Key Energy Services Inc. Annual Report 2012

Plain-text annual report

Table of ContentsIndex to Financial Statements UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 ______________________________________Form 10-K(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended December 31, 2012¨¨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)Maryland04-2648081(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification 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 ClassName of Exchange on Which RegisteredCommon Stock, $0.10 par valueNew 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 ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ 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 Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files.) Yes  No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K. Table of ContentsIndex to Financial StatementsIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer ¨Non-accelerated filer ¨Smaller reporting company ¨ (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 ¨ No The aggregate market value of the common stock of the registrant held by non-affiliates as of June 30, 2012, based on the $7.60 per share closingprice for the registrant’s common stock as quoted on the New York Stock Exchange on such date, was $1.0 billion (for purposes of calculating theseamounts, only directors, officers and beneficial owners of 10% or more of the outstanding common stock of the registrant have been deemed affiliates).As of February 15, 2013, the number of outstanding shares of common stock of the registrant was 152,320,915.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 with respect tothe 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Table of ContentsIndex to Financial StatementsKEY ENERGY SERVICES, INC.ANNUAL REPORT ON FORM 10-KFor the Year Ended December 31, 2012INDEXPageNumber PART I ITEM 1.Business4ITEM 1A.Risk Factors9ITEM 1B.Unresolved Staff Comments17ITEM 2.Properties17ITEM 3.Legal Proceedings17ITEM 4.Mine Safety Disclosures17 PART II ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities18ITEM 6.Selected Financial Data20ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations37ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk42ITEM 8.Financial Statements and Supplementary Data44ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure103ITEM 9A.Controls and Procedures103ITEM 9B.Other Information104 PART III ITEM 10.Directors, Executive Officers and Corporate Governance104ITEM 11.Executive Compensation104ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters105ITEM 13.Certain Relationships and Related Transactions, and Director Independence105ITEM 14.Principal Accounting Fees and Services105 PART IV ITEM 15.Exhibits, Financial Statement Schedules1082Table of ContentsIndex to Financial StatementsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSIn addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-lookingstatements. These “forward-looking statements” are based on our current expectations, estimates and projections about Key Energy Services, Inc. and itswholly owned and controlled subsidiaries, our industry and management’s beliefs and assumptions concerning future events and financial trends affectingour financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “should,”“predicts,” “expects,” “believes,” “anticipates,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. Thesestatements are only predictions and are subject to substantial risks and uncertainties and not guarantees of performance. Future actions, events and conditionsand future results of operations may differ materially from those expressed in these statements. In evaluating those statements, you should carefully considerthe risks outlined in “Item 1A. Risk Factors.”We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except as requiredby law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements thatmay accompany such forward-looking statements.Important factors that may affect our expectations, estimates or projections include, but are not limited to, the following:•conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;•volatility in oil and natural gas prices;•tight credit markets and disruptions in the U.S. and global financial systems;•our ability to implement price increases or maintain pricing on our core services;•industry capacity;•increased labor costs or unavailability of skilled workers;•asset impairments or other charges;•operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses orliabilities;•the economic, political and social instability risks of doing business in certain foreign countries;•our historically high employee turnover rate and our ability to replace or add workers;•our ability to implement technological developments and enhancements;•significant costs and liabilities resulting from environmental, health and safety laws and regulations;•severe weather impacts on our business;•our ability to successfully identify, make and integrate acquisitions;•the loss of one or more of our larger customers;•the impact of compliance with climate change legislation or initiatives;•our ability to generate sufficient cash flow to meet debt service obligations;•the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt;•an increase in our debt service obligations due to variable rate indebtedness; and•other factors affecting our business described in “Item 1A. Risk Factors.”3Table of ContentsIndex to Financial StatementsPART IITEM 1. BUSINESSGeneral Description of BusinessKey Energy Services, Inc. (NYSE: KEG) a Maryland corporation, is the largest onshore, rig-based well servicing contractor based on the number ofrigs owned. References to “Key,” the “Company,” “we,” “us” or “our” in this report refer to Key Energy Services, Inc., its wholly owned subsidiaries and itscontrolled subsidiaries. We were organized in April 1977 and commenced operations in July 1978 under the name National Environmental Group, Inc. InDecember 1992, we became Key Energy Group, Inc. and we changed our name to Key Energy Services, Inc. in December 1998.We provide a full range of well services to major oil companies, foreign national oil companies and independent oil and natural gas productioncompanies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluidmanagement services, fishing and rental services and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drillingapplications. We operate in most major oil and natural gas producing regions of the continental United States, and we have operations in Mexico, Colombia,the Middle East and Russia. In addition, we have a technology development and control systems business based in Canada.The following is a description of the various products and services that we provide and our major competitors for those products and services.Service OfferingsOur reportable segments are U.S. and International. We also have a “Functional Support” segment associated with overhead costs in support of ourreportable segments. The U.S. reporting segment includes our domestic rig services, fluid management services, fishing and rental services, and coiled tubingservices. The International reportable segment includes our operations in Mexico, Colombia, Russia, Bahrain and Oman. Our Canadian subsidiary is alsoreflected in our International reportable segment. We evaluate the performance of our operating segments based on gross margin measures. All inter-segmentsales pricing is based on current market conditions. The following is a description of the segments: See “Note 23. Segment Information” in “Item 8.Financial Statements and Supplementary Data” for additional financial information about our reportable business segments and the various geographicalareas where we operate.U.S. SegmentRig ServicesOur rig-based services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, wellmaintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gasproducers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes andcapabilities, allowing us to service all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietary KeyView® technology,which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crews tobetter monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through aworkover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing thesezones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in thecompletion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of thecompletion.The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consumingthan normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateralwellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wellsfor enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to severalweeks, depending on the complexity of the workover. 4Table of ContentsIndex to Financial StatementsMaintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of thesemaintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores,and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services are generally lesscomplicated than completion and workover related services and require less time to perform.Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These pluggingand abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is notsignificantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.We believe that the largest competitors for our U.S. rig-based services include Nabors Industries Ltd., Basic Energy Services, Inc., Superior EnergyServices, Inc., Forbes Energy Services Ltd. and Pioneer Drilling Company. Numerous smaller companies also compete in our rig-based markets in the UnitedStates.Fluid Management ServicesWe provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenanceactivities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transportedfor disposal in saltwater disposal (“SWD”) wells owned by us or a third party. Demand and pricing for these services generally correspond to demand for ourwell service rigs.We believe that the largest competitors for our domestic fluid management services include Basic Energy Services, Inc., Superior Energy Services,Inc., Nabors Industries Ltd., Heckman Water Resources Corporation and Stallion Oilfield Services Ltd. Numerous smaller companies also compete in thefluid management services market in the United States.Coiled Tubing ServicesCoiled tubing services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells toperform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemicaltreatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones andvarious other pre- and post- hydraulic fracturing well preparation services.Our primary competitors in the coiled tubing services market include: Schlumberger Ltd., Baker Hughes Incorporated, Halliburton Company andSuperior Energy Services, Inc. Numerous smaller companies also compete in our coiled tubing services markets in the United States.Fishing and Rental ServicesWe offer a full line of services and rental equipment designed for use in providing both onshore and offshore drilling and workover services. Fishingservices involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe,tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels,reversing units and foam air units. As a result of the 2011 acquisition of Edge Oilfield Services, LLC and Summit Oilfield Services, LLC (collectively, “Edge”), our rental inventoryalso includes frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids, proppants, oil and natural gas.We also provide well testing services.Demand for our fishing and rental services is also closely related to capital spending by oil and natural gas producers, which is generally a functionof oil and natural gas prices.Our primary competitors for our fishing and rental services include Baker Oil Tools, Weatherford International, Basic Energy Services, Inc., SmithServices (owned by Schlumberger), Superior Energy Services, Inc., Quail Tools (owned by Parker Drilling Company) and Knight Oil Tools. Numeroussmaller companies also compete in our fishing and rental services markets in the United States.5Table of ContentsIndex to Financial StatementsInternational SegmentOur International segment includes operations in Mexico, Colombia, the Middle East and Russia. In addition, we have a technology development andcontrol systems business based in Canada. Also, prior to the sale of our Argentina business in the third quarter of 2012, we operated in Argentina. We arereporting the results of our Argentina business as discontinued operations for all periods presented. We provide rig-based services such as the maintenance,workover, and recompletion of existing oil wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of their useful lives ineach of our international markets.In addition, in Mexico we provide drilling, coiled tubing, wireline and project management and consulting services. Our work in Mexico also requiresus to provide third-party services, which vary in scope by project.In the Middle East, we operate in the Kingdom of Bahrain and during the third quarter of 2012, we began operations in Oman. Our business inBahrain is currently conducted through a joint venture in which we have a controlling interest.Through our joint venture operations in Russia, we provide drilling workover and reservoir engineering services.Also included in our International segment is our technology development and control systems business based in Canada. This business is focusedon the development of hardware and software related to oilfield service equipment controls, data acquisition and digital information flow.Functional Support SegmentOur Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and International reportingsegments.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 notdependent on any single source of supply for those parts, supplies or materials.CustomersOur customers include major oil companies, foreign national oil companies, and independent oil and natural gas production companies. During theyear ended December 31, 2012, the Mexican national oil company, Petroleos Mexicanos (“Pemex”) and Occidental Petroleum Corporation accounted for 12 %and 10% of our consolidated revenue respectively. No other customer accounted for more than 10% of our consolidated revenue in 2012. No single customeraccounted for more than 10% of our consolidated revenues during the years ended December 31, 2011 and December 31, 2010.Receivables outstanding from Pemex were approximately 31% and 11% of our total accounts receivable as of December 31, 2012 and December 31,2011, respectively. No other customer accounted for more than 10% of our total accounts receivable as of December 31, 2012 and 2011.Competition and Other External FactorsThe markets in which we operate are highly competitive. Competition is influenced by such factors as price, capacity, availability of work crews,and reputation and experience of the service provider. We believe that an important competitive factor in establishing and maintaining long-term customerrelationships is having an experienced, skilled and well-trained work force. We devote substantial resources toward employee safety and training programs. Inaddition, we believe that our proprietary KeyView® system provides important safety enhancements. We believe many of our larger customers place increasedemphasis on the safety, performance and quality of the crews, equipment and services provided by their contractors. Although we believe customers considerall of these factors, price is often the primary factor in determining which service provider is awarded the work. However, in numerous instances, we secureand maintain work for large customers for which efficiency, safety, technology, size of fleet and availability of other services are of equal importance to price.6Table of ContentsIndex to Financial StatementsThe demand for our services fluctuates, primarily in relation to the price (or anticipated price) of oil and natural gas, which, in turn, is drivenprimarily by the supply of, and demand for, oil and natural gas. Generally, as supply of those commodities decreases and demand increases, service andmaintenance requirements increase as oil and natural gas producers attempt to maximize the productivity of their wells in a higher priced environment.However, in a lower oil and natural gas price environment, demand for service and maintenance generally decreases as oil and natural gas producers decreasetheir activity. In particular, 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 risk tolerant whencommodity prices are low or volatile, we may experience a more rapid decline in demand for well maintenance services compared with demand for other typesof oilfield services. Further, in a low commodity price environment, fewer well service rigs are needed for completions, as these activities are generallyassociated with drilling activity.The level of our revenues, earnings and cash flows are substantially dependent upon, and affected by, the level of U.S. and international oil andnatural gas exploration, development and production activity, as well as the equipment capacity in any particular region.SeasonalityOur operations are impacted by seasonal factors. Historically, our business has been negatively impacted during the winter months due to inclementweather, fewer daylight hours and holidays. During the summer months, our operations may be impacted by tropical weather systems. During periods ofheavy snow, ice or rain, we may not be able to operate or move our equipment between locations, thereby reducing our ability to provide services and generaterevenues. In addition, the majority of our equipment works only during daylight hours. In the winter months when days become shorter, this reduces theamount of time that our assets can work and therefore has a negative impact on total hours worked. Lastly, during the fourth quarter, we historically haveexperienced significant slowdown during the Thanksgiving and Christmas holiday seasons and demand sometimes slows during this period as our customersexhaust their annual capital spending budgets.Patents, Trade Secrets, Trademarks and CopyrightsWe own numerous patents, trademarks and proprietary technology that we believe provide us with a competitive advantage in the various markets inwhich we operate or intend to operate. We have devoted significant resources to developing technological improvements in our well service business and havesought patent protection both inside and outside the United States for products and methods that appear to have commercial significance. All the issued patentshave varying remaining durations and begin expiring between 2013 and 2028. The most notable of our technologies include numerous patents surrounding ourKeyView® system.We own several trademarks that are important to our business both in the United States and in foreign countries. In general, depending upon thejurisdiction, trademarks are valid as long as they are in use, or their registrations are properly maintained and they have not been found to become generic.Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While our patents and trademarks, in the aggregate, areof considerable importance to maintaining our competitive position, no single patent or trademark is considered to be of a critical or essential nature to ourbusiness.We also rely on a combination of trade secret laws, copyright and contractual provisions to establish and protect proprietary rights in our productsand services. We typically enter into confidentiality agreements with our employees, strategic partners and suppliers and limit access to the distribution of ourproprietary information.EmployeesAs of December 31, 2012, we employed approximately 7,500 persons in our United States operations and approximately 2,100 additional persons inMexico, Colombia, and Canada. Additionally, our joint ventures in Russia and the Middle East in which we own a controlling interest employed, in theaggregate, approximately 550 persons as of December 31, 2012. Our domestic employees are not represented by a labor union and are not covered by collectivebargaining agreements. In Mexico, we have entered into a collective bargaining agreement that applies to our workers in Mexico performing work under ourPemex contracts. As noted below in “Item 1A. Risk Factors,” we have historically experienced a high employee turnover rate. We have not experienced anysignificant work stoppages associated with labor disputes or grievances and consider our relations with our employees to be generally satisfactory.7Table of ContentsIndex to Financial StatementsGovernmental RegulationsOur operations are subject to various federal, state and local laws and regulations pertaining to health, safety and the environment. We cannot predictthe level of enforcement of existing laws or regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in thefuture. We also cannot predict whether additional laws and regulations affecting our business will be adopted, or the effect such changes might have on us, ourfinancial condition or our business. The following is a summary of the more significant existing environmental, health and safety laws and regulations towhich our operations are subject and for which a lack of compliance may have a material adverse impact on our results of operations, financial position orcash flows. We believe that we are in material compliance with all such laws.Environmental RegulationsOur operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants andother regulated substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of suchmaterials, and some of our operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements orpermits may result in fines and penalties, remediation orders and revocation of 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 of certain defined persons, including current and priorowners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardoussubstances found at the site. Under CERCLA, these “responsible persons” may be jointly and severally liable for the costs of cleaning up the hazardoussubstances, for damages to natural resources and for the costs of certain health studies.In the course of our operations, we occasionally generate materials that are considered “hazardous substances” and, as a result, may incur CERCLAliability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or otherpollutants. We also generate solid wastes that are subject to the requirements of the Resource Conservation and Recovery Act, as amended, or “RCRA,” andcomparable state statutes.Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have been released atproperties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for treatment or disposal. UnderCERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), or to performremedial 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 also impose variousmonitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operationof certain projects or facilities and may require use of emission controls.Global Warming and Climate ChangeSome scientific studies suggest that emissions of greenhouse gases (including carbon dioxide and methane) may contribute to warming of the Earth’satmosphere. While we do not believe our operations raise climate change issues different from those generally raised by commercial use of fossil fuels,legislation or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business could increase our costs in order to comply withany new laws.Water DischargesWe operate facilities that are subject to requirements of the Clean Water Act, as amended, or “CWA,” and analogous state laws that imposerestrictions and controls on the discharge of pollutants into navigable waters. Spill prevention, control and counter-measure requirements under the CWArequire implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. Other requirements for theprevention of spills are established under the Oil Pollution Act of 1990, as amended, or “OPA,” which applies to owners and operators of vessels, includingbarges, offshore platforms and certain onshore facilities. Under OPA, regulated parties are strictly and jointly and severally liable for oil spills and mustestablish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorilyresponsible.8Table of ContentsIndex to Financial StatementsOccupational Safety and Health ActWe are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or “OSHA,” and comparable state laws thatregulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used orproduced in our operations be maintained and provided to employees and state and local government authorities.Saltwater Disposal WellsWe operate SWD wells that are subject to the CWA, Safe Drinking Water Act, and state and local laws and regulations, including those establishedby the Underground Injection Control Program of the Environmental Protection Agency (“EPA”), which establishes the minimum program requirements. Mostof our SWD wells are located in Texas. We also operate SWD wells in Arkansas, Louisiana, Montana, New Mexico and North Dakota. Regulations in thesestates require us to obtain an Underground Injection Control permit to operate each of our SWD wells. The applicable regulatory agency may suspend ormodify one or more of our permits if our well operations are likely to result in pollution of freshwater, substantial violation of permit conditions or applicablerules, or if the well leaks into the environment.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 on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, as soon as reasonably practicable after such materialsare electronically filed with the Securities and Exchange Commission (“SEC”). Our Web site also includes general information about us, including ourCorporate Governance Guidelines and charters for the committees of our board of directors. Information on our Web site or any other Web site is not a part ofthis report. ITEM 1A. RISK FACTORSIn addition to the other information in this report, the following factors should be considered in evaluating us and our business.Our business is cyclical and depends 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 disruptions in the U.S. and globaleconomies and financial systems may adversely impact our business.Prices for oil and natural gas historically have been volatile and as a result of changes in the supply of, and demand for, oil and natural gas andother factors. These include changes resulting from. among other things, the ability of the Organization of Petroleum Export Countries ("OPEC") to support oilprices, changes in the levels of oil and natural gas production in the United States, domestic and worldwide economic conditions and political instability inoil-producing countries. We depend on our customers' willingness to make capital expenditures to explore for, develop and produce oil and natural gas.Therefore, 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 ina reduction in the utilization of our equipment and result in lower rates for our services.Our customers' willingness to undertake exploration and production activities depends largely upon prevailing industry conditions that are influenced bynumerous factors, over which we have no control, including:•prices, and expectations about future prices, of oil and natural gas;•domestic and worldwide economic conditions;•domestic and foreign supply of and demand for oil and natural gas;•the price and quantity of imports of foreign oil and natural gas including the ability of OPEC to set and maintain production levels for oil;•the cost of exploring for, developing, producing and delivering oil and natural gas;•the level of excess production capacity, available pipeline, storage and other transportation capacity;•lead times associated with acquiring equipment and products and availability of qualified personnel;•the expected rates of decline in production from existing and prospective wells;•the discovery rates of new oil and gas reserves;•federal, state and local regulation of exploration and drilling activities and equipment, material or supplies that we furnish;•public pressure on, and legislative and regulatory interest within, federal, state and local governments to stop, significantly limit or regulatehydraulic fracturing activities;9Table of ContentsIndex to Financial Statements•weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area and severe winter weather that caninterfere with our operations;•political instability in oil and natural gas producing countries;•advances in exploration, development and production technologies or in technologies affecting energy consumption;•the price and availability of alternative fuel and energy sources;•uncertainty in capital and commodities markets; and•changes in the value of the U.S. dollar relative to other major global currencies.A substantial decline in oil and natural gas prices generally leads to decreased spending by our customers. While higher oil and natural gas pricesgenerally lead to increased spending by our customers, sustained high energy prices can be an impediment to economic growth, and can therefore negativelyimpact spending by our customers. Our customers also take into account the volatility of energy prices and other risk factors by requiring higher returns forindividual projects if there is higher perceived risk. Any of these factors could affect the demand for oil and natural gas and could have a material adverseeffect on our business, financial condition, results of operations and cash flow.Spending by exploration and production companies can also be impacted by conditions in the capital markets. Limitations on the availability ofcapital, or higher costs of capital, for financing expenditures may cause exploration and production companies to make additional reductions to capitalbudgets in the future even if oil prices remain at current levels or natural gas prices increase from current levels. Any such cuts in spending will curtail drillingprograms as well as discretionary spending on well services, which may result in a reduction in the demand for our services, and the rates we can charge andthe utilization of our assets. Moreover, reduced discovery rates of new oil and natural gas reserves, or a decrease in the development rate of reserves, in ourmarket areas, whether due to increased governmental regulation, limitations on exploration and drilling activity or other factors, could also have a materialadverse impact on our business, even in a stronger oil and natural gas price environment.We may be unable to implement price increases or maintain existing prices on our core services.We periodically seek to increase the prices of our services to offset rising costs and to generate higher returns for our stockholders. However, weoperate in a very competitive industry and as a result, we are not always successful in raising, or maintaining our existing prices. Additionally, during periodsof increased market demand, a significant amount of new service capacity, including new well service rigs, fluid hauling trucks, coiled tubing units and newfishing and rental equipment, may enter the market, which also puts pressure on the pricing of our services and limits our ability to increase or maintainprices. Furthermore, during periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further adverselyaffect our profitability.Even when we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset such rising costs. In periods of highdemand for oilfield services, a tighter labor market may result in higher labor costs. During such periods, our labor costs could increase at a greater rate thanour ability to raise prices for our services. Also, we may not be able to successfully increase prices without adversely affecting our activity levels. The inabilityto maintain our prices or to increase our prices as costs increase could have a material adverse effect on our business, financial position and results ofoperations.We participate in a capital-intensive industry. We may not be able to finance future growth of our operations or future acquisitions.Our activities require substantial capital expenditures. If our cash flow from operating activities and borrowings under our revolving bank creditfacility are not sufficient to fund our capital expenditure budget, we would be required to fund these expenditures through debt or equity or alternativefinancing plans, such as refinancing or restructuring our debt or selling assets.Our ability to raise debt or equity capital or to refinance or restructure our debt will depend on the condition of the capital markets and our financialcondition at such time, among other things. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerouscovenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of thesealternatives. If debt and equity capital or alternative financing plans are not available or are not available on economically attractive terms, we would berequired to curtail our capital spending, and our ability to grow our business and sustain or improve our profits may be adversely affected. Any of theforegoing consequences could materially and adversely affect our business, financial condition, results of operations and prospects.10Table of ContentsIndex to Financial StatementsIncreased labor costs or the unavailability of skilled workers could hurt our operations.Companies in our industry, including us, are dependent upon the available labor pool of skilled employees. We compete with other oilfield servicesbusinesses and other employers to attract and retain qualified personnel with the technical skills and experience required to provide our customers with thehighest quality service. We are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other workingconditions, and which can increase our labor costs or subject us to liabilities to our employees. A shortage in the labor pool of skilled workers or other generalinflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain personnel and could require us toenhance our wage and benefits packages. Labor costs may increase in the future, and such increases could have a material adverse effect on our business,financial condition and results of operations.