about our revenues, profitability and cash flows infuture periods. The assumptions about our future tax rates and book-tax differences in the carrying value of our assets in future periodsare based on the assumptions about our future cash flows and growth rates, and management’s knowledge of and beliefs about tax lawand practice in current and future periods. The assumptions about discount rates include an assessment of the specific risk associatedwith each reporting unit being tested, and were developed with the assistance of a third-party valuation consultant, who reviewed ourestimates, assumptions and calculations. The ultimate conclusions of the valuation techniques remain our responsibility.While this test is required on an annual basis, it can also be required more frequently based on changes in external factors or othertriggering events, such as an impairment test of our long-lived assets. We conducted our most recent annual test for impairment of ourgoodwill and other indefinite-lived intangible assets as of December 31, 2009. On that date, our rig services reporting unit had$298.6 million of goodwill, our fluid management services reporting unit had $18.6 million of goodwill, and AMI had $4.1 million ofgoodwill. Our pressure pumping services, fishing and rental services, and wireline services reporting units did not have any goodwill,because either all of the goodwill for those reporting units had been impaired in prior periods or the reporting unit had been created entirelythrough organic growth. The $24.8 million of goodwill associated with our acquisition of Geostream was not included in this annualassessment due to the specific nature of the transaction giving rise to the goodwill and the recent nature of the fair value assessment inconnection with the acquisition. Based on the results of our annual test, the fair value of our reporting units that have goodwillsubstantially exceeded their carrying values. Because the fair value of those reporting units substantially exceeded their carrying values,we determined that no potential for impairment of our goodwill associated with those reporting units existed as of December 31, 2009, andthat step two of the impairment test was not required.As noted above, the determination of the fair value of our reporting units is heavily dependent upon certain estimates andassumptions that we make about our reporting units. While the estimates and assumptions that we made regarding our reporting units forour 2009 annual test indicated that the fair values of the reporting units exceeded their carrying values and we believe that our estimatesand assumptions are reasonable, it is possible that changes in those estimates and assumptions could impact the determination of the fairvalue of our reporting units. Discount rates we use in future periods could change substantially if the47Table of Contentscost of debt or equity were to significantly increase or decrease, or if we chose different comparable companies in determining theappropriate discount rate for our reporting units. Additionally, our future projected cash flows for our reporting units could significantlyimpact the fair value of our reporting units, and if our current projections about our future activity levels, pricing, and cost structure areinaccurate, the fair value of our reporting units could change materially. If the current recovery in the overall economy is temporary innature or if there is a significant and rapid adverse change in our business in the near- or mid-term for any of our reporting units, ourcurrent estimates of the fair value of our reporting units could decrease significantly, leading to possible impairment charges in futureperiods. Based on our current knowledge and beliefs, we do not feel that material adverse changes to our current estimates andassumptions such that our reporting units would fail step one of the impairment test are reasonably possible.As discussed in “Note 7. Goodwill and Other Intangible Assets” in “Item 8. Financial Statements and Supplementary Data,”during the third quarter of 2009, we identified a triggering event that required us to test our goodwill for impairment on an interim basis.As a result of that test, we determined that the goodwill associated with our fishing and rental services reporting unit was impaired, andrecorded a pre-tax charge of $0.5 million to write off the goodwill associated with that reporting unit.Valuation of Tangible and Finite-Lived Intangible AssetsOur fixed assets and finite-lived intangibles are tested for potential impairment when circumstances or events indicate a possibleimpairment may exist. These circumstances or events are referred to as “trigger events” and examples of such trigger events include, butare not limited to, an adverse change in market conditions, a significant decrease in benefits being derived from an acquired business, ora significant disposal of a particular asset or asset class.If a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis. To perform an impairmenttest, we make judgments, estimates and assumptions regarding long-term forecasts or revenues and expenses relating to the assets subjectto review. Market conditions, energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impactour operations and have a significant effect on the estimates we use to determine whether our assets are impaired. If the results of theanalysis indicate that the carrying value of the assets being tested for impairment are not recoverable, then we record an impairment chargeto write the carrying value of the assets down to their fair value. Using different judgments, assumptions or estimates, we couldpotentially arrive at a materially different fair value for the assets being tested for impairment, which may result in an impairment charge.As discussed in “Note 6. Property, Plant and Equipment” in “Item 8. Financial Statements and Supplementary Data,” duringthe third quarter of 2009 we retired a portion of our U.S. rig fleet and associated support equipment. We identified this as a trigger eventthat required us to test our well servicing fixed assets for impairment. Based on our analysis, the expected undiscounted cash flows forthese assets exceeded their carrying value, and no indication of impairment existed, and we do not feel that material adverse changes in ourestimates or assumptions such that our well servicing assets’ carrying value exceeded their fair value is reasonably possible.However, during the third quarter of 2009, due to continuing market overcapacity, continued and prolonged depression of naturalgas prices, decreased activity levels from our major customer base related to stimulation work and consecutive quarterly operating losses,we determined that events and changes in circumstances occurred indicating that the carrying value of the assets in our ProductionServices segment may not have been recoverable. We performed an assessment of the fair value of these asset groups using an expectedpresent value technique based on undiscounted cash flows. We used discounted cash flow models involving assumptions based on theutilization of the equipment, revenues, expenses, capital expenditures and working capital requirements. Our discounted cash flowprojections were based on financial forecasts and were discounted using a discount rate of 14%. Based on this assessment, the fair valueof our pressure pumping assets was less than their carrying value, and this resulted in the recording of a pre-tax impairment charge of$93.4 million during the third quarter of 2009.48Table of ContentsThe impairment tests for our well servicing and pressure pumping assets also triggered an interim test of our goodwill and indefinite-lived intangible assets for potential impairment during the third quarter of 2009. We did not identify any trigger events causing us to testour tangible and finite-lived intangible assets for impairment during the first, second, or fourth quarters of 2009.Valuation of Equity-Based CompensationWe have granted stock options, stock-settled stock appreciation rights (“SARs”), restricted stock (“RSAs”), and phantom shares(“Phantom Shares”) to our employees and non-employee directors. The option and SAR awards we grant are fair valued using a Black-Scholes option model on the grant date and are amortized to compensation expense over the vesting period of the option award, net ofestimated and actual forfeitures. Compensation related to RSAs is based on the fair value of the award on the grant date and is recognizedbased on the vesting requirements that have been satisfied during the period. Phantom Shares are accounted for at fair value, and changesin the fair value of these awards are recorded as compensation expense during the period. See “Note 18. Share-Based Compensation” in“Item 8. Financial Statements and Supplementary Data” for further discussion of the various award types and our accounting for ourequity-based compensation.In utilizing the Black-Scholes option pricing model to determine fair values of awards, certain assumptions are made which arebased on subjective expectations, and are subject to change. A change in one or more of these assumptions would impact the expenseassociated with future grants. These key assumptions include the volatility in the price of our common stock, the risk-free interest rateand the expected life of awards.We used the following weighted average assumptions in the Black-Scholes option pricing model for determining the fair value of ourstock option grants during the years ended December 31, 2009, 2008 and 2007: Year Ended December 31, 2009 2008 2007 Risk-free interest rate 2.21% 2.86% 4.41%Expected life of options, years 6 6 6 Expected volatility of the Company’s stock price 53.70% 36.86% 39.49%Expected dividends none none none We calculate the expected volatility for our stock option grants by measuring the volatility of our historical stock price for a periodequal to the expected life of the option and ending at the time the option was granted. We determine the risk-free interest rate based upon theinterest rate on a U.S. Treasury Bill with a term equal to the expected life of the option at the time the option was granted. In estimating theexpected lives of our stock options and SARs, we have elected to use the simplified method. During the time that we did not have currentfinancial statements filed with the SEC, our options were legally restricted from being exercised; therefore we believe that we do not haveaccess to sufficient historical exercise data to appropriately provide a reasonable basis upon which to estimate the expected term of stockoption awards. The expected life is less than the term of the option as option holders, in our experience, exercise or forfeit the optionsduring the term of the option.We are not required to recalculate the fair value of our stock option grants estimated using the Black-Scholes option pricing modelafter the initial calculation unless the original option grant terms are modified. However, a 10 percent increase in our expected volatilityand risk-free rate at the grant date would have increased our compensation expense for the year ended December 31, 2009 by less than$0.1 million.New Accounting Standards Adopted in this ReportSFAS 141(R). In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised 2007),Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial49Table of Contentsstatements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwillacquired. Significant changes from previous practice resulting from SFAS 141(R) include the expansion of the definitions of a “business”and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% ofall assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will berecognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings untilsettlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of theacquisition. SFAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of thebusiness combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the provisions ofSFAS 141(R) on January 1, 2009, but did not consummate any business combinations during the three months ended March 31, 2009.SFAS 141(R) may have an impact on our consolidated financial statements in the future. The nature and magnitude of the specific impactwill depend upon the nature, terms, and size of any acquisitions consummated after the effective date.SFAS 160. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated FinancialStatements — An amendment of ARB No. 51 (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, ConsolidatedFinancial Statements , to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minorityinterest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidatedfinancial statements. Among other requirements, SFAS 160 requires the consolidated statement of income to be reported at amounts thatinclude the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of theconsolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Weadopted the provisions of SFAS 160 on January 1, 2009. The adoption of this standard did not have a material impact on our financialposition, results of operations, or cash flows.SFAS 165. In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosing of events that occur after the balance sheet date but before the financial statements are issuedor are available to be issued. SFAS 165 does not significantly change the types of subsequent events that an entity reports, but it requiresthe disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective forinterim or annual reporting requirements ending after June 15, 2009. The adoption of this standard did not have a material impact on ourfinancial position, results of operations or cash flows.ASU 2009-01. In June 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01, The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB StatementNo. 162 (“ASU 2009-01”). ASU 2009-01 established the Accounting Standards Codification (the “Codification”) as the source ofauthoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification supersedes all prior non-SECaccounting and reporting standards. Following ASU 2009-01, the FASB will not issue new accounting standards in the form of FASBStatements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU 2009-01 also modifies the existing hierarchy of GAAPto include only two levels — authoritative and non-authoritative. ASU 2009-01 is effective for financial statements issued for interim andannual periods ending after September 15, 2009, and early adoption was not permitted. The adoption of this standard did not have animpact on our financial position, results of operations or cash flows.ASU 2009-05. In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 addresses concerns in situations where there may be a lack ofobservable market information to measure the fair value of a liability, and provides clarification in circumstances where a quoted marketprice in an active market for an identical liability is not available. In these cases, reporting entities should measure fair value using avaluation technique that uses the quoted price of the identical liability when that liability is traded as an asset,50Table of Contentsquoted prices for similar liabilities, or another valuation technique, such as an income or market approach. ASU 2009-05 also clarifiesthat when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputsrelating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting periodsubsequent to August 2009 and the adoption of this update did not have a material impact on our financial position, results of operations,or cash flows.Accounting Standards Not Yet Adopted in this ReportSFAS 166. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment ofFASB Statement No. 140 (“SFAS 166”). SFAS 166 amends the application and disclosure requirements of SFAS No. 140, Accountingfor Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of FASB Statement 125(“SFAS 140”), removes the concept of a “qualifying special purpose entity” from SFAS 140 and removes the exception from applyingFASB Interpretation (“FIN”) No. 46(R), Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51 (“FIN 46(R)”)to qualifying special purpose entities. SFAS 166 is effective for the first annual reporting period that begins after November 15, 2009,and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position,results of operations or cash flows.SFAS 167. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”).SFAS 167 amends the scope of FIN 46(R) to include entities previously considered qualifying special-purpose entities by FIN 46(R), asthe concept of a qualifying special-purpose entity was eliminated in SFAS 166. This standard shifts the guidance for determining whichenterprise in a Variable Interest Entity consolidates that entity from a quantitative consideration of who is the primary beneficiary to aqualitative focus of which entity has the power to direct activities and the obligation to absorb losses. This standard is to be effective forthe first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standardis not anticipated to have a material impact on our financial position, results of operations or cash flows.ASU 2009-13. In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-DeliverableRevenue Arrangements, a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 addresses theaccounting 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 vendor-specific objective evidence (“VSOE”) or third-party evidence of a selling price to separatedeliverables in a multiple-deliverable selling arrangement. As a result of ASU 2009-13, multiple-deliverable arrangements will be separatedin more circumstances than under current guidance. ASU 2009-13 establishes a selling price hierarchy for determining the selling price ofa deliverable. The selling price will be based on VSOE if it is available, on third-party evidence if VSOE is not available, or on anestimated selling price if neither VSOE nor third-party evidence is available. ASU 2009-13 also requires that an entity determine its bestestimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alonebasis, and increases the disclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU 2009-13 must beprospectively 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 adopt the provisions of ASU 2009-13 on January 1, 2011 and do not believe that the adoption of this standard will have amaterial impact on our financial position, results of operations, or cash flows.ASU 2009-14. In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements ThatInclude Software Elements — a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”). ASU 2009-14 was issued toaddress concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more thanincidental” to the product as a whole. Existing guidance in such circumstances requires entities to use VSOE of a selling price to separatedeliverables in a multiple-deliverable arrangement. Reporting entities raised concerns that the current51Table of Contentsaccounting model does not appropriately reflect the economics of the underlying transactions and that more software-enabled productsnow fall or will fall within the scope of the current guidance than originally intended. ASU 2009-14 changes the current accounting modelfor revenue arrangements that include both tangible products and software elements to exclude those where the software components areessential to the tangible products’ core functionality. In addition, ASU 2009-14 also requires that hardware components of a tangibleproduct containing software components always be excluded from the software revenue recognition guidance, and provides guidance onhow to determine which software, if any, relating to tangible products is considered essential to the tangible products’ functionality andshould be excluded from the scope of software revenue recognition guidance. ASU 2009-14 also provides guidance on how to allocatearrangement consideration to deliverables in an arrangement that contains tangible products and software that is not essential to theproduct’s functionality. ASU 2009-14 was issued concurrently with ASU 2009-13 and also requires entities to provide the disclosuresrequired by ASU 2009-13 that are included within the scope of ASU 2009-14. ASU 2009-14 will be effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted.Entities may also elect, but are not required, to adopt ASU 2009-14 retrospectively to prior periods, and must adopt ASU 2009-14 in thesame period and using the same transition methods that it uses to adopt ASU 2009-13. We expect to adopt the provisions of ASU 2009-14on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results ofoperations, or cash flows.ASU 2009-17. In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) — Improvements to FinancialReporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 replaces the quantitative-based risk and rewardscalculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approachfocused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantlyimpact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from theentity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has acontrolling financial interest in a variable interest entity. ASU 2009-17 also requires additional disclosures about a reporting entity’sinvolvement in variable interest entities. The provisions of ASU 2009-17 are to be applied beginning in the first fiscal period beginningafter November 15, 2009. We will adopt ASU 2009-17 on January 1, 2010 and do not anticipate that the adoption of this standard willhave 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 forDecreases in Ownership of a Subsidiary — A Scope Clarification. ASU 2010-02 clarifies that the scope of previous guidance in theaccounting and disclosure requirements related to decreases in ownership of a subsidiary apply to (i) a subsidiary or a group of assetsthat is a business or nonprofit entity; (ii) a subsidiary that is a business or nonprofit entity that is transferred to an equity methodinvestee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrollinginterest in an entity. ASU 2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of agroup of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of anycontinuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in thedeconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become arelated party after the transaction. The provisions of ASU 2010-02 will be effective for us for the first reporting period beginning afterDecember 13, 2009. We will adopt the provisions of ASU 2010-02 on January 1, 2010 and do not anticipate that the adoption of thisstandard will 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 fairvalue measurements and also requires registrants to provide certain additional disclosures about those measurements. The new disclosurerequirements include (i) the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during theperiod, along with the reason for those transfers, and (ii) separate presentation of information about52Table of Contentspurchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs. ASU 2010-06 is effectivefor interim and annual reporting periods beginning after December 15, 2009. We will adopt the provisions of ASU 2010-06 onJanuary 1, 2010 and do not expect that the adoption of this standard will have a material impact on our financial position, results ofoperations, or cash flows.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates,foreign currency exchange rates and equity prices that could impact our financial position, results of operations and cash flows. Wemanage our exposure to these risks through regular operating and financing activities, and may, on a limited basis, use derivativefinancial instruments to manage this risk. To the extent that we use such derivative financial instruments, we will use them only as riskmanagement tools and not for speculative investment purposes.Interest Rate RiskAs of December 31, 2009, we had outstanding $425.0 million of 8.375% Senior Notes due 2014. These notes are fixed-rateobligations, and as such do not subject us to risks associated with changes in interest rates. Borrowings under our Senior Secured CreditFacility, our capital lease obligations, and our Related Party Notes all bear interest at variable interest rates, and therefore expose us tointerest rate risk. As of December 31, 2009, the weighted average interest rate on our outstanding variable-rate debt obligations was 3.24%.A hypothetical 10% increase in that rate would increase the annual interest expense on those instruments by approximately $0.4 million.Foreign Currency RiskAs of December 31, 2009, we conduct operations in Argentina, Mexico, the Russian Federation, and also own Canadiansubsidiaries and have equity-method investments in two Canadian companies. The functional currency is the local currency for all ofthese entities, and as such we are exposed to the risk of changes in the exchange rates between the U.S. Dollar and the local currencies. Forbalances denominated in our foreign subsidiaries’ local currency, changes in the value of the subsidiaries’ assets and liabilities due tochanges in exchange rates are deferred and accumulated in other comprehensive income until we liquidate our investment. For balancesdenominated in currencies other than the local currency, our foreign subsidiaries must remeasure the balance at the end of each period toan equivalent amount of local currency, with changes reflected in earnings during the period. A hypothetical 10% decrease in the averagevalue of the U.S. Dollar relative to the value of the local currencies for our Argentinean, Mexican, Russian and Canadian subsidiaries andour Canadian investments would decrease our net income by approximately $0.2 million.Equity RiskCertain of our equity-based compensation awards’ fair values are determined based upon the price of our common stock on themeasurement date. Any increase in the price of our common stock would lead to a corresponding increase in the fair value of thoseawards. A 10% increase in the price of our common stock from its value at December 31, 2009 would increase annual compensationexpense recognized on these awards by approximately $0.1 million.53Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAKey Energy Services, Inc. and SubsidiariesINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm 55 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 56 Consolidated Balance Sheets 57 Consolidated Statements of Operations 58 Consolidated Statements of Comprehensive Income 59 Consolidated Statements of Cash Flows 60 Consolidated Statements of Stockholders’ Equity 61 Notes to Consolidated Financial Statements 62 54Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders ofKey Energy Services, Inc.We have audited the accompanying consolidated balance sheets of Key Energy Services, Inc. (a Maryland corporation) andSubsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income,stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on ouraudits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofKey Energy Services, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in theUnited States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Key Energy Services, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2009, based oncriteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) and our report dated February 26, 2010, expressed an unqualified opinion on the effectiveness ofinternal control over financial reporting./s/ GRANT THORNTON LLPHouston, TexasFebruary 26, 201055Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders ofKey Energy Services, Inc.We have audited Key Energy Services, Inc. (a Maryland corporation) and Subsidiaries’ internal control over financial reporting asof December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). Key Energy Services, Inc. and Subsidiaries’ management isresponsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal controlover financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on Key Energy Services, Inc. and Subsidiaries’ internal control over financial reporting based onour audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, Key