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 periodically evaluate our long-lived assets, includingour property and equipment, indefinite-lived intangible assets, and goodwill for impairment. In performing these assessments, we project future cash flows ona discounted basis for goodwill, and on an undiscounted basis for other long-lived assets, and compare these cash flows to the carrying amount of the relatedassets. These cash flow projections are based on our current operating plans, estimates and judgmental assumptions. We perform the assessment of potentialimpairment on our goodwill and indefinite-lived intangible assets at least annually, or more often if events and circumstances warrant. We perform theassessment of potential impairment for our property and equipment whenever facts and circumstances indicate that the carrying value of those assets may notbe recoverable due to various external or internal factors. If we determine that our estimates of future cash flows were inaccurate or our actual results arematerially different from what we have predicted, we could record additional impairment charges in future periods, which could have a material adverse effecton our financial position and results of operations.We have operated at a loss in the past and there is no assurance of our profitability in the future.Historically, we have experienced periods of low demand for our services and have incurred operating losses. In the future, we may incur furtheroperating losses and experience negative operating cash flow. We may not be able to reduce our costs, increase revenues, or reduce our debt service obligationssufficient to achieve or maintain profitability and generate positive operating income in the future.Our business involves certain operating risks, which are primarily self-insured, and our insurance may not be adequate to cover all insuredlosses 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 the property of others, orinjury or death to our or a third party's personnel.We self-insure against 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 to cover all losses or liabilities that we might incur in our operations.Furthermore, our insurance may not adequately protect us against liability from all of the hazards of our business. As a result of market conditions,premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable oravailable only for reduced amounts of coverage. We also are subject to the risk that we may be unable to maintain or obtain insurance of the type and amountwe desire at a reasonable cost. If we were to incur a significant liability for which we were uninsured or for which we were not fully insured, it could have amaterial adverse effect on our financial position, results of operations and cash flows.11Table of ContentsIndex to Financial StatementsWe operate in a highly competitive industry, with intense price competition, which may intensify as our competitors expand their operations.The market for oilfield services in which we operate is highly competitive and includes numerous small companies capable of competing effectivelyin our markets on a local basis, as well as several large companies that possess substantially greater financial resources than we do. Contracts are traditionallyawarded on the basis of competitive bids or direct negotiations with customers.The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, technology, equipmentquality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and production companies havereduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and can be moved from onemarket to another in response to market conditions heightens the competition in the industry. We may be competing for work against competitors that may bebetter able to withstand industry downturns and may be better suited to compete on the basis of price, retain skilled personnel and acquire new equipment andtechnologies, all of which could affect our revenues and profitability.We are subject to the economic, political and social instability risks of doing business in certain foreign countries.We currently have operations based in Mexico, Colombia, the Middle East and Russia and we own a technology development and control systemsbusiness based in Canada. In the future, we may expand our operations into other foreign countries. As a result, we are exposed to risks of internationaloperations, including:•increased governmental ownership and regulation of the economy in the markets in which we operate;•inflation and adverse economic conditions stemming from governmental attempts to reduce inflation, such as imposition of higher interest ratesand wage and price controls;•economic and financial instability of national oil companies;•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 markets where weoperate;•governmental policies limiting investments by and returns to foreign investors;•labor unrest and strikes•deprivation of contract rights; and•restrictive governmental regulation and bureaucratic delaysThe 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.Historically, we have experienced a high employee turnover rate. Any difficulty we experience replacing or adding workers could adverselyaffect our business.We believe that the high turnover rate in our industry is attributable to the nature of oilfield services work, which is physically demanding andperformed outdoors. As a result, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that arecompetitive with ours. The potential inability or lack of desire by workers to commute to our facilities and job sites, as well as the competition for workersfrom competitors or other industries, are factors that could negatively affect our ability to attract and retain workers. We may not be able to recruit, train andretain an adequate number of workers to replace departing workers. The inability to maintain an adequate workforce could have a material adverse effect onour business, financial condition and results of operations.12Table of ContentsIndex to Financial StatementsWe may not be successful in implementing and maintaining technology development and enhancements. New technology may cause us tobecome less competitive.The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some ofwhich may be subject to patent protection. As competitors and others use or develop new technologies in the future, we may be placed at a competitivedisadvantage. Further, we may face competitive pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors havegreater financial, technical and personnel resources that may allow them to implement new technologies before we can. If we are unable to develop andimplement new technologies or products on a timely basis and at competitive cost, our business, financial condition, results of operations and cash flowscould be adversely affected.An important component of our business strategy is to incorporate the KeyView® system, our proprietary technology, into our well service rigs. Theinability to successfully develop, integrate and protect this technology could:•limit our ability to improve our market position;•increase our operating costs; and•limit our ability to recoup the investments made in this technological initiative.The loss of or a substantial reduction in activity by one or more of our largest customers could materially and adversely affect our business,financial condition and results of operations.Two customers each accounted for more than 10% of our total consolidated revenues for the year ended December 31, 2012, and our ten largestcustomers represented approximately 51% of our consolidated revenues. In addition, our largest customer in our International segment representedapproximately 71% of our International segment revenues. The loss of or a substantial reduction in activity by one or more of these customers could have anadverse effect on our business, financial condition and results of operations.Potential adoption of future state or federal laws or regulations surrounding the hydraulic fracturing process could make it more difficult tocomplete oil or natural gas wells and could materially and adversely affect our business, financial condition and results of operations.Many of our customers utilize hydraulic fracturing services during the life of a well. Hydraulic fracturing is the process of creating or expandingcracks, or fractures, in underground formations where water, sand and other additives are pumped under high pressure into the formation. Although we arenot a provider of hydraulic fracturing services, many of our services complement the hydraulic fracturing process.Legislation has been introduced in Congress to provide for broader federal regulation of hydraulic fracturing operations and the reporting and publicdisclosure of chemicals used in the fracturing process. Additionally, the EPA has asserted federal regulatory authority over certain hydraulic fracturingactivities involving diesel fuel under the Safe Drinking Water Act and in May 2012 issued draft guidance for fracturing operations that involved diesel fuels. Ifadditional levels of regulation or permitting requirements were imposed through the adoption of new laws and regulations, our customers' business andoperations could be subject to delays and increased operating and compliance costs, which could negatively impact the number of active wells in themarketplaces we serve. New regulations addressing hydraulic fracturing and chemical disclosure have been approved or are under consideration by a numberof states and some municipalities have sought to restrict or ban hydraulic fracturing within their jurisdictions. The adoption of future federal, state ormunicipal laws regulating the hydraulic fracturing process could negatively impact our business, financial condition and results of operations.We may incur significant costs and liabilities as a result of environmental, health and safety laws and regulations that govern our operations.Our operations are subject to U.S. federal, state and local and foreign laws and regulations that impose limitations on the discharge of pollutants intothe environment and establish standards for the handling, storage and disposal of waste materials, including toxic and hazardous wastes. To comply withthese laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various governmental authorities. While the costof such compliance has not been significant in the past, new laws, regulations or enforcement policies could become more stringent and significantly increaseour compliance costs or limit our future business opportunities, which could have a material adverse effect on our financial condition and results ofoperations.13Table of ContentsIndex to Financial StatementsOur operations pose risks of environmental liability, including leakage from our operations to surface or subsurface soils, surface water orgroundwater. Some environmental laws and regulations may impose strict liability, joint and several liability, or both. Therefore, in some situations, we couldbe exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regardto whether we caused or contributed to the conditions. Actions arising under these laws and regulations could result in the shutdown of our operations, finesand penalties, expenditures for remediation or other corrective measures, and claims for liability for property damage, exposure to hazardous materials,exposure to hazardous waste or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations also may include theassessment of administrative, civil or criminal penalties, revocation of permits, temporary or permanent cessation of operations in a particular location andissuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a materialadverse effect on our business, financial condition, results of operations and cash flow. Additionally, an increase in regulatory requirements on oil and naturalgas exploration and completion activities could significantly delay or interrupt our operations.Severe weather could have a material adverse effect on our business.Our business could be materially and adversely affected by severe weather. Our customers' oil and natural gas operations located in Louisiana andparts of Texas may be adversely affected by hurricanes and tropical storms, resulting in reduced demand for our services. Furthermore, our customers'operations may be adversely affected by seasonal weather conditions. Adverse weather can also directly impede our own operations. Repercussions of severeweather conditions may include:•curtailment of services;•weather-related damage to facilities and equipment, resulting in suspension of operations;•inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and•loss of productivity.These constraints could delay our operations and materially increase our operating and capital costs. Unusually warm winters may also adverselyaffect the demand for our services by decreasing the demand for natural gas.We may not be successful in identifying, making and integrating acquisitions.An important component of our growth strategy is to make acquisitions that will strengthen our core services or presence in selected markets. Thesuccess of this strategy will depend, among other things, on our ability to identify suitable acquisition candidates, to negotiate acceptable financial and otherterms, to timely and successfully integrate acquired business or assets into our existing businesses and to retain the key personnel and the customer base ofacquired businesses. Any future acquisitions could present a number of risks, including but not limited to:•incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to berealized as a result of acquiring operations or assets;•failure to successfully integrate the operations or management of any acquired operations or assets in a timely manner;•failure to retain or attract key employees;•diversion of management's attention from existing operations or other priorities; and•inability to secure sufficient financing, sufficient financing on economically attractive terms, that may be required for any such acquisition orinvestment.Our business plan anticipates, and is based upon our ability to successfully complete and integrate, acquisitions of other businesses or assets in atimely and cost effective manner. Our failure to do so could adversely affect our business, financial condition or results of operations.Compliance with climate change legislation or initiatives could negatively impact our business.Various state governments and regional organizations comprising state governments are considering enacting new legislation and promulgating newregulations governing or restricting the emission of greenhouse gases, or GHG, from stationary sources, which may include our equipment and operations. Atthe federal level, the EPA has already issued regulations that require us to establish and report an inventory of GHG emissions. The EPA also has established aGHG permitting requirement for large stationary sources and may lower the threshold of the permitting program, which could include our equipment andoperations. Legislative and regulatory proposals for restricting GHG emissions or otherwise addressing climate change could require us to incur additionaloperating costs and could adversely affect demand for natural gas and oil. The potential increase in our operating costs could include new or increased costs toobtain permits, operate and maintain our equipment and facilities, install new emission controls on our equipment and facilities, acquire allowances toauthorize our greenhouse gas emissions, pay taxes related to our GHG emissions and administer and manage a GHG emissions program.14Table of ContentsIndex to Financial StatementsConservation measures and technological advances could reduce demand for natural gas and oil.Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technologicaladvances in fuel economy and energy generation could reduce demand for oil and natural gas. Moreover, incentives to conserve energy or use alternative energysources could reduce demand for oil and natural gas. Management cannot predict the impact of the changing demand for oil and natural gas services andproducts, and any major changes may have a material effect on our business, financial condition, results of operations and cash flows.The amount of our debt and the covenants in the agreements governing our debt could negatively impact our financial condition, results ofoperations and business prospects.Our level of indebtedness, and the covenants contained in the agreements governing our debt, could have important consequences for our operations,including:•making it more difficult for us to satisfy our obligations under the agreement governing our indebtedness and increasing the risk that we maydefault on our debt obligations;•requiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing theavailability 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 , general corporatepurposes 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 of our 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 with the covenants andother restrictions in the agreements governing our debt, it could lead to an event of default and the consequent acceleration of our obligation to repay outstandingdebt. Our ability to comply with debt covenants and other restrictions may be affected by events beyond our control, including general economic and financialconditions.In particular, under the terms of our indebtedness, we must comply with certain financial ratios and satisfy certain financial condition tests, severalof which become more restrictive over time and could require us to take action to reduce our debt or take some other action in order to comply with them. Ourability to satisfy required financial ratios and tests can be affected by events beyond our control, including prevailing economic, financial and industryconditions, and we may not be able to continue to meet those ratios and tests in the future. A breach of any of these covenants, ratios or tests could result in adefault under our indebtedness. If we default, lenders under our senior secured revolving credit facility will no longer be obligated to extend credit to us andthey, as well as the trustee for our outstanding notes, could elect to declare all amounts outstanding under our senior secured revolving credit facility orindentures, as applicable, together with accrued interest, to be immediately due and payable. The results of such actions would have a significant negativeimpact on our results of operations, financial position and cash flows.15Table of ContentsIndex to Financial StatementsWe may be able to incur more debt and long-term lease obligations in the future.The agreements governing our long-term debt restrict, but do not prohibit, us from incurring additional indebtedness and other obligations in thefuture. As of December 31, 2012, we had $848.1 million of long-term debt.An increase in our level of indebtedness could exacerbate the risks described in the immediately preceding risk factor and the occurrence of any ofsuch events could result in a material adverse effect on our business, financial condition, results of operations, and business prospects.We 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 depends on our ability to generate cash in the future.This, to a certain extent, is subject to conditions in the oil and natural gas industry, general economic and financial conditions, competition in the markets inwhich we operate, the impact of legislative and regulatory actions on how we conduct our business and other factors, all of which are beyond our control. Thisrisk could be exacerbated by any economic downturn or instability in the U.S. and global credit markets.Our business may not generate sufficient cash flow from operations to service our outstanding indebtedness. In addition, future borrowings may notbe available to us in amounts sufficient to enable us to repay our indebtedness or to fund our other capital needs. If our business does not generate sufficientcash flow from operations to service our outstanding indebtedness, we may have to undertake 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 may not be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, and implementing any suchalternative financing plans may not allow us to meet our debt obligations. In addition, a downgrade in our credit rating would make it more difficult for us toraise additional debt in the future. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to obtain alternative financings, couldmaterially and adversely affect our business, financial condition, results of operations and future prospects for growth.Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.Borrowings under our credit facility bear interest at variable rates, exposing us to interest rate risk. If interest rates increase, our debt service obligations onthe variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing ourindebtedness would decrease.Our failure to comply with the Foreign Corrupt Practices Act ("FCPA") and similar laws would have a negative impact on our ongoingoperations.Our ability to comply with the FCPA and similar laws is dependent on the success of our ongoing compliance program, including our ability tocontinue to manage our agents, affiliates and business partners, and supervise, train and retain competent employees. Our compliance program is alsodependent on the efforts of our employees to comply with applicable law and our Business Code of Conduct. We could be subject to sanctions and civil andcriminal prosecution as well as fines and penalties in the event of a finding of violation of the FCPA or similar laws by us or any of our employees.Our bylaws contain provisions that may prevent or delay a change in control.Our bylaws contain certain provisions designed to enhance the ability of our board of directors to respond to unsolicited attempts to acquire control ofthe Company. These provisions:•establish a classified board of directors, providing for three-year staggered terms of office for all members of our board of directors;•set limitations on the removal of directors;•enable our board of directors to set the number of directors and to fill vacancies on the board occurring between 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 to potentialacquirers seeking control of the Company at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price ofour common stock.16Table of ContentsIndex to Financial StatementsITEM 1B. UNRESOLVED STAFF COMMENTSNone. ITEM 2. PROPERTIESWe lease office space for our principal executive offices in Houston, Texas. We also lease local office space in the various countries in which weoperate. Additionally, we own or lease numerous rig facilities, storage facilities, truck facilities and sales and administrative offices throughout the geographicregions in which we operate. We lease temporary facilities to house employees in regions where infrastructure is limited. In connection with our fluidmanagement services, we operate a number of owned and leased SWD facilities, and brine and freshwater stations. Our leased properties are subject to variouslease terms and expirations.We believe all properties that we currently occupy are suitable for their intended uses. We believe that our current facilities are sufficient to conductour operations. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires.The following table shows our active owned and leased properties, as well as active SWD facilities, categorized by geographic region:RegionOffice, Repair &Service and Other (1) SWDs, Brine andFreshwater Stations(2) Operational FieldServices FacilitiesUnited States Owned10 37 78Leased23 47 55International Owned1 — —Leased39 — 8TOTAL73 84 141 (1)Includes 20 residential properties leased in the United States. Also includes one staff house leased in Colombia for Key employees, one house rental forthe Colombia country manager and one property in Russia leased by Geostream Services Group and its subsidiaries (“Geostream”), five rental homesfor managers and staff in Mexico, three staff houses in Bahrain and one rental house for a manager in Oman.(2)Includes SWD facilities as “leased” if we own the wellbore for the SWD but lease the land. In other cases, we lease both the wellbore and the land. Leaseterms vary among different sites, but with respect to some of the SWD facilities for which we lease the land and own the wellbore, the land owner hasan option under the land lease to retain the wellbore at the termination of the lease.ITEM 3. LEGAL PROCEEDINGSWe are subject to various suits and claims that have arisen in the ordinary course of business. We do not believe that the disposition of any of ourordinary course litigation will result in a material adverse effect on our consolidated financial position, results of operations or cash flows.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.17Table of ContentsIndex to Financial StatementsPART 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 New York Stock Exchange (“NYSE”) under the symbol “KEG.” As of February 15, 2013, there were 671registered holders of 152,320,915 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 the common stock that have shares held in “streetname” are not. The following table sets forth the reported high and low closing price of our common stock for the periods indicated: High LowYear Ended December 31, 2012 1st Quarter$17.82 $14.332nd Quarter15.73 6.863rd Quarter9.51 6.674th Quarter7.39 5.82 High LowYear Ended December 31, 2011 1st Quarter$15.92 $12.162nd Quarter18.20 14.593rd Quarter20.48 9.094th Quarter15.47 8.70The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shallsuch information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except tothe 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 Index, the Russell 1000 Index, theRussell 2000 Index, old peer group and new peer group as established by management.The old peer group consists of the following companies: Nabors Industries Ltd., Weatherford International Ltd., Basic Energy Services, Inc.,Complete Production Services, Inc. and RPC, Inc. In February 2012, Complete Production Services, Inc was acquired by Superior Energy Services, Inc.The new peer group consists of the following companies: Baker Hughes Incorporated, Basic Energy Services, Inc., Exterran Holdings, Inc., HelixEnergy Solutions Group, Inc., Noble Corporation, Oceaneering International Inc., Oil States International Inc., Patterson UTI Energy Inc., RPC, Inc.,Superior Energy Services, Inc. and Weatherford International Ltd.Also during 2008, we moved from the Russell 2000 Index to the Russell 1000 Index and, during 2009, we moved back from the Russell 1000 Index tothe Russell 2000 Index. For comparative purposes, both the Russell 2000 and the Russell 1000 Indices are reflected in the following performance graph.The graph below compares the cumulative five-year total return to holders of our common stock with the cumulative total returns of the PHLX OilService Sector, the listed Russell Indices, our old peer group and our new peer group. The graph assumes that the value of the investment in our commonstock and each index (including reinvestment of dividends) was $100 at December 31, 2007 and tracks the return on the investment through December 31,2012.18Table of ContentsIndex to Financial StatementsCOMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Key Energy Services, Inc., the Russell 2000 Index, the Russell 1000 Index,the PHLX Oil Service Sector Index, Old Peer Group and New Peer Group* $100 invested on 12/31/07 in stock or index, including reinvestment of dividends. Fiscal years ended December 31.Dividend PolicyThere were no dividends declared or paid on our common stock for the years ended December 31, 2012, 2011 and 2010. Under the terms of ourcurrent credit facility, we must meet certain financial covenants before we may pay dividends. We do not currently intend to pay dividends.Issuer Purchases of Equity SecuritiesDuring the fourth quarter of 2012, we repurchased an aggregate of 10,749 shares of our common stock. The repurchases were to satisfy taxwithholding obligations that arose upon vesting of restricted stock. Set forth below is a summary of the share repurchases:PeriodTotal Numberof SharesPurchased WeightedAverage PricePaid Per Share(1) Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans orProgramsOctober 1, 2012 to October 31, 2012— $— —November 1, 2012 to November 30, 20126,967 $6.10 —December 1, 2012 to December 31, 20123,782 $6.52 — (1)The price paid per share with respect to the tax withholding repurchases was determined using the closing prices on the applicable vesting date, asquoted on the NYSE.19Table of ContentsIndex to Financial StatementsEquity Compensation Plan InformationThe following table sets forth information as of December 31, 2012 with respect to equity compensation plans (including individual compensationarrangements) under which our common stock is authorized for issuance:Plan CategoryNumber of Securitiesto be Issued UponExercise ofOutstanding Options,Warrants And Rights(a) Weighted AverageExercise Price ofOutstandingOptions, WarrantsAnd Rights(b) Number of Securities RemainingAvailable for Future IssuanceUnder Equity CompensationPlans (Excluding SecuritiesReflected in Column (a))(c) (in thousands) (in thousands)Equity compensation plans approved by stockholders(1)2,064 $14.03 4,513Equity compensation plans not approved by stockholders— $— —Total2,064 4,513 (1)Represents options and other stock-based awards granted under the Key Energy Services, Inc. 2012 Equity and Cash Incentive Plan (the “2012Incentive Plan”), the Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan (the “2009 Incentive Plan”), the Key Energy Services, Inc. 2007Equity and Cash Incentive Plan (the “2007 Incentive Plan”), and the Key Energy Group, Inc. 1997 Incentive Plan (the “1997 Incentive Plan”).ITEM 6. SELECTED FINANCIAL DATAThe following historical selected financial data as of and for the years ended December 31, 2008 through December 31, 2012 has been derived fromour audited financial statements included in “Item 8. Financial Statements and Supplementary Data.” For the years ended December 31, 2008 throughDecember 31, 2011, we have reclassified the historical results of operations of our Argentina business as discontinued operations. Additionally, for the yearsended December 31, 2008 through December 31, 2010, we have reclassified the historical results of operations of our pressure pumping and wirelinebusinesses as discontinued operations.The historical selected financial data should be read in conjunction with “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes thereto included in “Item8. Financial Statements and Supplementary Data.”20Table of ContentsIndex to Financial StatementsRESULTS OF OPERATIONS DATA Year Ended December 31, 2012 2011 2010 2009 2008 (in thousands, except per share amounts)REVENUES$1,960,070 $1,729,211 $1,062,595 $887,074 $1,505,605COSTS AND EXPENSES: Direct operating expenses1,308,845 1,085,190 746,441 609,807 917,516Depreciation and amortization expense213,783 166,946 133,898 145,491 144,920General and administrative expenses230,496 223,299 186,188 160,220 232,836Asset retirements and impairments— — — 96,768 26,101Operating income (loss)206,946 253,776 (3,932) (125,212) 184,232Loss on early extinguishment of debt— 46,451 — 472 —Interest expense, net of amounts capitalized53,566 40,849 41,240 39,241 42,677Other (income) expense, net(6,649) (8,977) (2,807) (624) 1,191Income (loss) from continuing operations beforetax160,029 175,453 (42,365) (164,301) 140,364Income tax (expense) benefit(57,352) (64,117) 17,961 61,532 (77,312)Income (loss) from continuing operations102,677 111,336 (24,404) (102,769) 63,052Income (loss) from discontinued operations, netof tax(93,568) (10,681) 94,753 (53,907) 20,761Net income (loss)9,109 100,655 70,349 (156,676) 83,813Income (loss) attributable to noncontrollinginterest1,487 (806) (3,146) (555) (245)INCOME (LOSS) ATTRIBUTABLE TOKEY$7,622 $101,461 $73,495 $(156,121) $84,058Earnings (loss) per share from continuingoperations attributable to Key: Basic$0.67 $0.77 $(0.16) $(0.84) $0.51Diluted$0.67 $0.76 $(0.16) $(0.84) $0.50Earnings (loss) per share from discontinuedoperations: Basic$(0.62) $(0.07) $0.73 $(0.45) $0.17Diluted$(0.62) $(0.07) $0.73 $(0.45) $0.17Earnings (loss) per share attributable toKey: Basic$0.05 $0.70 $0.57 $(1.29) $0.68Diluted$0.05 $0.69 $0.57 $(1.29) $0.67 21Table of ContentsIndex to Financial Statements Year Ended December 31, 2012 2011 2010 2009 2008 (in thousands, except per share amounts)Income (loss) from continuing operationsattributable to Key: Income (loss) from continuing operations$102,677 $111,336 $(24,404) $(102,769) $63,052Income (loss) attributable to noncontrollinginterest1,487 (806) (3,146) (555) (245)Income (loss) from continuing operationsattributable to Key$101,190 $112,142 $(21,258) $(102,214) $63,297Weighted Average Shares Outstanding: Basic151,106 145,909 129,368 121,072 124,246Diluted151,125 146,217 129,368 121,072 125,565CASH FLOW DATA Year Ended December 31, 2012 2011 2010 2009 2008 (in thousands)Net cash provided by operating activities$369,660 $188,305 $129,805 $184,837 $367,164Net cash used in investing activities(428,709) (520,090) (8,631) (110,636) (329,074)Net cash provided by (used in) financingactivities73,946 306,084 (100,205) (127,475) (7,970)Effect of changes in exchange rates on cash(4,391) 4,516 (1,735) (2,023) 4,068BALANCE SHEET DATA Year Ended December 31, 2012 2011 2010 2009 2008 (in thousands)Working capital$284,698 $311,060 $132,385 $194,363 $285,749Property and equipment, gross2,528,578 2,184,810 1,789,571 1,604,523 1,808,836Property and equipment, net1,436,674 1,197,300 920,797 776,349 1,027,086Total assets2,761,588 2,599,120 1,892,936 1,664,410 2,016,923Long-term debt and capital leases, net of currentmaturities848,110 773,975 427,121 523,949 633,591Total liabilities1,474,256 1,384,489 911,133 921,270 1,156,191Equity1,287,332 1,214,631 981,803 743,140 860,732Cash dividends per common share— — — — — 22Table of ContentsIndex to Financial StatementsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with ourconsolidated financial statements and related notes thereto in “Item 8. Financial Statements and Supplementary Data.” The discussion below containsforward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances including thoseidentified in “Cautionary Note Regarding Forward-Looking Statements” above. Actual results may differ materially from these expectations due topotentially inaccurate assumptions and known or unknown risks and uncertainties. Such forward-looking statements should be read in conjunctionwith our disclosures under “Item 1A. Risk Factors.”OverviewWe provide a full range of well services to major oil companies, foreign national oil companies and independent oil and natural gas productioncompanies to produce, maintain and enhance the flow of oil and natural gas throughout the life of a well. These services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services and otherancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gasproducing regions of the continental United States, and we have operations in Mexico, Colombia, the Middle East and Russia. In addition, we have atechnology development and control systems business based in Canada.The demand for our services fluctuates, primarily in relation to the price (or anticipated price) of oil and natural gas, which, in turn, is drivenprimarily by the supply of, and demand for, oil and natural gas. Generally, as supply of those commodities decreases and demand increases, service andmaintenance requirements increase as oil and natural gas producers attempt to maximize the productivity of their wells in a higher priced environment.However, in a lower oil and natural gas price environment, demand for service and maintenance generally decreases as oil and natural gas producers decreasetheir activity. In particular, 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 risk tolerant whencommodity prices are low or volatile, we may experience a more rapid decline in demand for well maintenance services compared with demand for other typesof oilfield services. Further, in a lower-priced environment, fewer well service rigs are needed for completions, as these activities are generally associated withdrilling activity.Business and Growth StrategiesFocus on Horizontal Well ServicesIn recent years the number of horizontal wells drilled in the U.S. has increased significantly. Horizontal wells tend to involve a higher degree ofservice intensity associated with their drilling and completion, and we believe ultimately the maintenance required over their lifetime. To capitalize on thisgrowing market segment we have built and acquired new equipment, including more capable rigs and coiled tubing units, and upgraded existing equipmentcapable of providing services integral to the completion and maintenance of horizontal wellbores. Additionally, during 2011 we acquired Edge , whichprimarily rents frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids, proppants, oil and naturalgas. The Edge acquisition increased our higher-end equipment and service offerings associated with horizontal well completion activity. We also expanded allour service offerings into unconventional shale regions where horizontal activity is most prevalent including the Bakken shale, the Eagle Ford shale, andothers. We intend to continue our focus on the expansion of horizontal well service offerings in existing markets and into new markets in the United States.Continue Expansion in International MarketsWe presently operate internationally in Mexico, Colombia, the Middle East and Russia, particularly in regions of those countries with large matureoilfields facing production declines. We believe that our experience with domestic mature oilfields and our proprietary technologies, including our KeyView®system, provides us with the opportunity to compete for new business in foreign markets. We continue to evaluate international expansion opportunities in theregions where we already have a presence as well as other regions.Pursue Prudent Acquisitions in Complementary BusinessesWe intend to continue our disciplined approach to acquisitions, seeking opportunities, domestic and internationally, that strengthen our presence inselected regional markets and provide opportunities to expand our core services. We also seek to acquire technologies, assets and businesses that represent agood operational, strategic, and/or synergistic fit with our existing service offerings. For example, our recent acquisition of Edge complemented our otherhorizontal well service offerings.23Table of ContentsIndex to Financial StatementsLikewise, in October 2010, we acquired certain subsidiaries, together with associated assets, owned by OFS Energy Services, LLC and other coiled tubingasset acquisitions enabled us to further expand our unconventional shale market positioning.PERFORMANCE MEASURESThe Baker Hughes U.S. rig count data, which is publicly available on a weekly basis, is often used as a coincident indicator of overall Explorationand Production (E&P) company spending and broader oilfield activity. In assessing overall activity in the U.S. onshore oilfield service industry in which weoperate, we believe that the Baker Hughes U.S. land drilling rig count is the best barometer of E&P companies' capital spending and resulting activity levels.Historically, our activity levels have been highly correlated to U.S. onshore capital spending by our E&P company customers as a group.YearWTI Cushing CrudeOil(1) NYMEX Henry HubNatural Gas(1) Average Baker HughesU.S. Land Drilling Rigs(2)2008$99.57 $8.90 1,8142009$61.95 $4.28 1,0462010$79.48 $4.38 1,5142011$94.87 $4.03 1,8462012$94.05 $2.75 1,871 (1)Represents the average of the monthly average prices for each of the years presented. Source: U.S. Energy Information Administration, Bloomberg.(2)Source: www.bakerhughes.comInternally, we measure activity levels for our well servicing operations primarily through our rig and trucking hours. Generally, as capital spendingby E&P companies increases, demand for our services also rises, resulting in increased rig and trucking services and more hours worked. Conversely, whenactivity levels decline due to lower spending by E&P companies, we generally provide fewer rig and trucking services, which results in lower hours worked.The following table presents our quarterly rig and trucking hours from 2010 through 2012. Rig Hours Trucking Hours Key’s U.S.Working Days (3) U.S. International (1) Total (2) 2012 First Quarter435,280 84,469 519,749 722,718 64Second Quarter428,864 104,656 533,520 685,587 63Third Quarter412,998 103,448 516,446 607,480 63Fourth Quarter357,628 113,246 470,874 594,770 62Total 2012:1,634,770 405,819 2,040,589 2,610,555 2522011 First Quarter415,691 52,965 468,656 711,701 64Second Quarter426,278 59,384 485,662 776,382 63Third Quarter428,236 66,375 494,611 757,550 64Fourth Quarter413,052 69,528 482,580 721,411 61Total 2011:1,683,257 248,252 1,931,509 2,967,044 2522010 First Quarter372,842 60,596 433,438 459,292 63Second Quarter396,877 40,190 437,067 518,483 63Third Quarter413,052 34,739 447,791 559,181 64Fourth Quarter402,187 34,812 436,999 707,616 61Total 2010:1,584,958 170,337 1,755,295 2,244,572 25124Table of ContentsIndex to Financial Statements(1) International continuing operations rig hours exclude rig hours generated in Argentina, as our Argentina operations were sold in the third quarter of 2012and are reported as discontinued operations. Argentina hours were 54,625 and 55,972 for the first and second quarters of 2012, respectively. Argentina righours were 56,804, 59,255, 59,532 and 50,876 for the first, second, third and fourth quarters of 2011 respectively. Argentina rig hours were 51,745,52,101, 56,099 and 56,946 for the first, second, third and fourth quarters of 2010 respectively.(2) Total continuing operations rig hours included U.S. rig hours and international continuing operations rig hours, asdescribed in footnote (1) above.(3) Key's U.S. working days are the number of weekdays during the quarter minus national holidays.MARKET CONDITIONS AND OUTLOOKMarket Conditions — Year Ended December 31, 2012Industry conditions are influenced by a number of factors, such as the domestic and international supply and demand for oil and natural gas,domestic and international economic conditions, political instability in oil producing countries and merger, acquisition and divestiture activity among E&Pcompanies.In the first half of 2012, customer spending drove increased demand for our services. Accordingly, we invested in equipment, personnel andresources necessary to accommodate market growth. Meanwhile, oil prices peaked near $110 per barrel early in the year and subsequently declined to under$80 per barrel by mid-year. The lower realized oil prices combined with natural gas prices below $3.50 per mcf persisting through most of the year, negativelyimpacted customer cash flow.As a result of our customers' reduced operating cash flow, our overall activity levels and pricing for our services decreased as 2012 progressed. Weexperienced reduced equipment utilization and under-absorbed operating costs, particularly in our Fluids Management Services, Coiled Tubing Services, andFishing and Rental Services, due to their higher exposure to natural gas markets, where customer demand weakened and price competition increased for theservices we provide.Earlier in the year, we expanded our capacity in large diameter, extended reach capable coiled tubing units. We increased our frac stack and welltesting business in the Eagle Ford, and we developed a presence in other oil shale markets, notably the Mississippian Lime and Bakken Shale markets. Wecontinued to recapitalize our U.S. rig services fleet, deploying modern heavy workover rigs and retiring and scrapping older, less capable well servicing rigs.Internationally, we more than doubled our presence in Mexico, and we expanded in Colombia and the Middle East. Additionally during the year, wesold our Argentina operations. Market OutlookContinued growth in global and domestic oil demand combined with limited global production capacity has more recently improved the oil priceoutlook, which, we believe, supports continued oil-directed activity in 2013, particularly more productive horizontal wells. We anticipate Key's U.S. activityin 2013 will approximate 2012 levels, implying generally increasing activity from a lower first quarter level. Additionally, we believe the favorable global oilfundamentals should also lead to higher activity in our international segment.One of Key's large customers reduced its U.S. oilfield service activity, which negatively impacted our Rig Services business late in the fourth quarterof 2012. We anticipate a full quarter's impact of this activity reduction in the first quarter of 2013. We expect generally improving activity for Rig Servicesbeginning in the second quarter 2013 and continuing through the year as the idled rig assets return to service.Our Fishing and Rental Services business tends to be correlated mostly to the onshore drilling rig count. Even against the backdrop of overall flatyear-over-year U.S. oilfield service activity levels, we believe this business could grow as a result of investments in rental equipment that we made in 2012.Internationally, we expect to build on the growth experienced in 2012 and the capital investments we made during the year. In Mexico, Colombia andthe Middle East, assets that were deployed late in 2012 should help fuel incremental growth with a full year's contribution to results in 2013.Impact of Inflation on OperationsIn 2013, we anticipate cost inflation to remain one of our biggest challenges as it was in 2012. We expect that competition for experienced crewsthroughout the oilfield services industry will continue to put upward pressure on wages. Access to experienced, capable crews remains one of our biggestchallenges to growth. We also anticipate the need to mitigate equipment and fuel costs in 2013. In addition to effective, active cost management, we endeavor tosecure prices for our services which anticipate cost inflation, such that we can still generate an appropriate return for our services.25Table of ContentsIndex to Financial StatementsRESULTS OF OPERATIONSConsolidated Results of OperationsThe following table shows our consolidated results of operations for the years ended December 31, 2012, 2011 and 2010: Year Ended December 31, 2012 2011 2010 (in thousands, except per share amounts)REVENUES$1,960,070 $1,729,211 $1,062,595COSTS AND EXPENSES: Direct operating expenses1,308,845 1,085,190 746,441Depreciation and amortization expense213,783 166,946 133,898General and administrative expenses230,496 223,299 186,188Operating income (loss)206,946 253,776 (3,932)Loss on early extinguishment of debt— 46,451 —Interest expense, net of amounts capitalized53,566 40,849 41,240Other income, net(6,649) (8,977) (2,807)Income (loss) from continuing operations before tax160,029 175,453 (42,365)Income tax (expense) benefit(57,352) (64,117) 17,961Income (loss) from continuing operations102,677 111,336 (24,404)Income (loss) from discontinued operations, net of tax(93,568) (10,681) 94,753Net income9,109 100,655 70,349Income (loss) attributable to noncontrolling interest1,487 (806) (3,146)INCOME ATTRIBUTABLE TO KEY$7,622 $101,461 $73,495Year Ended December 31, 2012 and 2011For the year ended December 31, 2012, our operating income was $207.0 million, compared to $253.8 million for the year ended December 31,2011. Income for 2012 was $0.05 per diluted share compared to $0.69 per diluted share for 2011. Income and income per share during 2011 was impactedby our loss on the extinguishment of debt.RevenuesOur revenues for the year ended December 31, 2012 increased $230.9 million, or 13.4%, to $1.96 billion from $1.73 billion for the year endedDecember 31, 2011, mostly due to strong demand for our rig-based services in oil markets, improved pricing and overall economic conditions during the firsthalf of 2012 as well as both domestic and international expansion of our business. See “Segment Operating Results — Year Ended December 31, 2012and 2011” below for a more detailed discussion of the change in our revenues.Direct operating expensesOur direct operating expenses increased $223.7 million, or 20.6%, to $1.3 billion (66.8% of revenues) for the year ended December 31, 2012,compared to $1.1 billion (62.8% of revenues) for the year ended December 31, 2011. We incurred additional costs during the period to relocate assets andpersonnel from declining natural gas markets to oil markets. As a result, we experienced increased competition in the oil markets we serve giving rise to higherlabor costs. See “Segment Operating Results — Year Ended December 31, 2012 and 2011” below for a more detailed discussion of the change in ourdirect operating expenses.Depreciation and amortization expenseDepreciation and amortization expense increased $46.8 million, or 28.1%, to $213.8 million (10.9% of revenue) for the year ended December 31,2012, compared to $166.9 million (9.7% of revenue) for the year ended December 31, 2011. The increase was primarily attributable to the increase in ourfixed asset base through our acquisitions during 2011, as well as increased capital expenditures during 2011 and full year 2012.26Table of ContentsIndex to Financial StatementsGeneral and administrative expensesGeneral and administrative expenses increased $7.2 million, or 3.2%, to $230.5 million (11.8% of revenues) for the year ended December 31, 2012,compared to $223.3 million (12.9% of revenues) for the year ended December 31, 2011. The increase was primarily due to higher employee compensation,benefit costs and professional fees. In addition, prior year expenses were offset by a favorable legal settlement of $5.5 million in which Key Energy Services,Inc. was the plantiff.Loss on early extinguishment of debtLoss on early extinguishment of debt was zero for the year ended December 31, 2012, compared to $46.5 million for the same period in 2011, due toour tender offer for our 8.375% Senior Notes due 2014 (the “2014 Notes”) and the termination of our prior credit facility during the first quarter of 2011. Theloss consisted of the tender premium on the 2014 Notes, as well as transaction fees and the write-off of the unamortized portion of deferred financing costs.Interest expense, net of amounts capitalizedInterest expense increased $12.7 million to $53.6 million (2.7% of revenues), for the year ended December 31, 2012, compared to $40.8 million(2.4% of revenues) for the same period in 2011. Overall, interest rates on our debt have declined compared to 2011 due to our repurchase of the 2014 Notes andthe issuance of the 6.75% Senior Notes due 2021 during the first quarter of 2011. However, interest expense for the year ended December 31, 2012 increaseddue to the issuance of an additional $200.0 million aggregate principal amount of 6.75% Senior Notes due 2021 and a higher outstanding balance under our2011 Credit Facility (as defined below).Other (income) expense, netDuring the year ended December 31, 2012, we recognized other income, net, of $6.6 million, compared to other income, net, of $9.0 million for theyear ended December 31, 2011. In the second quarter of 2011, we sold our equity interest in IROC Energy Services Corp. (“IROC”) and recorded a gain on thesale of $4.8 million. Our foreign exchange gain relates to an increase in U.S. dollar-denominated transactions in our foreign locations and fluctuations in thestrength of the U.S. dollar. The table below presents comparative detailed information about other income, net at December 31, 2012 and 2011: Year EndedDecember 31, 2012 2011 (in thousands)Interest income$(46) $(26)Foreign exchange gain(4,726) (3,058)Gain on sale of equity method investment— (4,783)Other income, net(1,877) (1,110)Total$(6,649) $(8,977)Income tax (expense) benefitOur income tax expense on continuing operations was $57.4 million (35.8% effective rate) on pre-tax income of $160.0 million for the year endedDecember 31, 2012, compared to an income tax expense of $64.1 million (36.5% effective rate) on a pre-tax income of $175.5 million in 2011. Our effectivetax rates differ from the statutory rate of 35% primarily because of state, local and foreign income taxes, and the tax effects of permanent items attributable tobook-tax differences.Discontinued operationsDuring the years ended December 31, 2012 and 2011, our net loss from discontinued operations was $93.6 million and $10.7 million,respectively. This activity related to our Argentina business. Included in the loss from discontinued operations for the year ended December 31, 2012 is a pre-tax loss of $85.8 million, which includes the noncash impairment charge of $41.5 million recorded in the first quarter of 2012, and a write-off of $51.9million cumulative translation adjustment previously recorded in Accumulated other comprehensive loss. For further discussion see “Note 3. DiscontinuedOperations” in “Item 8. Financial Statements and Supplementary Data.”Noncontrolling InterestFor the year ended December 31, 2012, we allocated $1.5 million associated with the income incurred by our joint ventures to the noncontrollinginterest holders of these ventures compared to a net loss of $0.8 million for the year ended December 31, 2011.27Table of ContentsIndex to Financial StatementsYear Ended December 31, 2011 and 2010For the year ended December 31, 2011, operating income was $253.8 million, compared to a $4.0 million operating loss for the year ended December 31,2010. Income for 2011 was $0.69 per diluted share compared to $0.57 per diluted share for 2010. Income and income per share during 2011 was impacted byour loss on the extinguishment of debt. Also, our 2010 results included the gain on the sale of our pressure pumping and wireline businesses on October 1,2010.RevenuesOur revenues for the year ended December 31, 2011 increased $666.6 million, or 62.7%, to $1.73 billion from $1.06 billion for the year endedDecember 31, 2010 as a result of increased activity and improved pricing compared to 2010, domestic and international growth, as well as the revenuecontribution of acquisitions completed during 2011 and in the fourth quarter of 2010. See “Segment Operating Results — Year Ended December 31, 2011and 2010” below for a more detailed discussion of the change in our revenues.Direct operating expensesOur direct operating expenses increased $338.7 million, or 45.4%, to $1.1 billion (62.8% of revenues) for the year ended December 31, 2011,compared to $746.4 million (70.2% of revenues) for the year ended December 31, 2010 as a direct result of increased business activity as well as inflation inour operating costs. See “Segment Operating Results — Year Ended December 31, 2011 and 2010” below for a more detailed discussion of the change inour direct operating expenses.Depreciation and amortization expenseDepreciation and amortization expense increased $33.0 million, or 24.7%, to $166.9 million (9.7% of revenue) for the year ended December 31,2011, compared to $133.9 million (12.6% of revenue) for the year ended December 31, 2010. The increase is primarily attributable to the increase in our fixedasset base through our acquisitions during 2011 and the fourth quarter of 2010, as well as increased capital expenditures in 2011.General and administrative expensesGeneral and administrative expenses increased $37.1 million, or 19.9%, to $223.3 million (12.9% of revenues) for the year ended December 31,2011, compared to $186.2 million (17.5% of revenues) for the year ended December 31, 2010. Our general and administrative expenses increased due to anincrease in employee compensation resulting from the rescission of temporary employee compensation and benefit reductions late in 2010 as well as increasedheadcount due to our growth.Loss on early extinguishment of debtLoss on early extinguishment of debt was $46.5 million for the year ended December 31, 2011, compared to zero for the same period in 2010, due toour tender offer for our 2014 Notes and the termination of our prior credit facility during the first quarter of 2011. The loss consisted of the tender premium onthe 2014 Notes, as well as transaction fees and the write-off of the unamortized portion of deferred financing costs.Interest expense, net of amounts capitalizedInterest expense decreased $0.4 million to $40.8 million (2.4% of revenues), for the year ended December 31, 2011, compared to $41.2 million (3.9%of revenues) for the same period in 2010. Overall, interest rates on our debt declined during 2011 due to the replacement of the 2014 Notes with our 6.75%Senior Notes due 2021 during the first quarter of 2011. However, this rate decline was offset by additional interest expense due to a greater aggregate principalamount outstanding of the 2021 Notes and additional borrowings under our 2011 Credit Facility to fund the acquisition of Edge.Other (income) expense, netDuring the year ended December 31, 2011, we recognized other income, net, of $9.0 million, compared to other income, net, of $2.8 million for theyear ended December 31, 2010. In the second quarter of 2011, we sold our equity interest in IROC and recorded a gain on the sale of $4.8 million. Our foreignexchange gain relates to an increase in U.S. dollar-denominated transactions in our foreign locations and fluctuations in the strength of the U.S. dollar. Thetable below presents comparative detailed information about other income, net at December 31, 2011 and 2010:28Table of ContentsIndex to Financial Statements Year EndedDecember 31, 2011 2010 (in thousands)Interest income$(26) $(130)Foreign exchange gain(3,058) (1,681)Gain on sale of equity method investment(4,783) —Other income, net$(1,110) $(996)Total$(8,977) $(2,807)Income tax (expense) benefitOur income tax expense on continuing operations was $64.1 million (36.5% effective rate) on pre-tax income of $175.5 million for the year endedDecember 31, 2011, compared to an income tax benefit of $18.0 million (42.4% effective rate) on a pre-tax loss of $42.4 million in 2010. Our effective tax ratesdiffer from the statutory rate of 35% primarily because of state, local and foreign income taxes, and the tax effects of permanent items attributable to book-taxdifferences.Discontinued operationsNet loss from discontinued operations was $10.7 million for the year ended December 31, 2011, compared to income of $94.8 million for the yearended December 31, 2010. The net loss in 2011 related to our Argentina business, while the net income in 2010 related to both our Argentina business and ourpressure pumping and wireline businesses. For further discussion see “Note 3. Discontinued Operations” in “Item 8. Financial Statements andSupplementary Data.”Noncontrolling InterestFor the year ended December 31, 2011, we allocated $0.8 million associated with the net loss incurred by our joint ventures to the noncontrollinginterest holders of these ventures, compared to $3.1 million for the year ended December 31, 2010.Segment Operating ResultsYear Ended December 31, 2012 and 2011The following table shows operating results for each of our reportable segments for the years ended December 31, 2012 and 2011 (in thousands):For the year ended December 31, 2012 U.S. International FunctionalSupport TotalRevenues from external customers$1,626,768 $333,302 $— $1,960,070Operating expenses1,341,427 270,310 141,387 1,753,124Operating income (loss)285,341 62,992 (141,387) 206,946For the year ended December 31, 2011 U.S. International FunctionalSupport TotalRevenues from external customers$1,530,087 $199,124 $— $1,729,211Operating expenses1,172,481 160,203 142,751 1,475,435Operating income (loss)357,606 38,921 (142,751) 253,77629Table of ContentsIndex to Financial StatementsU.S.Revenues for our U.S. segment increased $96.7 million, or 6.3%, to $1.63 billion for the year ended December 31, 2012, compared to $1.53 billionfor the year ended December 31, 2011. The increase was due to an increase in activity for our rig-based services and fishing and rental services along withimproved pricing.Operating expenses for our U.S. segment were $1.34 billion during the year ended December 31, 2012, which represented an increase of $168.9million, or 14.4%, compared to $1.17 billion for the same period in 2011. We incurred additional costs during 2012 to relocate assets and personnel fromdeclining natural gas markets to oil markets. As a result, we experienced increased activity in oil markets during 2012 combined with the impact ofinflationary pressure on fuel, wages and benefit-related expenses.InternationalRevenues for our international segment increased $134.2 million, or 67.4%, to $333.3 million for the year ended December 31, 2012, compared to$199.1 million for the year ended December 31, 2011. The increase was primarily attributable to increased activity in Mexico.Operating expenses for our international segment increased $110.1 million, or 68.7%, to $270.3 million for the year ended December 31, 2012,compared to $160.2 million for the year ended December 31, 2011. These expenses increased as a direct result of additional activity during the period. We alsoincurred additional costs to mobilize assets to Oman and Mexico.Functional SupportOperating expenses for Functional Support decreased $1.4 million, or 1.0%, to $141.4 million (7.2% of consolidated revenues) for the year endedDecember 31, 2012 compared to $142.8 million (8.3% of consolidated revenues) for the year ended December 31, 2011. The decrease in costs primarily relatedto lower bonus and stock based compensation expenses. In addition, prior year expenses were offset by a favorable legal settlement of $5.5 million in whichKey Energy Services, Inc. was the plantiff.Year Ended December 31, 2011 and 2010The following table shows operating results for each of our reportable segments for the twelve-month periods ended December 31, 2011 and 2010 (inthousands):For the year ended December 31, 2011 U.S. International FunctionalSupport TotalRevenues from external customers$1,530,087 $199,124 $— $1,729,211Operating expenses1,172,481 160,203 142,751 1,475,435Operating income (loss)357,606 38,921 (142,751) 253,776For the year ended December 31, 2010 U.S. International FunctionalSupport TotalRevenues from external customers$961,244 $101,351 $— $1,062,595Operating expenses828,957 111,846 125,724 1,066,527Operating income (loss)132,287 (10,495) (125,724) (3,932)U.S.Revenues for our U.S. segment increased $568.8 million, or 59.2%, to $1.53 billion for the year ended December 31, 2011, compared to $961.2million for the year ended December 31, 2010. The increase in this segment was due to an increase in activity because of customer spending and improvedpricing. During the first quarter of 2011, we implemented price increases for all of our lines of business. We also added new equipment capacity in severalgrowing shale plays, including the Bakken and Eagle Ford. Additionally, acquisitions in the fourth quarter of 2010 and during 2011 contributed to theincrease in revenue year over year.Operating expenses for our U.S. segment were $1.17 billion during the year ended December 31, 2011, which represented an increase of $343.5million, or 41.4%, compared to $829.0 million for the same period in 2010.30Table of ContentsIndex to Financial StatementsThe increase was directly attributable to activity and growth increases during the period combined with the impact of inflationary pressure on operating costs,including fuel and wages and the impact of the rescission in late 2010 of temporary cost reduction measures.InternationalRevenues for our international segment increased $97.8 million, or 96.5%, to $199.1 million for the year ended December 31, 2011, compared to$101.4 million for the year ended December 31, 2010. The increase for this segment is primarily attributable to our international expansion in the second halfof 2010 to Colombia and the Middle East, in addition to a significant activity increase in Mexico.Operating expenses for our international segment increased $48.4 million, or 43.2%, to $160.2 million for the year ended December 31, 2011,compared to $111.8 million for the year ended December 31, 2010, and increased as a direct result of additional activity growth and a full year of operationsin Colombia and the Middle East during the period.Functional SupportOperating expenses for Functional Support increased $17.0 million, or 13.5%, to $142.8 million (8.3% of consolidated revenues) for the year endedDecember 31, 2011 compared to $125.7 million (11.8% of consolidated revenues) for the year ended December 31, 2010. The increase in costs relates to thereinstatement in late 2010 of certain employee compensation and benefits that had been suspended in 2009 as part of our cost savings effort.Liquidity and Capital ResourcesWe require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives,investments and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, available cash and borrowings under our seniorsecured revolving credit facility. We maintain a senior secured credit facility pursuant to a revolving credit agreement with several lenders and JPMorgan ChaseBank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit AgricoleCorporate and Investment Bank and DnB NOR Bank ASA, as Co-Documentation Agents (as amended on July 27, 2011, the “2011 Credit Facility”). The2011 Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility, up to an aggregate principal amount of $550.0million, all of which will mature no later than March 31, 2016. We intend to use these sources of liquidity to fund our working capital requirements, capitalexpenditures, strategic investments and acquisitions.In 2013, we expect to access available funds under our 2011 Credit Facility to meet our cash requirements for day-to-day operations and in times ofpeak needs throughout the year. Our planned capital expenditures, as well as any acquisitions we choose to pursue, could be financed through a combinationof cash on hand, cash flow from operations, borrowings under our 2011 Credit Facility and, in the case of acquisitions, equity. We believe that our internallygenerated cash flows from operations, current reserves of cash and availability under our 2011 Credit Facility are sufficient to finance our cash requirementsfor current and future operations, budgeted capital expenditures and debt service for the next twelve months. Under the terms of the 2011 Credit Facility,committed letters of credit