Energy Services, Inc. and Subsidiaries maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued byCOSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets, statements of operations, comprehensive income, stockholders’ equity, and cash flows of Key EnergyServices, Inc. and Subsidiaries and our report dated February 26, 2010, expressed an unqualified opinion on those consolidated financialstatements./s/ GRANT THORNTON LLPHouston, TexasFebruary 26, 201056Table of ContentsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS December 31, 2009 2008 (In thousands, except share amounts) ASSETSCurrent assets: Cash and cash equivalents $37,394 $92,691 Accounts receivable, net of allowance for doubtful accounts of $5,441 and $11,468 214,662 377,353 Inventories 27,452 34,756 Prepaid expenses 14,212 15,513 Deferred tax assets 25,323 26,623 Income taxes receivable 50,025 4,848 Other current assets 15,064 7,338 Total current assets 384,132 559,122 Property and equipment, gross 1,728,174 1,858,307 Accumulated depreciation (863,566) (806,624)Property and equipment, net 864,608 1,051,683 Goodwill 346,102 320,992 Other intangible assets, net 41,048 42,345 Deferred financing costs, net 10,421 10,489 Equity-method investments 5,203 24,220 Other assets 12,896 8,072 TOTAL ASSETS $1,664,410 $2,016,923 LIABILITIES AND EQUITYCurrent liabilities: Accounts payable $46,086 $46,185 Accrued liabilities 130,517 197,116 Accrued interest 3,014 4,368 Current portion of capital lease obligations 7,203 9,386 Current portion of notes payable — related parties, net of discount 1,931 14,318 Current portion of long-term debt 1,018 2,000 Total current liabilities 189,769 273,373 Capital lease obligations, less current portion 7,110 13,763 Notes payable — related parties, less current portion 4,000 6,000 Long-term debt, less current portion 512,839 613,828 Workers’ compensation, vehicular and health insurance liabilities 40,855 43,151 Deferred tax liabilities 146,980 188,581 Other non-current accrued liabilities 19,717 17,495 Commitments and contingencies Equity: Common stock, $0.10 par value; 200,000,000 shares authorized, 123,993,480 and121,305,289 shares issued and outstanding 12,399 12,131 Additional paid-in capital 608,223 601,872 Accumulated other comprehensive loss (50,763) (46,550)Retained earnings 137,158 293,279 Total equity attributable to common stockholders 707,017 860,732 Noncontrolling interest 36,123 — Total equity 743,140 860,732 TOTAL LIABILITIES AND EQUITY $1,664,410 $2,016,923 See the accompanying notes which are an integral part of these consolidated financial statements57Table of ContentsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2009 2008 2007 (In thousands, except per share amounts) REVENUES $1,078,665 $1,972,088 $1,662,012 COSTS AND EXPENSES: Direct operating expenses 779,457 1,250,327 985,614 Depreciation and amortization expense 169,562 170,774 129,623 General and administrative expenses 178,696 257,707 230,396 Asset retirements and impairments 159,802 75,137 — Interest expense, net of amounts capitalized 39,069 41,247 36,207 Other, net (120) 2,840 4,232 Total costs and expenses, net 1,326,466 1,798,032 1,386,072 (Loss) income before taxes and noncontrolling interest (247,801) 174,056 275,940 Income tax benefit (expense) 91,125 (90,243) (106,768)Net (Loss) Income (156,676) 83,813 169,172 Noncontrolling interest (555) (245) (117)(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $(156,121) $84,058 $169,289 (Loss) earnings per share attributable to common stockholders: Basic $(1.29) $0.68 $1.29 Diluted $(1.29) $0.67 $1.27 Weighted average shares outstanding: Basic 121,072 124,246 131,194 Diluted 121,072 125,565 133,551 See the accompanying notes which are an integral part of these consolidated financial statements58Table of ContentsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2009 2008 2007 (In thousands) Net (Loss) Income $(156,676) $83,813 $169,172 Other comprehensive (loss) income, net of tax: Foreign currency translation loss, net of tax of $(347), $(952), and $0 (4,243) (8,561) (1,281)Net deferred loss from cash flow hedges, net of tax of $0, $0, and $(115) — — (213)Deferred gain (loss) from available for sale investments, net of tax of $0, $0 and $(97) 30 (8) (203)Total other comprehensive loss, net of tax (4,213) (8,569) (1,697)Comprehensive (loss) income, net of tax (160,889) 75,244 167,475 Comprehensive loss attributable to noncontrolling interest (416) (316) (119)COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMONSTOCKHOLDERS $(160,473) $75,560 $167,594 See the accompanying notes which are an integral part of these consolidated financial statements59Table of ContentsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2009 2008 2007 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: (Loss) income attributable to common stockholders $(156,121) $84,058 $169,289 Adjustments to reconcile (loss) income attributable to common stockholders to net cash provided byoperating activities: Noncontrolling interest (555) (245) (117)Depreciation and amortization expense 169,562 170,774 129,623 Asset retirements and impairments 159,802 75,137 — Bad debt expense 3,295 37 3,675 Accretion of asset retirement obligations 533 594 585 Loss (income) from equity-method investments 1,057 (160) (387)Amortization of deferred financing costs and discount 2,182 2,115 1,680 Deferred income tax (benefit) expense (41,257) 29,747 24,613 Capitalized interest (4,335) (6,514) (5,296)Loss (gain) on disposal of assets, net 401 (641) 1,752 Loss on early extinguishment of debt 472 — 9,557 Loss on sale of available for sale investments, net 30 — — Share-based compensation 6,381 24,233 9,355 Excess tax benefits from share-based compensation (580) (1,733) (3,401)Changes in working capital: Accounts receivable 168,824 (34,943) (48,387)Other current assets 461 (15,622) (15,578)Accounts payable, accrued interest and accrued expenses (126,949) 46,375 (1,360)Cash paid for legal settlement with former chief executive officer — — (21,200)Share-based compensation liability awards 646 (516) 3,701 Other assets and liabilities 988 (5,532) (8,185)Net cash provided by operating activities 184,837 367,164 249,919 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (128,422) (218,994) (212,560)Proceeds from sale of fixed assets 5,580 7,961 8,427 Investment in Geostream Services Group — (19,306) — Acquisitions, net of cash acquired of $28,362, $2,017, and $2,154, respectively 12,007 (99,011) (160,278)Dividend from equity-method investments 199 — — Cash paid for short-term investments — — (121,613)Proceeds from sale of short-term investments — 276 183,177 Net cash used in investing activities (110,636) (329,074) (302,847)CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (16,552) (3,026) (396,000)Proceeds from long-term debt — — 425,000 Repayments of capital lease obligations (9,847) (11,506) (11,316)Borrowings on revolving credit facility — 172,813 50,000 Repayments on revolving credit facility (100,000) (35,000) — Repayments of debt assumed in acquisitions — — (17,435)Repurchases of common stock (488) (139,358) (30,454)Proceeds from exercise of stock options 1,306 6,688 13,444 Payment of deferred financing costs (2,474) (314) (13,400)Excess tax benefits from share-based compensation 580 1,733 3,401 Net cash (used in) provided by financing activities (127,475) (7,970) 23,240 Effect of changes in exchange rates on cash (2,023) 4,068 (184)Net (decrease) increase in cash and cash equivalents (55,297) 34,188 (29,872)Cash and cash equivalents, beginning of period 92,691 58,503 88,375 Cash and cash equivalents, end of period $37,394 $92,691 $58,503 See the accompanying notes which are an integral part of these consolidated financial statements60Table of ContentsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY COMMON STOCKHOLDERS Accumulated Common Stock Additional Other Number of Amount Paid-in Comprehensive Retained Noncontrolling Shares at par Capital Loss Earnings Interest Total (In thousands) BALANCE AT DECEMBER 31, 2006 131,624 $13,162 $711,798 $(36,284) $39,932 $— $728,608 Comprehensive loss, net of tax — — — (1,697) — — (1,697)Common stock purchases (2,414) (241) (33,161) — — — (33,402)Purchase of AFTI — — — — — 368 368 Exercise of stock options 1,598 159 13,285 — — — 13,444 Exercise of warrants 23 2 (2) — — — — Share-based compensation 312 32 9,323 — — — 9,355 Tax benefits from share-based compensation — — 3,401 — — — 3,401 Net income — — — — 169,289 (117) 169,172 BALANCE AT DECEMBER 31, 2007 131,143 13,114 704,644 (37,981) 209,221 251 889,249 Comprehensive loss, net of tax — — — (8,569) — — (8,569)Common stock purchases (11,183) (1,118) (135,291) — — — (136,409)Deconsolidation of AFTI — — — — — (6) (6)Exercise of stock options 757 76 6,612 — — — 6,688 Exercise of warrants 160 16 (16) — — — — Share-based compensation 428 43 24,190 — — — 24,233 Tax benefits from share-based compensation — — 1,733 — — — 1,733 Net income — — — — 84,058 (245) 83,813 BALANCE AT DECEMBER 31, 2008 121,305 12,131 601,872 (46,550) 293,279 — 860,732 Comprehensive loss, net of tax — — — (4,213) — (7) (4,220)Common stock purchases (72) (7) (481) — — — (488)Exercise of stock options 418 42 1,264 — — — 1,306 Issuance of warrants — — 367 — — — 367 Share-based compensation 2,342 233 5,781 — — — 6,014 Tax benefits from share-based compensation — — (580) — — — (580)Net loss — — — — (156,121) (555) (156,676)Purchase of Geostream — — — — — 36,685 36,685 BALANCE AT DECEMBER 31, 2009 123,993 $12,399 $608,223 $(50,763) $137,158 $36,123 $743,140 See the accompanying notes which are an integral part of these consolidated financial statements61Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESKey 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 services to major oil companies, foreign national oil companies andindependent oil and natural gas production companies, including rig-based well maintenance, workover, well completion andrecompletion services, fluid management services, pressure pumping services, fishing and rental services and ancillary oilfield services.We operate in most major oil and natural gas producing regions of the continental United States, and have operations based in Mexico,Argentina and the Russian Federation. We also own a technology development company based in Canada and have equity interests inoilfield service companies in Canada.Basis of PresentationThe consolidated financial statements included in this Annual Report on Form 10-K present our financial position, results ofoperations and cash flows for the periods presented in accordance with generally accepted accounting principles in the United States(“GAAP”).The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect ourfinancial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of ourcontingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable livesfor 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 otherinsurance 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 necessaryadjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improvedinformation not previously available. Because of the limitations inherent in this process, our actual results may differ materially fromthese estimates. We believe that our estimates are reasonable.Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. Wenow present the income statement line items related to gains and losses on the early extinguishment of debt, interest income, net gains andlosses on disposal of assets, and other income and expense as the single line item “Other, net” on our consolidated statements ofoperations. Detail for these items is now provided in “Note 4. Other Income and Expense” of these notes. Additionally, we now show thenon-current portion of our notes and accounts receivable from related parties as a component of other non-current assets and are disclosedin “Note 19. Transactions with Related Parties.” In prior years, these amounts were presented as a separate component of non-currentassets on our consolidated balance sheet. As discussed in “Note 21. Segment Information,” during the first quarter of 2009 we changedour reportable segments due to a reorganization of our U.S. operations to realign both our management structure and resources. Financialinformation for prior years has been recast to reflect the change in segments. None of the reclassifications and presentation changesdiscussed above impacted our consolidated net income, earnings per share, total current assets, total assets or total stockholders’ equity.We have evaluated events occurring after the balance sheet date included in this Annual Report on Form 10-K for possible disclosureas a subsequent event. Management monitored for subsequent events through the date that these financial statements were available to beissued. No subsequent events were identified by management that required disclosure.62Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Principles of ConsolidationWithin our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlledsubsidiaries. We eliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not havesignificant control or influence, we account for that interest using the cost method. When we have an interest in an entity and can exertsignificant influence but not control, we account for that interest using the equity method.As further discussed in “Note 2. Acquisitions,” in September 2009, we acquired an additional 24% interest in OOO GeostreamServices Group (“Geostream”), bringing our total investment in Geostream to 50%. Prior to the acquisition of the additional interest, weaccounted for our ownership in Geostream using the equity method. In connection with the acquisition of the additional interest, weobtained majority representation on Geostream’s board of directors and a controlling interest. We accounted for this acquisition as abusiness combination achieved in stages. Since the acquisition date, we have consolidated the assets, liabilities, results of operations andcash flows of Geostream into our consolidated financial statements, with the portion of Geostream remaining outside of our controlreflected as a noncontrolling interest in our consolidated financial statements.AcquisitionsFrom time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of operations foracquisitions are included in our financial statements beginning on the date of acquisition. Acquisitions made after January 1, 2009 areaccounted for using the acquisition method. The acquisition method differs from previous accounting guidance related to businesscombinations by expanding the scope of what constitutes a “business” and must therefore be accounted for as a business combination.For all business combinations (whether partial, full or in stages), the acquirer records 100% of all assets and liabilities of the acquiredbusiness, including goodwill, at their fair values; contingent consideration is recognized at its fair value on the acquisition date, and forcertain arrangements, changes in fair value must be recognized in earnings until settlement; and acquisition-related transaction andrestructuring costs must be expensed rather than treated as part of the cost of the acquisition. The acquisition method also establishes newdisclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination.Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year after the date of theacquisition. Acquisitions through December 31, 2008 are accounted for using the purchase method of accounting and the purchase priceis allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Final valuationsof assets and liabilities are obtained and recorded as soon as practicable and within one year from the date of the acquisition.Revenue RecognitionWe recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurredor services have been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectibility is reasonably assured. • Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidencedby a completed customer purchase order, field ticket, supplier contract, or master service agreement. • Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of thearrangement as evidenced by a field ticket or service log.63Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) • The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of theprice being fixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or acompleted customer field ticket. • Collectibility is reasonably assured when we screen our customers to determine credit terms and provide goods and services tocustomers that have been granted credit in accordance with our credit policy.We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or stategovernmental taxing authorities.We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting andassigned fair value if they have standalone value to our customer, they have objective and reliable evidence of fair value, and delivery ofundelivered items is substantially controlled by us. We believe that the negotiated prices for deliverables in our services contracts arerepresentative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.Cash and Cash EquivalentsWe consider short-term investments with an original maturity of less than three months to be cash equivalents. At December 31,2009, we have not entered into any compensating balance arrangements, but all of our obligations under our senior credit agreement with asyndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the administrative agents (the “SeniorSecured Credit Facility”) were secured by most of our assets, including assets held by our subsidiaries, which includes our cash andcash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposureto any one financial institution.We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2009,accounts were guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per account and substantially all of ouraccounts held deposits in excess of the FDIC limits.Cash and cash equivalents held by our Russian subsidiary are subject to a noncontrolling interest. We believe that the cash held byour wholly-owned foreign subsidiaries could be repatriated for general corporate use without material withholdings. From time to time andin the normal course of business in connection with our operations or ongoing legal matters, we are required to place certain amounts ofour cash in deposit accounts with restrictions that limit our ability to withdraw those funds. As of December 31, 2009, the amount of ourcash restricted under such arrangements was $0.8 million.Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cashbalances. We present the outstanding checks written against these zero-balance accounts as a component of accounts payable in theaccompanying consolidated balance sheets.Accounts Receivable and Allowance for Doubtful AccountsWe establish provisions for losses on accounts receivable if we determine that there is a possibility that we will not collect all or partof the outstanding balances. We regularly review accounts over 150 days past due from the invoice date for collectibility and establish oradjust our allowance as necessary using the specific identification method. If we exhaust all collection efforts and determine that thebalance will never be collected, we write off the accounts receivable against the associated allowance for uncollectible accounts.From time to time we are entitled to proceeds under our insurance policies for amounts that we have reserved in our self insuranceliability. We present these insurance receivables gross on our balance sheet as a component of accounts receivable, separate from thecorresponding liability.64Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Concentration of Credit Risk and Significant CustomersOur customers include major oil and natural gas production companies, independent oil and natural gas production companies, andforeign national oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do notrequire material collateral. We maintain reserves for potential credit losses when necessary.During the year ended December 31, 2009, revenues from one of the customers of our Well Servicing segment were approximately11% percent of our consolidated revenues. No other single customer accounted for 10% or more of our consolidated revenues for the yearended December 31, 2009. During the years ended December 31, 2008 and 2007 no single customer accounted for 10% or more of ourconsolidated revenues.InventoriesInventories, which consist primarily of equipment parts for use in our well servicing operations, sand and chemicals for ourpressure pumping operations, and supplies held for consumption, are valued at the lower of average cost or market.Property and EquipmentProperty and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimateddepreciable lives of the assets using the straight-line method. Depreciation expense for the years ended December 31, 2009, 2008 and 2007was $156.3 million, $153.2 million and $124.7 million, respectively. We depreciate our operational assets over their depreciable lives totheir salvage value, which is a fair value higher than the assets’ value as scrap. Salvage value approximates 10% of an operational asset’sacquisition cost. When an operational asset is stacked or taken out of service, we review its physical condition, depreciable life andultimate salvage value to determine if the asset is no longer operable and whether the remaining depreciable life and salvage value shouldbe adjusted. When we scrap an asset, we accelerate the depreciation of the asset down to its salvage value. When we dispose of an asset,gain or loss is recognized.As of December 31, 2009, the estimated useful lives of our asset classes are as follows:Description Years Well service rigs and components 3-15 Oilfield trucks, pressure pumping equipment, and related equipment 7-12 Motor vehicles 3-5 Fishing and rental tools 4-10 Disposal wells 15-30 Furniture and equipment 3-7 Buildings and improvements 15-30 We lease certain of our operating assets under capital lease obligations whose terms run from 55 to 60 months. These assets aredepreciated over their estimated useful lives or the term of the capital lease obligation, whichever is shorter.A long-lived asset or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carryingamount may not be recoverable. For purposes of testing for impairment, we group our long-lived assets along our lines of business basedon the services provided, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of otherassets and liabilities. If the asset group’s estimated future cash flows are less than its net carrying value, we would record an impairmentcharge, reducing the net carrying value to an estimated fair value. Events or changes in circumstance that65Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)cause us to evaluate our fixed assets for potential impairment may include changes in market conditions, such as adverse movements inthe prices of oil and natural gas, or changes of an asset group, such as its expected future life, intended use or physical condition, whichcould reduce the fair value of certain of our property and equipment. The development of future cash flows and the determination of fairvalue for an asset group involves significant judgment and estimates. As discussed in “Note 6. Property and Equipment,” during thethird quarter of 2009 we identified a triggering event that required us to test our long-lived assets for potential impairment. As a result ofthose tests, we determined that the equipment for our pressure pumping operations was impaired.Asset Retirement ObligationsWe recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets andcapitalize an equal amount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Ourobligations to perform our asset retirement activities are unconditional, despite the uncertainties that may exist surrounding an individualretirement activity. Accordingly, we recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can bereasonably estimated. In determining the fair value, we examine the inputs that we believe a market participant would use if we were totransfer the liability. We probability-weight the potential costs a third-party would charge, adjust the cost for inflation for the estimated lifeof the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved in estimating future cashflows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing of thecash flows change, such changes may have a material impact on our results of operations. See “Note 9. Asset Retirement Obligations.”Capitalized InterestInterest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using aneffective interest rate based on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost ofthe assets and amortized to depreciation expense over the useful life of the assets. It is included in the depreciation and amortization line inthe accompanying consolidated statements of operations.Deferred Financing CostsDeferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effectiveinterest method over the life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costsare included in the determination of the gain or loss on the extinguishment of the debt. We record gains and losses from the extinguishmentof debt as a part of continuing operations.Goodwill and Other Intangible AssetsGoodwill results from business combinations and represents the excess of the acquisition consideration over the fair value of the netassets acquired. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently ifevents or changes in circumstances indicate that the asset might be impaired.The test for impairment of indefinite-lived intangibles is a two step test. In the first step of the test, a fair value is calculated for eachof our reporting units, and that fair value is compared to the carrying value of the reporting unit, including the reporting unit’s goodwill. Ifthe fair value of the reporting unit exceeds its carrying value, there is no impairment, and the second step of the test is not performed. Ifthe carrying value exceeds the fair value for the reporting unit, then the second step of the test is required.66Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. The implied fairvalue of the reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination,with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is inexcess of its carrying value, no impairment is recorded. If the carrying value is in excess of the implied fair value, an impairment equal tothe excess is recorded.To assist management in the preparation and analysis of the valuation of our reporting units, we utilize the services of a third-partyvaluation consultant, who reviews our estimates, assumptions and calculations. The ultimate conclusions of the valuation techniquesremain our sole responsibility. We conduct our annual impairment test on December 31 of each year. For the annual test completed as ofDecember 31, 2009, no impairment of our goodwill was indicated. As discussed in “Note 7. Goodwill and Other Intangible Assets,”our tests for the potential impairment of our long-lived assets during the third quarter of 2009 constituted an event that required us to testour goodwill for potential impairment on an interim basis. As a result of that test, we determined that $0.5 million of goodwill in ourProduction Services segment was impaired and recorded a charge to reduce the goodwill to zero. We do not currently expect that additionaltests would result in additional charges, but the determination of the fair value used in the test is heavily impacted by the market prices ofour equity and debt securities, as well as the assumptions and estimates about our future activity levels, profitability and cash flows.Internal-Use SoftwareWe capitalize costs incurred during the application development stage of internal-use software and amortize these costs over itsestimated useful life, generally five years. Costs incurred related to selection or maintenance of internal-use software are expensed asincurred.LitigationWhen estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determinewhether a loss is probable and reasonably estimable.Various suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where weconduct business in the continental United States, we are often subject to jury verdicts or other outcomes that may be favorable toplaintiffs. We are also exposed to litigation in foreign locations where we operate. 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 establisha provision for a contingent liability when it is probable that a liability has been incurred and the amount is able to be estimated. See“Note 14. Commitments and Contingencies.”EnvironmentalOur operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil,contaminants, and regulated substances. These operations are subject to various federal, state and local laws and regulations intended toprotect the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expendituresthat relate to an existing condition caused by past operations and that have no future economic benefits are expensed. We record liabilitieson an undiscounted basis when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonablyestimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflectmanagement’s assessment of the insurance coverage that may apply to the matters at issue. See “Note 14. Commitments andContingencies.”67Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Self InsuranceWe are largely self-insured for physical damage caused by our equipment and vehicles in the course of our operations. The accrualsthat we maintain on our consolidated balance sheet relate to these deductibles and self-insured retentions, which we estimate through theuse of historical claims data and trend analysis. To assist management with the liability amount for our self insurance reserves, we utilizethe services of a third party actuary. The actual outcome of any claim could differ significantly from estimated amounts. We adjust lossestimates in the calculation of these accruals, based upon actual claim settlements and reported claims. See “Note 14. Commitments andContingencies.”Income TaxesWe account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporarydifferences. Management determines our current tax liability as well as taxes incurred as a result of current operations, but which aredeferred until future periods. Current taxes payable represent our liability related to our income tax returns for the current year, while netdeferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidatedbalance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities forfinancial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further,management makes certain assumptions about the timing of temporary tax differences for the differing treatments of certain items for taxand accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretationof local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptionsregarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood ofmore than 50%) that some portion or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we useestimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, todetermine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations,both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecastedbusiness economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amountthat management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic andinternational tax jurisdictions in which we operate.See “Note 12. Income Taxes” for further discussion of accounting for income taxes, changes in our valuation allowance,components of our tax rate reconciliation and realization of loss carryforwards.Earnings Per ShareBasic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted averagenumber of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased numberof shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the treasury stock and “as ifconverted” methods. See “Note 8. Earnings Per Share.”Share-Based CompensationIn the past, we have issued stock options, shares of restricted common stock, stock appreciation rights (“SARs”), and phantomshares to our employees as part of those employees’ compensation and as a retention68Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)tool. For our options, restricted shares and SARs, we calculate the fair value of the awards on the grant date and amortize that fair value tocompensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The fair value of our stockoption and SAR awards are estimated using a Black-Scholes fair value model. The valuation of our stock options and SARs requires usto estimate the expected term of award, which we estimate using the simplified method, as we do not currently have sufficient historicalexercise information because of past legal restrictions on the exercise of our stock options. Additionally, the valuation of our stock optionand SAR awards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to theexpected term of the award, a risk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stockawards is determined using our stock price on the grant date. Our phantom shares are treated as “liability” awards and carried at fairvalue on each balance sheet date, with changes in fair value recorded as a component of compensation expense and an offsetting liabilityon our consolidated balance sheet. We record share-based compensation as a component of general and administrative expense. See“Note 18. Share-Based Compensation.”Foreign Currency Gains and LossesFor our international locations in Argentina, Mexico, the Russian Federation and Canada, where the local currency is the functionalcurrency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items aretranslated at average rates of exchange during the period. The resulting gains or losses arising from the translation of accounts from thefunctional currency to the U.S. Dollar are included as a separate component of stockholders’ equity in other comprehensive income untila partial or complete sale or liquidation of our net investment in the foreign entity.From time to time our foreign subsidiaries may enter into transactions that are denominated in currencies other than their functionalcurrency. These transactions are initially recorded in the functional currency of that subsidiary based on the applicable exchange rate ineffect on the date of the transaction. At the end of each month, these transactions are remeasured to an equivalent amount of the functionalcurrency based on the applicable exchange rates in effect at that time. Any adjustment required to remeasure a transaction to the equivalentamount of the functional currency at the end of the month is recorded in the income or loss of the foreign subsidiary as a component ofother income and expense. See “Note 15. Accumulated Other Comprehensive Loss.”Comprehensive IncomeWe display comprehensive income and its components in our financial statements, and we classify items of comprehensive incomeby their nature in our financial statements and display the accumulated balance of other comprehensive income separately in ourstockholders’ equity.LeasesWe lease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyzethe terms of the arrangement to determine whether the lease should be accounted for as an operating lease or a capital lease.We periodically incur costs to improve the assets that we lease under these arrangements. We record the improvement as a componentof our property and equipment and amortize the improvement over the useful life of the improvement or the lease term, whichever isshorter.Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the leaseagreement. These increases may be the result of an inducement or “rent holiday”69Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation. We recognize scheduled and specified rentincreases on a straight-line basis over the term of the lease agreement. In addition, certain of our operating lease agreements containincentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, suchas moving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made to us oron our behalf represent incentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis overthe term of the lease agreement.New Accounting Standards Adopted in this ReportSFAS 141(R). In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised 2007),Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and anynoncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from previous practice resulting fromSFAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations(whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, includinggoodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certainarrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuringcosts will be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) also establishes disclosure requirements toenable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or afterDecember 15, 2008. The Company adopted the provisions of SFAS 141(R) on January 1, 2009, but did not consummate any businesscombinations during the three months ended March 31, 2009. SFAS 141(R) may have an impact on our consolidated financial statementsin the future. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of any acquisitionsconsummated after the effective date.SFAS 160. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated FinancialStatements — An amendment of ARB No. 51 (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, ConsolidatedFinancial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minorityinterest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidatedfinancial statements. Among other requirements, SFAS 160 requires the consolidated statement of income to be reported at amounts thatinclude the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of theconsolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Weadopted the provisions of SFAS 160 on January 1, 2009. The adoption of this standard did not have a material impact on our financialposition, results of operations, or cash flows.SFAS 165. In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosing of events that occur after the balance sheet date but before the financial statements are issuedor are available to be issued. SFAS 165 does not significantly change the types of subsequent events that an entity reports, but it requiresthe disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective forinterim or annual reporting requirements ending after June 15, 2009. The adoption of this standard did not have a material impact on ourfinancial position, results of operations or cash flows.70Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)ASU 2009-01. In June 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01, The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB StatementNo. 162 (“ASU 2009-01”). ASU 2009-01 established the Accounting Standards Codification (the “Codification”) as the source ofauthoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification supersedes all prior non-SECaccounting and reporting standards. Following ASU 2009-01, the FASB will not issue new accounting standards in the form of FASBStatements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU 2009-01 also modifies the existing hierarchy of GAAPto include only two levels — authoritative and non-authoritative. ASU 2009-01 is effective for financial statements issued for interim andannual periods ending after September 15, 2009, and early adoption was not permitted. The adoption of this standard did not have animpact on our financial position, results of operations or cash flows.ASU 2009-05. In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 addresses concerns in situations where there may be a lack ofobservable market information to measure the fair value of a liability, and provides clarification in circumstances where a quoted marketprice in an active market for an identical liability is not available. In these cases, reporting entities should measure fair value using avaluation technique that uses the quoted price of the identical liability when that liability is traded as an asset, quoted prices for similarliabilities, or another valuation technique, such as an income or market approach. ASU 2009-05 also clarifies that when estimating thefair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence ofa restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period subsequent to August 2009and the adoption of this update did not have a material impact on our financial position, results of operations, or cash flows.Accounting Standards Not Yet Adopted in this ReportSFAS 166. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment ofFASB Statement No. 140 (“SFAS 166”). SFAS 166 amends the application and disclosure requirements of SFAS No. 140, Accountingfor Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of FASB Statement 125(“SFAS 140”), removes the concept of a “qualifying special purpose entity” from SFAS 140 and removes the exception from applyingFASB Interpretation (“FIN”) No. 46(R), Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51 (“FIN 46(R)”)to qualifying special purpose entities. SFAS 166 is effective for the first annual reporting period that begins after November 15, 2009,and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position,results of operations or cash flows.SFAS 167. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”).SFAS 167 amends the scope of FIN 46(R) to include entities previously considered qualifying special-purpose entities by FIN 46(R), asthe concept of a qualifying special-purpose entity was eliminated in SFAS 166. This standard shifts the guidance for determining whichenterprise in a variable interest entity consolidates that entity from a quantitative consideration of who is the primary beneficiary to aqualitative focus of which entity has the power to direct activities and the obligation to absorb losses. This standard is to be effective forthe first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standardis not anticipated to have a material impact on our financial position, results of operations or cash flows.ASU 2009-13. In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-DeliverableRevenue Arrangements, a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 addresses theaccounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit,and addresses how to separate71Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Existing GAAP requires anentity to use vendor-specific objective evidence (“VSOE”) or third-party evidence of a selling price to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU 2009-13, multiple-deliverable arrangements will be separated in more circumstancesthan under current guidance. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. Theselling price will be based on VSOE if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price ifneither VSOE nor third-party evidence is available. ASU 2009-13 also requires that an entity determine its best estimate of selling price ina manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis, and increases thedisclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU 2009-13 must be prospectively applied to allrevenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption ispermitted. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We expect to adoptthe provisions of ASU 2009-13 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact onour financial position, results of operations, or cash flows.ASU 2009-14. In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements ThatInclude Software Elements — a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”). ASU 2009-14 was issued toaddress concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more thanincidental” to the product as a whole. Existing guidance in such circumstances requires entities to use VSOE of a selling price to separatedeliverables in a multiple-deliverable arrangement. Reporting entities raised concerns that the current accounting model does notappropriately reflect the economics of the underlying transactions and that more software-enabled products now fall or will fall within thescope of the current guidance than originally intended. ASU 2009-14 changes the current accounting model for revenue arrangements thatinclude both tangible products and software elements to exclude those where the software components are essential to the tangibleproducts’ core functionality. In addition, ASU 2009-14 also requires that hardware components of a tangible product containing softwarecomponents always be excluded from the software revenue recognition guidance, and provides guidance on how to determine whichsoftware, if any, relating to tangible products is considered essential to the tangible products’ functionality and should be excluded fromthe scope of software revenue recognition guidance. ASU 2009-14 also provides guidance on how to allocate arrangement consideration todeliverables in an arrangement that contains tangible products and software that is not essential to the product’s functionality. ASU2009-14 was issued concurrently with ASU 2009-13 and also requires entities to provide the disclosures required by ASU 2009-13 thatare included within the scope of ASU 2009-14. ASU 2009-14 will be effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may also elect, but arenot required, to adopt ASU 2009-14 retrospectively to prior periods, and must adopt ASU 2009-14 in the same period and using the sametransition methods that it uses to adopt ASU 2009-13. We expect to adopt the provisions of ASU 2009-14 on January 1, 2011 and do notbelieve that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.ASU 2009-17. In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) — Improvements to FinancialReporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 replaces the quantitative-based risk and rewardscalculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approachfocused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantlyimpact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from theentity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has acontrolling financial interest in a variable interest entity. ASU 2009-17 also requires additional disclosures about a reporting entity’sinvolvement in variable interest entities.72Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The provisions of ASU 2009-17 are to be applied beginning in the first fiscal period beginning after November 15, 2009. We will adoptASU 2009-17 on January 1, 2010 and do not anticipate that the adoption of this standard will have a material effect on our financialposition, results of operations, or cash flows.ASU 2010-02. In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) — Accounting and Reporting forDecreases in Ownership of a Subsidiary — A Scope Clarification. ASU 2010-02 clarifies that the scope of previous guidance in theaccounting and disclosure requirements related to decreases in ownership of a subsidiary apply to (i) a subsidiary or a group of assetsthat is a business or nonprofit entity; (ii) a subsidiary that is a business or nonprofit entity that is transferred to an equity methodinvestee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrollinginterest in an entity. ASU 2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of agroup of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of anycontinuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in thedeconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become arelated party after the transaction. The provisions of ASU 2010-02 will be effective for us for the first reporting period beginning afterDecember 13, 2009. We will adopt the provisions of ASU 2010-02 on January 1, 2010 and do not anticipate that the adoption of thisstandard will 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 fairvalue measurements and also requires registrants to provide certain additional disclosures about those measurements. The new disclosurerequirements include (i) the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during theperiod, along with the reason for those transfers, and (ii) and separate presentation of information about purchases, sales, issuances andsettlements of fair value measurements with significant unobservable inputs. ASU 2010-06 is effective for interim and annual reportingperiods beginning after December 15, 2009. We will adopt the provisions of ASU 2010-06 on January 1, 2010 and do not anticipate thatthe adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.NOTE 2. ACQUISITIONS2009 AcquisitionsGeostream Services Group. On September 1, 2009, we acquired an additional 24% interest in Geostream for $16.4 million. Thiswas our second investment in Geostream pursuant to an agreement dated August 26, 2008, as amended. This second investment bringsour total investment in Geostream to 50%. Prior to the acquisition of the additional interest, we accounted for our ownership in Geostreamas an equity-method investment. Upon acquiring the 50% interest, we also obtained majority representation on Geostream’s board ofdirectors and a controlling interest. We accounted for this acquisition as a business combination achieved in stages. The results ofGeostream have been included in our consolidated financial statements since the acquisition date, with the portion outside of our controlreflected as a noncontrolling interest.Geostream is an oilfield services company in the Russian Federation providing drilling and workover services and sub-surfaceengineering and modeling. As a result of this acquisition, we expect to expand our international presence in Russia where oil wells areshallow and suited for services that we perform.The acquisition date fair value of the consideration transferred totaled $35.0 million, which consisted of cash consideration in thesecond investment and the fair value of our previous equity interest. The acquisition date fair value of our previous equity interest was$18.3 million. We recognized a73Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)loss of $0.2 million as a result of remeasuring our prior equity interest in Geostream held before the business combination, which isincluded in the line item “other, net” in the consolidated statements of operations.The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at September 1, 2009. Weare in the process of obtaining a third-party valuation of intangible and certain tangible assets; thus, the preliminary measurements ofintangible assets, goodwill and certain tangible assets are subject to change. (In thousands) At September 1, 2009: Cash and cash equivalents $28,362 Other current assets 8,545 Property and equipment 2,959 Intangible assets 11,470 Other assets 194 Total identifiable assets acquired 51,530 Current liabilities 5,456 Other liabilities 8 Total liabilities assumed 5,464 Noncontrolling interest 34,994 Net identifiable assets acquired 11,072 Goodwill 23,918 Net assets acquired $34,990 Of the $11.5 million of acquired intangible assets, $8.4 million was preliminarily assigned to trade name intangibles that are notsubject to amortization. Of the remaining $3.1 million of acquired intangible assets, $1.2 million relates to three customer contracts thatwill be amortized over one year, and $1.9 million relates to customer relationships that will be amortized as the value of the relationshipsare realized using rates of 35%, 21%, 12%, 7%, 4%, 3%, 2%, and 1% for 2010 through 2017, respectively, with a portion alreadyamortized in 2009. As noted above, the fair value of the acquired identifiable intangible assets is preliminary pending receipt of the finalvaluation for these assets. The fair value and carrying value of the acquired accounts receivable on September 1, 2009 were $6.3 million.The $23.9 million of goodwill was assigned to our Well Servicing segment. The goodwill recognized is attributable primarily tointernational diversification and the assembled workforce of Geostream. None of the goodwill is expected to be deductible for income taxpurposes. As of December 31, 2009, there were no changes in the recognized amount of goodwill resulting from the acquisition ofGeostream.We recognized $0.1 million of acquisition related costs that were expensed during the year ended December 31, 2009. These costs areincluded in the statements of operations in the line item “general and administrative expenses” for the year ended December 31, 2009.Included in our consolidated statements of operations for year ended December 31, 2009 are revenues of $9.2 million and net lossesof $0.4 million attributable to Geostream from the acquisition date to the period ended December 31, 2009.On September 1, 2009, the fair value of the 50% noncontrolling interest in Geostream was estimated to be $35.0 million. The fairvalue of the noncontrolling interest was estimated using a combination of the income approach and a market approach. As Geostream is aprivate company, the fair value measurement is74Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. The fair value estimates arebased on (i) a discount rate range of 16% to 19%, (ii) a terminal value based on a long-term constant growth rate between two and threepercent, (iii) financial data of historical and forecasted operating results of Geostream and (iv) adjustments because of the lack of controlor lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest inGeostream.In conjunction with our second investment, Geostream agreed to purchase from us a customized suite of equipment, including twoworkover rigs, two drilling rigs, associated complementary support equipment, cementing equipment, and fishing tools for approximately$23.0 million, a portion of which will be financed by us. Concurrently with the second investment, Geostream paid us approximately$16.0 million in cash, representing a down payment on the equipment. We began to deliver this equipment in the fourth quarter of 2009.We recognized no gain or loss associated with the sale of the equipment to Geostream.2008 AcquisitionsWestern Drilling, LLC. On April 3, 2008, we acquired Western Drilling, LLC (“Western”), a privately-owned company based inCalifornia that provides workover and drilling services. The purchase price totaled $52.0 million, including direct transaction costs.Western was incorporated into our Well Servicing segment.Hydra-Walk, Inc. On May 30, 2008, we acquired Hydra-Walk, Inc. (“Hydra-Walk”), a privately owned company providingautomated pipe handling services. The purchase price totaled $10.7 million, including direct transaction costs. The purchase price alsoprovides for a performance earn-out potential of up to $2.0 million over two years from the acquisition date, if certain financial andoperational performance measures are met, of which $1.1 million was paid through 2009.Leader Energy Services Ltd. On July 22, 2008, we purchased all of the United States-based assets of Leader Energy Services,Ltd. (“Leader”), a Canadian company, for total consideration of $35.4 million, including direct transaction cots. The Leader assets wereincorporated into our Production Services segment.All of the purchase price allocations for 2008 acquisitions were finalized in 2009.2007 AcquisitionsAMI. On September 5, 2007, we acquired Advanced Measurements, Inc. (“AMI”), which operates in Canada and is a technologycompany focused on oilfield service equipment controls, data acquisition and digital information flow. The purchase price totaled$7.9 million, including direct transaction costs. AMI was incorporated into our Production Services segment.Moncla. On October 25, 2007, we acquired Moncla Well Service, Inc. and related entities (“Moncla”), which operated well servicerigs, barges and ancillary equipment in the southeastern United States for total consideration of $147.0 million, including directtransaction costs. The Moncla purchase agreement entitles the former owners of Moncla to receive earnout payments, on each anniversaryof the closing date of the acquisition until 2012, of up to $5.0 million per year and $25.0 million in total. The earnout payments arebased on achievement of certain revenue targets and profit percentage targets on each anniversary date or a cumulative target on the 2012anniversary date. Moncla was incorporated into our Well Servicing segment.Kings Oil Tools. On December 7, 2007, we purchased the well service assets and related equipment of Kings Oil Tools, Inc.