count against our borrowing capacity. As of December 31, 2012, we had $165.0 million in borrowings and $54.1 million of lettersof credit outstanding under our 2011 Credit Facility, leaving $330.9 million of unused borrowing capacity.All obligations under the 2011 Credit Facility are guaranteed by most of our subsidiaries and are secured by most of our assets, including ouraccounts receivable, inventory and equipment. See further discussion under “Debt Service” below.As of December 31, 2012, our adjusted working capital (working capital excluding the current portion of capital lease obligations of $0.4 million)was $285.1 million. Adjusted working capital at December 31, 2011 was $312.8 million, excluding the current portion of capital lease obligations of $1.7million. Our adjusted working capital at December 31, 2011 decreased during 2012 as a result of our sale of Argentina business working capital and anincrease in current liabilities and were slightly offset by an increase in accounts receivable.As of December 31, 2012, we had $46.0 million of cash, of which approximately $3.4 million was held in the bank accounts of our foreignsubsidiaries. Of this amount, approximately $2.0 million was held by our joint ventures, which are subject to a noncontrolling interest and therefore, the cashcannot be repatriated. Less than $0.1 million of the cash held by our foreign subsidiaries was held in U.S. bank accounts and denominated in U.S. dollars.We believe that the cash held by our wholly owned foreign subsidiaries could be repatriated for general corporate use without material withholdings.31Table of ContentsIndex to Financial StatementsCash FlowsDuring the year ended December 31, 2012, we generated cash flows from operating activities of $369.7 million, compared to $188.3 million for theyear ended December 31, 2011. These operating cash inflows primarily relate to an increase in collection of accounts receivable and higher accounts payablesand accrued liabilities.Cash used in investing activities was $428.7 million and $520.1 million for years ended December 31, 2012 and 2011, respectively. Investing cashoutflows during these periods consisted primarily of capital expenditures and an acquisition during 2011. Our capital expenditures during 2012 relate to theincreased demand for our services compared to 2011 and associated growth initiatives.Cash provided by financing activities was $73.9 million and $306.1 million during the years ended December 31, 2012, and 2011, respectively.Overall financing cash inflows for 2012 relate to the proceeds from the issuance of an additional $200.0 million of 6.75% Senior Notes due 2021on March 8,2012, partially offset by net payments on the revolving credit facility.The following table summarizes our cash flows for the year ended December 31, 2012 and 2011: Year Ended December 31, 2012 2011 (in thousands)Net cash provided by operating activities$369,660 $188,305Cash paid for capital expenditures(447,160) (359,097)Proceeds from sale of fixed assets17,127 14,100Proceeds received from sale of assets held for sale2,000 —Acquisitions, net of cash acquired of $- and $886, respectively— (187,058)Investment in Wilayat Key Energy, LLC(676) —Proceeds from sale of equity method investments— 11,965Repayments of capital lease obligations(1,959) (4,016)Repayments of long-term debt— (421,427)Payment of bond tender premium— (39,082)Proceeds from long-term debt205,000 475,000Proceeds from borrowings on revolving credit facility275,000 418,000Repayments on revolving credit facility(405,000) (123,000)Payment of deferred financing costs(4,597) (16,485)Other financing activities, net5,502 17,094Effect of changes in exchange rates on cash(4,391) 4,516Net increase (decrease) in cash and cash equivalents$10,506 $(21,185)Debt ServiceAt December 31, 2012, our annual maturities on our indebtedness, consisting only of our 2014 Notes and 6.75% Senior Notes due 2021 andborrowings under our 2011 Credit Facility at year-end, are as follows: Principal Payments (in thousands)2013$—20143,5732015—2016165,0002017 and thereafter675,000Total$843,57332Table of ContentsIndex to Financial StatementsWe have no maturities of debt in 2013. Interest on our $675.0 million of 6.75% Senior Notes due 2021 is due on March 1 and September 1 of eachyear. Our 6.75% Senior Notes due 2021 mature on September 1, 2021. Interest on the remaining $3.6 million aggregate principal amount of 2014 Notesoutstanding is due on June 1 and December 1 of each year. Our 2014 Notes mature on December 1, 2014. Interest paid on our 2014 Notes and 6.75% SeniorNotes due 2021 during 2012 was $38.9 million. Interest on the 2014 Notes and 6.75% Senior Notes due 2021 for 2013 is expected to be $45.9 million. Weexpect to fund interest payments from cash on hand and cash generated by operations.8.375% Senior Notes due 2014On November 29, 2007, we issued $425.0 million aggregate principal amount of our 2014 Notes. On March 4, 2011, we repurchased $421.3million aggregate principal amount of our 2014 Notes at a purchase price of $1,090 per $1,000 principal amount. On March 15, 2011, we repurchased anadditional $0.1 million aggregate principal amount at a purchase price of $1,060 per $1,000 principal amount. In connection with the repurchase of the 2014Notes, we incurred a loss of $44.3 million on the early extinguishment of debt related to the premium paid on the tender, the payment of related fees and thewrite-off of unamortized loan fees.6.75% Senior Notes due 2021We issued $475.0 million aggregate principal amount of 6.75% Senior Notes due 2021 on March 4, 2011 and issued an additional $200.0 million ofsuch notes on March 8, 2012 (collectively the “2021 Notes”) under an indenture dated March 4, 2011 (the "Base Indenture"), as supplemented by a firstsupplemental indenture dated March 4, 2011 and amended by a first supplemental indenture dated March 8, 2012 (as amended, the "Supplemental Indenture"and, together with the Base Indenture, the "Indenture"). We used the net proceeds to repay senior secured indebtedness under our revolving bank credit facility.We capitalized $4.6 million of financing costs associated with the issuance of the 2021 Notes that will be amortized over the term of the notes.On January 29, 2013, we commenced an offer to exchange the $200.0 million in aggregate principal amount of notes issued in a private placement onMarch 8, 2012 for an equal principal amount of such notes registered under the Securities Act of 1933. The exchange offer will expire on February 25, 2013and is scheduled to close on March 5, 2013. All of the 2021 Notes are treated as a single class under the Indenture, and assuming the completion of theexchange offer and the exchange of all the notes subject thereto, all of the 2021 Notes will bear the same CUSIP and ISIN numbers.The 2021 Notes are general unsecured senior obligations and are effectively subordinated to all of our existing and future secured indebtedness. The2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries.On or after March 1, 2016, the 2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at theredemption prices below (expressed as percentages of the principal amount redeemed), plus accrued and unpaid interest to the applicable redemption date, ifredeemed during the twelve-month period beginning on March 1 of the years indicated below: YearPercentage2016103.375%2017102.250%2018101.125%2019 and thereafter100.000%At any time and from time to time before March 1, 2014, we may on any one or more occasions redeem up to 35% of the aggregate principal amountof the outstanding 2021 Notes at a redemption price of 106.750% of the principal amount, plus accrued and unpaid interest to the redemption date, with thenet cash proceeds from any one or more equity offerings provided that (i) at least 65% of the aggregate principal amount of the 2021 Notes remainsoutstanding immediately after each such redemption and (ii) each such redemption shall occur within 180 days of the date of the closing of such equityoffering.In addition, at any time and from time to time prior to March 1, 2016, we may, at our option, redeem all or a portion of the 2021 Notes at aredemption price equal to 100% of the principal amount plus a premium with respect to the 2021 Notes plus accrued and unpaid interest to the redemptiondate. If we experience a change of control, subject to certain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021 Notes,in whole or in part, at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.33Table of ContentsIndex to Financial StatementsWe are subject to certain negative covenants under the Indenture. The Indenture limits our ability to, among other things:•incur additional indebtedness and issue preferred equity interests;•pay dividends or make other distributions or repurchase or redeem equity interests;•make loans and investments;•enter into sale and leaseback transactions;•sell, transfer or otherwise convey assets;•create liens;•enter into transactions with affiliates;•enter into agreements restricting subsidiaries’ ability to pay dividends;•designate future subsidiaries as unrestricted subsidiaries; and•consolidate, merge or sell all or substantially all of the applicable entities’ assets.These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions relating to the covenants of our 2011 CreditFacility discussed below. Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agencies assigns the2021 Notes an investment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2012, the 2021 Notes were belowinvestment grade. Any covenants 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 2021 Notes later falls below investment grade. We were in compliance with all covenants at December 31, 2012.Senior Secured Credit FacilityOur 2011 Credit Facility is an important source of liquidity for us. The 2011 Credit Facility consists of a revolving credit facility, letter of creditsub-facility and swing line facility totaling $550 million, all of which will mature no later than March 31, 2016. The maximum amount that we may borrowunder the facility may be subject to limitation due to the operation of the covenants contained in the facility. The 2011 Credit Facility allows us to requestincreases in the total commitments under the facility by up to $100.0 million in the aggregate in part or in full anytime during the term of the 2011 CreditFacility, with any such increases being subject to compliance with the restrictive covenants in the 2011 Credit Facility and in the Indenture governing our 2021Senior Notes, as well as lender approval.We capitalized $4.9 million of financing costs in connection with the execution of the 2011 Credit Facility and an additional $1.4 million related to asubsequent amendment that will be amortized over the term of the debt.The interest rate per annum applicable to the 2011 Credit Facility is, at our option, (i) adjusted LIBOR plus the applicable margin or (ii) the higher of(x) JPMorgan’s prime rate, (y) the Federal Funds rate plus 0.5% and (z) one-month adjusted LIBOR plus 1.0%, plus in each case the applicable margin for allother loans. The applicable margin for LIBOR loans ranges from 225 to 300 basis points, and the applicable margin for all other loans ranges from 125 to 200basis points, depending upon our consolidated total leverage ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facility equal 0.50%.The 2011 Credit Facility contains certain financial covenants, which, among other things, limit our annual capital expenditures, restrict our abilityto repurchase shares and require us to maintain certain financial ratios. The financial ratios require that:•our ratio of consolidated funded indebtedness to total capitalization be no greater than 45%;•our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation andamortization (as calculated pursuant to the terms of the 2011 Credit Facility, “EBITDA”) be no greater than 2.00 to 1.00;•we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of the lastday of any fiscal quarter of at least 2.00 to 1.00;•we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least 3.00 to 1.00; and •we limit our capital expenditures and investments in foreign subsidiaries to $250.0 million per fiscal year, if the consolidated total leverage ratioexceeds 3.00 to 1.00.34Table of ContentsIndex to Financial StatementsIn addition, the 2011 Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions on (i) liens;(ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets;(v) loans, acquisitions, joint ventures and other investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or event ofdefault exists under the 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed 4.00 to 1.00, we are in compliance with otherfinancial covenants and we have at least $25.0 million of availability under the 2011 Credit Facility); (vi) dividends and other distributions to, andredemptions and repurchases from, equityholders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming orrepurchasing subordinated (contractually or structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements;(xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (xiv) changes in the nature of business;(xv) amending organizational documents; and (xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certainexceptions.We were in compliance with these covenants at December 31, 2012. We may prepay the 2011 Credit Facility in whole or in part at any time withoutpremium or penalty, subject to certain reimbursements to the lenders for breakage and redeployment costs. As of December 31, 2012, we had borrowings of$165.0 million under the revolving credit facility and $54.1 million of letters of credit outstanding, leaving $330.9 million of available borrowing capacityunder the 2011 Credit Facility. For the years ended December 31, 2012 and 2011, the weighted average interest rate on the outstanding borrowings under the2011 Credit Facility was 2.71% and 2.78%, respectively.Capital Lease AgreementsFrom time to time, we lease equipment, such as vehicles, tractors, trailers, frac tanks and forklifts, from financial institutions under master leaseagreements. As of December 31, 2012, there was approximately $0.4 million outstanding under such equipment leases.Off-Balance Sheet ArrangementsAt December 31, 2012, we did not, and we currently do not, have any off-balance sheet arrangements that have or are reasonably likely to have amaterial current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.Contractual ObligationsSet forth below is a summary of our contractual obligations as of December 31, 2012. The obligations we pay in future periods reflect certainassumptions, including variability in interest rates on our variable-rate obligations and the duration of our obligations, and actual payments in future periodsmay vary.35Table of ContentsIndex to Financial Statements Payments Due by Period Total Less than 1Year (2013) 1-3 Years(2014-2016) 4-5 Years(2017-2018) After 5 Years(2019+)(in thousands)8.375% Senior Notes due 20143,573 — 3,573 — —6.75% Senior Notes due 2021675,000 — — — 675,000Interest associated with 8.375% Senior Notesdue 2014 and 6.75% Senior Notes due 2021372,795 45,862 136,937 91,125 98,871Borrowings under Senior Secured CreditFacility165,000 — 165,000 —Interest associated with Senior Secured CreditFacility(1)14,479 4,455 10,024 —Commitment and availability fees associatedwith Senior Secured Credit Facility5,377 1,654 3,723 —Capital lease obligations, excluding interest andexecutory costs393 393 Interest and executory costs associated withcapital lease obligations(1)165 165 Non-cancelable operating leases69,823 26,607 37,062 3,808 2,346Liabilities for uncertain tax positions1,201 863 338 — —Equity based compensation liabilityawards(2)277 277 Total$1,308,083 $80,276 $356,657 $94,933 $776,217 (1)Based on interest rates in effect at December 31, 2012.(2)Based on our closing stock price at December 31, 2012.36Table of ContentsIndex to Financial StatementsDebt ComplianceAt December 31, 2012, we were in compliance with all the financial covenants under the 2011 Credit Facility, our 2014 Notes and 2021 Notes.Based on management’s current projections, we expect to be in compliance with all the covenants under our 2011 Credit Facility, 2014 Notes and 2021 Notesfor the next twelve months. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness. See “Item 1A. Risk Factors.”Capital ExpendituresDuring the year ended December 31, 2012, our capital expenditures totaled $447.2 million, primarily related to the addition of larger well service rigs,coiled tubing units, fluid transportation equipment, rental equipment including drill pipe and major maintenance of our existing fleet and equipment. Ourcapital expenditure plan for 2013 is $210 million for equipment maintenance needs, including ongoing upgrades to our rig services fleet. Our capitalexpenditure program for 2013 is subject to market conditions, including activity levels, commodity prices, industry capacity and specific customer needs.Our focus for 2013 will be the maximization of our current equipment fleet, but we may choose to increase our capital expenditures in 2013 to increase marketshare or expand our presence into a new market. We currently anticipate funding our 2013 capital expenditures through a combination of cash on hand,operating cash flow, and borrowings under our 2011 Credit Facility. Should our operating cash flows or activity levels prove to be insufficient to warrant ourcurrently planned capital spending levels, management expects it will adjust our capital spending plans accordingly. We may also incur capital expendituresfor strategic investments and acquisitions.AcquisitionsEdgeWe completed our acquisition of Edge in August 2011. Edge primarily rents frac stack equipment used to support hydraulic fracturing operationsand the associated flowback of frac fluids, proppants, oil and natural gas. It also provides well testing services, rental equipment such as pumps and powerswivels and oilfield fishing services.The total consideration for the acquisition was approximately $305.9 million consisting of approximately 7.5 million shares of our common stockand approximately $187.9 million in cash, which included $26.3 million to reimburse Edge for growth capital expenditures incurred between March 1, 2011and the date of closing, net of working capital adjustments of $1.8 million.OtherIn January 2011, we acquired 10 SWD wells from Equity Energy Company for approximately $14.3 million. Most of these SWD wells are locatedin North Dakota.We anticipate that acquisitions of complementary companies, assets and lines of businesses will continue to play an important role in our businessstrategy. While there are currently no unannounced agreements or ongoing negotiations for the acquisition of any material businesses or assets, suchtransactions can be effected quickly and may occur at any time.Critical Accounting PoliciesOur Accounting Department is responsible for the development and application of our accounting policies and internal control procedures and reportsto the Chief Financial Officer.The process and preparation of our financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”)requires us to make certain estimates, judgments and assumptions, which may affect the reported amounts of our assets and liabilities, disclosures ofcontingencies at the balance sheet date, the amounts of revenues and expenses recognized during the reporting period and the presentation of our statement ofcash flows. We may record materially different amounts if these estimates, judgments and assumptions change or if actual results differ. However, we analyzeour estimates, assumptions and judgments based on our historical experience and various other factors that we believe to be reasonable under thecircumstances.We have identified the following critical accounting policies that require a significant amount of estimation and judgment to accurately present ourfinancial position, results of operations and cash flows:•Revenue recognition;•Estimate of reserves for workers’ compensation, vehicular liability and other self-insurance;•Contingencies;•Income taxes;•Estimates of depreciable lives;37Table of ContentsIndex to Financial Statements•Valuation of indefinite-lived intangible assets;•Valuation of tangible and finite-lived intangible assets; and•Valuation of equity-based compensation.Revenue RecognitionWe recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or services havebeen rendered, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured.•Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completedcustomer 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 the arrangement asevidenced by a field ticket or service log.•The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixedand determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a field ticket.•Collectability is reasonably assured when we screen our customers and provide goods and services to customers according to determined creditterms that have been granted 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 state governmental taxingauthorities.We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair value ifthey have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled byus. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of eachelement in the contract does not affect the other elements.Workers’ Compensation, Vehicular Liability and Other Self-InsuranceThe occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to meet its indemnification or insuranceobligations, could result in substantial losses. In addition, insurance may not be available to cover any or all of these risks, and, if available, we might not beable to obtain such insurance without a substantial increase in premiums. It is possible that, in addition to higher premiums, future insurance coverage maybe subject to higher deductibles and coverage restrictions.We estimate our liability arising out of uninsured and potentially insured events, including workers’ compensation, employer’s liability, vehicularliability, and general liability, and record accruals in our consolidated financial statements. Reserves related to claims are based on the specific facts andcircumstances of the insured event and our past experience with similar claims and trend analysis. We adjust loss estimates in the calculation of these accrualsbased upon actual claim settlements and reported claims. Loss estimates for individual claims are adjusted based upon actual claim judgments, settlementsand reported claims. The actual outcome of these claims could differ significantly from estimated amounts. Changes in our assumptions and estimates couldpotentially have a negative impact on our earnings.We are largely self-insured against physical damage to our property, rigs, equipment and automobiles due to large deductibles or self-insurance.ContingenciesWe are periodically required to record other loss contingencies, which relate to lawsuits, claims, proceedings and tax-related audits in the normalcourse of our operations, on our consolidated balance sheet. We record a loss contingency for these matters when it is probable that a liability has been incurredand the amount of the loss can be reasonably estimated. We periodically review our loss contingencies to ensure that we have recorded appropriate liabilities onthe balance sheet. We adjust these liabilities based on estimates and judgments made by management with respect to the likely outcome of these matters,including the effect of any applicable insurance coverage for litigation matters. Our estimates and judgments could change based on new information, changesin laws or regulations, changes in management’s plans or intentions, the outcome of legal proceedings, settlements or other factors. Actual results could varymaterially from these reserves.We record liabilities when environmental assessment indicates that site remediation efforts are probable and the costs can be reasonably estimated. Wemeasure environmental liabilities based, in part, on relevant past experience, currently enacted laws and regulations, existing technology, site-specific costs andcost-sharing arrangements. Recognition of any joint and several liability is based upon our best estimate of our final pro-rata share38Table of ContentsIndex to Financial Statementsof such liability or the low amount in a range of estimates. These assumptions involve the judgments and estimates of management, and any changes inassumptions or new information could lead to increases or decreases in our 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 discount when we incur theliability. Significant judgment is involved in estimating our future cash flows associated with such obligations, as well as the ultimate timing of the cashflows. If our estimates on the amount or timing of the cash flows change, the change may have a material 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 temporary differences.Management determines our current tax liability as well as taxes incurred as a result of current operations, yet deferred until future periods. Current taxespayable represent our liability related to our income tax return for the current year, while net deferred tax expense or benefit represents the change in the balanceof deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilitiesusing the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differencesreverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax andaccounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, taxtreaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations andresults 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 of more than 50%)that some or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our futuretaxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such evidence caninclude our current financial 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 their net recognizableamount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domesticand 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 have potentiallymaterial negative impacts on our earnings.Estimates of Depreciable LivesWe use the estimated depreciable lives of our long-lived assets, such as rigs, heavy-duty trucks and trailers, to compute depreciation expense, toestimate future asset retirement obligations and to conduct impairment tests. We base the estimates of our depreciable lives on a number of factors, such as theenvironment in which the assets operate, industry factors including forecasted prices and competition, and the assumption that we provide the appropriateamount of capital expenditures while the asset is in operation to maintain economical operation of the asset and prevent untimely demise to scrap. The usefullives of our intangible assets are determined by the years over which 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 generally 10% of the acquisition cost. We recognize again or loss upon ultimate disposal of the asset based on the difference between the carrying value of the asset on the disposal date and any proceeds we receivein connection with the disposal.We periodically analyze our estimates of the depreciable lives of our fixed assets to determine if the depreciable periods and salvage value continue tobe appropriate. We also analyze useful lives and salvage value when events or conditions occur that could shorten the remaining 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 uponestimates of depreciable lives of the fixed assets, the salvage value and economic factors, all of which require management to make significant judgments andestimates. If we determine that the depreciable lives should be different than originally estimated, depreciation expense may increase or decrease andimpairments in the carrying values of our fixed assets may result, which could negatively impact our earnings.39Table of ContentsIndex to Financial StatementsValuation of Indefinite-Lived Intangible AssetsWe periodically review our intangible assets not subject to amortization, including our goodwill, to determine whether an impairment of those assetsmay exist. These tests must be made on at least an annual basis, or more often if circumstances indicate that the assets may be impaired. These circumstancesinclude, but are not limited to, significant adverse changes in the business climate.The test for impairment of indefinite-lived intangible assets allows us to first assess the qualitative factors to determine whether it is “more likely thannot” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwillimpairment test. If our qualitative analysis shows that it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount we willperform the two-step goodwill impairment test. In the first step, a fair value is calculated for each of our reporting units, and that fair value is compared to thecurrent carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is nopotential impairment, and the second step is not performed. 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 carrying value. The impliedfair value of the reporting unit’s goodwill is determined in the same manner as the amount of goodwill that would be 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 in excess of its carryingvalue, no impairment charge is recorded. If the carrying value of the reporting unit’s goodwill is in excess of its implied fair value, an impairment charge equalto the excess is recorded.We conducted our annual impairment test for goodwill and other intangible assets not subject to amortization as of December 31, 2012. Indetermining the fair value of our reporting units, we use a weighted-average approach of three commonly used valuation techniques — a discounted cash flowmethod, a guideline companies method, and a similar transactions method. We assigned a weight to the results of each of these methods based on the facts andcircumstances that are in existence for that testing period. We assigned more weight to the discounted cash flow method.In addition to the estimates made by management regarding the weighting of the various valuation techniques, the creation of the techniquesthemselves requires that we make significant estimates and assumptions. The discounted cash flow method, which was assigned the highest weight bymanagement during the current year, requires us to make assumptions about future cash flows, future growth rates, tax rates in future periods, book-taxdifferences in the carrying value of our assets in future periods, and discount rates. The assumptions about future cash flows and growth rates are based onour current budgets for future periods, as well as our strategic plans, the beliefs of management about future activity levels, and analysts’ expectations aboutour revenues, profitability and cash flows in future periods. The assumptions about our future tax rates and book-tax differences in the carrying value of ourassets in future periods are 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 associated with each reportingunit being tested, and were developed with the assistance of a third-party valuation consultant. The ultimate conclusions of the valuation techniques remainour responsibility.While this test is required on an annual basis, it can also be required more frequently based on changes in external factors or other triggering events.We conducted our most recent annual test for impairment of our goodwill and other indefinite-lived intangible assets as of December 31, 2012. On that date,our reporting units for the purposes of impairment testing were rig services, fluid management services,coiled tubing services, fishing and rental services andour Russian and Canadian reporting units. Our goodwill by reporting unit as of December 31, 2012 is as follows (in thousands, except for percentages): 40Table of ContentsIndex to Financial StatementsU.S. Rig Services $283,400 45%Coiled Tubing Services 102,799 16%Fishing and Rental Services 173,463 28%Fluid Management Services 19,301 3% Functional Support 18,493 3%Subtotal $597,456 95%International Canada 4,382 1%Russia 24,643 4%Subtotal 29,025 5%Total $626,481 100%We also have intangible assets that are not amortized of $5.1 million and $8.3 million related to our fishing and rental services reporting unit and ourRussian reporting unit, respectively. These tradenames are tested for impairment annually using a relief from royalty method.We performed our qualitative analysis of goodwill impairment as of December 31, 2012. Based on this analysis, our Canadian reporting unit did nothave a triggering event that would indicate it was “more likely than not” that the carrying value of this reporting unit was higher than its fair value. However,we determined it was necessary to perform the first step of the goodwill impairment test for our rig services, fluid management services, coiled tubing services,fishing and rental services and Russian reporting units. Under the first step of the goodwill impairment test, we compared the fair value of each reporting unitto its carrying amount, including goodwill. Based on the results of step 1, the fair value of our rig services, fluid management services, coiled tubing services,fishing and rental services and our Russian reporting units exceeded their carrying value by 16.5%, 13.2%, 15.0%, 15.5% and 17.8%, respectively. A keyassumption in our model was our forecast of increased revenue for 2013 and 2014 for rig services and fishing and rental services, followed by nominalrevenue increases through 2017. For our fluid management services , we anticipate a decrease in revenue from 2013 to 2014 with steady revenue increases from2014 to 2017. We anticipate our coiled tubing services and Russian reporting units to have increased revenue in future years. Potential events that could affectthis assumption include the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gascompanies in Russia, oil and natural gas production costs, government regulations and conditions in the worldwide oil and natural gas industry. Otherpossible factors that could affect this assumption are the ability to acquire and deploy additional assets and deployment of these assets into the region. Becausethe fair value of the reporting units exceeded their carrying values, we determined that no impairment of our goodwill associated with our reporting units existedas of December 31, 2012, and that 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 and assumptions that we makeabout our reporting units. While the estimates and assumptions that we made regarding our reporting units for our 2012 annual test indicated that the fairvalues of the reporting units exceeded their carrying values, and although we believe that our estimates and assumptions are reasonable, it is possible thatchanges in those estimates and assumptions could impact the determination of the fair value of our reporting units. Discount rates we use in future periodscould change substantially if the cost of debt or equity were to significantly increase or decrease, or if we were to choose different comparable companies indetermining the appropriate 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 are inaccurate, the fairvalue of our reporting units could change materially. If the current overall economy further declines or if there is a significant and rapid adverse change in ourbusiness in the near- or mid-term for any of our reporting units, our current estimates of the fair value of our reporting units could decrease significantly,leading to possible impairment charges in future periods. Based on our current knowledge and beliefs, we do not feel that material adverse changes to ourcurrent estimates and assumptions such that our reporting units would fail step one of the impairment test are reasonably possible.