(“Kings”), a California-based well service company totaling $45.2 million, including direct transaction costs. The assets of Kings wereincorporated into our Well Servicing segment.All of the purchase price allocations for 2007 acquisitions were finalized in 2008.75Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 3. OTHER CURRENT AND NON-CURRENT LIABILITIESThe table below presents comparative detailed information about our current accrued liabilities at December 31, 2009 and 2008: December 31, December 31, 2009 2008 (In thousands) Current Accrued Liabilities: Accrued payroll, taxes and employee benefits $33,953 $67,408 Accrued operating expenditures 24,194 50,833 Income, sales, use and other taxes 30,447 41,003 Self-insurance reserves 24,366 25,724 Insurance premium financing 7,282 — Unsettled legal claims 2,665 4,550 Phantom share liability 1,518 902 Other 6,092 6,696 Total $130,517 $197,116 The table below presents comparative detailed information about our other non-current accrued liabilities at December 31, 2009 and2008: December 31, December 31, 2009 2008 (In thousands) Non-Current Accrued Liabilities: Asset retirement obligations $10,045 $9,348 Environmental liabilities 3,353 3,004 Accrued rent 2,399 2,497 Accrued income taxes 2,813 1,359 Phantom share liability 508 478 Other 599 809 Total $19,717 $17,495 76Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 4. OTHER INCOME AND EXPENSEThe table below presents comparative detailed information about our other income and expense, shown on the consolidatedstatements of operations as “other, net” for the years ended December 31, 2009, 2008 and 2007: Year Ended December 31, 2009 2008 2007 (In thousands) Loss on early extinguishment of debt $472 $— $9,557 Loss (gain) on disposal of assets, net 401 (641) 1,752 Interest income (499) (1,236) (6,630)Foreign exchange (gain) loss, net (1,482) 3,547 (458)Equity-method loss (income) 1,052 (166) (391)Other expense, net (64) 1,336 402 Total $(120) $2,840 $4,232 NOTE 5. ALLOWANCE FOR DOUBTFUL ACCOUNTSThe table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2009, 2008 and2007: Additions Balance at Charged to Balance at Beginning Charged to Other End of of Period Expense Accounts Acquisitions Deductions(1) Period (In thousands) As of December 31, 2009 $11,468 $3,295 $— $— $(9,322) $5,441 As of December 31, 2008 13,501 37 (38) 15 (2,047) 11,468 As of December 31, 2007 12,998 3,675 — 1,251 (4,423) 13,501 (1)Deductions represent write offs to the allowance. Deductions in 2009 include approximately $5.2 million for a single customer thathad been specifically identified and reserved for prior to 2007.77Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 6. PROPERTY AND EQUIPMENTProperty and equipment consists of the following: December 31, 2009 2008 (In thousands) Major classes of property and equipment: Well servicing equipment $1,368,925 $1,431,624 Disposal wells 52,797 60,508 Motor vehicles 101,142 125,031 Furniture and equipment 82,346 81,129 Buildings and land 55,411 71,014 Work in progress 67,553 89,001 Gross property and equipment 1,728,174 1,858,307 Accumulated depreciation (863,566) (806,624)Net property and equipment $864,608 $1,051,683 We capitalize costs incurred during the application development stage of internal-use software. These costs are capitalized to work inprogress until such time the application is put in service. For the years ended December 31, 2009, 2008 and 2007 we capitalized costs inthe amount of $13.1 million, $4.5 million, and $1.9 million, respectively. Capitalized internal-use software during 2009 consistedprimarily of our expenditures for new ERP and Human Resources information systems.Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using aneffective interest rate based on related debt until the underlying assets are placed into service. Capitalized interest for the years endedDecember 31, 2009, 2008 and 2007 was $4.3 million, $6.5 million, and $5.3 million, respectively.We are obligated under various capital leases for certain vehicles and equipment that expire at various dates during the next fiveyears. The carrying value of assets acquired under capital leases consists of the following: December 31, 2009 2008 (In thousands) Carrying values of assets leased under capital lease obligations: Well servicing equipment $116 $20,442 Motor vehicles 10,207 9,271 Furniture and fixtures 36 — Total $10,359 $29,713 Depreciation of assets held under capital leases was $3.5 million, $4.3 million, and $5.9 million for the years ended December 31,2009, 2008 and 2007, respectively, and is included in depreciation and amortization expense in the accompanying consolidatedstatements of operations.During the third quarter of 2009, we removed from service and retired a portion of our U.S. rig fleet and associated supportequipment, resulting in the recording of a pre-tax asset retirement charge of $65.9 million. Included in the retirement were approximately250 of our older, less efficient rigs. We retired these rigs in order to better align supply with demand for well servicing as market activityremained low. The asset78Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)retirement charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the yearended December 31, 2009. For the rigs we retired, certain of these assets were stacked and will be harvested for spare parts, and certain ofthese assets are to be cut up and sold for scrap. The carrying value for stacked rigs and associated support equipment was reduced tosalvage value of 10%, based on expected fair value for these assets. The carrying value for scrapped rigs and components was reduced toquoted market prices for scrap metal. These assets are reported under our Well Servicing segment.We determined that the retirement of the rigs described above was an event requiring assessment for impairment of the asset groupswithin the reporting units of our Well Servicing segment. Based on our analysis, the expected undiscounted cash flows for these assetgroups exceeded carrying value, and no indication of impairment existed.Also, during the third quarter of 2009, due to market overcapacity, continued and prolonged depression of natural gas prices,decreased activity levels from our major customer base related to stimulation work and consecutive quarterly operating losses in ourProduction Services segment, we determined that events and changes in circumstances occurred indicating that the carrying value of theasset groups under this segment may not be recoverable. We performed an assessment of the fair value of these asset groups using anexpected present value technique. We used discounted cash flow models involving assumptions based on utilization of the equipment,revenues, direct expenses, general and administrative expenses, applicable income taxes, capital expenditures and working capitalrequirements. Our discounted cash flow projections were based on financial forecasts and were discounted using a discount rate of 14%.Based on this assessment, our pressure pumping assets were impaired. This assessment resulted in the recording of a pre-tax impairmentcharge of $93.4 million during the third quarter of 2009. The asset impairment charge is included in the line item “asset retirements andimpairments” in the consolidated statements of operations for the year ended December 31, 2009. These assets are reported under ourProduction Services segment.NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETSThe changes in the carrying amount of our goodwill for the years ended December 31, 2009 and 2008 are as follows: Well Servicing Production Services Total (In thousands) December 31, 2007 $306,248 $72,302 $378,550 Purchase price allocation and other adjustments, net 2,353 23 2,376 Goodwill acquired during the period 8,970 1,815 10,785 Impairment of goodwill — (69,752) (69,752) Impact of foreign currency translation (81) (886) (967) December 31, 2008 317,490 3,502 320,992 Purchase price allocation and other adjustments, net (356) 500 144 Acquisition of Geostream 23,918 — 23,918 Impairment of goodwill — (500) (500) Impact of foreign currency translation 971 577 1,548 December 31, 2009 $342,023 $4,079 $346,102 79Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The components of our other intangible assets as of December 31, 2009 and 2008 are as follows: December 31, December 31, 2009 2008 (In thousands) Noncompete agreements: Gross carrying value $14,010 $16,309 Accumulated amortization (5,618) (4,699)Net carrying value $8,392 $11,610 Patents, trademarks and tradename: Gross carrying value $10,481 $4,391 Accumulated amortization (917) (3,114)Net carrying value $9,564 $1,277 Customer relationships and contracts: Gross carrying value $41,389 $39,225 Accumulated amortization (19,947) (12,359)Net carrying value $21,442 $26,866 Developed technology: Gross carrying value $3,073 $3,598 Accumulated amortization (1,724) (1,421)Net carrying value $1,349 $2,177 Customer backlog: Gross carrying value $724 $622 Accumulated amortization (423) (207)Net carrying value $301 $415 Amortization expense for our intangible assets with determinable lives was as follows: Year Ended December 31, 2009 2008 2007 (In thousands) Noncompete agreements $3,222 $4,108 $1,919 Patents and trademarks 489 748 774 Customer relationships and contracts 8,679 10,710 1,649 Developed technology 659 1,803 389 Customer backlog 167 252 210 Total intangible asset amortization expense $13,216 $17,621 $4,941 80Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The weighted average remaining amortization periods and expected amortization expense for the next five years for our intangibleassets are as follows: Weighted Average Remaining Amortization Expected Amortization Expense Period (Years) 2010 2011 2012 2013 2014 (In thousands) Noncompete agreements 3.3 $2,654 $2,620 $2,423 $406 $289 Patents and trademarks 4.8 273 203 96 40 33 Customer relationships and contracts 8.1 6,726 4,226 3,057 2,208 1,671 Customer backlog 1.7 181 120 — — — Developed technology 1.7 798 551 — — — Total intangible asset amortization expense $10,632 $7,720 $5,576 $2,654 $1,993 Certain of our intangible assets are denominated in currencies other than U.S. Dollars and as such the values of these assets aresubject to fluctuations associated with changes in exchange rates. Expected amortization expense for intangibles denominated in currenciesother than U.S. Dollars are translated at the December 31, 2009 rate. Additionally, certain of these assets are also subject to purchaseaccounting adjustments. The estimated fair values of intangible assets obtained through acquisitions consummated in the precedingtwelve months are based on preliminary information which is subject to change until final valuations are obtained.We perform annual impairment tests associated with our goodwill on December 31 of each year, or more frequently if circumstanceswarrant. Due to the recoverability tests and impairments recorded for our long-lived assets described above in “Note 6. Property andEquipment,” we were required to test our goodwill for impairment during the third quarter rather than delaying testing until our annualassessment performed at year-end.Under the first step of the goodwill impairment test, we compared the fair value of each reporting unit to its carrying amount,including goodwill. No impairment was indicated by this test for the reporting units of our Well Servicing segment, thus the second stepof the impairment test was unnecessary. However, this test concluded that the fair value of the fishing and rental services reporting unitunder our Production Services segment did not exceed its carrying value. Therefore, the second step of the goodwill impairment test wasperformed to measure the amount of the impairment loss, if any. As a result of our calculation of step two of the test, we determined thatthe goodwill of this reporting unit was impaired. As such, we recorded a pre-tax impairment charge of $0.5 million to our ProductionServices segment during the third quarter of 2009. The impairment charge is included in the line item “asset retirements andimpairments” in the consolidated statements of operations for the year ended December 31, 2009. We tested our goodwill for potentialimpairment again on the 2009 annual testing date. The results of that test indicated that the fair value of our reporting units that havegoodwill was substantially in excess of its carrying value, and none of our reporting units were at risk of failing step one of the 2009annual goodwill impairment test.Upon completion of the 2008 assessment, we determined that the fair value associated with two of our reporting units comprisingour Production Services segment was less than the carrying value of these reporting units, indicating potential impairment. Becauseindicators of impairment existed for these reporting units, we performed step two of the impairment test for those units. The result of thesetests indicated that the implied fair value of the goodwill for our pressure pumping and fishing and rental lines of business was less thantheir carrying values.81Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The implied fair value of the goodwill of the reporting units being tested was determined in the same manner as a hypotheticalbusiness combination, with the fair value of the reporting unit representing the purchase price. As a result of the calculations of step twoof the test, we determined that the goodwill of the pressure pumping and fishing and rental reporting units comprising our ProductionServices segment was impaired, and that the amount of the impairment loss was greater than the current carrying value of those reportingunits’ goodwill. As such, we recorded a pre-tax impairment charge of $69.8 million in our Production Services segment during the fourthquarter of 2008. The impairment charge is included in the item “asset retirements and impairments” in the consolidated statements ofoperations for the year ended December 31, 2008.Upon completion of the 2007 assessment, no impairment was indicated since the estimated fair values of the reporting units were inexcess of their carrying values.NOTE 8. EARNINGS PER SHAREThe following table presents our basic and diluted earnings per share for the years ended December 31, 2009, 2008 and 2007: Year Ended December 31, 2009 2008 2007 (In thousands, except per share data) Basic EPS Computation: Numerator (Loss) income attributable to common stockholders $(156,121) $84,058 $169,289 Denominator Weighted average shares outstanding 121,072 124,246 131,194 Basic (loss) earnings per share $(1.29) $0.68 $1.29 Diluted EPS Computation: Numerator (Loss) income attributable to common stockholders $(156,121) $84,058 $169,289 Denominator Weighted average shares outstanding 121,072 124,246 131,194 Stock options — 555 1,518 Restricted stock — 254 256 Warrants — 506 565 Stock appreciation rights — 4 18 121,072 125,565 133,551 Diluted (loss) earnings per share $(1.29) $0.67 $1.27 Stock options, warrants and SARs are included in the computation of diluted earnings per share using the treasury stock method.Restricted stock grants are legally considered issued and outstanding, but are included in basic and diluted earnings per share only to theextent that they are vested. Unvested restricted stock is included in the computation of diluted earnings per share using the treasury stockmethod. The diluted earnings per share calculation for the years ended December 31, 2009, 2008 and 2007 exclude the potential exercise of3.5 million, 2.6 million, and 0.5 million stock options, respectively, because the effects of such exercises on earnings per share in thoseperiods would be anti-dilutive. The diluted earnings per share calculation for the years ended December 31, 2009 and 2008 each excludethe potential exercise of 0.4 million SARs because the effects of such exercises on earnings per share in those periods would be anti-dilutive. For 2009, these options and SARs would be anti-dilutive because of our net loss for the year. For 2008 and 2007,82Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)these options and SARs are considered anti-dilutive because their exercise prices exceeded the average price of our stock during thoseyears.There have been no material changes in share amounts subsequent to the balance sheet date that would have a material impact on theearnings per share calculation for the year ended December 31, 2009.NOTE 9. ASSET RETIREMENT OBLIGATIONSIn connection with our well servicing activities, we operate a number of saltwater disposal (“SWD”) facilities. Our operationsinvolve the transportation, handling and disposal of fluids in our SWD facilities that are by-products of the drilling process. SWDfacilities used in connection with our fluid hauling operations are subject to future costs associated with the retirement of these properties.Annual amortization of the assets associated with the asset retirement obligations was $0.5 million, $0.6 million, and $0.6 millionfor the years ended December 31, 2009, 2008 and 2007, respectively. A summary of changes in our asset retirement obligations is asfollows (in thousands):Balance at December 31, 2007 $9,298 Additions 397 Costs incurred (462)Accretion expense 594 Disposals (479)Balance at December 31, 2008 9,348 Additions 517 Costs incurred (306)Accretion expense 533 Disposals (47)Balance at December 31, 2009 $10,045 NOTE 10. EQUITY-METHOD INVESTMENTSIROC Energy Services Corp.As of December 31, 2009 and 2008 we owned approximately 8.7 million shares of IROC Energy Services Corp. (“IROC”), anAlberta-based oilfield services company. This represented 20.1% and 19.7% of IROC’s outstanding common stock on December 31,2009 and 2008, respectively.Through December 31, 2009, we have significant influence over the operations of IROC through our ownership interest, but we donot control it. We account for our investment in IROC using the equity method. The pro-rata share of IROC’s earnings and losses towhich we are entitled is recorded in our consolidated statements of operations as a component of other income and expense, with anoffsetting increase or decrease to the carrying value of our investment, as appropriate. Any earnings distributed back to us from IROC inthe form of dividends would result in a decrease in the carrying value of our equity investment. The value of our investment may alsoincrease or decrease each period due to changes in the exchange rate between the U.S. Dollar and Canadian Dollar. Changes in the value ofour investment due to fluctuations in exchange rates are offset by accumulated other comprehensive income.During 2009, the value of our investment in IROC increased by $0.6 million due to changes in exchange rates between the U.S. andCanadian dollar.83Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)During the years ended December 31, 2009, 2008 and 2007, we recorded $0.1 million of equity losses and $0.2 million and$0.4 million of equity income related to our investment in IROC, respectively. During the second quarter of 2009, IROC declared adividend which was paid to us in June of 2009, reducing the value of our investment by $0.2 million.The carrying value of our investment in IROC totaled $4.0 million and $3.7 million as of December 31, 2009 and 2008,respectively. The carrying value of our investment in IROC was $5.6 million below our proportionate share of the book value of the netassets of IROC as of December 31, 2009. This difference is attributable to certain long-lived assets of IROC, and our proportionate shareof IROC’s net income or loss will be adjusted in future periods over the estimated remaining useful lives of those long-lived assets. Themarket value of our IROC shares was approximately $5.4 million as of December 31, 2009, based on quoted market prices for IROC’sshares.Advanced Flow Technologies, Inc.In September 2007, we completed the acquisition of AMI, a privately-held Canadian company focused on oilfield technology. AMIowns a portion of another Canadian company, Advanced Flow Technologies, Inc. (“AFTI”). As part of the acquisition, AMI increased itsownership percentage of AFTI to 51.46%, and subsequent to the acquisition date we consolidated the assets, liabilities, results ofoperations and cash flows of AFTI into our consolidated financial statements, with the portion of AFTI remaining outside of our controlforming a noncontrolling interest in our consolidated financial statements. Our ownership of AFTI declined to 48.73% during the fourthquarter of 2008 due to the issuance of additional shares by AFTI. As a result, we deconsolidated AFTI from our consolidated financialstatements at December 31, 2008. As of December 31, 2009 and 2008, AMI’s ownership percentage was 48.63% and 48.73%,respectively, and we account for the interest in AFTI using the equity method. We recorded losses of $0.2 million and income of less than$0.1 million associated with our investment in AFTI for the years ended December 31, 2009 and 2008. The carrying value of ourinvestment in AFTI totaled approximately $1.2 million as of December 31, 2009 and 2008, respectively. As of December 31, 2009, thecarrying value of our investment in AFTI exceeded our proportionate share of the book value of the net assets of AFTI by $0.9 million.This difference was attributable to intangible assets that were recognized in the original purchase of AMI as well as unrecognized goodwillthat is not subject to amortization. During 2009 the value of our investment in AFTI increased by $0.2 million due to changes in exchangerates between the U.S. and Canadian dollar. This increase was offset in accumulated other comprehensive income.84Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTSThe following is a summary of the carrying amounts and estimated fair values of our financial instruments as of December 31,2009 and 2008.Cash, cash equivalents, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of theshort maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date. December 31, 2009 December 31, 2008 Carrying Value Fair Value Carrying Value Fair Value (In thousands) Financial assets: Notes and accounts receivable — related parties $281 $281 $336 $336 Financial liabilities: 8.375% Senior Notes $425,000 $422,875 $425,000 $282,115 Senior Secured Credit Facility revolving loans 87,813 87,813 187,813 187,813 Notes payable — related parties 5,931 5,931 20,318 20,318 Notes receivable-related parties. The amounts reported relate to notes receivable from certain of our employees related to relocationand retention agreements. The carrying values of these notes approximate their fair values as of the applicable balance sheet dates.8.375% Senior Notes due 2014. The fair value of our long-term debt is based upon the quoted market prices and face value for thevarious debt securities at December 31, 2009. The carrying value of these notes as of December 31, 2009 was $425.0 million and the fairvalue was $422.9 million (99.5% of carrying value).Senior Secured Credit Facility revolving loans. Because of their variable interest rates and our recent amendment of the creditfacility, the fair values of the revolving loans borrowed under our Senior Secured Credit Facility approximate their carrying values as ofDecember 31, 2009. The carrying and fair values of these loans as of December 31, 2009 were approximately $87.8 million.Notes payable — related parties. The amounts reported relate to the seller financing arrangement entered into in connection withour acquisition of Moncla. Because of their variable interest rates and the discount applied to the notes the carrying value of these notesapproximate their fair values as of December 31, 2009.85Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 12. INCOME TAXESThe components of our income tax expense are as follows: Year Ended December 31, 2009 2008 2007 (In thousands) Current income tax (expense) benefit: Federal and state $53,798 $(55,190) $(81,384)Foreign (3,930) (5,306) (771) 49,868 (60,496) (82,155)Deferred income tax (expense) benefit: Federal and state 36,895 (30,363) (24,281)Foreign 4,362 616 (332) 41,257 (29,747) (24,613)Total income tax benefit (expense) $91,125 $(90,243) $(106,768)The sources of our income or loss before income taxes and noncontrolling interest were as follows: Year Ended December 31, 2009 2008 2007 (In thousands) Domestic $(279,278) $150,870 $270,975 Foreign 31,477 23,186 4,965 Total $(247,801) $174,056 $275,940 We made net federal income tax payments of $0.1 million, $33.5 million and $85.5 million for the years ended December 31, 2009,2008 and 2007, respectively. We made net state income tax payments of $5.5 million, $6.6 million and $6.6 million for the years endedDecember 31, 2009, 2008 and 2007, respectively. We made net foreign tax payments of $7.3 million, $3.4 million and $4.2 million forthe years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2009, $0.6 million of tax expense wasallocated to stockholders’ equity for compensation expense for financial reporting purposes in excess of amounts recognized for incometax purposes. For the years ended December 31, 2008 and 2007, tax benefits allocated to stockholders’ equity for compensation expensefor income tax purposes in excess of amounts recognized for financial reporting purposes were $1.7 million and $3.4 million,respectively. We had allocated tax benefits to stockholders’ equity in prior years for compensation expense for income tax purposes inexcess of amounts recognized for financial reporting purposes. In addition, we expect to receive a federal income tax refund ofapproximately $50.0 million in 2010.86Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Income tax expense differs from amounts computed by applying the statutory federal rate as follows: Year Ended December 31, 2009 2008 2007 Income tax computed at Federal statutory rate 35.00% 35.00% 35.00%State taxes 2.1 3.1 3.2 Non-deductible goodwill — 12.8 — Change in valuation allowance — (0.3) 0.2 Other (0.3) 1.2 0.3 Effective income tax rate 36.80% 51.80% 38.70%As of December 31, 2008 and 2007, our deferred tax assets and liabilities were comprised of the following: December 31, 2009 2008 (In thousands) Deferred tax assets: Net operating loss and tax credit carryforwards $11,990 $4,664 Self-insurance reserves 17,735 20,944 Allowance for doubtful accounts 1,835 4,023 Accrued liabilities 11,550 14,681 Share-based compensation 10,746 10,116 Other 2,554 3,085 Total deferred tax assets 56,410 57,513 Valuation allowance for deferred tax assets (835) (844)Net deferred tax assets 55,575 56,669 Deferred tax liabilities: Property and equipment (147,956) (190,675)Intangible assets (29,238) (27,952)Other (38) — Total deferred tax liabilities (177,232) (218,627)Net deferred tax liability, net of valuation allowance $(121,657) $(161,958)In 2009, deferred tax liabilities decreased by $0.4 million for adjustments to accumulated other comprehensive loss. In 2008,deferred tax liabilities decreased by $1.0 million for adjustments to accumulated other comprehensive loss.In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred incometax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable incomeduring the periods in which those deferred income tax assets would be deductible. We consider the scheduled reversal of deferred incometax liabilities and projected future taxable income for this determination. To fully realize the deferred income tax assets related to our federalnet operating loss carryforwards that do not have a valuation allowance due to Section 382 limitations, we would need to generate futurefederal taxable income of approximately $4.8 million over the next nine years. With certain exceptions noted below, we believe that afterconsidering all the available87Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)objective evidence, both positive and negative, historical and prospective, with greater weight given to the historical evidence, it is morelikely than not that these assets will be realized.In 2009, we generated a federal tax net operating loss of $142.1 million. The 2009 federal net operating loss will be carried back, inits entirety, to a prior year and result in a refund of approximately $50.0 million. We estimate that as of December 31, 2009, 2008 and2007 we have available $7.1 million, $7.1 million and $8.2 million, respectively, of federal net operating loss carryforwards.Approximately $4.7 million of our net operating losses as of December 31, 2009 are subject to a $1.1 million annual Section 382limitation and expire in 2018. Approximately $2.4 million of our net operating losses as of December 31, 2009 are subject to a $5,000annual Section 382 limitation and expire in 2016 through 2018. A valuation allowance is provided when it is more likely than not thatsome portion of the deferred tax assets will not be realized. Due to annual limitations under Sections 382 and 383, management believesthat we will not be able to utilize all available carryforwards prior to their ultimate expiration. At December 31, 2009 and 2008, we had avaluation allowance of $0.8 million related to the deferred tax asset associated with our remaining federal net operating loss carryforwardsthat will expire before utilization due to Section 382 limitations.We estimate that as of December 31, 2009, 2008 and 2007 we have available approximately $64.2 million, $15.9 million, and$18.6 million, respectively, of state net operating loss carryforwards that will expire from 2019 to 2025. To fully realize the deferredincome tax assets related to our state net operating loss carryforwards, we would need to generate future West Virginia taxable income of$15.2 million over the next 20 years and future Pennsylvania taxable income of $3.3 million over the next 20 years. Management believesthat it is not more likely than not that we will be able to utilize all available carryforwards prior to their ultimate expiration. The deferredtax asset associated with our remaining state net operating loss carryforwards at December 31, 2009 of $5.2 million includes a valuationallowance of less than $0.1 million as a result.In 2007, we began operations in Mexico that resulted in a net operating loss of $2 million and a deferred tax asset related to the netoperating loss carryforward of $0.6 million. Mexico enacted a flat tax rate effective January 1, 2008. The flat tax functions in addition tothe regular corporate tax rate of 28%. Tax expense is calculated under both methods and if the flat tax is greater than the regular tax, theadditional tax expense above the regular tax is assessed in addition to the regular tax calculation. In 2007, we recorded a full valuationallowance related to our Mexico net operating loss carryforwards of $0.6 million, as management believed that, due to the enactment of theMexico flat tax, all of our net operating loss carryforwards related to the Mexico operations were not more likely than not to be fullyrealized in the future. We determined we were not in a flat tax position in 2008 and all of the 2007 regular net operating loss were utilizedagainst 2008 regular Mexico income. Accordingly, the valuation allowance of $0.6 million set up in 2007 was released in 2008.At December 31, 2009 and 2008, our Canadian operations had net operating losses of $3.9 million and $3.8 million, respectively.At December 31, 2009 and 2008 the deferred tax asset related to the net operating loss carryforward was $1.1 million and $1.1 millionrespectively. We have recorded no valuation allowance related to our Canadian net operating loss carryforwards at December 31, 2009 and2008, as management believes that all of our net operating loss carryforwards are more likely than not to be fully realized in the future. Tofully realize the deferred income tax assets related to our Canadian net operating loss carryforwards, we would need to generate$0.2 million of future Canadian taxable income over the next six years and $3.7 million of future Canadian taxable income over the nextnineteen years. The net operating losses expire from 2015 to 2029.We have not provided deferred U.S. income taxes or foreign withholding taxes on the unremitted cumulative earnings of our foreignsubsidiaries as these earnings are considered permanently reinvested in these operations. The unremitted earnings of our foreignsubsidiaries that are considered permanently reinvested were approximately $14.2 million as of December 31, 2009. Upon repatriation ofthese earnings, we would be subject to U.S. income tax, net of available foreign tax credits. At December 31, 2009, the88Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)estimated amount of this unrecognized deferred tax liability on permanently reinvested foreign earnings, based on current exchange ratesand assuming we would be able to use foreign tax credits, was approximately $1.0 million.As of December 31, 2009, 2008 and 2007 we had $3.2 million, $5.6 million and $6.8 million, respectively, of unrecognized taxbenefits which, if recognized, would impact our effective tax rate. We have accrued $1.1 million, $2.1 million and $2.3 million for thepayment of interest and penalties as of December 31, 2009, 2008 and 2007, respectively. We believe that is reasonably possible that$1.7 million of our currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized bythe end of 2010 as a result of a lapse of the statute of limitations and settlement of an audit of our former operations in Egypt.We file income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. We are not under acurrent federal tax examination. Federal tax years ending December 31, 2006 and forward are open for tax audits as of December 31,2009. Our other significant filings are Argentina which has been examined through 2006, Mexico which is in the intermediate stages of a2007 tax audit of our initial year of operations and in the State of Texas, where tax filings remain open for 2003 to 2006 for certainsubsidiaries of the Company.We recognized tax benefits in 2009 of $2.6 million for expirations of statutes of limitations. We recorded an income tax benefit of$1.4 million and an increase to deferred tax liabilities of $0.4 million related to these statute expirations.The following table presents the activity during 2009 related to our liabilities for uncertain tax positions (in thousands):Balance at January 1, 2009 $5,058 Additions based on tax positions related to the current year 336 Reductions as a result of lapse of applicable statute of limitations (2,153)Settlements — Balance at December 31, 2009 $3,241 Tax Legislative ChangesThe Economic Stimulus Act of 2008. The Economic Stimulus Act of 2008 permits a bonus first-year depreciation deduction of50% of the adjusted basis of qualified property (most personal property and software) acquired and placed in service after December 31,2007 and before January 1, 2009. We have $140 million of qualifying additions in 2008 resulting in additional 2008 tax depreciation of$70 million.The American Recovery and Reinvestment Act of 2009. The American Recovery and Reinvestment Act of 2009 extends the bonusfirst-year depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed in service to after December 31,2008 and before January 1, 2010. We have an estimated $66 million of qualifying additions in 2009 resulting in additional 2009 taxdepreciation of $33 million.89Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 13. LONG-TERM DEBTThe components of our long-term debt are as follows: December 31, December 31, 2009 2008 (In thousands) 8.375% Senior Notes due 2014 $425,000 $425,000 Senior Secured Credit Facility revolving loans due 2012 87,813 187,813 Other long-term indebtedness 1,044 3,015 Notes payable — related parties, net of discount of $69 and $182, respectively 5,931 20,318 Capital lease obligations 14,313 23,149 $534,101 $659,295 Less current portion (10,152) (25,704)Total long-term debt and capital lease obligations, net of discount $523,949 $633,591 8.375% Senior Notes due 2014On November 29, 2007, we issued $425.0 million in Senior Notes under an indenture (the “Indenture”). The Senior Notes werepriced at 100% of their face value to yield 8.375%. Net proceeds, after deducting initial purchasers’ fees and offering expenses, wereapproximately $416.1 million. The Senior Notes were registered as public debt effective August 22, 2008.The Senior Notes are general unsecured senior obligations of the Company. They rank effectively subordinate to all of our existingand future secured indebtedness. The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by certain of ourexisting and future domestic subsidiaries. The Senior Notes mature on December 1, 2014.On or after December 1, 2011, the Senior Notes will be subject to redemption at any time and from time to time at our option, inwhole or in part, at the redemption prices (expressed as percentages of the principal amount redeemed) below, plus accrued and unpaidinterest to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicatedbelow:Year Percentage 2011 104.19%2012 102.09%2013 100.00%In addition, at any time and from time to time before December 1, 2010, we have the option to redeem up to 35% of the aggregateprincipal amount of the outstanding Senior Notes at a redemption price of 108.375%, plus accrued and unpaid interest to the redemptiondate, with the net cash proceeds of one or more equity offerings, provided that at least 65% of the aggregate principal amount of the SeniorNotes issued under the Indenture remains outstanding immediately after each such redemption. These redemptions must occur within180 days of the date of the closing of the equity offering.In addition, at any time and from time to time prior to December 1, 2011, we may, at our option, redeem all or a portion of theSenior Notes at a redemption price equal to 100% of the principal amount, plus the Applicable Premium (as defined in the Indenture) withrespect to the Senior Notes plus accrued and unpaid interest to the redemption date. If we experience a change of control, subject to certainexceptions, we must give holders of the Senior Notes the opportunity to sell to us their Senior Notes, in whole or in part, at a90Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.We are subject to certain negative covenants under the Indenture governing the Senior Notes. The Indenture limits our ability to,among other things: • sell assets; • pay dividends or make other distributions on capital stock or subordinated indebtedness; • make investments; • incur additional indebtedness or issue preferred stock; • create certain liens; • enter into agreements that restrict dividends or other payments from our subsidiaries to us; • consolidate, merge or transfer all or substantially all of our assets; • engage in transactions with affiliates; and • create unrestricted subsidiaries.These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions in connection with thecovenants of our Senior Secured Credit Facility. Substantially all of the covenants will terminate before the Senior Notes mature if one oftwo specified ratings agencies assigns the Senior Notes an investment grade rating in the future and no events of default exist under theIndenture. As of December 31, 2009, the Senior Notes were below investment grade. Any covenants that cease to apply to us as a result ofachieving an investment grade rating will not be restored, even if the credit rating assigned to the Senior Notes later falls below aninvestment grade rating. We were in compliance with these covenants at December 31, 2009.Senior Secured Credit FacilityWe maintain a Senior Secured Credit Facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank ofAmerica Securities LLC and Wells Fargo Bank, N.A. are the administrative agents. We entered into the Senior Secured Credit Facility onNovember 29, 2007, simultaneously with the offering of the Senior Notes, and entered into an amendment (the “Amendment”) to theSenior Secured Credit Facility on October 27, 2009. As amended, the Senior Secured Credit Facility consists of a revolving creditfacility, letter of credit sub-facility and swing line facility, up to an aggregate principal amount of $300.0 million, all of which will matureno later than November 29, 2012.The Amendment we entered into in the fourth quarter of 2009 reduced the total credit commitments under the facility from$400.0 million to $300.0 million, effected by a pro rata reduction of the commitment of each lender under the facility. We have the abilityto request increases in the total commitments under the facility by up to $100.0 million in the aggregate, with any such increases beingsubject to certain requirements as well as lenders’ approval. Pursuant to the Amendment, we also modified the applicable interest ratesand some of the financial covenants, among other changes.The interest rate per annum applicable to the Senior Secured Credit Facility (as amended) is, at our option, (i) LIBOR plus a marginof 350 to 450 basis points, depending on our consolidated leverage ratio, or, (ii) the base rate (defined as the higher of (x) Bank ofAmerica’s prime rate and (y) the Federal Funds rate plus 0.5%), plus a margin of 250 to 350 basis points, depending on our consolidatedleverage 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 certainfinancial ratios and limit our annual capital expenditures. In addition to91Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)covenants that impose restrictions on our ability to repurchase shares, have assets owned by domestic subsidiaries located outside theUnited States and other such limitations, the amended Senior Secured Credit Facility also requires: • that our consolidated funded indebtedness be no greater than 45% of our adjusted total capitalization; • that our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes,depreciation and amortization (as calculated pursuant to the terms of the Senior Secured Credit Facility, “EBITDA”) be no greaterthan (i) 2.50 to 1.00 for the fiscal quarter ended December 31, 2009 through and including the fiscal quarter endingDecember 31, 2010 and, (ii) thereafter, 2.00 to 1.00; • that we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least the followingamounts during each corresponding period:from the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending June 30, 2010 1.75 to 1.00through the fiscal quarter ending September 30, 2010 2.00 to 1.00for the fiscal quarter ending December 31, 2010 2.50 to 1.00thereafter 3.00 to 1.00; • that we limit our capital expenditures (not including any made by foreign subsidiaries that are not wholly-owned) to(i) $135.0 million during fiscal year 2009 and $120.0 million during each subsequent fiscal year if our consolidated leverageratio of total funded debt to trailing four quarters EBITDA is greater than 3.50 to 1.00; or (ii) $250.0 million if our consolidatedleverage ratio of total funded debt to trailing four quarters EBITDA is equal to or less than 3.50 to 1.00, subject to certainadjustments; • that we only make acquisitions that either (i) are completed for equity consideration, without regard to leverage, or (ii) arecompleted for cash consideration, but only (A) if the consolidated leverage ratio of total funded debt to trailing four quartersEBITDA is 2.75 to 1.00 or less, (x) there is an aggregate amount of $25.0 million in unused credit commitments under thefacility and (y) we are in pro forma compliance with the financial covenants contained in the credit agreement; and (B) if theconsolidated leverage ratio of total funded debt to trailing four quarters EBITDA is greater than 2.75 to 1.00, in addition to therequirements in subclauses (x) and (y) in clause (A) above, the cash amount paid with respect to acquisitions is limited to$25.0 million per fiscal year (subject to potential increase using amounts then available for capital expenditures and any net cashproceeds we receive after October 27, 2009 in connection with the issuance or sale of equity interests or the incurrence or issuanceof certain unsecured debt securities that are identified as being used for such purpose); and • that we limit our investment in foreign subsidiaries (including by way of loans made by us and our domestic subsidiaries toforeign subsidiaries and guarantees made by us and our domestic subsidiaries of debt of foreign subsidiaries) to $75.0 millionduring any fiscal year or an aggregate amount after October 27, 2009 equal to (i) the greater of $200.0 million or 25% of ourconsolidated net worth, plus (ii) any net cash proceeds we receive after October 27, 2009, in connection with the issuance or saleof equity interests or the incurrence of certain unsecured debt securities that are identified as being used for such purpose.In addition, the amended Senior Secured Credit Facility contains certain affirmative covenants, including, without limitation,restrictions related to (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfersand other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments; (vi) dividends and otherdistributions to, and redemptions and repurchases from, equity holders; (vii) prepaying, redeeming or repurchasing the Senior Notes orother unsecured debt incurred pursuant to the sixth bullet point listed above; (viii) granting negative pledges other92Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)than to the lenders; (ix) changes in the nature of our business; (x) amending organizational documents, or amending or otherwisemodifying any debt if such amendment or modification would have a material adverse effect, or amending the Senior Notes or any otherunsecured debt incurred pursuant to the sixth bullet point listed above if the effect of such amendment is to shorten the maturity of theSenior 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 at December 31, 2009.We may prepay the Senior Secured Credit Facility in whole or in part at any time without premium or penalty, subject to ourobligation to reimburse the lenders for breakage and redeployment costs. In connection with the Amendment, we wrote off a proportionateamount of the unamortized deferred financing costs associated with the capacity reduction of the credit facility. During the year endedDecember 31, 2009, we recognized $0.5 million in pre-tax charges in losses on extinguishment of debt associated with the write-off ofunamortized deferred financing costs.As of December 31, 2009, $87.8 million of borrowings and $55.2 million of letters of credit were outstanding under our revolvingcredit facility, leaving $156.9 million of availability under our revolving credit facility. Under the terms of the Senior Secured CreditFacility, committed letters of credit count against our borrowing capacity. All obligations under the Senior Secured Credit Facility areguaranteed by most of our subsidiaries and are secured by most of our assets, including our accounts receivable, inventory andequipment. The weighted average interest rate on the outstanding borrowings of the Senior Secured Credit Facility was 3.73% atDecember 31, 2009.Notes Payable to Related PartiesOn October 25, 2007, we entered into two promissory notes with related parties in connection with an acquisition. The first was anunsecured note in the amount of $12.5 million, which was due and paid in a lump-sum, together with accrued interest, on October 25,2009. The second unsecured note in the amount of $10.0 million is payable in annual installments of $2.0 million, plus accrued interest,on each anniversary date of its issue through October 2012. Each of the notes bore or bears interest at the Federal Funds Rate, adjustedannually on the anniversary date of the note. As of December 31, 2009, the interest rate on the second note was 0.11%. Interest expense forthe years ended December 31, 2009 and 2008 was $0.2 million and $1.2 million, respectively, on the two notes in aggregate.The Federal Funds Rate does not represent a rate that would have resulted if an independent borrower and an independent lender hadnegotiated a similar transaction under comparable terms and conditions and is not equal to our incremental borrowing rate. We recordedthe promissory notes at fair value which resulted in a discount being recorded. The discount will be recognized as interest expense over thelife of the promissory notes using the effective interest method. The amount of discount remaining to be amortized as of December 31,2009 and 2008 was less than $0.1 million and $0.2 million, respectively, for both notes in the aggregate. The total amount of discountamortization included in interest expense related to the notes for both years ended December 31, 2009 and 2008 was $0.1 million.93Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Long-Term Debt Principal Repayment and Interest ExpensePresented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as ofDecember 31, 2009: Principal Amount of Long-Term Debt (In thousands) 2010 $3,044 2011 2,000 2012 89,813 2013 — 2014 425,000 Thereafter — Total principal payments 519,857 Less: fair value discount (69)Total long-term debt $519,788 Presented below is a schedule of our estimated minimum lease payments on our capital lease obligations for the next five years andthereafter as of December 31, 2009: Capital Lease Obligation Minimum Lease Payments (In thousands) 2010 $7,517 2011 4,828 2012 2,116 2013 499 2014 — Thereafter — Total minimum lease payments 14,960 Less: executory costs (479)Net minimum lease payments 14,481 Less: amounts representing interest (168)Present value of minimum lease payments $14,313 94Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Interest expense for the years ended December 31, 2009, 2008 and 2007 consisted of the following: Year Ended December 31, 2009 2008 2007 (In thousands) Cash payments $41,750 $45,211 $33,964 Commitment and agency fees paid 825 102 2,232 Amortization of discount 113 140 — Amortization of deferred financing costs 2,070 1,975 1,680 Settlement of interest rate swaps — — 2,261 Net change in accrued interest (1,354) 333 1,366 Capitalized interest (4,335) (6,514) (5,296)Net interest expense $39,069 $41,247 $36,207 As of December 31, 2009 and 2008, the weighted average interest rate of our variable rate debt was 3.24% and 4.17%, respectively.Deferred Financing CostsCost capitalized, amortized, and written off in the determination of the loss on extinguishment of debt for the years endedDecember 31, 2009, 2008 and 2007 are presented in the table below: Year Ended December 31, 2009 2008 2007 (In thousands) Capitalized costs $2,474 $314 $13,400 Amortization 2,070 1,975 1,680 Loss on extinguishment 472 — 9,557 Net carrying values for the years presented appear in the table below: December 31, 2009 2008 (In thousands) Deferred financing costs: Gross carrying value $14,611 $12,609 Accumulated amortization (4,190) (2,120)Net carrying value $10,421 $10,489 NOTE 14. COMMITMENTS AND CONTINGENCIESOperating Lease ArrangementsWe lease certain property and equipment under non-cancelable operating leases that expire at various dates through 2019, withvarying payment dates throughout each month.95Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2009, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands): Lease Payments 2010 $7,230 2011 4,706 2012 4,045 2013 2,933 2014 2,147 Thereafter 3,472 $24,533 We are also party to a significant number of month-to-month leases that are cancelable at any time. Operating lease expense was$22.7 million, $22.4 million, and $16.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.LitigationVarious suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where weconduct business in the continental United States, we are often subject to jury verdicts or other outcomes that may be favorable toplaintiffs. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accrualsand our need for the disclosure of these items. We establish a provision for a contingent liability when it is probable that a liability hasbeen incurred and the amount is reasonably estimable. As of December 31, 2009, the aggregate amount of our liabilities related to litigationthat are deemed probable and reasonably estimable is approximately $2.7 million. We do not believe that the disposition of any of thesematters will have a material impact on our financial position, results of operations, or cash flows. In the year ended December 31, 2009,we recorded a net decrease in our reserves of $3.7 million related to the settlement of ongoing legal matters and the continued refinement ofliabilities recognized for litigation deemed probable and estimable. Our liabilities related to litigation matters that were deemed probable andestimable as of December 31, 2008 and 2007 were $4.5 million and $6.8 million, respectively.Litigation with Former Officers and EmployeesOur former general counsel, Jack D. Loftis, Jr., filed a lawsuit against us in the U.S. District Court, District of New Jersey, onApril 21, 2006, in which he alleges a “whistle-blower” claim under the Sarbanes-Oxley Act, breach of contract, breach of duties of goodfaith and fair dealing, breach of fiduciary duty and wrongful termination. On August 17, 2007, we filed counterclaims against Mr. Loftisalleging attorney malpractice, breach of contract and breach of fiduciary duties. In our counterclaims, we are seeking repayment of allseverance paid to Mr. Loftis (approximately $0.8 million) plus benefits paid during the period July 8, 2004 to September 21, 2004, anddamages relating to the allegations of malpractice and breach of fiduciary duties. The case is currently pending in the U.S. District Courtfor the Eastern District of Pennsylvania and will begin to appear on the trial docket during the second quarter of 2010. We recorded aliability for this matter in the fourth quarter of 2008.On October 17, 2006, Jane John, the ex-wife of our former chief executive officer, Francis John, filed a complaint in Bucks County,Pennsylvania against her ex-husband and us. Ms. John alleged a breach of the marital agreement, a breach of options agreements, civilconspiracy and fraud. By virtue of assignments, Ms. John held 375,000 stock options which expired unexercised during a period inwhich we were not current in our financial statements, when such options could not be exercised. Mr. John has agreed to indemnify us96Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)with respect to damages attributable to any and all of Ms. John’s claims, other than damages attributable to any alleged breach ofMs. John’s stock option agreements. We reached a settlement with Ms. John regarding the alleged breach of stock option agreements, andrecorded an additional charge related to the settlement in the third quarter of 2009, having initially recorded a liability for this matter in thethird quarter of 2008.On September 3, 2006, our former controller and former assistant controller filed suit against us in Harris County, Texas, allegingconstructive termination and breach of contract. We reached an agreement to resolve the matter through arbitration that included anobligation to pay a minimum amount to the claimants regardless of outcome, and we recorded a liability based upon the minimumpayment for this matter in the third quarter of 2009. In early December 2009, the matter went to trial and the arbitrator found in favor ofKey.Tax AuditsWe are routinely the subject of audits by tax authorities, and in the past have received material assessments from tax auditors. As ofDecember 31, 2009 and 2008, we have recorded reserves that management feels are appropriate for future potential liabilities as a result ofprior audits. While we believe we have fully reserved for these assessments, the ultimate amount of settlements can vary from ourestimates.Self-Insurance ReservesWe maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimatesusing an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurancepolicies for workers’ compensation, vehicular liability and general liability claims. These insurance policies carry self-insured retentionlimits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for allworkers’ compensation, vehicular liability and general liability claims. As of December 31, 2009 and 2008, we have recorded$65.2 million and $68.9 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities andgeneral liability claims. Partially offsetting these liabilities, we