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 possible impairment mayexist. These circumstances or events are referred to as “trigger events” and examples of such trigger events include, but are not limited to, an adverse change inmarket conditions, a significant decrease in benefits being derived from an acquired business, a change in the use of an asset, or a significant disposal of aparticular asset or asset class.41Table of ContentsIndex to Financial StatementsIf a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis. To perform an impairment test, we makejudgments, estimates and assumptions regarding long-term forecasts of revenues and expenses relating to the assets subject to review. Market conditions,energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impact our operations and have a significant effect on theestimates we use to determine whether our assets are impaired. If the results of the analysis indicate that the carrying value of the assets being tested forimpairment are not recoverable, then we record an impairment charge to write the carrying value of the assets down to their fair value. Using differentjudgments, assumptions or estimates, we could potentially arrive at a materially different fair value for the assets being tested for impairment, which mayresult in an impairment charge.We did not identify any trigger events causing us to test our tangible and finite-lived intangible assets for impairment during the years endedDecember 31, 2012, 2011 and 2010.Valuation of Equity-Based CompensationWe have granted stock options, stock-settled stock appreciation rights (“SARs”), restricted stock (“RSAs” and “RSUs”), phantom shares andperformance units to our employees and non-employee directors. The option and SAR awards we grant are fair valued using a Black-Scholes option model onthe grant date and are amortized to compensation expense over the vesting period of the option award, net of estimated and actual forfeitures. Compensationrelated to RSAs and RSUs is based on the fair value of the award on the grant date and is recognized based on the vesting requirements that have been satisfiedduring the period. Phantom shares are accounted for at fair value, and changes in the fair value of these awards are recorded as compensation expense duringthe period. Performance units provide a cash incentive award, the unit value of which is determined with reference to our common stock. See "Note 20. ShareBased Compensation" in “Item 8. Financial Statements and Supplementary Data" for a more detailed discussion of performance units measurement.In utilizing the Black-Scholes option pricing model to determine fair values of awards, certain assumptions are made which are based on subjectiveexpectations, and are subject to change. A change in one or more of these assumptions would impact the expense associated with future grants. These keyassumptions include the volatility in the price of our common stock, the risk-free interest rate and the expected life of awards. We did not grant any stockoptions during the years ended December 31, 2012, 2011 and 2010.New Accounting Standards Adopted in this ReportASU 2011-04. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common FairValue Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU represents the converged guidance of the FASB and the IASB onmeasuring fair value and for disclosing information about fair value measurements. The amendments in this ASU clarify the Board’s intent about theapplication of existing fair value measurement and disclosure requirements and changes particular principles or requirements for measuring fair value and fordisclosing information about fair value measurements. ASU 2011-04 is effective prospectively for interim and annual reporting periods beginning afterDecember 15, 2011. We adopted the provisions of ASU 2011-04 on January 1, 2012, and the adoption of this standard did not have a material impact on ourfinancial position, results of operations, 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 currencyexchange rates and equity prices that could impact our financial position, results of operations and cash flows. We manage our exposure to these risks throughregular operating and financing activities, and may, on a limited basis, use derivative financial instruments to manage this risk. Derivative financialinstruments were not used in the years ended December 31, 2012, 2011 and 2010. To the extent that we use such derivative financial instruments, we will usethem only as risk management tools and not for speculative investment purposes.Interest Rate RiskAs of December 31, 2012, we had outstanding $675.0 million of 2021 Notes and $3.6 million of 2014 Notes. These notes are fixed-rate obligations,and as such do not subject us to risks associated with changes in interest rates. Borrowings under our Senior Secured Credit Facility and our capital leaseobligations bear interest at variable interest rates, and therefore expose us to interest rate risk. As of December 31, 2012, the weighted average interest rate onour outstanding variable-rate debt obligations was 2.70%. A hypothetical 10% increase in that rate would increase the annual interest expense on thoseinstruments by $0.4 million.42Table of ContentsIndex to Financial StatementsForeign Currency RiskAs of December 31, 2012, we conduct operations in Mexico, Colombia, the Middle East and Russia. We also have a Canadian subsidiary. As ofDecember 31, 2011, the functional currency for Mexico, Russia and Canada was the local currency and the functional currency for Colombia and the MiddleEast was the U. S. dollar. Due to significant changes in economic facts and circumstances, the functional currency for Mexico and Canada was changed to theU.S. dollar effective January 1, 2012. For balances denominated in our Russian subsidiaries’ local currency, changes in the value of their assets and liabilitiesdue to changes in exchange rates are deferred and accumulated in other comprehensive income until we liquidate our investment. Our Russian foreignsubsidiaries must remeasure their account balances at the end of each period to an equivalent amount of local currency, with changes reflected in earningsduring the period. A hypothetical 10% decrease in the average value of the U.S. Dollar relative to the value of the local currency for our Russian subsidiarieswould increase our net income by less than $0.1 million.Equity RiskCertain of our equity-based compensation awards’ fair values are determined based upon the price of our common stock on the measurement date.Any increase in the price of our common stock would lead to a corresponding increase in the fair value of those awards. A 10% increase in the price of ourcommon stock from its value at December 31, 2012 would increase annual compensation expense recognized on these awards by approximately less than $0.1million.43Table of ContentsIndex to Financial StatementsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAKey Energy Services, Inc. and SubsidiariesINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm45Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting46Consolidated Balance Sheets47Consolidated Statements of Operations48Consolidated Statements of Comprehensive Income (Loss)49Consolidated Statements of Cash Flows50Consolidated Statements of Stockholders’ Equity51Notes to Consolidated Financial Statements5244Table of ContentsIndex to Financial StatementsREPORT 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) and subsidiaries (the“Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity,and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat 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 of KeyEnergy Services, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three yearsin the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company'sinternal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2013 expressed an unqualified opinion onthe effectiveness of internal control over financial reporting./s/ GRANT THORNTON LLPHouston, TexasFebruary 25, 201345Table of ContentsIndex to Financial StatementsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders ofKey Energy Services, Inc.We have audited the internal control over financial reporting of Key Energy Services, Inc. (a Maryland corporation) and subsidiaries (the“Company”) as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's report on InternalControl Over Financial Reporting (Management's Report). Our responsibility is to express an opinion on the Company's internal control over financialreporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe 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 reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,based on criteria established in Internal Control-Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedfinancial statements of the Company as of and for the year ended December 31, 2012, and our report dated February 25, 2013 expressed an unqualifiedopinion on those financial statements./s/ GRANT THORNTON LLPHouston, TexasFebruary 25, 201346Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS December 31, 2012 2011 (in thousands, exceptshare amounts)ASSETSCurrent assets: Cash and cash equivalents$45,949 $35,443Accounts receivable, net of allowance for doubtful accounts of $2,860 and $8,013404,390 379,533Inventories38,622 25,968Other current assets100,833 99,276Current assets held for sale— 60,343Total current assets589,794 600,563Property and equipment, gross2,528,578 2,184,810Accumulated depreciation(1,091,904) (987,510)Property and equipment, net1,436,674 1,197,300Goodwill626,481 622,773Other intangible assets, net60,905 81,867Deferred financing costs, net16,628 14,771Deposits7,339 43,685Equity method investments966 918Other assets22,801 14,360Non-current assets held for sale— 22,883TOTAL ASSETS$2,761,588 $2,599,120LIABILITIES AND EQUITYCurrent liabilities: Accounts payable$104,073 $71,736Other current liabilities200,630174,183Current portion of capital lease obligations393 1,694Current liabilities directly associated with assets held for sale— 41,890Total current liabilities305,096 289,503Capital lease obligations, less current portion— 402Long-term debt848,110 773,573Workers’ compensation, vehicular and health insurance liabilities33,676 30,854Deferred tax liabilities259,453 261,072Other non-current accrued liabilities27,921 29,085Commitments and contingencies Equity: Common stock, $0.10 par value; 200,000,000 shares authorized, 151,069,609 and 150,733,022 shares issuedand outstanding15,108 15,073Additional paid-in capital925,132 915,400Accumulated other comprehensive loss(6,148) (58,231)Retained earnings319,736 312,114Total equity attributable to Key1,253,828 1,184,356Noncontrolling interest33,504 30,275Total equity1,287,332 1,214,631TOTAL LIABILITIES AND EQUITY$2,761,588 $2,599,120See the accompanying notes which are an integral part of these consolidated financial statements47Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2012 2011 2010 (in thousands, except per share amounts)REVENUES$1,960,070 $1,729,211 $1,062,595COSTS AND EXPENSES: Direct operating expenses1,308,845 1,085,190 746,441Depreciation and amortization expense213,783 166,946 133,898General and administrative expenses230,496 223,299 186,188 Operating income (loss)206,946 253,776 (3,932)Loss on early extinguishment of debt— 46,451 —Interest expense, net of amounts capitalized53,566 40,849 41,240Other income, net(6,649) (8,977) (2,807)Income (loss) from continuing operations before tax160,029 175,453 (42,365)Income tax (expense) benefit(57,352) (64,117) 17,961Income (loss) from continuing operations102,677 111,336 (24,404)Income (loss) from discontinued operations, net of tax(93,568) (10,681) 94,753Net income9,109 100,655 70,349Income (loss) attributable to noncontrolling interest1,487 (806) (3,146)INCOME ATTRIBUTABLE TO KEY$7,622 $101,461 $73,495Earnings (loss) per share from continuing operations attributable to Key: Basic$0.67 $0.77 $(0.16)Diluted$0.67 $0.76 $(0.16)Earnings (loss) per share from discontinued operations: Basic$(0.62) $(0.07) $0.73Diluted$(0.62) $(0.07) $0.73Earnings per share attributable to Key: Basic$0.05 $0.70 $0.57Diluted$0.05 $0.69 $0.57Income (loss) from continuing operations attributable to Key: Income (loss) from continuing operations$102,677 $111,336 $(24,404)Income (loss) attributable to noncontrolling interest1,487 (806) (3,146)Income (loss) from continuing operations attributable to Key$101,190 $112,142 $(21,258)Weighted Average Shares Outstanding: Basic151,106 145,909 129,368Diluted151,125 146,217 129,368See the accompanying notes which are an integral part of these consolidated financial statements48Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended December 31, 2012 2011 2010 (in thousands)INCOME (LOSS) FROM CONTINUING OPERATIONS$102,677 $111,336 $(24,404)Other comprehensive income (loss), net of tax: Foreign currency translation income (loss), net of tax of $—, $734, and $(129)1,933 (7,194) 738Reclassification adjustment for sales of foreign subsidiaries51,892 — —Gain on sale of equity method investment, net of tax of $—, $(410), and $—— 1,061 —Total other comprehensive income (loss), net of tax53,825 (6,133) 738COMPREHENSIVE INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OFTAX156,502 105,203 (23,666)Comprehensive income (loss) from discontinued operations, net of tax(93,568) (13,081) 93,184COMPREHENSIVE INCOME62,934 92,122 69,518Comprehensive Income (loss) attributable to noncontrolling interest(3,229) 2,442 3,406COMPREHENSIVE INCOME ATTRIBUTABLE TO KEY$59,705 $94,564 $72,924See the accompanying notes which are an integral part of these consolidated financial statements49Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2012 2011 2010 (in thousands)CASH FLOWS FROM OPERATING ACTIVITIES: Net income$9,109 $100,655 $70,349Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense213,783 169,604 143,805Asset retirements and impairments, including loss (gain) on sale of discontinued operations84,732 — (154,355)Bad debt expense1,299 2,559 3,849Accretion of asset retirement obligations594 594 526Loss (Income) from equity method investments926 (266) (396)Gain on sale of equity method investment— (4,783) —Amortization of deferred financing costs and discount2,664 2,150 2,615Deferred income tax expense (benefit)35,998 85,792 (12,370)Capitalized interest(1,314) (1,735) (3,789)Loss (gain) on disposal of assets, net1,661 (3,726) 533Loss on early extinguishment of debt— 46,451 —Share-based compensation13,306 15,609 12,111Excess tax benefits from share-based compensation(4,085) (4,859) (2,069)Changes in working capital: Accounts receivable(15,409) (152,771) (26,448)Other current assets(42,558) (22,110) 36,731Accounts payable and accrued liabilities60,665 3,720 61,671Share-based compensation liability awards1,555 385 1,297Other assets and liabilities6,734 (48,964) (4,255)Net cash provided by operating activities369,660 188,305 129,805CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures(447,160) (359,097) (180,310)Proceeds from sale of fixed assets17,127 14,100 258,202Proceeds from sale of assets held for sale2,000 — —Acquisitions, net of cash acquired of $—, $886 and $539, respectively— (187,058) (86,688)Investment in Wilayat Key Energy, LLC(676) Dividend from equity method investments— — 165Proceeds from sale of equity method investment— 11,965 —Net cash used in investing activities(428,709) (520,090) (8,631)CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt— (421,427) (6,970)Payment of bond tender premium— (39,082) —Proceeds from long-term debt205,000 475,000 —Repayments of capital lease obligations(1,959) (4,016) (8,493)Proceeds from borrowings on revolving credit facility275,000 418,000 110,000Repayments on revolving credit facility(405,000) (123,000) (197,813)Payment of deferred financing costs(4,597) (16,485) —Repurchases of common stock(7,519) (5,681) (3,098)Proceeds from exercise of stock options and warrants901 8,000 4,100Excess tax benefits from share-based compensation4,085 4,859 2,069Other financing activities8,035 9,916 —Net cash provided by (used in) financing activities73,946 306,084 (100,205)Effect of changes in exchange rates on cash(4,391) 4,516 (1,735)Net increase (decrease) in cash and cash equivalents10,506 (21,185) 19,234Cash and cash equivalents, beginning of period35,443 56,628 37,394Cash and cash equivalents, end of period$45,949 $35,443 $56,628See the accompanying notes which are an integral part of these consolidated financial statements50Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY COMMON STOCKHOLDERS NoncontrollingInterest TotalCommon Stock AdditionalPaid-inCapital AccumulatedOtherComprehensiveLoss RetainedEarnings Number ofShares Amountat par (in thousands)BALANCE AT DECEMBER 31, 2009123,993 $12,399 $608,223 $(50,763) $137,158 $36,123 $743,140Foreign currency translation— — — 998 — (260) 738Foreign currency impact on sale of Argentina(Note 3)— — — (1,569) — — (1,569)Common stock purchases(302) (30) (3,068) — — — (3,098)Exercise of stock options507 50 4,050 — — — 4,100Issuance of warrants15,807 1,581 152,382 — — — 153,963Share-based compensation1,651 166 11,945 — — — 12,111Tax benefits from share-based compensation— — 2,069 — — — 2,069Net income (loss)— — — — 73,495 (3,146) 70,349BALANCE AT DECEMBER 31, 2010141,656 14,166 775,601 (51,334) 210,653 32,717 981,803Foreign currency translation (5,558) — (1,636) (7,194)Foreign currency impact on sale of Argentina(Note 3)— — — (2,400) — — (2,400)Common stock purchases(384) (39) (5,642) — — — (5,681)Exercise of stock options and warrants728 73 7,927 — — — 8,000Issuance of shares in acquisition7,549 755 117,164 — — — 117,919Share-based compensation1,184 118 15,491 — — — 15,609Tax benefits from share-based compensation— — 4,859 — — 4,859Foreign currency impact of sale of equityinvestment, net of tax (Note 11)— — — 1,061 — — 1,061Net income (loss)— — — — 101,461 (806) 100,655BALANCE AT DECEMBER 31, 2011150,733 15,073 915,400 (58,231) 312,114 30,275 1,214,631Foreign currency translation— — — 191 — 1,742 1,933Foreign currency impact on sale of Argentina(Note 3)— — — 51,892 — — 51,892Common stock purchases(483) (48) (7,471) — — — (7,519)Exercise of stock options and warrants100 10 891 — — — 901Share-based compensation788 80 13,226 — — — 13,306Tax benefits from share-based compensation— — 4,085 — — — 4,085Shares surrendered(68) (7) (999) — — — (1,006)Net income— — — — 7,622 1,487 9,109BALANCE AT DECEMBER 31, 2012151,070 15,108 925,132 (6,148) 319,736 33,504 1,287,332See the accompanying notes which are an integral part of these consolidated financial statements51Table of ContentsIndex to Financial StatementsKey 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” and“our”) provide a full range of well services to major oil companies, foreign national oil companies and independent oil and natural gas production companies.Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid managementservices, fishing and rental services and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. Weoperate in most major oil and natural gas producing regions of the continental United States, and we have operations in Mexico, Colombia, the Middle Eastand Russia. In addition, we have a technology development and control systems business based in Canada.Basis of PresentationThe consolidated financial statements included in this Annual Report on Form 10-K present our financial position, results of operations and cashflows 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 our financialposition, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Amongother things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure andrealization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable,(viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and recordthe effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate toimproved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from theseestimates. We believe that our estimates are reasonable.Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications.We have evaluated events occurring after the balance sheet date included in this Annual Report on Form 10-K for possible disclosure as a subsequentevent. Management monitored for subsequent events through the date that these financial statements were issued.On February 17, 2012, the Company announced its decision to sell its business and operations in Argentina (the "Argentina business") and onSeptember 14, 2012 completed the sale of the Argentina business. In accordance with applicable accounting requirements and guidance, the Company hasreclassified and presented the Argentina business as a discontinued operation for all periods presented.Principles of ConsolidationWithin our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlled subsidiaries. Weeliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not have significant control or influence, we accountfor that interest using the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for that interestusing the equity method.We apply ASC No. 810-10, Consolidation of Variable Interest Entities (revised December 2009) — Improvements to Financial Reporting byEnterprises Involved with Variable Interest Entities (“ASU 2009-17”), when determining whether or not to consolidate a Variable Interest Entity(“VIE”). ASC 810-10 requires the reporting entity to have the power to direct the activities of a VIE that most significantly impacts the entity’s economicperformance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. A reporting entity that has these characteristicswill be required to consolidate the VIE.AcquisitionsFrom time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of operations for acquisitions areincluded in our financial statements beginning on the date of52Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) acquisition and are accounted for using the acquisition method. For all business combinations (whether partial, full or in stages), the acquirer records 100% ofall assets and liabilities of the acquired business, including goodwill, at their fair values; including contingent consideration. Final valuations of assets andliabilities are obtained and recorded as soon as practicable no later than 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 occurred or services havebeen rendered, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured.•Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completedcustomer 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 the arrangement asevidenced by a field ticket or service log.•The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixedand determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a field ticket.•Collectability is reasonably assured when we screen our customers and provide goods and services to customers according to determined creditterms that have been granted 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 state governmental taxingauthorities.We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair value ifthey have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled byus. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of eachelement 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, 2012, we have notentered into any compensating balance arrangements, but all of our obligations under our 2011 Credit Facility with a syndicate of banks of which JPMorganChase Bank, N.A. is the administrative agent 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 exposure to any one financialinstitution.We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2012, accounts wereguaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 and substantially all of our accounts held deposits in excess of the FDIClimits.Cash and cash equivalents held by our Russian and Middle East subsidiaries are subject to a noncontrolling interest and cannot be repatriated;absent these amounts, we believe that the cash held by our other foreign subsidiaries could be repatriated for general corporate use without materialwithholdings. From time to time and in the normal course of business in connection with our operations or ongoing legal matters, we are required to placecertain amounts of our cash in deposit accounts with restrictions that limit our ability to withdraw those funds.Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cash balances. Wepresent the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balancesheets.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 part of theoutstanding balances. We regularly review accounts over 150 days past due from the invoice date for collectability and establish or adjust our allowance asnecessary using the specific identification method. If we exhaust all collection efforts and determine that the balance will never be collected, we write off theaccounts receivable and the associated provision for uncollectible accounts.53Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) From time to time we are entitled to proceeds under our insurance policies for amounts that we have reserved in our self-insurance liability. We presentthese insurance receivables gross on our balance sheet as a component of other assets, separate from the corresponding liability.Concentration of Credit Risk and Significant CustomersOur customers include major oil and natural gas production companies, independent oil and natural gas production companies, and foreign nationaloil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintainreserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demandexperienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results ofoperations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cashprovided by operating activities.During the year ended December 31, 2012, the Mexican national oil company, Petróleos Mexicanos (“Pemex”) and Occidental Petroleum Corporationaccounted for 12% and 10% of our consolidated revenue respectively. No other customer accounted for more than 10% of our consolidated revenue in 2012. Nosingle customer accounted for more than 10% of our consolidated revenues during the year ended December 31, 2011 and December 31, 2010.Receivables outstanding from Pemex were approximately 31% of our total accounts receivable as of December 31, 2012. Receivables outstanding fromPemex were approximately 11% of our total accounts receivable as of December 31, 2011. No other customers accounted for more than 10% of our totalaccounts receivable as of December 31, 2012 and 2011.InventoriesInventories, which consist primarily of equipment parts and spares for use in our operations and supplies held for consumption, are valued at thelower 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 estimated depreciable livesof the assets using the straight-line method. Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was $190.5 million, $145.7 millionand $122.7 million, respectively. We depreciate our operational assets over their depreciable lives to their salvage value, which is a value higher than theassets’ value as scrap. Salvage value approximates 10% of an operational asset’s acquisition cost. When an operational asset is stacked or taken out ofservice, we review its physical condition, depreciable life and ultimate salvage value to determine if the asset is operable and whether the remaining depreciablelife and salvage value should be adjusted. When we scrap an asset, we accelerate the depreciation of the asset down to its salvage value. When we dispose of anasset, a gain or loss is recognized.As of December 31, 2012, the estimated useful lives of our asset classes are as follows: DescriptionYearsWell service rigs and components3-15Oilfield trucks, vehicles and related equipment5-10Well intervention units and equipment10-12Fishing and rental tools, tubulars and pressure control equipment3-10Disposal wells15-30Furniture and equipment3-7Buildings and improvements15-30From time to time,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.54Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) A long-lived asset or asset group should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amountmay not be recoverable. For purposes of testing for impairment, we group our long-lived assets along our lines of business based on the services provided,which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We would record animpairment charge, reducing the net carrying value to an estimated fair value, if the asset group’s estimated future cash flows were less than its net carryingvalue. Events or changes in circumstance that cause us to evaluate our fixed assets for recoverability and possible impairment may include changes in marketconditions, such as adverse movements in the prices of oil and natural gas, or changes of an asset group, such as its expected future life, intended use orphysical condition, which could reduce the fair value of certain of our property and equipment. The development of future cash flows and the determination offair value for an asset group involves significant judgment and estimates. We did not identify any triggering events or record any asset impairments during2012, 2011 or 2010.Asset Retirement ObligationsWe recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equalamount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Our obligations to perform our asset retirementactivities are unconditional, despite the uncertainties that may exist surrounding an individual retirement activity. Accordingly, we recognize a liability for thefair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. In determining the fair value, we examine the inputs that webelieve a market participant would use if we were to transfer the liability. We probability-weight the potential costs a third-party would charge, adjust the costfor inflation for the estimated life of the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved in estimatingfuture cash flows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing of the cashflows change, such changes may have a material impact on our results of operations. See “Note 10. Asset Retirement Obligations.”DepositsDue to capacity constraints on equipment manufacturers, we have been required to make advanced payments for certain oilfield service equipmentand other items used in the normal course of business. As of December 31, 2012 and December 31, 2011, deposits totaled $7.3 million and $43.7 millionrespectively. Deposits as of December 31, 2012 consisted primarily of payments made related to high demand long-lead time items for our U.S. and Mexicooperations, while deposits as of December 31, 2011 consisted primarily of payments made related to our U.S. and Mexico operations, as well as, equipmentdeposits related to our 2011 acquisition of Edge Oilfield Services, LLC and Summit Oilfield Services, LLC (collectively, “Edge”).Capitalized InterestInterest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest ratebased on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost of the assets and amortized to depreciationexpense over the useful life of the assets, and is included in the depreciation and amortization line in the 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 effective interest method overthe life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costs are included in the determination of thegain or loss on the extinguishment of the debt. We record gains and losses from the extinguishment of debt as a part of continuing operations. See “Note 15.Long-term Debt,” for further discussion.55Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Goodwill and Other Intangible AssetsGoodwill results from business combinations and represents the excess of the acquisition consideration over the fair value of the net assets acquired.Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstancesindicate that the asset might be impaired.The test for impairment of indefinite-lived intangible assets allows us to first assess the qualitative factors to determine whether it is “more likely thannot” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwillimpairment test. If our qualitative analysis shows that it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount we willperform the two-step goodwill impairment test. In the first step of the test, a fair value is calculated for each of our reporting units, and that fair value iscompared to the carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value,there is no impairment, and the second step of the test is not performed. If the carrying value exceeds the fair value for the reporting unit, then the second stepof the test is required.The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. The implied fair value of thereporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, with the purchase price beingequal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment isrecorded. If the carrying value is in excess of the implied fair value, an impairment equal to the 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-party valuationconsultant. The ultimate conclusions of the valuation techniques remain our sole responsibility. The determination of the fair value used in the test is heavilyimpacted by the market prices of our equity and debt securities, as well as the assumptions and estimates about our future activity levels, profitability andcash flows. We conduct our annual impairment test as of December 31 of each year. For the annual test completed as of December 31, 2012, no impairment ofour goodwill was indicated. See “Note 8. Goodwill and Other Intangible Assets,” for further discussion.Internal-Use SoftwareWe capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the software’s estimateduseful life, generally five to seven years. Costs incurred related to selection or maintenance of internal-use software are expensed as incurred.LitigationWhen estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determine whether a loss isprobable and reasonably estimable.Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental UnitedStates and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. Wecontinually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure ofthese items. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. See“Note 16. 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 to protect the environment.Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused bypast operations and that have no future economic benefits are expensed. We record liabilities on an undiscounted basis when our remediation efforts areprobable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurancecoverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. See “Note 16.Commitments and Contingencies.”Self-InsuranceWe are largely self-insured against physical damage to our equipment and automobiles as well as workers’ compensation claims. The accruals thatwe maintain on our consolidated balance sheet relate to these56Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) deductibles and self-insured retentions, which we estimate through the use of historical claims data and trend analysis. To assist management with the liabilityamount for our self-insurance reserves, we utilize the services of a third party actuary. The actual outcome of any claim could differ significantly fromestimated amounts. We adjust loss estimates in the calculation of these accruals, based upon actual claim settlements and reported claims. See “Note 16.Commitments and Contingencies.”Income TaxesWe account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences.Management determines our current tax liability as well as taxes incurred as a result of current operations, but which are deferred until future periods. Currenttaxes payable represent our liability related to our income tax returns for the current year, while net deferred tax expense or benefit represents the change in thebalance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets andliabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when thedifferences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatments of certain itemsfor tax and accounting purposes 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 the scope of futureoperations 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 of more than 50%)that some portion or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding ourfuture taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Suchevidence can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and taxplanning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their netrecognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities inthe domestic and international tax jurisdictions in which we operate. See “Note 14. 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 average number of commonshares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstandingassuming conversion of dilutive outstanding convertible securities using the treasury stock and “as if converted” methods. See “Note 9. Earnings Per Share.”Share-Based CompensationIn the past, we have issued stock options, shares of restricted common stock, restricted stock units, stock appreciation rights (“SARs”), phantomshares and performance units to our employees as part of those employees’ compensation and as a retention 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 to compensation expense ratably over the vesting period of the award, netof estimated and actual forfeitures. The fair value of our stock option and SAR awards are estimated using a Black-Scholes fair value model. The valuation ofour stock options and SARs requires us to estimate the expected term of award, which we estimated using the simplified method, as we did not have sufficienthistorical exercise information because of past legal restrictions on the exercise of our stock options. Additionally, the valuation of our stock option and SARsawards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to the expected term of the award, arisk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stock awards is determined using our stock price on thegrant date. Our phantom shares and performance units are treated as “liability” awards and carried at fair value at each balance sheet date, with changes infair value recorded as a component of compensation expense and an offsetting liability on our consolidated balance sheet. We record share-based compensationas a component of general and administrative and direct operating expense for the applicable individual. See “Note 20. Share-Based Compensation.”57Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Foreign Currency Gains and LossesWith respect to our operations in Russia, where the local currency is the functional currency, assets and liabilities are translated at the rates ofexchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the period. The resulting gains or lossesarising from the translation of accounts from the functional currency to the U.S. Dollar are included as a separate component of stockholders’ equity in othercomprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity. As of December 31, 2011, the functionalcurrency for Mexico, Russia and Canada was the local currency and the functional currency for Colombia and the Middle East was the U. S. dollar. Due tosignificant changes in economic facts and circumstances, the functional currency for Mexico and Canada was changed to the U.S. dollar effective January 1,2012. See “Note 17. Accumulated Other Comprehensive Loss.”From time to time our foreign subsidiaries may enter into transactions that are denominated in currencies other than their functional currency. Thesetransactions are initially recorded in the functional currency of that subsidiary based on the applicable exchange rate in effect on the date of the transaction. Atthe end of each month, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rates in effect atthat time. Any adjustment required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month is recorded in theincome or loss of the foreign subsidiary as a component of other income, net.Comprehensive IncomeWe display comprehensive income (loss) and its components in our financial statements, and we classify items of comprehensive income by theirnature in our financial statements and display the accumulated balance of other comprehensive income separately in our stockholders’ equity.LeasesWe lease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyze the terms of thearrangement 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. If the value of the leasehold improvements exceeds ourthreshold for capitalization, we record the improvement as a component of our property and equipment and amortize the improvement over the useful life of theimprovement or the lease term, whichever is shorter.Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the lease agreement. Theseincreases may be the result of an inducement or “rent holiday” conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation. Werecognize scheduled and specified rent increases on a straight-line basis over the term of the lease agreement. In addition, certain of our operating leaseagreements contain incentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, such asmoving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made to us or on our behalf representincentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis over the term of the lease agreement.New Accounting Standards Adopted in this ReportASU 2011-4. In May 2011, the FASB issued ASU 2011-4, Fair Value Measurement (Topic 820): Amendments to Achieve Common FairValue Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU represents the converged guidance of the FASB and the IASB onmeasuring fair value and for disclosing information about fair value measurements. The amendments in this ASU clarify the Board’s intent about theapplication of existing fair value measurement and disclosure requirements and changes particular principles or requirements for measuring fair value and fordisclosing information about fair value measurements. ASU 2011-4 is effective prospectively for interim and annual reporting periods beginning afterDecember 15, 2011. We adopted the provisions of ASU 2011-4 on January 1, 2012, and the adoption of this standard did not have a material impact on ourfinancial position, results of operations, or cash flows.58Table of ContentsIndex to Financial StatementsNOTE 2. ACQUISITIONS2011 AcquisitionsEdge. On August 5, 2011, we completed the acquisition of Edge. We accounted for this acquisition as a business combination. The results ofoperations for Edge have been included in our consolidated financial statements from the acquisition date.The total consideration for the acquisition was approximately $305.9 million consisting of approximately 7.5 million shares of our common stockand approximately $187.9 million in cash, which included $26.3 million to reimburse Edge for growth capital expenditures incurred between March 1, 2011and the date of closing, net of working capital adjustments of $1.8 million. We finalized the purchase accounting related to this acquisition as of June 30,2012. The following table summarizes the fair values of the assets acquired and liabilities assumed. (in thousands)Cash$189,696Key common stock117,919Consideration transferred$307,615Working capital adjustment(1,752)Total$305,863The fair value of the 7.5 million common shares issued was $15.62 per share based on the closing price on the acquisition date (August 5, 2011).The following table summarizes the fair values of the assets acquired and the liabilities assumed. (in thousands)At August 5, 2011: Cash and cash equivalents$886Accounts receivable21,124Other current assets234Property and equipment87,185Intangible assets49,310Other long term assets3,826Total identifiable assets acquired162,565Current liabilities19,406Total liabilities assumed19,406Net identifiable assets acquired143,159Goodwill162,704Net assets acquired$305,863Of the $49.3 million of acquired intangible assets, $40.0 million was assigned to customer relationships that will be amortized as the value of therelationships are realized using expected rates of 12.5%, 30.0%, 30.0%, 11.0%, 6.4%, 3.8%, 2.5%, 1.7%, 1.2% and 0.8% from 2011 through 2020. Inaddition, $5.1 million of acquired intangible assets was assigned to tradenames and are not subject to amortization. The remaining $4.2 million of acquiredintangible assets was assigned to non-compete agreements that will be amortized on a straight-line basis over 38 months.The fair value and gross contractual amount of accounts receivable acquired on August 5, 2011 was $21.1 million.All of the goodwill acquired was assigned to our fishing and rental business, which is part of our U.S. reportable segment. We believe the goodwillrecognized is attributable primarily to the acquired workforce and expansion of a growing service line. All of the goodwill is expected to be deductible forincome tax purposes.Transaction costs related to this acquisition were $3.6 million for the year ended December 31, 2011, and are included in general and administrativeexpenses in the 2011 consolidated statement of operations.59Table of ContentsIndex to Financial StatementsIncluded in our consolidated statements of operations for the year ended December 31, 2011, related to this acquisition are revenues of $52.5 millionand operating income of $14.7 million from the acquisition date through December 31, 2011.The following represents the pro forma consolidated income statement as if the Edge acquisition had been included in our consolidated results as ofJanuary 1, 2010 for the years ended December 31, 2011 and 2010: 20112010 (unaudited)(in thousands, except per shareamounts)REVENUES$1,803,768$1,130,854COSTS AND EXPENSES: Direct operating expenses1,115,770773,701Depreciation and amortization expense[1]176,298149,930General and administrative expenses[2]227,652198,973Operating income (loss)284,0488,250Loss on early extinguishment of debt46,451—Interest expense, net of amounts capitalized42,38943,688Other (income) expense, net(7,585)613Income (loss) from continuing operations before tax202,793(36,051)Income tax (expense) benefit[3](76,169)15,285Income (loss) from continuing operations126,624(20,766)Income (loss) from discontinued operations, net of tax(10,303)95,113Net income116,32174,347Loss attributable to noncontrolling interest(806)(3,146)INCOME ATTRIBUTABLE TO KEY$117,127$77,493Earnings per share attributable to Key: Basic$0.79$0.57Diluted$0.79$0.57Weighted average shares outstanding[4]: Basic150,397136,917Diluted150,705136,917 Pro Forma Adjustments[1]Depreciation and amortization expense for all periods has been adjusted to reflect the additional expense that would have been charged assuming thefair value adjustments to property and equipment and intangible assets had been applied on January 1, 2010.[2]General and administrative expenses for the years ended December 31, 2011 and 2010 have been adjusted for $3.6 million of transaction costs. Thecosts were removed from 2011 and included in 2010.[3]Income tax (expense) benefit for all periods has been adjusted to reflect applicable corporate tax as if Edge had been acquired and converted from itsLLC status on January 1, 2010.[4]Weighted average shares outstanding has been adjusted to reflect the issuance of shares in the Edge transaction as if the transaction occurred onJanuary 1, 2010.These unaudited pro forma results, based on assumptions deemed appropriate by management, have been prepared for informational purposes onlyand are not necessarily indicative of our results if the acquisition had occurred on January 1, 2010 for the years ended December 2011 and 2010. Theseamounts have been calculated after applying our accounting policies and adjusting the results of Edge as if these changes had been applied on January 1,2010, together with the consequential tax effects.60Table of ContentsIndex to Financial StatementsEquity Energy Company (“EEC”). In January 2011, we acquired 10 saltwater disposal (“SWD”) wells from EEC for approximately $14.3million. Most of these SWD wells are located in North Dakota. We accounted for this purchase as an asset acquisition.2010 AcquisitionsThe results of operations for all of the acquired businesses discussed below have been included in our consolidated financial statements since thedate of acquisition.Enhanced Oilfield Technologies, LLC (“EOT”). In December 2010, we acquired 100% of the equity interests in EOT, a privately held oilfieldtechnology company, for a cash payment of $11.7 million and a performance earn-out equal to 8% of adjusted revenue over five years from the acquisitiondate. We have estimated our liability under the earn-out agreement to be $2.8 million. We accounted for this acquisition as a business combination. Theacquired business was at the time of acquisition, and continues to be, in the developmental stage. The goodwill acquired of $10.1 million was assigned tofishing and rental services, which is included in our U.S. reportable segment. The acquired intangible asset of $4.4 million was assigned to developedtechnology and will be amortized on a straight line basis over a period of 20 years. We finalized the third-party valuations of the intangible assets during thefourth quarter of 2011, and our acquisition accounting is final.Five J.A.B., Inc. and Affiliates (“5 JAB”). In November 2010, we acquired 13 rigs and associated equipment from 5 JAB for cash considerationof approximately $14.6 million. We have accounted for this acquisition as a business combination. The goodwill acquired was assigned to rig-based servicesand is included in our U.S. reportable segment. We completed the valuations of the property and equipment and intangible assets acquired during the secondquarter of 2011, and our acquisition accounting is final.OFS Energy Services, LLC (“OFS”). In October 2010, we acquired certain subsidiaries, together with associated assets, owned by OFS, anoilfield services company owned by ArcLight Capital Partners, LLC. The total consideration for the acquisition was 15.8 million shares of our common stockand a cash payment of $75.9 million including a final working capital adjustment of $0.1 million. We accounted for this acquisition as a businesscombination. We finalized the third-party valuations of the tangible and intangible assets during the second quarter of 2011, and our acquisition accounting isfinal.Other Acquisitions. We also completed an asset acquisition during 2010 as part of our business strategy. In June 2010, we acquired five large-diameter capable coiled tubing units and associated equipment for approximately $12.7 million in cash from Express Energy Services, a privately held oilfieldservices company.61Table of ContentsIndex to Financial StatementsNOTE 3. DISCONTINUED OPERATIONSIn September 2012, we completed the sale of our Argentina operations for approximately $12.5 million, net of transaction costs. The $12.5 millionnet proceeds from the sale of Argentina operations included $2.0 million received in cash and the balance in notes receivable. There are three non-interestbearing notes that are due within 24 months that are included in our other current assets and other assets in our accompanying 2012 consolidated balancesheet. In connection with the sale, we recognized a total loss of $85.8 million, which includes the noncash impairment charge of $41.5 million recorded in thefirst quarter of 2012, and a write-off of $51.9 million cumulative translation adjustment previously recorded in accumulated other comprehensive loss. Weare reporting the results of our Argentina operations in discontinued operations for all periods presented. The following table presents the assets and liabilities of this disposal group as of December 31, 2011:December 31,2011 (in thousands)Current assets held for sale: Accounts receivable, net of allowance for doubtful accounts of $69$41,682Inventories8,018Prepaid expenses1,198Deferred tax assets2,454Other current assets6,991Total current assets held for sale60,343Noncurrent assets held for sale: Property and equipment, gross39,292Accumulated depreciation(26,296)Property and equipment, net12,996Goodwill661Deposits7Other assets9,219Total noncurrent assets held for sale22,883TOTAL ASSETS83,226Liabilities directly associated with assets held for sale: Accounts payable7,101Other current liabilities34,789Total liabilities directly associated with assets held for sale41,890TOTAL NET ASSETS HELD FOR SALE FROM DISCONTINUED OPERATIONS$41,33662Table of ContentsIndex to Financial StatementsThe following table presents the results of operations for the Argentina business sold in this transaction for the three years ended December 31, 2012, 2011and 2010. Year Ended December 31, 2012 2011 2010 (in thousands)REVENUES$75,815 $117,672 $91,089COSTS AND EXPENSES: Direct operating expenses72,664 111,893 88,571Depreciation and amortization expense143 2,658 3,149General and administrative expenses11,232 14,769 12,083Asset retirements and impairments85,755 — —Operating loss(93,979) (11,648) (12,714)Interest expense, net of amounts capitalized168 1,694 719Other expense, net3,725 3,159 110Loss before taxes(97,872) (16,501) (13,543)Income tax benefit$4,304 $5,820 $2,551Net loss$(93,568) $(10,681) $(10,992)On October 1, 2010, we completed the sale of our pressure pumping and wireline businesses to Patterson-UTI Energy (“Patterson-UTI”).Management determined to sell these businesses because they were not aligned with our core business strategy of well intervention and international expansion.For the periods presented in this report, we show the results of operations related to these businesses as discontinued operations for all periods. Prior to the sale,the businesses sold to Patterson-UTI were reported as part of our U.S. segment. The sale of these businesses represented the sale of a significant portion of areporting unit which requires the reassessment of goodwill. However, due to previous impairment charges, there was no goodwill related to this reporting unitin 2010. Because the agreed-upon purchase price for the businesses exceeded the carrying value of the assets being sold, we did not record a write-down onthese assets on the date that they became classified as held for sale. The carrying value of the assets sold was $76.5 million as of September 30, 2010. Wediscontinued depreciation and amortization of our pressure pumping and wireline property and equipment at June 30, 2010 when they were classified as heldfor sale.63Table of ContentsIndex to Financial StatementsThe following table presents the 2010 results of discontinued operations for the businesses sold in connection with this transaction: Year Ended December 31, 2010 (in thousands)REVENUES$197,704COSTS AND EXPENSES: Direct operating expenses154,369Depreciation and amortization expense6,758General and administrative expenses11,734Asset retirements and impairments—Operating income24,843Interest expense, net of amounts capitalized(262)Other income, net(75)Gain on sale of discontinued operations(154,355)Income before taxes179,535Income tax expense(73,790)Net income$105,74564Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 4. OTHER BALANCE SHEET INFORMATIONThe table below presents comparative detailed information about other current assets at December 31, 2012 and 2011: December 31,2012 December 31,2011 (in thousands)Other current assets: Deferred tax assets$20,026 $54,646Prepaid current assets27,736 24,330Reinsurance receivable10,217 8,731VAT asset32,762 9,883Other10,092 1,686Total$100,833 $99,27665Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The table below presents comparative detailed information about other current liabilities at December 31, 2012 and 2011: December 31, 2012 December 31, 2011 (in thousands)Other current liabilities: Accrued payroll, taxes and employee benefits$31,708 $51,558Accrued operating expenditures42,137 41,332Income, sales, use and other taxes62,709 27,764Self-insurance reserves35,742 32,030Accrued interest15,301 10,870Insurance premium financing8,021 8,358Other5,012 2,271Total$200,630 $174,183The table below presents comparative detailed information about other non-current accrued liabilities at December 31, 2012 and 2011: December 31, 2012 December 31, 2011 (in thousands)Other non-current liabilities: Asset retirement obligations$11,659 $11,928Environmental liabilities4,539 3,953Accrued rent1,424 1,977Accrued sales, use and other taxes6,952 7,191Other3,347 4,036Total$27,921 $29,085NOTE 5. OTHER INCOME, NETThe table below presents comparative detailed information about our other income and expense from continuing operations for the years endedDecember 31, 2012, 2011 and 2010: Year Ended December 31, 2012 2011 2010 (in thousands)Interest income$(46) $(26) $(130)Foreign exchange gain(4,726) (3,058) (1,681)Gain on sale of equity method investment— (4,783) —Other income, net(1,877) (1,110) (996)Total$(6,649) $(8,977) $(2,807)66Table of ContentsIndex to Financial StatementsNOTE 6. ALLOWANCE FOR DOUBTFUL ACCOUNTSThe table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2012, 2011 and 2010: Additions Balance atBeginningof Period Charged toExpense Charged toOtherAccounts Deductions Balance atEnd ofPeriod (in thousands)As of December 31, 20128,013 1,299 6 (6,458) 2,860As of December 31, 20117,717 2,559 519 (2,782) 8,013As of December 31, 20105,380 3,833 896 (2,392) 7,71767Table of ContentsIndex to Financial StatementsNOTE 7. PROPERTY AND EQUIPMENTProperty and equipment consists of the following: December 31, 2012 2011 (in thousands)Major classes of property and equipment: Oilfield service equipment$1,825,707 $1,701,303Disposal wells86,970 88,998Motor vehicles306,161 114,047Furniture and equipment112,828 110,668Buildings and land69,158 61,278Work in progress127,754 108,516Gross property and equipment2,528,578 2,184,810Accumulated depreciation(1,091,904) (987,510)Net property and equipment$1,436,674 $1,197,300We capitalize costs incurred during the application development stage of internal-use software. These costs are capitalized to work in progress untilsuch time the application is put in service. For the years ended December 31, 2012, 2011 and 2010, we capitalized costs in the amount of $1.5 million, $1.2million and $14.7 million, respectively.Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest ratebased on related debt until the underlying assets are placed into service. Capitalized interest for the years ended December 31, 2012, 2011 and 2010 was $1.3million, $1.7 million, and $3.5 million, respectively.We are obligated under various capital leases for certain vehicles and equipment that expire at various dates during the next two years. The carryingvalue of assets acquired under capital leases consists of the following: December 31, 2012 2011 (in thousands)Values of assets leased under capital lease obligations: Well servicing equipment$249 $59Motor vehicles37,827 18,121Furniture and fixtures— 3,153Gross values38,076 21,333Accumulated depreciation(33,692) (17,741)Carrying value of leased assets$4,384 $3,592Depreciation of assets held under capital leases was $2.8 million, $2.8 million, and $3.2 million for the years ended December 31, 2012, 2011 and2010, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations.There were no asset impairment charges for the years ended December 31, 2012, 2011 and 2010.68Table of ContentsIndex to Financial StatementsNOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETSThe changes in the carrying amount of our goodwill for the years ended December 31, 2012 and 2011 are as follows: U.S. International Total (in thousands)December 31, 2010$418,047 $28,848 $446,895Purchase price allocation and other adjustments, net16,705 — 16,705Goodwill acquired during the period160,297 — 160,297Impact of foreign currency translation— (1,124) (1,124)December 31, 2011595,049 27,724 622,773Purchase price adjustments, net2,407 — 2,407Impact of foreign currency translation— 1,301 1,301December 31, 2012$597,456 $29,025 $626,48169Table of ContentsIndex to Financial StatementsThe components of our other intangible assets as of December 31, 2012 and 2011 are as follows: December 31, 2012 December 31, 2011 (in thousands)Noncompete agreements: Gross carrying value$9,332 $19,242Accumulated amortization(5,022) (12,278)Net carrying value$4,310 $6,964Patents, trademarks and tradename: Gross carrying value$14,689 $13,393Accumulated amortization(410) (655)Net carrying value$14,279 $12,738Customer relationships and contracts: Gross carrying value$100,481 $101,064Accumulated amortization(62,143) (43,098)Net carrying value$38,338 $57,966Developed technology: Gross carrying value$7,583 $7,592Accumulated amortization(3,605) (3,393)Net carrying value$3,978 $4,199Customer backlog: Gross carrying value$779 $778Accumulated amortization(779) (778)Net carrying value$— $—Total: Gross carrying value$132,864 $142,069Accumulated amortization(71,959) (60,202)Net carrying value$60,905 $81,867 Amortization expense for our intangible assets with determinable lives was as follows: Year Ended December 31,2012 2011 2010 (in thousands)Noncompete agreements$3,827 $4,154 $2,707Patents, trademarks and tradename309 202 262Customer relationships and contracts18,941 15,830 7,349Developed technology221 883 752Customer backlog— 162 184Total intangible asset amortization expense$23,298 $21,231 $11,254Of our intangible assets at December 31, 2012, $13.4 million are indefinite-lived tradenames and not subject to amortization. These tradenames aretested for impairment annually using a relief from royalty method. The weighted average remaining amortization periods and expected amortization expense forthe next five years for our definite lived intangible assets are as follows:70Table of ContentsIndex to Financial Statements Weightedaverage remainingamortizationperiod (years) Expected Amortization Expense2013 2014 2015 2016 2017 (in thousands)Noncompete agreements1.8 $1,739 $1,338 $— $— $—Patents, trademarks and tradename5.4 125 125 54 40 40Customer relationships and contracts5.3 16,953 7,963 5,100 3,454 2,431Developed technology18.0 233 221 221 221 221Total intangible asset amortization expense $19,050 $9,647 $5,375 $3,715 $2,692Certain of our goodwill and 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. Additionally, certain of these assets are also subject to purchase accounting adjustments.Additions to goodwill and intangibles during 2011 relate to the Edge acquisition. Purchase accounting adjustments in 2012 relate to the reduction of fixedassets acquired from Edge in 2011. Purchase accounting adjustments made in 2011 related to the reduction of fixed assets and intangibles acquired from OFSin 2010, and adjustments to the goodwill and intangibles related to the EOT and 5 JAB acquisitions. We do not believe the impact of these purchaseaccounting adjustments is material to our consolidated financial statements for the year ended December 31, 2012 or 2011.We performed our qualitative analysis of goodwill impairment as of December 31, 2012. Based on this analysis, our Canadian reporting unit did nothave a triggering event that would indicate it was “more likely than not” that the carrying value of this reporting unit was higher than its fair value. However,we determined it was necessary to perform the first step of the goodwill impairment test for our rig services, fluid management services, coiled tubing services,fishing and rental services and Russian reporting units. Under the first step of the goodwill impairment test, we compared the fair value of each reporting unitto its carrying amount, including goodwill. Based on the results of step 1, the fair value of our rig services, fluid management services, coiled tubing services,fishing and rental services and our Russian reporting units exceeded their carrying value by 16.5%, 13.2%, 15.0%, 15.5% and 17.8%, respectively. A keyassumption in our model was our forecast of increased revenue from 2013 to 2014 for rig services and fishing and rental services, followed by nominalrevenue increases through 2017. For our fluid management services , we anticipate a decrease in revenue for 2013 and 2014 with steady revenue from 2014 to2017. We anticipate our coiled tubing services and Russian reporting units to have increased revenue in future years. Potential events that could affect thisassumption include the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies inRussia, oil and natural gas production costs, government regulations and conditions in the worldwide oil and natural gas industry. Other possible factors thatcould affect this assumption are the ability to acquire and deploy additional assets and deployment of these assets into the region. Because the fair value of thereporting units exceeded their carrying values, we determined that no impairment of our goodwill associated with our reporting units existed as of December 31,2012, and that step two of the impairment test was not required.71Table of ContentsIndex to Financial StatementsNOTE 