had approximately $17.2 million and $10.8 million of insurancereceivables as of December 31, 2009 and 2008, respectively. We feel that the liabilities we have recorded are appropriate based on theknown facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.Environmental Remediation LiabilitiesFor environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposedproperties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can bereasonably estimated. As of December 31, 2009 and 2008, we have recorded $3.4 million and $3.0 million, respectively, for ourenvironmental remediation liabilities. We feel that the liabilities we have recorded are appropriate based on the known facts andcircumstances and do not expect further losses materially in excess of the amounts already accrued.We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our SWD properties tocomply with environmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws andregulations), in the future (required to divest or cease operations), or for optimization (to improve operations, but not for safety orregulatory compliance).97Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 15. ACCUMULATED OTHER COMPREHENSIVE LOSSThe components of our accumulated other comprehensive loss are as follows (in thousands): December 31, 2009 2008 Foreign currency translation loss $(50,763) $(46,520)Deferred loss from available for sale investments — (30)Accumulated other comprehensive loss $(50,763) $(46,550)The local currency is the functional currency for our operations in Argentina, Mexico, Canada, the Russian Federation and for ourequity investments in Canada. The cumulative translation gains and losses resulting from translating each foreign subsidiary’s financialstatements from the functional currency to U.S. Dollars are included in other comprehensive income and accumulated in stockholders’equity until a partial or complete sale or liquidation of our net investment in the foreign entity. The table below summarizes the conversionratios used to translate the financial statements and the cumulative currency translation gains and losses, net of tax, for each currency: Argentine Peso Mexican Peso Canadian Dollar Euro Russian Rouble Total (In thousands, except for conversion ratios) As of December 31, 2009: Conversion ratio 3.82:1 13.04:1 1.05:1 0.70:1 30.27:1 n/a Cumulative translation adjustment $(48,953) $(716) $(1,087) n/a $(7) $(50,763)As of December 31, 2008: Conversion ratio 3.46:1 13.78:1 1.22:1 0.71:1 29.48:1 n/a Cumulative translation adjustment $(43,654) $(1,663) $(917) $(286) n/a $(46,520)NOTE 16. EMPLOYEE BENEFIT PLANSWe maintain a 401(k) plan as part of our employee benefits package. In the first quarter of 2009, management suspended the 401(k)matching program as part of our cost cutting efforts. Prior to this, we matched 100% of employee contributions up to 4% of the employee’ssalary into our 401(k) plan, subject to maximums of $9,200 and $9,000 for the years ended December 31, 2008 and 2007 respectively.Our matching contributions were $1.7 million, $11.9 million, and $10.2 million for the years ended December 31, 2009, 2008 and2007, respectively. We do not offer participants the option to purchase units of our common stock through a 401(k) plan fund.NOTE 17. STOCKHOLDERS’ EQUITYCommon StockAs of December 31, 2009, we had 200,000,000 shares of common stock authorized with a $0.10 par value, of which123,993,480 shares were issued and outstanding. On December 31, 2008, we had 200,000,000 shares of common stock authorized witha $0.10 par value, of which 121,305,289 shares were issued and outstanding. During 2009 and 2008, no dividends were declared orpaid. Under the terms of the Senior Notes and Senior Secured Credit Facility, we must meet certain financial covenants before we maypay dividends. We currently do not intend to pay dividends.98Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Share Repurchase ProgramIn October 2007, our board of directors authorized a share repurchase program of up to $300.0 million which was effective throughMarch 31, 2009. From the inception of the program in November 2007 through December 31, 2008, we repurchased approximately13.4 million shares of our common stock through open market transactions for an aggregate price of approximately $167.3 million. Wedid not repurchase any shares under this program in 2009, and the plan expired on March 31, 2009.Tax WithholdingWe repurchase shares of restricted common stock that have been previously granted to certain of our employees, pursuant to anagreement under which those individuals are permitted to sell shares back to us in order to satisfy the minimum income tax withholdingrequirements related to vesting of these grants. We repurchased a total of 71,954, 97,443 and 72,847 shares for an aggregate cost of$0.5 million, $1.2 million and $1.3 million during 2009, 2008 and 2007, respectively, which represented the fair market value of theshares based on the price of our stock on the dates of purchase.Common Stock WarrantsIn January 1999, we issued 150,000 warrants (the “Warrants”) in connection with a debt offering that were exercisable for anaggregate of approximately 2.2 million shares of our stock at an exercise price of $4.88125 per share. As of December 31, 2008, 83,800Warrants had been exercised, leaving 66,200 outstanding, which were exercisable for approximately 1.0 million shares of our commonstock. Termination notice was provided to the holders of the outstanding Warrants and the Warrants expired unexercised on February 2,2009.Under the terms of the Warrants, we were required to maintain an effective registration statement covering the shares potentiallyissuable upon exercise of the Warrants or make liquidated damages payments to the holders of the Warrants if we did not. On August 21,2008, the requisite registration statement required by the terms of the Warrants became effective. However, because we did not have aneffective registration statement through this date, we made liquidated damages payments totaling $0.8 and $0.9 million, respectivelyduring 2008 and 2007.On May 12, 2009, in connection with the settlement of a lawsuit, we issued to two individuals warrants to purchase shares ofKey’s common stock. The warrants, which expire on May 12, 2014, are exercisable for 174,000 shares of our common stock at anexercise price of $4.56 per share. We received no proceeds upon the issuance of the warrants, but we will receive the exercise price of anywarrants that are exercised prior to their expiration. The warrants, which are unregistered securities, were issued in a private placementand, therefore, their issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. As of December 31,2009, none of these warrants had been exercised.NOTE 18. SHARE-BASED COMPENSATION2009 Incentive PlanOn June 4, 2009, our stockholders approved the 2009 Equity and Cash Incentive Plan (the “2009 Incentive Plan”). The 2009Incentive Plan is administered by our board of directors or a committee designated by our board of directors (the “Committee”). Our boardof directors or the Committee (the “Administrator”) will have the power and authority to select Participants (as defined below) in the 2009Incentive Plan and to grant Awards (as defined below) to such Participants pursuant to the terms of the 2009 Incentive Plan. The 2009Incentive Plan expires June 4, 2019.Subject to adjustment, the total number of shares of our common stock that will be available for the grant of Awards under the 2009Incentive Plan may not exceed 4,000,000 shares; however, for purposes of this99Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)limitation, any stock subject to an award that is canceled, forfeited or expires prior to exercise or realization will again become availablefor issuance under the 2009 Incentive Plan. Subject to adjustment, no Participant will be granted, during any one year period, options topurchase common stock and/or stock appreciation rights with respect to more than 500,000 shares of common stock. Stock available fordistribution under the 2009 Incentive Plan will come from authorized and unissued shares or shares we reacquire in any manner. Allawards under the 2009 Incentive Plan are granted at fair market value on the date of issuance.Awards may be in the form of stock options (incentive stock options and nonqualified stock options), restricted stock, restrictedstock units, performance compensation awards and stock appreciation rights (collectively, “Awards”). Awards may be granted toemployees, directors and, in some cases, consultants and those individuals whom the Administrator determines are reasonably expectedto become employees, directors or consultants following the grant date of the Award (“Participants”). However, incentive stock optionsmay be granted only to employees. Vesting periods may be set at the discretion of the board of directors, or its compensation committee,but are generally set at two to four years. Awards to our directors are generally not subject to vesting.Our board of directors may at any time, and from time to time, amend or terminate the 2009 Incentive Plan. However, no repricingof stock options is permitted unless approved by our stockholders, and, except as provided otherwise in the 2009 Incentive Plan, no otheramendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy any applicablelaw or securities exchange listing requirements. As of December 31, 2009, there were 3,835,688 remaining shares available for grantunder the 2009 Incentive Plan.2007 Incentive PlanOn December 6, 2007, our stockholders approved the 2007 Equity and Cash Incentive Plan (the “2007 Incentive Plan”). The 2009Incentive Plan was based on the form of the 2007 Incentive Plan, and the terms of both plans are substantially similar. However, there area few differences between the plans. For example, the 2009 Incentive Plan addresses the treatment of Awards when a Participant’scontinuous service with the Company terminates as a result of retirement (as defined in the plan), but the 2007 Incentive Plan does notspecifically address that situation. Also, the 2007 Incentive Plan allows for the transferability of stock options by will, by the laws ofdescent and distribution, to a third party designee upon death, or, as may determined in the discretion of the Administrator, to certainother permitted transferees set forth in the 2007 Incentive Plan. However, the 2009 Incentive Plan only permits such transferability bywill, by the laws of descent and distribution or to a third party designee upon death.Subject to adjustment, the total number of shares of our common stock that are available for the grant of Awards under the 2007Incentive Plan may not exceed 4,000,000 shares; however, as is the case under the 2009 Incentive Plan, for purposes of this limitation,any stock subject to an award that is canceled, forfeited or expires prior to exercise or realization will again become available for issuanceunder the 2007 Incentive Plan.Our board of directors may at any time, and from time to time, amend or terminate the 2007 Incentive Plan. However, except asprovided otherwise in the 2007 Incentive Plan, no amendment will be effective unless approved by our stockholders to the extentstockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of December 31, 2009,there were 246,537 remaining shares available for grant under the 2007 Incentive Plan.1997 Incentive PlanOn January 13, 1998, our stockholders approved the Key Energy Group, Inc. 1997 Incentive Plan, as amended (the “1997Incentive Plan”). The 1997 Incentive Plan was an amendment and restatement of the plans formerly known as the Key Energy Group,Inc. 1995 Stock Option Plan and the Key Energy Group, Inc.100Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)1995 Outside Directors Stock Option Plan. On November 17, 2007, the 1997 Incentive Plan terminated pursuant to its terms, afterwhich no new awards could be granted under the plan.The exercise price of options granted under the 1997 Incentive Plan is at or above the fair market value per share on the date theoptions are granted. Under the 1997 Incentive Plan, when the shares of common stock were listed on a securities exchange, fair marketvalue was determined using the closing sales price on the immediate preceding business day as reported on such securities exchange.When the shares were not listed on an exchange, which included the period from April 2005 through October 2007, the fair marketvalue was determined by using the published closing price of the common stock on the Pink Sheets on the business day immediatelypreceding the date of grant.During the period from 2000 to 2001, the board of directors granted 3.7 million stock options that were outside the 1997 IncentivePlan, of which 120,000 remained outstanding as of December 31, 2009. The 3.7 million non-plan options were in addition to, and did notinclude, other options which were granted under the 1997 Incentive Plan, but not in conformity with certain of the terms of the 1997Incentive Plan.Accelerated Vesting of Option and SAR AwardsOur board of directors resolved during the fourth quarter of 2008 to accelerate the vesting period for certain of our outstandingunvested stock option awards and stock appreciation rights, which affected approximately 280 employees. Primarily as a result of theacceleration, we recorded a pre-tax charge of $10.9 million in general and administrative expense during the fourth quarter of 2008.Because of the acceleration of the vesting term, no expense will be recognized on these awards in periods subsequent to December 31,2008.Stock Option AwardsStock option awards granted under our incentive plans have a maximum contractual term of ten years from the date of grant. Sharesissuable upon exercise of a stock option are issued from authorized but unissued shares of our common stock. The following tablesummarizes the stock option activity during fiscal years ended December 31, 2009, 2008 and 2007 (shares in thousands): Year Ended December 31, 2009 Weighted Average Weighted Average Options Exercise Price Fair Value Outstanding at beginning of period 4,961 $12.21 $5.42 Granted 15 $4.14 $2.23 Exercised (418) $3.12 $2.30 Cancelled or expired (663) $13.70 $5.84 Outstanding at end of period 3,895 $12.90 $5.62 Exercisable at end of period 3,853 $12.99 $5.66 101Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2008 Weighted Average Weighted Average Options Exercise Price Fair Value Outstanding at beginning of period 4,594 $11.01 $5.32 Granted 1,379 $14.76 $5.43 Exercised (757) $8.81 $4.81 Cancelled or expired (255) $14.53 $6.15 Outstanding at end of period 4,961 $12.21 $5.38 Exercisable at end of period 4,911 $12.30 $5.42 Year Ended December 31, 2007 Weighted Average Weighted Average Options Exercise Price Fair Value Outstanding at beginning of period 5,829 $9.46 $4.94 Granted 1,195 $14.41 $5.98 Exercised (1,592) $8.45 $4.58 Cancelled or expired (838) $10.36 $5.03 Outstanding at end of period 4,594 $11.01 $5.32 Exercisable at end of period 2,615 $8.34 $4.47 The following table summarizes information about the stock options outstanding at December 31, 2009 (shares in thousands): Options Outstanding Weighted Average Remaining Number of Contractual Life Options Weighted Average Weighted Average (Years) Outstanding Exercise Price Fair Value Range of exercise prices: $3.87 - $8.00 2.60 350 $7.36 $3.98 $8.01 - $9.37 0.99 425 $8.49 $5.25 $9.38 - $13.10 4.64 708 $11.42 $5.04 $13.11 - $15.05 7.08 1,341 $14.58 $6.43 $15.06 - $19.42 8.26 1,071 $15.34 $5.69 3,895 $12.90 $5.62 Aggregate intrinsic value (in thousands) $637 102Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Options Exercisable Number of Options Weighted Average Weighted Average Exercisable Exercise Price Fair Value Range of exercise prices: $3.87 - $8.00 308 $7.76 $4.24 $8.01 - $9.37 425 $8.49 $5.25 $9.38 - $13.10 708 $11.42 $5.04 $13.11 - $15.05 1,341 $14.58 $6.43 $15.06 - $19.42 1,071 $15.34 $5.69 3,853 $12.99 $5.66 Aggregate intrinsic value (in thousands) $453 The total fair value of stock options granted during the years ended December 31, 2009, 2008 and 2007 was less than $0.1 million,$7.5 million and $7.1 million, respectively. The total fair value of stock options vested during the year ended December 31, 2009 wasless than $0.1 million. For the years ended December 31, 2009, 2008 and 2007, we recognized less than $0.1 million, $15.1 million and$3.5 million in pre-tax expense related to stock options, respectively. We recognized tax benefits of less than $0.1 million, $5.2 million,and $0.7 million related to our stock options for the years ended December 31, 2009, 2008 and 2007, respectively. Compensation expenserecognized during 2008 related to stock option awards included the charge we took for the accelerated vesting, as discussed above. Forunvested stock option awards outstanding as of December 31, 2009, we expect to recognize less than $0.1 million of compensationexpense over a weighted average remaining vesting period of approximately 2.0 years. The weighted average remaining contractual term forstock option awards exercisable as of December 31, 2009 is 5.9 years. The intrinsic value of the options exercised for the years endedDecember 31, 2009, 2008 and 2007 was $1.9 million, $5.8 million and $10.2 million, respectively. Cash received from the exercise ofoptions for the year ended December 31, 2009 was $1.3 million with recognition of associated tax benefits in the amount of $0.1 million.Common Stock AwardsThe total fair market value of all common stock awards granted during the years ended December 31, 2009, 2008 and 2007 was$8.8 million, $6.5 million and $4.7 million, respectively.The following table summarizes information for the years ended December 31, 2009, 2008 and 2007 about the common shareawards that we have issued (shares in thousands): Year Ended December 31, 2009 Weighted Average Weighted Average Outstanding Issuance Price Vested Issuance Price Shares at beginning of period 1,409 $14.42 748 $14.05 Shares issued during period(1) 2,667 $3.30 146 $5.96 Previously issued shares vesting during period — $— 272 $15.04 Shares cancelled during period (325) $7.24 — $— Shares repurchased during period (72) $6.73 (72) $6.73 Shares at end of period 3,679 $7.14 1,094 $13.70 103Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2008 Weighted Average Weighted Average Outstanding Issuance Price Vested Issuance Price Shares at beginning of period 1,078 $14.01 478 $13.48 Shares issued during period(1) 428 $15.10 47 $18.01 Previously issued shares vesting during period — $— 320 $13.97 Shares repurchased during period (97) $12.86 (97) $12.86 Shares at end of period 1,409 $14.42 748 $14.05 Year Ended December 31, 2007 Weighted Average Weighted Average Outstanding Issuance Price Vested Issuance Price Shares at beginning of period 833 $13.69 258 $12.44 Shares issued during period(1) 318 $14.87 54 $17.48 Previously issued shares vesting during period — $— 239 $13.87 Shares repurchased during period (73) $14.05 (73) $14.05 Shares at end of period 1,078 $14.01 478 $13.48 (1)Includes 143,100, 47,190 and 53,648 shares of common stock issued to our non-employee directors vested immediately uponissuance during 2009, 2008 and 2007, respectively.For common stock grants that vest immediately upon issuance, we record expense equal to the fair market value of the shares on thedate of grant. For common stock awards that do not immediately vest, we recognize compensation expense ratably over the vesting periodof the grant, net of estimated and actual forfeitures. For the years ended December 31, 2009, 2008 and 2007, we recognized $6.0 million,$6.1 million and $5.6 million, respectively, of pre-tax expense associated with common stock awards, including common stock grantsto our outside directors. In connection with the expense related to common stock awards recognized during the year ended December 31,2009, we recognized tax benefits of $2.0 million. Tax benefits for the years ended December 31, 2008 and 2007 were $1.5 million and$1.2 million, respectively. For the unvested common stock awards outstanding as of December 31, 2009, we anticipate that we willrecognize $6.5 million of pre-tax expense over the next 1.2 years.Phantom Share PlanIn December 2006, we announced the implementation of a “Phantom Share Plan,” in which certain of our employees were granted“Phantom Shares.” Phantom Shares vest ratably over a four-year period and convey the right to the grantee to receive a cash payment onthe anniversary date of the grant equal to the fair market value of the Phantom Shares vesting on that date. Grantees are not permitted todefer this payment to a later date. The Phantom Shares are a “liability” type award and we account for these awards at fair value. Werecognize compensation expense related to the Phantom Shares based on the change in the fair value of the awards during the period andthe percentage of the service requirement that has been performed, net of estimated and actual forfeitures, with an offsetting liabilityrecorded on our consolidated balance sheets. We recognized $1.9 million of pre-tax compensation expense, less than $0.1 million of pre-tax benefit and approximately $3.3 million of pre-tax compensation expense associated with the Phantom Shares for the years endedDecember 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, we recorded current and non-current liabilities of$1.5 million and $0.5, respectively, which represented the aggregate fair value of the Phantom Shares on that date.104Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)We recognized income tax benefits associated with the Phantom Shares of $0.7 million, less than $0.1 million and $1.3 million in2009, 2008 and 2007, respectively. For unvested Phantom Share awards outstanding as of December 31, 2009, based on the market priceof our common stock on this date, we expect to recognize approximately $0.9 million of compensation expense over a weighted averageremaining vesting period of approximately 1.2 years. During 2009, cash payments related to the Phantom Shares totaled $1.2 million.Stock Appreciation RightsIn August 2007, we issued approximately 587,000 SARs to our executive officers. Each SAR has a ten-year term from the date ofgrant. The vesting of all outstanding SAR awards was accelerated during the fourth quarter of 2008. Upon the exercise of a SAR, therecipient will receive an amount equal to the difference between the exercise price and the fair market value of a share of our common stockon the date of exercise, multiplied by the number of shares of common stock for which the SAR was exercised. All payments will be madein shares of our common stock. Prior to exercise, the SAR does not entitle the recipient to receive any shares of our common stock anddoes not provide the recipient with any voting or other stockholders’ rights. We account for these SARs as equity awards and recognizecompensation expense ratably over the vesting period of the SAR based on their fair value on the date of issuance, net of estimated andactual forfeitures. We did not recognize any expense associated with these awards during 2009. Compensation expense recognized in 2008and 2007 in connection with the SARs was $3.1 million and $0.6 million, respectively. We recognized income tax benefits of$1.1 million and $0.2 million in 2008 and 2007, respectively, in connection with this expense.Valuation Assumptions on Stock Options and Stock Appreciation RightsThe fair value of each stock option grant or SAR was estimated on the date of grant using the Black-Scholes option-pricing model,based on the following weighted-average assumptions: Year Ended December 31, 2009 2008 2007 Risk-free interest rate 2.21% 2.86% 4.41%Expected life of options and SARs, years 6 6 6 Expected volatility of our stock price 53.70% 36.86% 39.49%Expected dividends none none none NOTE 19. TRANSACTIONS WITH RELATED PARTIESEmployee Loans and AdvancesFrom time to time, we have made certain retention loans and relocation loans to employees other than executive officers. The retentionloans are forgiven over various time periods so long as the employee continues their employment with us. The relocation loans are repaidupon the employee selling his prior residence. As of December 31, 2009 and 2008, these loans, in the aggregate, totaled $0.2. Of thisamount, less than $0.1 million were made to our former officers, with the remainder being made to our current employees.Related Party Notes PayableOn October 25, 2007, we entered into two promissory notes with related parties in connection with an acquisition. The first was anunsecured note in the amount of $12.5 million, which was due and paid in a lump-sum, together with accrued interest, on October 25,2009. The second unsecured note in the amount of $10.0 million is payable in annual installments of $2.0 million, plus accrued interest,on each anniversary date of its issue through October 2012. Each of the notes bore or bears interest at the Federal Funds Rate, adjusted105Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)annually on the anniversary date of the note. As of December 31, 2009, the interest rate on the second note was 0.11%. Interest expense forthe years ended December 31, 2009, 2008 and 2007 was $0.2 million, $1.2 million and $0.2 million respectively, on the two notes inaggregate.The Federal Funds rate does not represent a rate that would have resulted if an independent borrower and an independent lender hadnegotiated a similar transaction under comparable terms and conditions and is not equal to our incremental borrowing rate. We recordedthe promissory notes at fair value which resulted in a discount being recorded. The discount will be recognized as interest expense over thelife of the promissory notes using the effective interest method.Transactions with EmployeesIn connection with an acquisition in 2008, the former owner of the acquiree became an employee of Key. At the time of theacquisition, the employee owned, and continues to own, an exploration and production company. Subsequent to the acquisition, wecontinued to provide services to this company. The prices charged for these services are at rates that are an average of the prices charged toour other customers in the California market. As of December 31, 2009, our receivables with this company totaled $0.1 million, and forthe year ended December 31, 2009, revenues from this company totaled $3.4 million.Board of Director Relationship with CustomerOne member of our board of directors is the Senior Vice President, General Counsel and Chief Administrative Officer of AnadarkoPetroleum Corporation (“Anadarko”), which is one of our customers. Sales to Anadarko comprised less than 2% of our total revenues forthe years ended December 31, 2009, 2008 and 2007. Our sales to Anadarko were less than 1% of Anadarko’s revenues for 2009, 2008and 2007. Transactions with Anadarko for our services are made on terms consistent with other customers.NOTE 20. SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, 2009 2008 2007 (In thousands) Noncash investing and financing activities: Property and equipment acquired under captial lease obligations $938 $7,654 $12,003 Asset retirement obligations 517 397 12 Unrealized loss on short-term investments — (8) — Accrued repurchases of common stock — — 2,949 Debt assumed and issued in acquisitions — — 40,149 Software acquired under financing arrangement — 3,985 — Supplemental cash flow information: Cash paid for interest $42,575 $45,313 $38,457 Cash paid for taxes $12,872 $43,494 $96,327 Tax refunds $9,135 $3,701 $429 Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations, commitment andagency fees paid, and cash paid to settle the interest rate swaps associated with the termination of our prior credit facility in 2007.106Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 21. SEGMENT INFORMATIONWe revised our reportable business segments effective in the first quarter of 2009. The new operating segments are Well Servicingand Production Services. Financial results for the years ended December 31, 2008 and 2007 have been restated to reflect the change inoperating segments. We revised our segments to align with changes