9. EARNINGS PER SHAREThe following table presents our basic and diluted earnings per share for the years ended December 31, 2012, 2011 and 2010: Year Ended December 31,2012 2011 2010(in thousands, except per share amounts)Basic EPS Calculation: Numerator Income (loss) from continuing operations attributable to Key$101,190 $112,142 $(21,258)Income (loss) from discontinued operations, net of tax(93,568) (10,681) 94,753Income attributable to Key$7,622 $101,461 $73,495Denominator Weighted average shares outstanding151,106 145,909 129,368Basic earnings (loss) per share from continuing operations attributable to Key$0.67 $0.77 $(0.16)Basic earnings (loss) per share from discontinued operations(0.62) (0.07) 0.73Basic earnings per share attributable to Key$0.05 $0.70 $0.57Diluted EPS Calculation: Numerator Income (loss) from continuing operations attributable to Key$101,190 $112,142 $(21,258)Income (loss) from discontinued operations, net of tax(93,568) (10,681) 94,753Income attributable to Key$7,622 $101,461 $73,495Denominator Weighted average shares outstanding151,106 145,909 129,368Stock options19 201 —Warrants— 48 —Stock appreciation rights— 59 —Total151,125 146,217 129,368Diluted earnings (loss) per share from continuing operations attributable to Key$0.67 $0.76 $(0.16)Diluted earnings (loss) per share from discontinued operations(0.62) (0.07) 0.73Diluted earnings per share attributable to Key$0.05 $0.69 $0.57Stock options, warrants and SARs are included in the computation of diluted earnings per share using the treasury stock method. Restricted stockawards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding. The diluted earnings pershare calculation for the years ended December 31, 2012, 2011 and 2010 excludes the potential exercise of 2.0 million, 1.3 million and 2.8 million stockoptions, respectively, because the effect would be anti-dilutive. For 2012, these options were considered anti-dilutive because the exercise prices exceeded theaverage price of our stock. The diluted earnings per share calculation for the year ended December 31, 2012 also excluded the potential exercise of 0.4 millionSARs, because the effects of such exercises on earnings per share in those periods would be anti-dilutive. None of our SARs were anti-dilutive for the yearended December 31, 2011. The diluted earnings per share calculation for the year ended December 31, 2010 also excluded the potential exercise of 0.4 millionSARs. For 2010, these options and SARs would be anti-dilutive because of our net loss from continuing operations. There have been no material changes in share amounts subsequent to the balance sheet date that would have a material impact on the earnings pershare calculation for the year ended December 31, 2012. However, we issued 0.9 million and 0.6 million shares of restricted stock on January 21, 2013 andFebruary 4, 2013, respectively.72Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 10. ASSET RETIREMENT OBLIGATIONSIn connection with our well servicing activities, we operate a number of SWD facilities. Our operations involve the transportation, handling anddisposal of fluids in our SWD facilities that are by-products of the drilling process. SWD facilities used in connection with our fluid hauling operations aresubject to future costs associated with the retirement of these properties. As a result, we have incurred costs associated with the proper storage and disposal ofthese materials.Annual amortization of the assets associated with the asset retirement obligations was $0.6 million, $0.6 million, and $0.5 million for the yearsended December 31, 2012, 2011 and 2010, respectively. A summary of changes in our asset retirement obligations is as follows (in thousands): Balance at December 31, 2010$11,003Additions741Costs incurred(400)Accretion expense594Disposals(10)Balance at December 31, 2011$11,928Additions—Costs incurred(251)Accretion expense594Disposals(612)Balance at December 31, 2012$11,659NOTE 11. EQUITY METHOD INVESTMENTSIROC Energy Services Corp.In April 2011, we sold all of our equity interest (approximately 8.7 million shares) in IROC Energy Services Corp., an Alberta-based oilfield servicescompany, for $12.0 million, net of fees. We recorded a net gain on sale of $4.8 million (including the write-off of the cumulative translation adjustment of$1.1 million, net of tax) during the second quarter of 2011, as the proceeds received exceeded the carrying value of our investment.OtherAs of December 31, 2012, we have other equity method investments that are not material on a combined basis.NOTE 12. VARIABLE INTEREST ENTITIESOn March 7, 2010, we entered into an agreement with AlMansoori Petroleum Services LLC (“AlMansoori”) to form the joint venture AlMansoori KeyEnergy Services LLC under the laws of Abu Dhabi, UAE. The purpose of the joint venture is to engage in conventional workover and drilling services,pressure pumping services, coiled tubing services, fishing and rental tools and services, rig monitoring services, pipe handling services, fluids, wastetreatment, and handling services, and wireline services. AlMansoori holds a 51% interest in the joint venture while we hold a 49% interest. Future capitalcontributions to the joint venture will be made on equal terms and in equal amounts, and any future share capital increases will be issued in proportion to theinitial share capital percentages but paid for by AlMansoori and Key in equal amounts. Also, we share the profits and losses of the joint venture on equalterms and in equal amounts with AlMansoori. However, we hold three of the five board of directors seats and a controlling financial interest. The joint venturedoes not have sufficient resources to carry on its activities without our financial support; accordingly, we have determined it to be a variable interest entity ofwhich we are the primary beneficiary. We consolidate the entity in our financial statements.For the years ended December 31, 2012 and 2011, we recognized $16.2 million and $10.2 million of revenue, respectively, and net income of $2.6million and $0.3 million respectively, associated with this joint venture. Also, we have guaranteed the performance of the joint venture under its sole servicescontract valued at $2.0 million. At December 31, 2012 and 2011, there were $16.2 million and $12.4 million of assets, respectively, and $14.7 million and$13.4 million of liabilities associated with the joint venture. Also, creditors of the joint venture have no recourse against us other than the $2.0 millionperformance guarantee previously mentioned.73Table of ContentsIndex to Financial StatementsNOTE 13. 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, 2012 and 2011.Cash, cash equivalents, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity ofthe instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date. December 31, 2012 December 31, 2011Carrying Value Fair Value Carrying Value Fair Value(in thousands)Financial assets: Notes and accounts receivable — related parties$440 $440 $735 $735Notes receivable - Argentina operations sale12,955 12,955 — —Financial liabilities: 6.75% Senior Notes issued March 4, 2011$475,000 $479,750 $475,000 $472,6256.75% Senior Notes issued March 8, 2012200,000 200,760 8.375% Senior Notes3,573 3,656 3,573 3,731Credit Facility revolving loans165,000 165,000 295,000 295,000Notes receivable-related parties. The amounts reported relate to notes receivable from certain of our employees related to relocation and retentionagreements and certain trade accounts receivable with affiliates. The carrying values of these items approximate their fair values as of the applicable balancesheet dates.Notes receivable-Argentina operations sale. The fair value of these notes receivable is based upon the quoted market Treasury rates as of thetwelve, eighteen and twenty-four month maturity dates indicated. The carrying values of these items approximate their fair values because a market rate ofinterest was used to discount the notes.6.75% Senior Notes due 2021 (issued March 4, 2011). The fair value of our 6.75% Senior Notes due 2021 is based upon the quoted marketprices for those securities as of the dates indicated. The carrying value of these notes as of December 31, 2012 was $475.0 million, and the fair value was$479.8 million (101.0% of carrying value).6.75% Senior Notes due 2021 (issued March 8, 2012). The fair value of our 6.75% Senior Notes due 2021 is based upon the quoted marketprices for those securities as of the dates indicated. The carrying value of these notes as of December 31, 2012 was $200.0 million, and the fair value was$200.8 million (100.4% of carrying value).8.375% Senior Notes due 2014. The fair value of our 8.375% Senior Notes is based upon the quoted market prices for those securities as of thedates indicated. The carrying value of these notes as of December 31, 2012 was $3.6 million and the fair value was $3.7 million (102.32% of carrying value).Credit Facility Revolving Loans. Because of their variable interest rates, the fair values of the revolving loans borrowed under our 2011 CreditFacility (as defined below) approximate their carrying values. The carrying and fair values of these loans as of December 31, 2012 were $165.0 million.74Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 14. INCOME TAXESThe components of our income tax expense are as follows: Year Ended December 31, 2012 2011 2010 (in thousands)Current income tax (expense) benefit: Federal and state$(16,165) $28,291 $11,134Foreign(5,189) (796) (3,218) (21,354) 27,495 7,916Deferred income tax (expense) benefit: Federal and state(32,729) (89,421) (2,959)Foreign(3,269) (2,191) 13,004 (35,998) (91,612) 10,045Total income tax (expense) benefit$(57,352) $(64,117) $17,961The sources of our income or loss from continuing operations before income taxes and noncontrolling interest were as follows: Year Ended December 31, 2012 2011 2010 (in thousands)Domestic income$129,865 $160,755 $4,089Foreign (loss) income30,164 14,698 (46,454)Total income (loss)$160,029 $175,453 $(42,365)We made federal income tax payments of $5.1 million, $53.2 million and zero for the years ended December 31, 2012, 2011 and 2010, respectively.We made state income tax payments of $2.9 million, $7.6 million and $0.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. Wemade foreign tax payments of $5.2 million, $2.9 million and $4.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. For the yearsended December 31, 2012, 2011 and 2010, tax benefit (expense) allocated to stockholders’ equity for compensation expense for income tax purposes in excessof amounts recognized for financial reporting purposes was $4.1 million, $4.9 million and $2.1 million, respectively. In addition, we received federal incometax refunds of $16.7 million and $26.2 million during the years ended December 31, 2012 and 2011, respectively.Income tax expense differs from amounts computed by applying the statutory federal rate as follows: Year Ended December 31, 2012 2011 2010Income tax computed at Federal statutory rate35.00 % 35.00 % 35.00%State taxes2.5 % 2.7 % 2.3%Other(1.7)% (1.3)% 5.1%Effective income tax rate35.80 % 36.40 % 42.40% 75Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of December 31, 2012 and 2011, our deferred tax assets and liabilities consisted of the following: December 31, 2012 2011 (in thousands)Deferred tax assets: Net operating loss and tax credit carryforwards$16,026 $48,764Capital loss carryforwards21,417 —Self-insurance reserves18,167 16,829Allowance for doubtful accounts965 2,890Accrued liabilities10,794 10,461Share-based compensation11,377 10,395Other261 (74)Total deferred tax assets79,007 89,265Valuation allowance for deferred tax assets(22,248) (835)Net deferred tax assets56,759 88,430Deferred tax liabilities: Property and equipment(248,902) (254,153)Intangible assets(42,553) (36,818)Other(1,856) —Total deferred tax liabilities(293,311) (290,971)Net deferred tax liability, net of valuation allowance$(236,552) $(202,541)In 2012 and 2011, deferred tax liabilities decreased by zero and $0.7 million, respectively, 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 income tax assets will berealized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which thosedeferred income tax assets would be deductible. We consider the scheduled reversal of deferred income tax liabilities and projected future taxable income for thisdetermination. To fully realize the deferred income tax assets related to our federal net operating loss carryforwards that do not have a valuation allowance dueto Section 382 limitations, we would need to generate future federal taxable income of approximately $0.4 million over the next six years. With certainexceptions noted below, we believe that after considering all the available objective evidence, both positive and negative, historical and prospective, with greaterweight given to the historical evidence, it is more likely than not that these assets will be realized.We estimate that as of December 31, 2012, 2011 and 2010, we have available $2.8 million, $79.3 million and $4.9 million, respectively, of federalnet operating loss carryforwards. Approximately $0.4 million of our net operating losses as of December 31, 2012 are subject to a $1.1 million annualSection 382 limitation and expire in 2018. Approximately $2.4 million of our net operating losses as of December 31, 2012 are subject to a $5,000 annualSection 382 limitation and expire in 2016 through 2018. The gross deferred tax asset associated with our federal net operating loss carryforward at December31, 2012 is $1.0 million. Due to annual limitations under Sections 382 and 383, management believes that we will not be able to utilize all availablecarryforwards prior to their ultimate expiration. At December 31, 2012 and 2011, we had a valuation allowance of $0.8 million related to the deferred tax assetassociated with our remaining federal net operating loss carryforwards that will expire before utilization due to Section 382 limitations.We estimate that as of December 31, 2012, 2011 and 2010, we have available approximately $44.4 million, $73.3 million and $37.7 million,respectively, of state net operating loss carryforwards that will expire between 2014 to 2032. The deferred tax asset associated with our remaining state netoperating loss carryforwards at December 31, 2012 is $3.6 million. Management believes that it is more likely than not that we will be able to utilize allavailable carryforwards prior to their ultimate expiration.We estimate that as of December 31, 2012, 2011 and 2010, we have available approximately $34.4 million, $39.6 million, and $50.6 million,respectively, of foreign net operating loss carryforwards that will expire between 2020 and 2030. The gross deferred tax asset associated with our foreign netoperating loss carryforwards at December 31, 2012 is $8.5 million.76Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Management believes that it is more likely than not that we will be able to utilize the net operating loss carryforwards prior to their ultimate expiration in allforeign jurisdictions in which we currently operate.The Company recognized a valuation allowance of $21.4 million as of December 31, 2012 against the deferred tax asset associated with the capitalloss carryforward. The capital loss carryforward will expire in 2017.We did not provide for U.S. income taxes or withholding taxes on the 2012 unremitted earnings of our Mexico, Canada, Colombia and the MiddleEast subsidiaries, as these earnings are considered permanently reinvested because increasing demand for our services requires additional equipment andworking capital to support these businesses. Furthermore, we did not provide for U.S. income taxes on unremitted earnings of our other foreign subsidiaries in2012 or prior years, as our tax basis in these foreign subsidiaries exceeded the book basis for each period.We file income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. We are currently under audit by theInternal Revenue Service for the tax year ended December 31, 2009. Our other significant filings are in Mexico, which have been examined through 2008.As of December 31, 2012, 2011 and 2010, we had $1.2 million, $1.8 million and $2.2 million, respectively, of unrecognized tax benefits which, ifrecognized, would impact our effective tax rate. We have accrued $0.3 million, $0.6 million and $0.8 million for the payment of interest and penalties as ofDecember 31, 2012, 2011 and 2010, respectively. We believe that it is reasonably possible that $0.9 million of our currently remaining unrecognized taxpositions, each of which are individually insignificant, may be recognized by the end of 2013 as a result of a lapse of the statute of limitations and settlementof an open audit.We recognized a net tax benefit of $0.6 million in 2012 for expirations of statutes of limitations.The following table presents the gross activity during 2012 and 2011 related to our liabilities for uncertain tax positions (in thousands): Balance at January 1, 2011$2,254Additions based on tax positions related to the current year33Decreases in unrecognized tax benefits acquired or assumed in business combinations(207)Reductions for tax positions from prior years—Settlements—Balance at December 31, 20112,080Additions based on tax positions related to the current year205Decreases in unrecognized tax benefits acquired or assumed in business combinations—Reductions for tax positions from prior years(692)Settlements—Balance at December 31, 2012$1,593 Tax Legislative ChangesThe Small Business Jobs Act of 2010. The Small Business Jobs Act of 2010 extended the first-year bonus depreciation deduction of 50% of theadjusted basis of qualified property acquired and placed in service during 2010 and increased the deduction to 100% of the adjusted basis of qualifiedproperty acquired and placed in service after September 8, 2010 and before January 1, 2012. We have estimated $185.0 million of qualifying additions in2012 resulting in bonus depreciation of $92.5 million. We had $199.9 million of qualifying additions in 2011 resulting in bonus tax depreciation of $199.9million. We had $131.9 million of qualifying additions in 2010 resulting in bonus tax depreciation of $88.0 million.77Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 15. LONG-TERM DEBTThe components of our long-term debt are as follows: December 31, 2012 December 31, 2011 (in thousands)6.75% Senior Notes due 2021$675,000 $475,0008.375% Senior Notes due 20143,573 3,573Senior Secured Credit Facility revolving loans due 2016165,000 295,000Net unamortized premium on debt4,537 —Capital lease obligations393 2,096Total debt$848,503 $775,669Less current portion(393) (1,694)Total long-term debt and capital leases$848,110 $773,9758.375% Senior Notes due 2014On November 29, 2007, we issued $425.0 million aggregate principal amount of 8.375% Senior Notes due 2014 (the “2014 Notes”). On March 4,2011, we repurchased $421.3 million aggregate principal amount of our 2014 Notes at a purchase price of $1,090 per $1,000 principal amount. OnMarch 15, 2011, we repurchased an additional $0.1 million aggregate principal amount at a purchase price of $1,060 per $1,000 principal amount. Inconnection with the repurchase of the 2014 Notes, we incurred a loss of $44.3 million on the early extinguishment of debt related to the premium paid on thetender, the payment of related fees and the write-off of unamortized loan fees. Interest on the remaining $3.6 million aggregate principal amount of 2014 Notesoutstanding is payable on June 1 and December 1 of each year.6.75% Senior Notes due 2021We issued $475.0 million aggregate principal amount of 6.75% Senior Notes due 2021 on March 4, 2011 and issued an additional $200.0 million ofsuch notes on March 8, 2012 (collectively, the “2021 Notes”) under an indenture dated March 4, 2011 (the "Base Indenture"), as supplemented by a firstsupplemental indenture dated March 4, 2011 and amended by a further supplemental indenture dated March 8, 2012 (the "Supplemental Indenture" and,together with the Base Indenture, the "Indenture"). We used the net proceeds to repay senior secured indebtedness under our revolving bank credit facility. Wecapitalized $4.6 million of financing costs associated with the issuance of the 2021 Notes that will be amortized over the term of the notes.On January 29, 2013, we commenced an offer to exchange the $200.0 million in aggregate principal amount of notes issued in a private placement onMarch 8, 2012 for an equal principal amount of such notes registered under the Securities Act of 1933. The exchange offer will expire on February 25, 2013and is scheduled to close on March 5, 2013. All of the 2021 Notes are treated as a single class under the Indenture and, assuming the completion of theexchange offer and the exchange of all the notes subject thereto, all of the 2021 Notes will bear the same CUSIP and ISIN numbers.The 2021 Notes are general unsecured senior obligations and are effectively subordinated to all of our existing and future secured indebtedness. The2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest onthe 2021 Notes is payable on March 1 and September 1 of each year. The 2021 Notes mature on March 1, 2021. On or after March 1, 2016, the 2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at theredemption prices below (expressed as percentages of the principal amount redeemed), plus accrued and unpaid interest to the applicable redemption date, ifredeemed during the twelve-month period beginning on March 1 of the years indicated below:YearPercentage2016103.375%2017102.250%2018101.125%2019 and thereafter100.000%78Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) At any time and from time to time before March 1, 2014, we may on any one or more occasions redeem up to 35% of the aggregate principal amountof the outstanding 2021 Notes at a redemption price of 106.750% of the principal amount, plus accrued and unpaid interest to the redemption date, with thenet cash proceeds from any one or more equity offerings provided that (i) at least 65% of the aggregate principal amount of the 2021 Notes remainsoutstanding immediately after each such redemption and (ii) each such redemption shall occur within 180 days of the date of the closing of such equityoffering.In addition, at any time and from time to time prior to March 1, 2016, we may, at our option, redeem all or a portion of the 2021 Notes at aredemption price equal to 100% of the principal amount plus a premium with respect to the 2021 Notes plus accrued and unpaid interest to the redemptiondate. If we experience a change of control, subject to certain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021 Notes,in whole or in part, at a 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. The Indenture limits our ability to, among other things:•incur additional indebtedness and issue preferred equity interests;•pay dividends or make other distributions or repurchase or redeem equity interests;•make loans and investments;•enter into sale and leaseback transactions;•sell, transfer or otherwise convey assets;•create liens;•enter into transactions with affiliates;•enter into agreements restricting subsidiaries’ ability to pay dividends;•designate future subsidiaries as unrestricted subsidiaries; and•consolidate, merge or sell all or substantially all of the applicable entities’ assets.These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions relating to the covenants of our 2011 CreditFacility discussed below. Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agencies assigns the2021 Notes an investment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2012, the 2021 Notes were belowinvestment grade. Any covenants 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 2021 Notes later falls below investment grade. We were in compliance with these covenants at December 31, 2012.Senior Secured Credit FacilityWe are party to a $550.0 million senior secured revolving bank credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank ofAmerica, N.A., as Syndication Agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit Agricole Corporate and Investment Bank and DnB NORBank ASA, as Co-Documentation Agent (as amended, the "2011 Credit Facility"), which is an important source of liquidity for us. The 2011 Credit Facilityconsists of a revolving credit facility, letter of credit sub-facility and swing line facility, all of which will mature no later than March 31, 2016. The maximumamount that we may borrow under the facility may be subject to limitation due to the operation of the covenants contained in the facility. The 2011 CreditFacility allows us to request increases in the total commitments under the facility by up to $100.0 million in the aggregate in part or in full anytime during theterm of the 2011 Credit Facility, with any such increases being subject to compliance with the restrictive covenants in the 2011 Credit Facility and in theIndenture governing our 2021 Senior Notes, as well as lender approval.We capitalized $4.9 million of financing costs in connection with the execution of the 2011 Credit Facility and an additional $1.4 million related to asubsequent amendment that will be amortized over the term of the debt.The interest rate per annum applicable to the 2011 Credit Facility is, at our option, (i) adjusted LIBOR plus the applicable margin or (ii) the higher of(x) JPMorgan’s prime rate, (y) the Federal Funds rate plus 0.5% and (z) one-month adjusted LIBOR plus 1.0%, plus in each case the applicable margin for allother loans. The applicable margin for LIBOR loans ranges from 225 to 300 basis points, and the applicable margin for all other loans ranges from 125 to 200basis points, depending upon our consolidated total leverage ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facility equal 0.50%.The 2011 Credit Facility contains certain financial covenants, which, among other things, limit our annual capital expenditures, restrict our abilityto repurchase shares and require us to maintain certain financial ratios. The financial ratios require that:•our ratio of consolidated funded indebtedness to total capitalization be no greater than 45%;79Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) •our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation andamortization (as calculated pursuant to the terms of the 2011 Credit Facility, “EBITDA”) be no greater than 2.00 to 1.00;•we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of the lastday of any fiscal quarter of at least 2.00 to 1.00;•we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least 3.00 to 1.00; and•we limit our capital expenditures and investments in foreign subsidiaries to $250.0 million per fiscal year, if the consolidated total leverage ratioexceeds 3.00 to 1.00.In addition, the 2011 Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions on (i) liens;(ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets;(v) loans, acquisitions, joint ventures and other investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or event ofdefault exists under the 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed 4.00 to 1.00, we are in compliance with otherfinancial covenants and we have at least $25.0 million of availability under the 2011 Credit Facility); (vi) dividends and other distributions to, andredemptions and repurchases from, equityholders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming orrepurchasing subordinated (contractually or structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements;(xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (xiv) changes in the nature of business;(xv) amending organizational documents; and (xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certainexceptions.We were in compliance with these covenants at December 31, 2012. We may prepay the 2011 Credit Facility in whole or in part at any time withoutpremium or penalty, subject to certain reimbursements to the lenders for breakage and redeployment costs. As of December 31, 2012, we had borrowings of$165.0 million under the revolving credit facility and $54.1 million of letters of credit outstanding, leaving $330.9 million of unused borrowing capacityunder the 2011 Credit Facility. For the years ended December 31, 2012 and 2011, the weighted average interest rate on the outstanding borrowings under the2011 Credit Facility was 2.71% and 2.78%, respectively.80Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Long-Term Debt Principal Repayment and Interest ExpensePresented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as of December 31, 2012: Principal Amount of Long-Term Debt (in thousands)2013$—20143,5732015—2016165,0002017Thereafter675,000Total long-term debt$843,573 Presented below is a schedule of our estimated minimum lease payments on our capital lease obligations for the next five years and thereafter as ofDecember 31, 2012: Capital Lease ObligationMinimumLease Payments (in thousands)2013$5582014—2015—2016—2017—Thereafter—Total minimum lease payments558Less: executory costs(162)Net minimum lease payments396Less: amounts representing interest(3)Present value of minimum lease payments$393Interest expense for the years ended December 31, 2012, 2011 and 2010 consisted of the following: Year Ended December 31, 2012 2011 2010 (in thousands)Cash payments$46,767 $32,204 $39,893Commitment and agency fees paid1,450 1,456 1,151Amortization of premium and discount(463) — 15Amortization of deferred financing costs2,695 2,150 2,615Net change in accrued interest4,431 6,774 1,083Capitalized interest(1,314) (1,735) (3,517)Net interest expense$53,566 $40,849 $41,240As of December 31, 2012, 2011 and 2010, the weighted average interest rate of our variable rate debt was 2.70%, 2.72% and 1.78%, respectively.81Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Deferred Financing CostsA summary of deferred financing costs including cost capitalized, amortized, and written off in the determination of the loss on extinguishment ofdebt for the years ended December 31, 2012 and 2011 are presented in the table below (in thousands):Balance at December 31, 2010$7,806Capitalized costs16,485Amortization(2,150)Loss on extinguishment(7,370)Balance at December 31, 2011$14,771Capitalized costs4,552Amortization(2,695)Balance at December 31, 2012$16,628 NOTE 16. COMMITMENTS AND CONTINGENCIESOperating Lease ArrangementsWe lease certain property and equipment under non-cancelable operating leases that expire at various dates through 2019, with varying payment datesthroughout each month. In addition, we have a number of leases scheduled to expire during 2013.As of December 31, 2012, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands): LeasePayments2013$26,607201417,550201511,71520167,79720172,475Thereafter3,679 $69,823We are also party to a significant number of month-to-month leases that are cancelable at any time. Operating lease expense was $24.4 million, $26.6million, and $21.1 million for the years ended December 31, 2012, 2011 and 2010, respectively.LitigationVarious suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental UnitedStates and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. Wecontinually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and the need for disclosure of theseitems, if any. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable.As of December 31, 2012, the aggregate amount of our liabilities related to litigation that are deemed probable and reasonably estimable is $0.8 million. We donot believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded. Our liabilitiesrelated to litigation matters that were deemed probable and reasonably estimable as of December 31, 2011 were $1.1 million.82Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Patent SettlementIn June 2011, we agreed to accept $5.5 million in damages, related to the settlement of a KeyView® system patent infringement lawsuit, which waspaid in full in July 2011. We recognized related legal fees and other expenses of $1.4 million during the year ended December 31, 2011. The settlement amountwas recorded in general and administrative expenses on the consolidated statement of operations. The resolution of this matter did not have a material effect onour results of operations for the year ended December 31, 2011.Tax AuditsWe are routinely the subject of audits by tax authorities, and in the past have received material assessments from tax auditors. As of December 31,2012 and 2011, we have recorded reserves that management feels are appropriate for future potential liabilities as a result of prior audits. While we believe wehave fully reserved for these assessments, the ultimate amount of settlements can vary from our estimates.Self-Insurance ReservesWe maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarialmethod based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation,vehicular liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. Theretention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. As ofDecember 31, 2012 and 2011, we have recorded $69.4 million and $62.9 million, respectively, of self-insurance reserves related to workers’ compensation,vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $20.6 million and $17.0 million of insurancereceivables as of December 31, 2012 and 2011, respectively. 