in management’s resource allocation and performance assessment inmaking decisions regarding our operations. Our rig services and fluid management services operations are aggregated within our WellServicing segment. Our pressure pumping services, fishing and rental services and wireline services operations, as well as our technologydevelopment group in Canada, are now aggregated within our Production Services segment. These changes reflect our current operatingfocus. The accounting policies for our segments are the same as those described in “Note 1. Organization and Summary of SignificantAccounting Policies.” All inter-segment sales pricing is based on current market conditions. The following is a description of thesegments:Well Servicing SegmentRig ServicesThese services include the maintenance of existing wells, workover of existing wells, completion of newly drilled wells, drilling ofhorizontal wells, recompletion of existing wells (re-entering a well to complete the well in a new geologic zone or formation) and pluggingand abandonment of wells at the end of their useful lives.Workover services are performed to enhance the production of existing wells. Such services include extensions of existing wells todrain new formations either by deepening well bores to new zones or by drilling horizontal or lateral well bores to improve reservoirdrainage. In less extensive workovers, our rigs are used to seal off depleted zones in existing well bores or to access a previously bypassedproductive zone.Our completion services prepare a newly drilled oil or natural gas well for production. We typically provide a well service rig andmay also provide other equipment such as a workover package to assist in the completion process.Fluid Management ServicesThese services include fluid management logistics, including oilfield transportation and produced-water disposal services. Ouroilfield transportation and produced-water disposal services include vacuum truck services, fluid transportation services and disposalservices for operators whose oil or natural gas wells produce saltwater and other fluids. In addition, we are a supplier of frac tanks whichare used for temporary storage of fluids in conjunction with the fluid hauling operations. Our fluid management services will collect,transport and dispose of the saltwater. These fluids are removed from the well site and transported for disposal in a SWD well.Production Services SegmentPressure Pumping ServicesThese services include well stimulation and cementing services to oil and natural gas producers. Well stimulation services includefracturing, nitrogen, acidizing, cementing and coiled tubing services. These services (which may be completion or workover services) areprovided to oil and natural gas producers and are used to enhance the production of oil and natural gas wells from formations whichexhibit restricted flow of oil and natural gas. In the fracturing process, we typically pump fluid and sized sand, or proppants, into a wellat high pressure in order to fracture the formation and thereby increase the flow of oil and natural gas. With our cementing services, wepump cement into a well between the casing and the well bore.107Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Fishing and Rental ServicesThese services include the recovery of lost or stuck equipment in the well bore utilizing a “fishing tool.” We offer a full line ofservices and rental equipment designed for use both onshore and offshore for drilling and workover services. Our rental tool inventoryconsists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-controlled equipment, power swivels, and foam air units.Wireline ServicesThese services include perforating, completion logging, production logging and casing integrity services. After the well bore is casedand cemented, we can provide a number of services. Perforating creates the flow path between the reservoir and the well bore. Productionlogging can be performed throughout the life of the well to measure temperature, fluid type, flow rate, pressure and other reservoircharacteristics. This service helps the operator analyze and monitor well performance and determine when a well may need a workover orfurther stimulation.Advanced Measurements, Inc.Also included in our Production Services segment is AMI, our technology development company based in Canada. AMI is focusedon oilfield service equipment controls, data acquisition and digital information flow.Functional SupportWe 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 consistprimarily of cash and cash equivalents, accounts and notes receivable and investments in subsidiaries, our equity-method investment inIROC and deferred income tax assets.The following present our segment information as of and for the years ended December 31, 2009, 2008 and 2007 (in thousands): Well Production Functional Servicing Services Support Eliminations Total As of and for the year ended December 31, 2009: Revenues from external customers $859,747 $218,918 $— $— $1,078,665 Intersegment revenue 10 5,662 — (5,672) — Operating expenses 781,504 240,625 105,586 — 1,127,715 Asset retirements and impairments 65,869 93,933 — — 159,802 Operating income (loss) 12,374 (115,640) (105,586) — (208,852)Interest expense (2,007) (727) 41,803 — 39,069 Income (loss) before income taxes 14,414 (114,150) (148,065) — (247,801)Total assets 1,133,068 251,580 643,854 (364,092) 1,664,410 Capital expenditures, excluding acquisitions 75,242 39,305 13,875 — 128,422 108Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Well Production Functional Servicing Services Support Eliminations Total As of and for the year ended December 31, 2008: Revenues from external customers $1,470,332 $501,756 $— $— $1,972,088 Intersegment revenue 93 5,281 — (5,374) — Operating expenses 1,114,432 407,560 156,816 — 1,678,808 Asset retirements and impairments — 69,752 5,385 — 75,137 Operating income (loss) 355,900 24,444 (162,201) — 218,143 Interest expense (2,310) (1,828) 45,385 — 41,247 Income (loss) before income taxes 354,928 27,804 (208,676) — 174,056 Total assets 1,386,753 429,131 587,696 (386,657) 2,016,923 Capital expenditures, excluding acquisitions 145,494 65,312 8,188 — 218,994 Well Production Functional Servicing Services Support Eliminations Total As of and for the year ended December 31, 2007: Revenues from external customers $1,240,126 $421,886 $— $— $1,662,012 Intersegment revenue — — — — — Operating expenses 879,270 315,919 150,444 — 1,345,633 Asset retirements and impairments — — — — — Operating income (loss) 360,856 105,967 (150,444) — 316,379 Interest expense (1,205) (1,047) 38,459 — 36,207 Income (loss) before income taxes 358,549 108,129 (190,738) — 275,940 Total assets 1,300,516 373,380 390,662 (205,481) 1,859,077 Capital expenditures, excluding acquisitions 126,394 79,854 6,312 — 212,560 The following table presents selected financial information related to our operations by geography (in thousands of U.S. Dollars): U.S. Argentina Mexico Canada Russia Eliminations Total As of and for the year ended December 31, 2009: Revenue from external customers $881,329 $68,625 $118,650 $873 $9,188 $— $1,078,665 Long-lived assets 1,263,376 18,671 64,162 8,182 54,956 (129,069) 1,280,278 As of and for the year ended December 31, 2008: Revenue from external customers $1,800,199 $118,841 $47,200 $5,848 $— $— $1,972,088 Long-lived assets 1,434,578 25,419 45,547 7,482 — (55,225) 1,457,801 As of and for the year ended December 31, 2007: Revenue from external customers $1,556,108 $93,925 $9,041 $2,938 $— $— $1,662,012 Long-lived assets 1,368,735 29,762 11,089 10,782 — (49,156) 1,371,212 109Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 22. UNAUDITED QUARTERLY RESULTS OF OPERATIONSSet forth below is unaudited summarized quarterly information for the two most recent years covered by these consolidated financialstatements (in thousands, except for per share data): First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended December 31, 2009: Revenues $331,989 $241,458 $237,671 267,547 Direct operating expenses 227,227 173,853 179,901 198,476 Asset retirements and impairments — — 159,802 — Income (loss) before income taxes 1,129 (29,131) (198,206) (21,593)Net income (loss) 904 (18,473) (125,017) (14,090)Income (loss) attributable to common stockholders 904 (18,473) (124,942) (13,610)Earnings per share(1): Basic $0.01 $(0.15) $(1.03) $(0.11)Diluted $0.01 $(0.15) $(1.03) $(0.11) First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended December 31, 2008: Revenues $456,399 $502,003 $535,620 $478,066 Direct operating expenses 281,641 322,488 342,195 304,003 Asset retirements and impairments — — — 75,137 Income (loss) before income taxes 56,907 71,247 77,541 (31,639)Net income (loss) 34,450 43,801 48,462 (42,900)Income (loss) attributable to common stockholders 34,484 44,012 48,462 (42,900)Earnings per share(1): Basic $0.27 $0.35 $0.39 $(0.35)Diluted $0.27 $0.35 $0.39 $(0.35)(1)Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and thesum of the quarters may not equal annual earnings per common share.110Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 23. CONDENSED CONSOLIDATING FINANCIAL STATEMENTSOur Senior Notes are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly-owned. The guarantees werejoint and several, full, complete and unconditional. There were no restrictions on the ability of subsidiary guarantors to transfer funds tothe parent company.As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information.CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2009 Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Assets: Current assets $72,021 $189,935 $122,018 $158 $384,132 Property and equipment, net — 822,882 41,726 — 864,608 Goodwill — 316,513 29,589 — 346,102 Deferred financing costs, net 10,421 — 537 — 10,958 Intercompany notes, accounts receivable andinvestment in subsidiaries 1,782,002 577,546 7,462 (2,367,010) — Other assets 4,033 40,198 14,379 — 58,610 TOTAL ASSETS $1,868,477 $1,947,074 $215,711 $(2,366,852) $1,664,410 Liabilities and equity: Current liabilities $6,468 $145,040 $38,261 $— $189,769 Long-term debt and capital leases, lesscurrent portion 512,812 11,105 32 — 523,949 Intercompany notes and accounts payable 451,361 1,487,950 87,568 (2,026,879) — Deferred tax liabilities 151,624 — (4,644) — 146,980 Other long-term liabilities 3,072 57,500 — — 60,572 Equity 743,140 245,479 94,494 (339,973) 743,140 TOTAL LIABILITIES AND EQUITY $1,868,477 $1,947,074 $215,711 $(2,366,852) $1,664,410 111Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) December 31, 2008 Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Assets: Current assets $29,673 $440,758 $88,534 $157 $559,122 Property and equipment, net — 1,025,007 26,676 — 1,051,683 Goodwill — 316,669 4,323 — 320,992 Deferred financing costs, net 10,489 — — — 10,489 Intercompany notes, accounts receivable andinvestment in subsidiaries 1,917,522 419,554 1,775 (2,338,851) — Other assets 22,597 48,237 3,803 — 74,637 TOTAL ASSETS $1,980,281 $2,250,225 $125,111 $(2,338,694) $2,016,923 Liabilities and equity: Current liabilities $13,792 $231,528 $28,054 $(1) $273,373 Long-term debt and capital leases, lesscurrent portion 612,813 20,729 49 — 633,591 Intercompany notes and accounts payable 305,348 1,624,932 69,204 (1,999,484) — Deferred tax liabilities 187,596 — 985 — 188,581 Other long-term liabilities — 60,386 260 — 60,646 Stockholders’ equity 860,732 312,650 26,559 (339,209) 860,732 TOTAL LIABILITIES ANDSTOCKHOLDERS’ EQUITY $1,980,281 $2,250,225 $125,111 $(2,338,694) $2,016,923 112Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2009 Guarantor Non-Guarantor Parent Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Revenues $— $928,639 $201,507 $(51,481) $1,078,665 Costs and expenses: Direct operating expenses — 653,112 164,243 (37,898) 779,457 Depreciation and amortization expense — 162,415 7,147 — 169,562 General and administrative expenses (452) 160,426 18,693 29 178,696 Asset retirements and impairments — 159,535 267 — 159,802 Interest expense, net of amounts capitalized 42,671 (3,756) 154 — 39,069 Other, net 1,237 (698) 10,412 (11,071) (120)Total costs and expenses, net 43,456 1,131,034 200,916 (48,940) 1,326,466 (Loss) income before income taxes andnoncontrolling interest (43,456) (202,395) 591 (2,541) (247,801)Income tax benefit 90,694 — 431 — 91,125 Net income (loss) 47,238 (202,395) 1,022 (2,541) (156,676)Noncontrolling interest — — (555) — (555)Income (loss) attributable to commonstockholders $47,238 $(202,395) $1,577 $(2,541) $(156,121)113Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2008 Guarantor Non-Guarantor Parent Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Revenues $— $1,818,736 $175,845 $(22,493) $1,972,088 Costs and expenses: Direct operating expenses — 1,139,006 127,374 (16,053) 1,250,327 Depreciation and amortization expense — 163,257 7,517 — 170,774 General and administrative expenses 1,616 237,635 19,251 (795) 257,707 Asset retirements and impairments — 75,137 — — 75,137 Interest expense, net of amounts capitalized 44,842 (4,320) 477 248 41,247 Other, net 5,219 (7,073) 9,143 (4,449) 2,840 Total costs and expenses, net 51,677 1,603,642 163,762 (21,049) 1,798,032 (Loss) income before income taxes andnoncontrolling interest (51,677) 215,094 12,083 (1,444) 174,056 Income tax expense (81,233) (4,320) (4,690) — (90,243)Net (loss) income (132,910) 210,774 7,393 (1,444) 83,813 Noncontrolling interest — — (245) — (245)(Loss) income attributable to commonstockholders $(132,910) $210,774 $7,638 $(1,444) $84,058 114Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2007 Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Revenues $— $1,561,059 $105,819 $(4,866) $1,662,012 Costs and expenses: Direct operating expenses — 906,254 82,980 (3,620) 985,614 Depreciation and amortization expense — 123,821 5,802 — 129,623 General and administrative expenses 1,693 216,959 11,935 (191) 230,396 Interest expense, net of amounts capitalized 38,866 (3,134) 723 (248) 36,207 Loss on early extinguishment of debt 9,557 — — — 9,557 Other, net (449) (5,850) 1,781 (807) (5,325)Total costs and expenses, net 49,667 1,238,050 103,221 (4,866) 1,386,072 (Loss) income before income taxes andnoncontrolling interest (49,667) 323,009 2,598 — 275,940 Income tax (expense) benefit (105,928) 934 (1,774) — (106,768)Net (loss) income (155,595) 323,943 824 — 169,172 Noncontrolling interest — — (117) — (117)(Loss) income attributable to commonstockholders $(155,595) $323,943 $941 $— $169,289 115Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2009 Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Net cash provided by (used in) operating activities $— $185,279 $(442) $— $184,837 Cash flows from investing activities: Capital expenditures — (124,744) (3,678) — (128,422)Intercompany notes and accounts 65,580 (17,523) (22,115) (25,942) — Other investing activities, net 199 5,580 12,007 — 17,786 Net cash provided by (used in) investing activities 65,779 (136,687) (13,786) (25,942) (110,636)Cash flows from financing activities: Payments on revolving credit facility (100,000) — — — (100,000)Intercompany notes and accounts 32,823 (76,175) 17,410 25,942 — Other financing activities, net 1,398 (28,873) — — (27,475)Net cash (used in) provided by financing activities (65,779) (105,048) 17,410 25,942 (127,475)Effect of changes in exchange rates on cash — — (2,023) — (2,023)Net (decrease) increase in cash — (56,456) 1,159 — (55,297)Cash and cash equivalents, beginning of period — 75,847 16,844 — 92,691 Cash and cash equivalents, end of period $— $19,391 $18,003 $— $37,394 116Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2008 Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Net cash provided by (used in) operating activities $17,573 $364,840 $(15,249) $— $367,164 Cash flows from investing activities: Capital expenditures — (214,659) (4,335) — (218,994)Acquisitions and asset purchases, net — (97,925) — — (97,925)of cash acquired Investment in Geostream Services Group (19,306) — — — (19,306)Intercompany notes and accounts (179,501) (199,428) (1,515) 380,444 — Other investing activities, net — 7,151 — — 7,151 Net cash (used in) provided by investing activities (198,807) (504,861) (5,850) 380,444 (329,074)Cash flows from financing activities: Borrowings on revolving credit facilty 172,813 — — — 172,813 Payments on revolving credit facility (38,026) — — — (38,026)Repurchases of common stock (139,358) — — — (139,358)Intercompany notes and accounts 177,698 181,016 21,730 (380,444) — Other financing activities, net 8,107 (11,506) — — (3,399)Net cash provided by (used in) financing activities 181,234 169,510 21,730 (380,444) (7,970)Effect of changes in exchange rates on cash — — 4,068 — 4,068 Net increase in cash — 29,489 4,699 — 34,188 Cash and cash equivalents, beginning of period — 46,358 12,145 — 58,503 Cash and cash equivalents, end of period $— $75,847 $16,844 $— $92,691 117Table of ContentsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2007 Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated (In thousands) Net cash (used in) provided by operatingactivities $(3,401) $264,275 $(10,955) $— $249,919 Cash flows from investing activities: Capital expenditures — (207,400) (5,160) — (212,560)Acquisitions, net of cash acquired — (157,955) — — (157,955)Investment in available for sale securities — (121,613) — — (121,613)Proceeds from the sale of available for salesecurities — 183,177 — — 183,177 Intercompany notes and accounts (473,412) (434,672) — 908,084 — Other investing activities, net — 6,104 — — 6,104 Net cash (used in) provided by investingactivities (473,412) (732,359) (5,160) 908,084 (302,847)Cash flows from financing activities: Repayment of long-term debt (396,000) — — — (396,000)Proceeds from long-term debt 425,000 — — — 425,000 Borrowings on revolving credit facility 50,000 — — — 50,000 Common stock acquired by purchase (30,454) — — — (30,454)Intercompany notes and accounts 424,822 458,560 24,702 (908,084) — Other financing activities, net 3,445 (28,751) — — (25,306)Net cash provided by (used in) financingactivities 476,813 429,809 24,702 (908,084) 23,240 Effect of changes in exchange rates on cash — — (184) — (184)Net (decrease) increase in cash — (38,275) 8,403 — (29,872)Cash and cash equivalents, beginning of period — 84,633 3,742 — 88,375 Cash and cash equivalents, end of period $— $46,358 $12,145 $— $58,503 118Table of ContentsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresWe maintain a set of disclosure controls and procedures that are designed to provide reasonable assurance that information requiredto be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized,and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submitunder the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principalfinancial officer, as appropriate to allow timely decisions regarding required disclosure.Our management, with the participation of our principal executive officer and principal financial officer, has evaluated theeffectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Exchange Act) as of the endof the period covered by this report. Based on such evaluation, our principal executive and financial officers have concluded that ourdisclosure controls and procedures were effective as of the end of such period.Management’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control overfinancial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financialreporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts andexpenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a materialeffect on the financial statements.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of itsinherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject tolapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented bycollusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be preventedor detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process.Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.A material weakness (as defined in SEC Rule 12b-2) is a deficiency, or combination of deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements willnot be prevented or detected on a timely basis.Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009.In making this assessment, management used the criteria described in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that ourinternal control over financial reporting was effective as of December 31, 2009.119Table of ContentsOur internal control over financial reporting has been audited by Grant Thornton LLP, an independent registered public accountingfirm, as stated in their report included herein.Remediation of Material Weaknesses in Internal Control Over Financial ReportingAs described in “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2008, ourmanagement determined that as of December 31, 2008, ineffective control activities surrounding our payroll process constituted a materialweakness to our system of internal control. These ineffective control activities had first been identified during 2006 and changes weremade to our controls and procedures over 2007 and 2008, and continuing into 2009, in an effort to remediate these deficiencies. Activitiesto remediate the previously identified material weakness included relocating the payroll function to our corporate offices in Houston,Texas, replacement of personnel, increasing the overall size of the payroll department, and the implementation of a new human resourceinformation system. The new human resource information system implemented in January 2009 allows for automated workflow andapproval of standard human resource transactions. Additionally, we have compensating controls in place such as analytical reviews ofpayroll expenses and reconciliations of payroll accounts. Based upon the changes in internal control and the testing and evaluation of theeffectiveness of these controls, management has concluded that the remediation of the material weakness for our payroll process has beenachieved as of December 31, 2009.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting during the fourth quarter of 2009, that materially affected, orare reasonably likely to materially affect, our internal control over financial reporting; however, the testing of the remediation of thematerial weakness identified in the prior year was completed during the fourth quarter of 2009, allowing us to conclude that theremediation of this material weakness was achieved as of December 31, 2009.ITEM 9B. OTHER INFORMATIONNot applicable.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 10 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxystatement with the SEC within 120 days after the close of the year ended December 31, 2009.ITEM 11. EXECUTIVE COMPENSATIONItem 11 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxystatement with the SEC within 120 days after the close of the year ended December 31, 2009.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSItem 12 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxystatement with the SEC within 120 days after the close of the year ended December 31, 2009.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEItem 13 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxystatement with the SEC within 120 days after the close of the year ended December 31, 2009.120Table of ContentsITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESItem 14 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxystatement with the SEC within 120 days after the close of the year ended December 31, 2009.PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESThe following financial statements and exhibits are filed as part of this report:1. Financial Statements — See “Index to Consolidated Financial Statements” at Page 54.2. We have omitted all financial statement schedules because they are not required or are not applicable, or the required informationis shown in the financial statements in notes to the financial statements.3. ExhibitsExhibit No. Description 3.1 Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-08038.) 3.2 Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting thedesignation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 001-08038.) 3.3 Second Amended and Restated By-laws of Key Energy Services, Inc., adopted September 21, 2006. (Incorporated byreference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on September 22, 2006, File No. 001-08038.) 3.4 Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted November 2, 2007.(Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 2, 2007, FileNo. 001-08038.) 3.5 Amendments to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted April 4, 2008.(Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on April 9, 2008, FileNo. 001-08038.) 3.6 Amendment to Second Amended and Restated Bylaws of Key Energy Services, Inc., adopted June 4, 2009. (Incorporatedby reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on June 10, 2009, File No. 001-08038.) 4.1 Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and The Bankof New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s CurrentReport on Form 8-K filed on November 30, 2007, File No. 001-08038.) 4.2 Registration Rights Agreement dated as of November 29, 2007, among Key Energy Services, Inc., the subsidiaryguarantors of the Company party thereto, and Lehman Brothers Inc., Banc of America Securities LLC and MorganStanley & Co. Incorporated, as representatives of the several initial purchasers named therein. (Incorporated by referenceto Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on November 30, 2007, File No. 001-08038.) 4.3 First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantorsand The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, File No. 001-08038.) 4.4 Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existing Guarantorsand The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.6 of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.)121Table of ContentsExhibit No. Description 4.5 Third Supplemental Indenture, dated as of July 31, 2009, among Key Energy Services California, Inc., the existingGuarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 ofthe Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) 10.1† Key Energy Group, Inc. 1997 Incentive Plan, as an amendment and restatement effective November 17, 1997 of theKey Energy Group, Inc. 1995 Outside Directors Stock Option Plan. (Incorporated by reference to Exhibit B of theCompany’s Schedule 14A Proxy Statement filed November 26, 1997, File No. 001-08038.) 10.2† Form of Restricted Stock Award Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated byreference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, FileNo. 001-08038.) 10.3† The 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K dated October 19, 2006, File No. 001-08038.) 10.4† Form of Award Agreement under the 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference toExhibit 10.2 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) 10.5† Form of Stock Appreciation Rights Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated byreference to Exhibit 99.1 of the Company’s Current Report on Form 8-K dated August 24, 2007, File No. 001-08038.) 10.6† Form of Non-Plan Option Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference toExhibit 4.1 of the Company’s Registration Statement on Form S-8 filed on September 25, 2007, File No. 333-146294.) 10.7† Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of theCompany’s Schedule 14A Proxy Statement filed on November 1, 2007, File No. 001-08038.) 10.8† Form of Nonstatutory Stock Option Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 001-08038.) 10.9† Form of Restricted Stock Award Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company’s Current Report on Form 8-K dated April 16, 2008, File No. 001-08038.) 10.10† Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of theCompany’s Schedule 14A Proxy Statement filed on April 16, 2009, File No. 001-08038.) 10.11† Form of Restricted Stock Award Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) 10.12† Form of Nonqualified Stock Option Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) 10.13† Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.14† Acknowledgment and Waiver by Richard J. Alario, dated March 25, 2005, regarding rescinded option grant.(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated March 29, 2005, FileNo. 001-08038.) 10.15† Employment Agreement, dated as of March 26, 2009, by and between Trey Whichard and Key Energy SharedServices, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 1,2009, File No. 001-08038.)122Table of ContentsExhibit No. Description 10.16† Restated Employment Agreement, dated effective as of December 31, 2007, among Newton W. Wilson III, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.3 of the Company’sCurrent Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.17† Acknowledgment and Waiver by Newton W. Wilson III, dated March 25, 2005, regarding rescinded option grant.(Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated March 29, 2005, FileNo. 001-08038.) 10.18† Amended and Restated Employment Agreement, dated October 22, 2008, between Kimberly R. Frye, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.14 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) 10.19† Restated Employment Agreement dated effective as of December 31, 2007, among Kim B. Clarke, Key Energy Services,Inc. and Key Energy Shared Services, LLC (Incorporated by reference to Exhibit 10.4 of the Company’s Current Reporton Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.20† Employment Agreement, dated as of January 1, 2004, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporatedby reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) 10.21† First Amendment to Employment Agreement, dated November 26, 2007, between Key Energy Services, Inc. and Jim D.Flynt. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on November 30,2007, File No. 001-08038.) 10.22† Employment Agreement, dated November 17, 2004, between Key Energy Services, Inc. and Phil Coyne. (Incorporated byreference to Exhibit 10.8 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) 10.23† First Amendment to Employment Agreement, effective as of January 24, 2005, between Key Energy Services, Inc. andPhil Coyne. (Incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K dated October 19,2006, File No. 001-08038.) 10.24† Amended and Restated Employment Agreement, dated December 31, 2007, between Key Energy Services, Inc. and DonD. Weinheimer. (Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2007 filed on February 28, 2008, File No. 001-08038.) 10.25† Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and J. Marshall Dodson.(Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2007, File No. 001-08038.) 10.26† Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and D. Bryan Norwood.(Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2007, File No. 001-08038.) 10.27† Restated Employment Agreement, effective August 1, 2007, between Key Energy Shared Services, LLC and TommyPipes. (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2008, File No. 001-08038.) 10.28† Employment Agreement, effective August 1, 2007, between Key Energy Services, Inc. and John Carnett. (Incorporated byreference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, FileNo. 001-08038.) 10.29† Restated Employment Agreement, dated effective as of December 31, 2007, among William M. Austin, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.2 of the Company’sCurrent Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.30† Letter Agreement, dated February 5, 2009, between Key Energy Services, Inc. and William M. Austin. (Incorporated byreference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, FileNo. 001-08038.) 10.31† Settlement Agreement and Release of Claims by and between Kevin P. Collins and Key Energy Services, Inc. dated April3, 2009 (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarterended March 31, 2009, File No. 001-08038.)123Table of ContentsExhibit No. Description 10.32† Settlement Agreement and Release of Claims by and between W. Phillip Marcum and Key Energy Services, Inc. datedApril 3, 2009 (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarterended June 30, 2009, File No. 001-08038.) 10.33† Separation and Release Agreement, dated February 11, 2009, by and between Key Energy Shared Services, LLC, KeyEnergy Services, Inc. and William M. Austin. (Incorporated by reference to Exhibit 10.2 of the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2009, File No. 001-08038.) 10.34† Separation and Release Agreement, dated February 11, 2009, by and between Key Energy Shared Services, LLC, KeyEnergy Services, Inc. and William M. Austin. (Incorporated by reference to Exhibit 10.2 of the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2009, File No. 001-08038.) 10.35 Credit Agreement, dated as of November 29, 2007, among Key Energy Services, Inc., each lender from time to timeparty thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer,and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer.(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 30, 2007,File No. 001-08038.) 10.36 Amendment No. 1 to Credit Agreement, dated as of October 27, 2009, among Key Energy Services, Inc., each lenderfrom time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lenderand L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/CIssuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 29,2009, File No. 001-08038.) 10.37 Stock and Membership Interest Purchase Agreement, dated as of September 19, 2007, between and among Key EnergyServices, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies namedtherein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 20,2007, File No. 001-08038.) 10.38 First Amendment to Stock and Membership Interest Purchase Agreement, dated as of October 25, 2007, among KeyEnergy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companiesnamed therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for thequarter ended September 30, 2007, File No. 001-08038.) 10.39 Second Amendment to Stock and Membership Interest Purchase Agreement, dated as of September 30, 2008, among KeyEnergy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companiesnamed therein. (Incorporated by reference to Exhibit 10.31 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2008, File No. 001-08038.) 10.40 Purchase Agreement, dated November 14, 2007, by and among the Company, certain of its domestic subsidiaries, andLehman Brothers, Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives ofthe initial purchasers. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed onNovember 15, 2007, File No. 001-08038.) 10.41 Asset Purchase Agreement, dated December 7, 2007, among Key Energy Services, LLC, Kings Oil Tools, Inc. andThomas Fowler. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed onDecember 13, 2007, File No. 001-08038.) 10.42 Purchase Agreement, dated April 3, 2008, among Key Energy Services, LLC, Western Drilling Holdings, Inc., and FredS. Holmes and Barbara J. Holmes. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, File No. 001-08038.) 10.43 Stock Purchase Agreement, dated May 30, 2008, by and among Key Energy Services, LLC, and E. Kent Tolman, NitaTolman, Ronald D. Jones and Melinda Jones. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Reporton Form 8-K filed on June 5, 2008, File No. 001-08038.)124Table of ContentsExhibit No. Description 10.44 Asset Purchase Agreement, dated July 22, 2008, by and among Key Energy Pressure Pumping Services, LLC, LeaderEnergy Services Ltd., Leader Energy Services USA Ltd., and CementRite, Inc. (Incorporated by reference toExhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 24, 2008, File No. 001-08038.) 10.45 Master Agreement, dated August 26, 2008, by and among Key Energy Services, Inc., Key Energy Services CyprusLtd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K filed on September 2, 2008, File No. 001-08038.) 10.46 Amendment to Master Agreement, dated March 11, 2009, by and among Key Energy Services, Inc., Key Energyservices Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 ofthe Company’s Current Report on Form 8-K filed on March 25, 2009, File No. 001-08038.) 10.47 Amendment No. 2 to Master Agreement, dated June 23, 2009 (fully executed on June 26, 2009), by and among KeyEnergy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group.(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 1, 2009, FileNo. 001-08038.) 10.48 Master Equipment Purchase and Sale Agreement, dated September 1, 2009, by and between Key Energy PressurePumping Services, LLC and GK Drilling Tools Leasing Company Ltd., and form of Addendum thereto (Incorporatedby reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 8, 2009, File No. 001-08038.) 21* Significant Subsidiaries of the Company. 23* Consent of Independent Registered Public Accounting Firm. 31.1* Certification of CEO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act. of 2002. 31.2* Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.†Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officerparticipates.*Filed herewith.125Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized.KEY ENERGY SERVICES, INC. By: /s/ T.M. Whichard IIIT.M. Whichard III,Senior Vice President and Chief Financial Officer(Principal Financial Officer)Date: February 26, 2010POWER OF ATTORNEYEach person whose signature appears below hereby constitutes and appoints Richard J. Alario and T.M. Whichard III, and each ofthem, his true and lawful attorney-in-fact and agent, with full powers of substitution, for him and in his name, place and stead, in anyand all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto,and other documents in connection therewith, with the Securities and Exchange Commission granting to said attorneys-in-fact, and eachof them, full power and authority to perform any other act on behalf of the undersigned required to be done in connection therewith.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the registrant in their capacities and on February 26, 2010.Signature Title /s/ Richard J. AlarioRichard J. Alario Chairman of the Board of Directors, President andChief Executive Officer (Principal Executive Officer) /s/ T.M. Whichard IIIT.M. Whichard III Senior Vice President and Chief Financial Officer(Principal Financial Officer) /s/ Ike C. SmithIke C. Smith Vice President and Controller (Principal Accounting Officer) /s/ David J. BreazzanoDavid J. Breazzano Director /s/ Lynn R. ColemanLynn R. Coleman Director /s/ Kevin P. CollinsKevin P. Collins Director /s/ William D. FertigWilliam D. Fertig Director126Table of ContentsSignature Title /s/ W. Phillip MarcumW. Phillip Marcum Director /s/ Ralph S. Michael, IIIRalph S. Michael, III Director /s/ William F. OwensWilliam F. Owens Director /s/ Robert K. ReevesRobert K. Reeves Director /s/ J. Robinson WestJ. Robinson West Director /s/ Arlene M. YocumArlene M. Yocum Director127Table of ContentsEXHIBIT INDEXExhibit No. Description 3.1 Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-08038.) 3.2 Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting thedesignation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 001-08038.) 3.3 Second Amended and Restated By-laws of Key Energy Services, Inc., adopted September 21, 2006. (Incorporated byreference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on September 22, 2006, FileNo. 001-08038.) 3.4 Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted November 2, 2007.(Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 2, 2007, FileNo. 001-08038.) 3.5 Amendments to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted April 4, 2008.(Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on April 9, 2008, FileNo. 001-08038.) 3.6 Amendment to Second Amended and Restated Bylaws of Key Energy Services, Inc., adopted June 4, 2009. (Incorporatedby reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on June 10, 2009, File No. 001-08038.) 4.1 Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and TheBank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’sCurrent Report on Form 8-K filed on November 30, 2007, File No. 001-08038.) 4.2 Registration Rights Agreement dated as of November 29, 2007, among Key Energy Services, Inc., the subsidiaryguarantors of the Company party thereto, and Lehman Brothers Inc., Banc of America Securities LLC and MorganStanley & Co. Incorporated, as representatives of the several initial purchasers named therein. (Incorporated by referenceto Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on November 30, 2007, File No. 001-08038.) 4.3 First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantorsand The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, File No. 001-08038.) 4.4 Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existingGuarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.6 ofthe Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) 4.5 Third Supplemental Indenture, dated as of July 31, 2009, among Key Energy Services California, Inc., the existingGuarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 ofthe Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) 10.1† Key Energy Group, Inc. 1997 Incentive Plan, as an amendment and restatement effective November 17, 1997 of theKey Energy Group, Inc. 1995 Outside Directors Stock Option Plan. (Incorporated by reference to Exhibit B of theCompany’s Schedule 14A Proxy Statement filed November 26, 1997, File No. 001-08038.) 10.2† Form of Restricted Stock Award Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated byreference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, FileNo. 001-08038.) 10.3† The 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K dated October 19, 2006, File No. 001-08038.)128Table of ContentsExhibit No. Description 10.4† Form of Award Agreement under the 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference toExhibit 10.2 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) 10.5† Form of Stock Appreciation Rights Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated byreference to Exhibit 99.1 of the Company’s Current Report on Form 8-K dated August 24, 2007, File No. 001-08038.) 10.6† Form of Non-Plan Option Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference toExhibit 4.1 of the Company’s Registration Statement on Form S-8 filed on September 25, 2007, File No. 333-146294.) 10.7† Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of theCompany’s Schedule 14A Proxy Statement filed on November 1, 2007, File No. 001-08038.) 10.8† Form of Nonstatutory Stock Option Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 001-08038.) 10.9† Form of Restricted Stock Award Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company’s Current Report on Form 8-K dated April 16, 2008, File No. 001-08038.) 10.10† Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of theCompany’s Schedule 14A Proxy Statement filed on April 16, 2009, File No. 001-08038.) 10.11† Form of Restricted Stock Award Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, FileNo. 001-08038.) 10.12† Form of Nonqualified Stock Option Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, FileNo. 001-08038.) 10.13† Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.14† Acknowledgment and Waiver by Richard J. Alario, dated March 25, 2005, regarding rescinded option grant.(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated March 29, 2005, FileNo. 001-08038.) 10.15† Employment Agreement, dated as of March 26, 2009, by and between Trey Whichard and Key Energy SharedServices, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 1,2009, File No. 001-08038.) 10.16† Restated Employment Agreement, dated effective as of December 31, 2007, among Newton W. Wilson III, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.3 of the Company’sCurrent Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.17† Acknowledgment and Waiver by Newton W. Wilson III, dated March 25, 2005, regarding rescinded option grant.(Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated March 29, 2005, FileNo. 001-08038.) 10.18† Amended and Restated Employment Agreement, dated October 22, 2008, between Kimberly R. Frye, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.14 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) 10.19† Restated Employment Agreement dated effective as of December 31, 2007, among Kim B. Clarke, Key Energy Services,Inc. and Key Energy Shared Services, LLC (Incorporated by reference to Exhibit 10.4 of the Company’s Current Reporton Form 8-K filed on January 7, 2008, File No. 001-08038.)129Table of ContentsExhibit No. Description 10.20† Employment Agreement, dated as of January 1, 2004, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporatedby reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K dated October 19, 2006, FileNo. 001-08038.) 10.21† First Amendment to Employment Agreement, dated November 26, 2007, between Key Energy Services, Inc. and Jim D.Flynt. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on November 30,2007, File No. 001-08038.) 10.22† Employment Agreement, dated November 17, 2004, between Key Energy Services, Inc. and Phil Coyne. (Incorporated byreference to Exhibit 10.8 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) 10.23† First Amendment to Employment Agreement, effective as of January 24, 2005, between Key Energy Services, Inc. andPhil Coyne. (Incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K dated October 19,2006, File No. 001-08038.) 10.24† Amended and Restated Employment Agreement, dated December 31, 2007, between Key Energy Services, Inc. and DonD. Weinheimer. (Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2007 filed on February 28, 2008, File No. 001-08038.) 10.25† Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and J. Marshall Dodson.(Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2007, File No. 001-08038.) 10.26† Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and D. Bryan Norwood.(Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2007, File No. 001-08038.) 10.27† Restated Employment Agreement, effective August 1, 2007, between Key Energy Shared Services, LLC and TommyPipes. (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2008, File No. 001-08038.) 10.28† Employment Agreement, effective August 1, 2007, between Key Energy Services, Inc. and John Carnett. (Incorporated byreference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, FileNo. 001-08038.) 10.29† Restated Employment Agreement, dated effective as of December 31, 2007, among William M. Austin, Key EnergyServices, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.2 of the Company’sCurrent Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) 10.30† Letter Agreement, dated February 5, 2009, between Key Energy Services, Inc. and William M. Austin. (Incorporated byreference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, FileNo. 001-08038.) 10.31† Settlement Agreement and Release of Claims by and between Kevin P. Collins and Key Energy Services, Inc. datedApril 3, 2009 (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarterended March 31, 2009, File No. 001-08038.) 10.32† Settlement Agreement and Release of Claims by and between W. Phillip Marcum and Key Energy Services, Inc. datedApril 3, 2009 (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarterended June 30, 2009, File No. 001-08038.) 10.33† Separation and Release Agreement, dated February 11, 2009, by and between Key Energy Shared Services, LLC, KeyEnergy Services, Inc. and William M. Austin. (Incorporated by reference to Exhibit 10.2 of the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2009, File No. 001-08038.) 10.34† Separation and Release Agreement, dated February 11, 2009, by and between Key Energy Shared Services, LLC, KeyEnergy Services, Inc. and William M. Austin. (Incorporated by reference to Exhibit 10.2 of the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2009, File No. 001-08038.)130Table of ContentsExhibit No. Description 10.35 Credit Agreement, dated as of November 29, 2007, among Key Energy Services, Inc., each lender from time to timeparty thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer,and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer.(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 30, 2007,File No. 001-08038.) 10.36 Amendment No. 1 to Credit Agreement, dated as of October 27, 2009, among Key Energy Services, Inc., each lenderfrom time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lenderand L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/CIssuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 29,2009, File No. 001-08038.) 10.37 Stock and Membership Interest Purchase Agreement, dated as of September 19, 2007, between and among Key EnergyServices, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies namedtherein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 20,2007, File No. 001-08038.) 10.38 First Amendment to Stock and Membership Interest Purchase Agreement, dated as of October 25, 2007, among KeyEnergy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companiesnamed therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for thequarter ended September 30, 2007, File No. 001-08038.) 10.39 Second Amendment to Stock and Membership Interest Purchase Agreement, dated as of September 30, 2008, among KeyEnergy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companiesnamed therein. (Incorporated by reference to Exhibit 10.31 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2008, File No. 001-08038.) 10.40 Purchase Agreement, dated November 14, 2007, by and among the Company, certain of its domestic subsidiaries, andLehman Brothers, Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives ofthe initial purchasers. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed onNovember 15, 2007, File No. 001-08038.) 10.41 Asset Purchase Agreement, dated December 7, 2007, among Key Energy Services, LLC, Kings Oil Tools, Inc. andThomas Fowler. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed onDecember 13, 2007, File No. 001-08038.) 10.42 Purchase Agreement, dated April 3, 2008, among Key Energy Services, LLC, Western Drilling Holdings, Inc., and FredS. Holmes and Barbara J. Holmes. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, File No. 001-08038.) 10.43 Stock Purchase Agreement, dated May 30, 2008, by and among Key Energy Services, LLC, and E. Kent Tolman, NitaTolman, Ronald D. Jones and Melinda Jones. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Reporton Form 8-K filed on June 5, 2008, File No. 001-08038.) 10.44 Asset Purchase Agreement, dated July 22, 2008, by and among Key Energy Pressure Pumping Services, LLC, LeaderEnergy Services Ltd., Leader Energy Services USA Ltd., and CementRite, Inc. (Incorporated by reference to Exhibit 10.1of the Company’s Current Report on Form 8-K filed on July 24, 2008, File No. 001-08038.) 10.45 Master Agreement, dated August 26, 2008, by and among Key Energy Services, Inc., Key Energy Services CyprusLtd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K filed on September 2, 2008, File No. 001-08038.) 10.46 Amendment to Master Agreement, dated March 11, 2009, by and among Key Energy Services, Inc., Key Energyservices Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 ofthe Company’s Current Report on Form 8-K filed on March 25, 2009, File No. 001-08038.)131Table of ContentsExhibit No. Description 10.47 Amendment No. 2 to Master Agreement, dated June 23, 2009 (fully executed on June 26, 2009), by and among KeyEnergy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group.(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 1, 2009, FileNo. 001-08038.) 10.48 Master Equipment Purchase and Sale Agreement, dated September 1, 2009, by and between Key Energy PressurePumping Services, LLC and GK Drilling Tools Leasing Company Ltd., and form of Addendum thereto (Incorporatedby reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 8, 2009, FileNo. 001-08038.) 21* Significant Subsidiaries of the Company. 23* Consent of Independent Registered Public Accounting Firm. 31.1* Certification of CEO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act. of 2002. 31.2* Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002†Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officerparticipates.*Filed herewith.132Exhibit 21KEY ENERGY SERVICES, INC. — SUBSIDIARIES LISTThe following is a list of the significant subsidiaries of Key Energy Services, Inc. showing the place of incorporation or organizationand the names under which each subsidiary does business. The names of certain subsidiaries are omitted as such subsidiaries,considered as a single subsidiary, would not constitute a significant subsidiary.Subsidiary/Doing Business As(1) State of Incorporation/OrganizationKey Energy Services, LLC(2)(3)(4) TexasKey Energy Pressure Pumping Services, LLC(5) TexasKey Energy Shared Services, LLC Delaware(1)Effective December 31, 2007, the Company performed an internal reorganization via merger of Moncla Well Service, Inc. and itssubsidiary entities.(2)Key Energy Services, LLC does business in North Dakota under the trade name Key Rocky Mountain Division — Key EnergyServices, LLC.(3)Key Energy Services, LLC does business in Nebraska under the trade name Key Rocky Mountain — Key Energy Services, LLC.(4)Key Energy Services, LLC does business in Texas and Oklahoma as Hydra-Walk, Inc.(5)Key Energy Pressure Pumping Services, LLC does business in North Dakota as Key Rocky Mountain Division — Key EnergyPressure Pumping Services, LLC.133Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated February 26, 2010, with respect to the consolidated financial statements and internal control overfinancial reporting included in the Annual Report of Key Energy Services, Inc. on Form 10-K for the year ended December 31, 2009. Wehereby consent to the incorporation by reference of said reports in the Registration Statements of Key Energy Services, Inc. on Form S-8(File No. 333-146293, effective September 25, 2007, File No. 333-146294, effective September 25, 2007, File No. 333-150098, effectiveApril 4, 2008 and File No. 333-159794, effective June 4, 2009) and on Form S-4 (File No. 333-151166, effective May 23, 2008)./s/ GRANT THORNTON LLPHouston, TexasFebruary 26, 2010134Exhibit 31.1CERTIFICATIONI, Richard J. Alario, certify that:1. I have reviewed this annual report on Form 10-K of Key Energy Services, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisreport;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report basedon such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. By: /s/ Richard J. AlarioRichard J. Alario,President and Chief Executive Officer(Principal Executive Officer)Date: February 26, 2010135Exhibit 31.2CERTIFICATIONI, T.M. Whichard III, certify that:1. I have reviewed this annual report on Form 10-K of Key Energy Services, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisreport;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report basedon such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. By: /s/ T. M. Whichard IIIT. M. Whichard IIISenior Vice President and Chief Financial Officer(Principal Financial Officer)Date: February 26, 2010136Exhibit 32CertificationPursuant to 18 U.S.C. SECTION 1350,As Adopted Pursuant toSection 906 of the SARBANES-OXLEY ACT of 2002Each of the undersigned officers of Key Energy Services, Inc. (the “Company”) hereby certifies, pursuant to 18 U.S.C. § 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to such officer’s knowledge that:(1) the accompanying Annual Report on Form 10-K for the period ending December 31, 2009 as filed with the U.S. Securitiesand Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of1934, as amended; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company as of the dates and for the periods expressed in the Report./s/ Richard J. AlarioRichard J. Alario,President and Chief Executive Officer(Principal Executive Officer)Dated: February 26, 2010/s/ T. M. Whichard IIIT. M. Whichard III,Senior Vice President and Chief Financial Officer(Principal Financial Officer)Dated: February 26, 2010137

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