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 for existing claims.Environmental Remediation LiabilitiesFor environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, we recordliabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. As of December 31, 2012and 2011, we have recorded $4.5 million and $4.0 million respectively for our environmental remediation liabilities. We believe that the liabilities we haverecorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our SWD properties to comply withenvironmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required todivest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).83Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 17. ACCUMULATED OTHER COMPREHENSIVE LOSSThe components of our accumulated other comprehensive loss are as follows (in thousands): December 31, 2012 2011Foreign currency translation loss$(6,148) $(58,231)Accumulated other comprehensive loss$(6,148) $(58,231) Upon the completion of the sale of our Argentina operations on September 14, 2012, the accumulated foreign currency translation balance related toArgentina was reversed out of our accumulated other comprehensive loss and recorded as part of our 2012 loss from discontinued operations. Included in the2011 accumulated other comprehensive loss is $50.5 million related to the accumulated translation adjustment for our Argentina business.The local currency is the functional currency for our operations in Russia. As of December 31, 2011, the functional currency for Mexico, Russiaand Canada was the local currency and the functional currency for Colombia and the Middle East was the U. S. dollar. Due to significant changes ineconomic facts and circumstances, the functional currency for Mexico and Canada was changed to the U.S. dollar effective January 1, 2012. The cumulativetranslation gains and losses resulting from translating financial statements from the functional currency to U.S. dollars are included in other comprehensiveincome and accumulated in stockholders’ equity until a partial or complete sale or liquidation of our net investment in the entity.The table below summarizes the conversion ratios used to translate the financial statements and the cumulative currency translation gains and losses,net of tax, for each currency: Mexican Peso Canadian Dollar Euro Russian Rouble Total As of December 31,2012: Conversion ratio 13.01 : 1 1:00 : 1 0.76 : 1 30.44 : 1 n/aCumulative translationadjustment $(1,815)$(752)n/a$(3,581)$(6,148)As of December 31,2011: Conversion ratio 13.97 : 11.02 : 10.77 : 132.08 : 1n/aCumulative translationadjustment $(1,815) $(752) n/a $(3,403) $(5,970)NOTE 18. EMPLOYEE BENEFIT PLANSWe maintain a 401(k) plan as part of our employee benefits package. Late in the first quarter of 2009, management suspended the 401(k) matchingprogram as part of our cost reduction efforts. No matching contributions were made during 2010. We reinstated the 401(k) matching program effectiveJanuary 1, 2011. We match 100% of employee contributions up to 4% of the employee’s salary, which vest immediately, into our 401(k) plan, subject tomaximums of $10,000 for each of the years ended December 31, 2012 and 2011. Our matching contributions were $10.7 million and $8.8 million for theyears ended December 31, 2012 and 2011, respectively. We do not offer participants the option to purchase units of our common stock through a 401(k) planfund.84Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 19. STOCKHOLDERS’ EQUITYCommon StockAs of December 31, 2012 and 2011, we had 200,000,000 shares of common stock authorized with a par value of $0.10 per share, of which151,069,609 shares were issued and outstanding at December 31, 2012 and 150,733,022 shares were issued and outstanding at December 31, 2011. During2012, 2011 and 2010, no dividends were declared or paid. Under the terms of the Senior Notes and the 2011 Credit Facility, we must meet certain financialcovenants before we may pay dividends. We currently do not intend to pay dividends.Tax WithholdingWe repurchase shares of restricted common stock that have been previously granted to certain of our employees, pursuant to an agreement underwhich those individuals are permitted to sell shares back to us in order to satisfy the minimum income tax withholding requirements related to vesting of thesegrants. We repurchased a total of 482,951, 383,884 and 301,837 shares for an aggregate cost of $7.5 million, $5.7 million and $3.1 million during 2012,2011 and 2010, respectively, which represented the fair market value of the shares based on the price of our stock on the dates of purchase.Common Stock WarrantsOn May 12, 2009, in connection with the settlement of a lawsuit, we issued to two individuals warrants to purchase 174,000 shares of our commonstock at an exercise price of $4.56 per share. As of December 31, 2012, all of these warrants had been exercised.NOTE 20. SHARE-BASED COMPENSATION2012 Incentive PlanOn May 17, 2012, our stockholders approved the 2012 Equity and Cash Incentive Plan (the “2012 Incentive Plan”). The 2012 Incentive Plan isadministered by our board of directors or a committee designated by our board of directors (the “Committee”). Our board of directors or the Committee (the“Administrator”) will have the power and authority to select Participants (as defined below) in the 2012 Incentive Plan and grant Awards (as defined below) tosuch Participants pursuant to the terms of the 2012 Incentive Plan. The 2012 Incentive Plan expires May 17, 2022.Subject to adjustment, the total number of shares of our common stock, that will be available for the grant of Awards under the 2012 Incentive Planmay not exceed 4,000,000 shares; however, for purposes of this limitation, any stock subject to an Award that is canceled, forfeited, expires or otherwiseterminates without the issuance of stock, is settled in cash, or is exchanged with the Administrator's permission, prior to the issuance of stock, for an Awardnot involving stock, will again become available for issuance under the 2012 Incentive Plan. However, the full number of stock appreciation rights grantedthat are to be settled by the issuance of stock will count against the plan limit described above, regardless of the number of shares of stock actually issuedupon settlement of the stock appreciation rights. Shares of stock surrendered or withheld in payment of the exercise price of an option and shares of stockwithheld by the Company to satisfy tax withholding obligations will count against the plan limit described above. Subject to adjustment, no Participant will begranted, during any one year period, options to purchase common stock and/or stock appreciation rights with respect to more than 500,000 shares of commonstock. Stock available for distribution under the 2012 Incentive Plan will be authorized and unissued shares, treasury shares or shares we reacquire in anymanner.Awards may be in the form of stock options (incentive stock options and nonqualified stock options), restricted stock, restricted stock units,performance compensation awards and stock appreciation rights (collectively, "Awards"). Awards may be granted to employees, directors and, in some cases,consultants and those individuals whom the Administrator determines are reasonably expected to become employees, directors or consultants following thegrant date of the Award (“Participants”). However, incentive stock options may be granted only to employees.Our board of directors at any time, and from time to time, may amend or terminate the 2012 Incentive Plan. However, except as provided otherwise inthe 2012 Incentive Plan, no amendment will be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessaryto satisfy any applicable law or securities exchange listing requirements. Further, if the exercise price of an option, including an incentive stock option, exceedsthe fair market value of our common stock on a given date, the Committee has the authority to reduce the exercise price of such option to a new exercise pricethat is no less than the then-current fair market value of our common stock; provided that such action shall first have been approved by a vote of ourstockholders. The Administrator at any time, and from time to time, may amend the terms85Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) of any one or more Awards; however, if the amendment would constitute an impairment of the rights under any Award, we must request the consent of theParticipant and the Participant must consent in writing. It is expressly contemplated that the Board may amend the 2012 Incentive Plan in any respect ourboard of directors deem necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of theCode and the regulations promulgated thereunder relating to incentive stock options and/or to bring the 2012 Incentive Plan and/or Awards granted under it intocompliance therewith. As of December 31, 2012, there were 3.8 million shares available for grant under the 2012 Incentive Plan.2009 Incentive PlanOn June 4, 2009, our stockholders approved the 2009 Equity and Cash Incentive Plan (the “2009 Incentive Plan”). The 2009 Incentive Plan isadministered by our board of directors or the Committee. The Administrator will have the power and authority to select Participants in the 2009 Incentive Planand to grant Awards to such Participants pursuant to the terms of the 2009 Incentive Plan. The 2009 Incentive Plan expires June 4, 2019.Subject to adjustment, the total number of shares of our common stock available for the grant of Awards under the 2009 Incentive Plan may notexceed 4,000,000 shares; however, for purposes of this limitation, any stock subject to an Award that is canceled, forfeited or expires prior to exercise orrealization will again become available for issuance under the 2009 Incentive Plan. Subject to adjustment, no Participant will be granted, during any one yearperiod, options to purchase 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. All awards under the 2009Incentive Plan are granted at fair market value on the date of issuance.Awards may be granted to employees, directors and, in some cases, consultants and those individuals whom the Administrator determines arereasonably expected to 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 Board’s discretion but are generally set at two to four years. Awards to our directors aregenerally not subject to vesting.Our board of directors at any time, and from time to time, may amend or terminate the 2009 Incentive Plan. However, no repricing of stock optionsis permitted unless approved by our stockholders, and, except as provided otherwise in the 2009 Incentive Plan, no other amendment will be effective unlessapproved by our stockholders to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As ofDecember 31, 2012, there were 0.5 million shares available for grant under the 2009 Incentive Plan.86Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 2007 Incentive PlanOn December 6, 2007, our stockholders approved the 2007 Equity and Cash Incentive Plan (the “2007 Incentive Plan”). The 2007 Incentive Plan issubstantially similar to the 2009 Incentive Plan except for certain differences related to treatment of Awards at retirement and transferability of Awards at death.The 2007 Incentive Plan expires December 6, 2017.Subject to adjustment, the total number of shares of our common stock that are available for the grant of Awards under the 2007 Incentive Plan maynot exceed 4,000,000 shares; however, for purposes of this limitation, any stock subject to an award that is canceled, forfeited or expires prior to exercise orrealization will again become available for issuance under the 2007 Incentive Plan.Our board of directors at any time, and from time to time, may amend or terminate the 2007 Incentive Plan. However, except as provided otherwise inthe 2007 Incentive Plan, no amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy anyapplicable law or securities exchange listing requirements. As of December 31, 2012, there were 0.1 million shares available for grant under the 2007 IncentivePlan.Stock Option AwardsStock option awards granted under our incentive plans have a maximum contractual term of ten years from the date of grant. Shares issuable uponexercise of a stock option are issued from authorized but unissued shares of our common stock. The following tables summarize the stock option activity andcertain options granted in prior years that were outside the 1997 Incentive Plan (shares in thousands): Year Ended December 31, 2012 Options Weighted AverageExercise Price Weighted AverageFair ValueOutstanding at beginning of period2,137 $13.87 $5.84Granted— $— $—Exercised(114) $9.76 $4.83Cancelled or expired(203) $14.68 $5.91Outstanding at end of period1,820 $14.04 $5.91Exercisable at end of period1,820 $14.04 $5.91 Year Ended December 31, 2011 Options Weighted AverageExercise Price Weighted AverageFair ValueOutstanding at beginning of period2,816 $13.52 $5.72Granted— $— $—Exercised(647) $12.29 $5.31Cancelled or expired(32) $13.89 $5.86Outstanding at end of period2,137 $13.87 $5.84Exercisable at end of period2,126 $13.92 $5.87 Year Ended December 31, 2010 Options Weighted AverageExercise Price Weighted AverageFair ValueOutstanding at beginning of period3,895 $12.90 $5.62Granted— $— $—Exercised(454) $8.51 $4.83Cancelled or expired(625) $13.28 $5.77Outstanding at end of period2,816 $13.52 $5.72Exercisable at end of period2,790 $13.60 $5.7687Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following tables summarize information about the stock options outstanding at December 31, 2012 and certain options granted in prior yearsthat were outside the 1997 Incentive Plan (shares in thousands): Options Outstanding WeightedAverageRemainingContractual Life(Years) Number ofOptionsOutstanding Weighted AverageExercise Price Weighted AverageFair ValueRange of exercise prices: $3.87 - $8.005.92 10 $3.96 $1.70$8.01 - $9.370 — $— $—$9.38 - $13.101.96 462 $10.79 $5.45$13.11 - $15.054.00 715 $14.61 $6.49$15.06 - $19.425.27 633 $15.26 $5.65 1,820 $14.04 $5.91Aggregate intrinsic value(in thousands) $30 Options Exercisable Number ofOptionsExercisable Weighted AverageExercise Price Weighted AverageFair ValueRange of exercise prices: $3.87 - $8.00 10 $3.96 $1.70$8.01 - $9.37 — $— $—$9.38 - $13.10 462 $10.79 $5.45$13.11 - $15.05 715 $14.61 $6.49$15.06 - $19.42 633 $15.26 $5.65 1,820 $14.04 $5.91Aggregate intrinsic value (in thousands) $30 We did not grant any stock options during the years ended December 31, 2012, 2011 and 2010. The total fair value of stock options vested duringthe year ended December 31, 2012 was $0.1 million. For each of the years ended December 31, 2012, 2011 and 2010, we recognized less than $0.1 million, inpre-tax expense related to stock options. We recognized tax benefits of less than $0.1 million, related to our stock options for each of the years endedDecember 31, 2012, 2011 and 2010. All of the stock option awards were vested as of December 31, 2012. The weighted average remaining contractual term forstock option awards exercisable as of December 31, 2012 is 3.9 years. The intrinsic value of the options exercised for the years ended December 31, 2012,2011 and 2010 was $0.6 million, $3.0 million and $4.0 million, respectively. Cash received from the exercise of options for the year ended December 31,2012, was $0.9 million with recognition of associated tax benefits in the amount of $0.1 million.88Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Common Stock AwardsThe total fair market value of all common stock awards granted during the years ended December 31, 2012, 2011 and 2010 was $14.9 million,$18.4 million and $17.9 million, respectively.The following tables summarize information for the years ended December 31, 2012, 2011 and 2010 about the common share awards that we haveissued (shares in thousands): Year Ended December 31, 2012 Outstanding Weighted AverageIssuance Price Vested Weighted AverageIssuance PriceShares at beginning of period5,874 $8.78 2,876 $6.27Shares issued during period(1)1,106 $13.50 153 $10.29Previously issued shares vesting during period— $— 1,837 $7.98Shares cancelled during period(337) $13.13 — $—Shares repurchased during period(483) $15.42 (483) $15.42Shares at end of period6,160 $8.87 4,383 $6.12 Year Ended December 31, 2011 Outstanding Weighted AverageIssuance Price Vested Weighted AverageIssuance PriceShares at beginning of period5,027 $7.98 1,913 $8.41Shares issued during period(1)1,370 $13.43 101 $1.18Previously issued shares vesting during period— $— 1,246 $5.99Shares cancelled during period(139) $9.43 — $—Shares repurchased during period(384) $14.68 (384) $14.68Shares at end of period5,874 $8.78 2,876 $6.27 Year Ended December 31, 2010 Outstanding Weighted AverageIssuance Price Vested Weighted AverageIssuance PriceShares at beginning of period3,679 $7.14 1,094 $13.70Shares issued during period(1)1,804 $9.90 153 $1.28Previously issued shares vesting during period— $— 968 $4.13Shares cancelled during period(154) $5.94 — $—Shares repurchased during period(302) $10.24 (302) $10.24Shares at end of period5,027 $7.98 1,913 $8.41 (1)Includes 153,063 shares, 99,999 shares and 109,410 shares of common stock issued to our non-employee directors that vested immediately uponissuance during 2012, 2011 and 2010, respectively.For common stock grants that vest immediately upon issuance, we record expense equal to the fair market value of the shares on the date of grant.For common stock awards that do not immediately vest, we recognize compensation expense ratably over the graded vesting period of the grant, net ofestimated and actual forfeitures. For the years ended December 31, 2012, 2011 and 2010, we recognized $11.7 million, $15.6 million and $10.6 million,respectively, of pre-tax expense from continuing operations associated with common stock awards, including common stock grants to our outside directors. Inconnection with the expense related to common stock awards recognized during the year ended December 31, 2012, we recognized tax benefits of $4.2 million.Tax benefits for the years ended December 31, 2011 and 2010 were $6.0 million and $4.1 million, respectively. For the unvested common stock awardsoutstanding as of December 31, 2012, we anticipate that we will recognize $13.7 million of pre-tax expense over the next 0.8 years.89Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Performance UnitsOn January 16, 2012, the Compensation Committee of our board of directors adopted the 2012 Performance Unit Plan (the “2012 PU Plan”).Performance units provide a cash incentive award, the unit value of which is determined with reference to our common stock. We believe that the 2012 PUPlan will enable us to obtain and retain employees who will contribute to our long term success by providing compensation that is linked directly to increasesin share value.In January 2012, we issued 0.1 million performance units to our officers under the 2009 Equity and Cash Incentive Plan. Additionally, inFebruary 2012, we issued 0.1 million performance units to certain of our employees under the 2012 PU Plan. The performance units are measured based ontwo performance periods from January 1, 2012 to December 31, 2012 and from January 1, 2013 to December 31, 2013. One half of the performance units aremeasured based on the first performance period, and the other half are measured based on the second performance period. The number of performance unitsthat may be earned by a participant is determined at the end of each performance period based on the relative placement of Key's total stockholder return forthat period within the peer group, as follows:Company Placement for the Performance Period Percentile Ranking inPeer Group Performance Units Earned asa Percentage of TargetFirst 100%% 200%%Second 91%% 180%%Third 82%% 160%%Fourth 73%% 140%%Fifth 64%% 120%%Sixth 55%% 100%%Seventh 45%% 75%%Eighth 36%% 50%%Ninth 27%% 25%%Tenth 18%% —%%Eleventh 9%% —%%Twelfth —%% —%%If any performance units vest for a given performance period, the award holder will be paid a cash amount equal to the vested percentage of theperformance units multiplied by the closing stock price of our common stock on the last trading day of the performance period. We account for theperformance units as a liability-type award as they are settled in cash. As of December 31, 2012, the fair value of outstanding performance units was $1.4million, and is being accreted to compensation expense over the vesting terms of the awards. As of December 31, 2012, the unrecognized compensation costrelated to our unvested performance units is estimated to be $0.3 million and is expected to be recognized over a weighted-average period of 1.0 years.During March 2010, we issued a total of 0.6 million performance units to certain of our employees and officers. The performance units are measuredbased on two performance periods. One half of the performance units are measured based on a performance period consisting of the first year after the grantdate, and the other half are measured based on a performance period consisting of the second year after the grant date. At the end of each performance period,100%, 50%, or 0% of an individual’s performance units for that period will vest, based on the relative placement of our total shareholder return within a peergroup consisting of Key and five other companies. If we are in the top third of the peer group, 100% of the performance units will vest; if we are in the middlethird, 50% will vest; and if we are in the bottom third, the performance units will expire unvested and no payment will be made. If any performance units vestfor a given performance period, the award holder will be paid a cash amount equal to the vested percentage of the performance units multiplied by the closingprice of our common stock on the last trading day of the performance period. We account for the performance units as a liability-type award as they are settledin cash. As of December 31, 2012, none of the performance units issued in March 2010 were outstanding.90Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 on the anniversary date of the grant equal tothe fair market value of the Phantom Shares vesting on that date. Grantees are not permitted to defer this payment to a later date. The Phantom Shares are a“liability” type award and we account for these awards at fair value. We recognize compensation expense related to the Phantom Shares based on the change inthe fair value of the awards during the period and the percentage of the service requirement that has been performed, net of estimated and actual forfeitures,with an offsetting liability recorded on our consolidated balance sheets. We recognized less than $0.1 million pre-tax compensation benefit from continuingoperation, associated with the Phantom Shares for the year end December 31, 2012, and $0.3 million and $1.1 million of pre-tax compensation expense fromcontinuing operations, associated with the Phantom Shares for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2012, noPhantom Shares were outstanding. We recognized income tax benefit associated with the Phantom Shares of less than $0.1 million in 2012. We recognized income tax benefits associatedwith the Phantom Shares of $0.1 million and $0.4 million in 2011 and 2010, respectively. During 2012, cash payments related to the Phantom Shares totaled$0.5 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 of grant. The vestingof all outstanding SAR awards was accelerated during the fourth quarter of 2008. Upon the exercise of a SAR, the recipient will receive an amount equal to thedifference between the exercise price and the fair market value of a share of our common stock on the date of exercise, multiplied by the number of shares ofcommon stock for which the SAR was exercised. All payments will be made in shares of our common stock. Prior to exercise, the SAR does not entitle therecipient to receive any shares of our common stock and does not provide the recipient with any voting or other stockholders’ rights. We account for theseSARs as equity awards and recognize compensation expense ratably over the vesting period of the SAR based on their fair value on the date of issuance, net ofestimated and actual forfeitures. We did not recognize any expense associated with these awards during 2012, 2011 and 2010. We forfeited less than $0.1million SARs during 2012. As of December 31, 2012, 0.3 million SARs remain unexercised.91Table of ContentsIndex to Financial StatementsNOTE 21. 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 retention loans areforgiven over various time periods so long as the employee continues their employment with us. The relocation loans are repaid upon the employee selling theirprior residence. As of December 31, 2012, we did not have any employee loans and advance outstanding. As of December, 2011, these loans, in the aggregate,totaled less than $0.1 million.Transactions with AffiliatesAs discussed in “Note 2. Acquisitions”, in October 2010, we acquired certain subsidiaries, together with associated assets, from OFS, an oilfieldservices company owned by ArcLight Capital Partners, LLC. At the time of the acquisition, OFS conducted business with companies owned by a formerowner and employee of an OFS subsidiary that we purchased. Subsequent to the acquisition, we continued to provide services to these companies. The pricescharged to these companies for our services are at rates that are equivalent to the prices charged to our other customers in the U.S. market. As of December 31,2012 and 2011, our receivables from these related parties totaled $0.2 million. Revenues from these customers for the years ended December 31, 2012 and2011 were $2.7 million and $2.7 million, respectively. Revenue from these customers since the date of acquisition through the year ended December 31, 2010were $1.3 million.We provide services to an exploration and production company owned by one of our former employees. The prices charged to this company for theseservices are at rates that are an average of the prices charged to other customers in the California market where the services are provided. As of December 31,2012 and 2011, our receivables from this company totaled $0.2 million and $0.5 million, respectively. Revenues from this company totaled $5.1 million,$5.2 million and $4.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.Board of Director RelationshipsA member of our board of directors is the Senior Vice President, General Counsel and Chief Administrative Officer of Anadarko PetroleumCorporation (“Anadarko”), which is one of our customers. Sales to Anadarko were $37.0 million, $37.2 million and $49.4 million for the years endedDecember 31, 2012, 2011 and 2010, respectively. Receivables outstanding from Anadarko were $3.5 million and $5.1 million as of December 31, 2012 and2011, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.A former member of our board of directors who resigned in May 2011 is a member and managing director of the general partner of the indirectmajority owner of one of our customers. Sales to this customer were $0.4 million, $1.0 million and $0.4 million for the years ended December 31, 2012, 2011and 2010, respectively. Receivables outstanding from this customer were less than $0.1 million as of December 31, 2012 and 2011. Transactions with thiscustomer are made on terms consistent with other customers. A member of our board of directors serves on the United States Advisory Board of the Alexander Proudfoot practice of Management ConsultingGroup PLC (“Proudfoot”), which provided consulting services to us during 2012 and 2011 related to our general and administrative cost restructuringinitiative. Payments to Proudfoot were $1.9 million and $4.1 million for the years ended December 31, 2012 and December 31, 2011, respectively. There wereno payments made to Proudfoot in the year ended December 31, 2010.92Table of ContentsIndex to Financial StatementsNOTE 22. SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, 2012 2011 2010 (in thousands)Noncash investing and financing activities: Sale of Argentina operations/Notes receivable$12,955 $— $—Common stock issued in acquisition— 117,919 153,963Asset retirement obligations— 741 1,023Supplemental cash flow information: Cash paid for interest$48,217 $35,354 $41,763Cash paid for taxes$13,148 $63,680 $4,610Tax refunds$18,681 $27,206 $56,154Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations, and commitment and agency fees paid.NOTE 23. SEGMENT INFORMATION Our operating segments are U.S. and International. We also have a “Functional Support” segment associated with managing each of our reportableoperating segments. Our domestic rig services, fluid management services, fishing and rental services, and coiled tubing services (formerly interventionservices) are aggregated within our U.S. reportable segment. Our international rig services business and our Canadian technology development group areaggregated within our International reportable segment. We evaluate the performance of our operating segments based on revenue and income measures. Allinter-segment sales pricing is based on current market conditions. The following is a description of the segments:U.S. SegmentRig ServicesOur rig-based services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, wellmaintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gasproducers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes andcapabilities, allowing us to service all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietary KeyView® technology,which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crews tobetter monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through aworkover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing thesezones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in thecompletion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of thecompletion.The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consumingthan normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateralwellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wellsfor enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to severalweeks, depending on the complexity of the workover.Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of thesemaintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores,and pulling rods and other downhole equipment from wellbores to93Table of ContentsIndex to Financial Statementsidentify and resolve production problems. Maintenance services are generally less complicated than completion and workover related services and require lesstime to perform.Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These pluggingand abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is notsignificantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.Fluid Management ServicesWe provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover andmaintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site andtransported for disposal in saltwater disposal (“SWD”) wells owned by us or a third party. In addition, we operate a fleet of hot oilers capable of pumpingheated fluids used to clear soluble restrictions in a wellbore. Demand and pricing for these services generally correspond to demand for our well service rigs.Coiled Tubing ServicesCoiled tubing services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells toperform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemicaltreatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, andvarious other pre- and post- hydraulic fracturing well preparation services.Fishing and Rental ServicesWe offer a full line of services and rental equipment designed for use in providing both onshore and offshore drilling and workover services. Fishingservices involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe,tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels,reversing units and foam air units. As a result of the 2011 acquisition of Edge, our rental inventory also includes frac stack equipment used to support hydraulic fracturing operationsand the associated flowback of frac fluids, proppants, oil and natural gas. We also provide well testing services.Demand for our fishing and rental services is also closely related to capital spending by oil and natural gas producers, which is generally a functionof oil and natural gas prices.International SegmentOur International segment includes operations in Mexico, Colombia, the Middle East and Russia. In addition, we have a technology development andcontrol systems business based in Canada. Also, prior to the sale of our Argentina business in the third quarter of 2012, we operated in Argentina. We arereporting the results of our Argentina business as discontinued operations for all periods presented. We provide rig-based services such as the maintenance,workover, recompletion of existing oil wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of their useful lives in eachof our international markets.In addition, in Mexico we provide drilling, coiled tubing, wireline and project management and consulting services. Our work in Mexico also requiresus to provide third party services which varies in scope by project.In the Middle East, we operate in the Kingdom of Bahrain and during the third quarter of 2012, we began operations in Oman. Our business inBahrain is currently conducted through a joint venture in which we have a controlling interest.Through our joint venture operations in Russia, we provide drilling, workover, and reservoir engineering services.Also included in our International segment is our technology development and control systems business based in Canada. This business is focusedon the development of hardware and software related to oilfield service equipment controls, data acquisition and digital information flow.94Table of ContentsIndex to Financial StatementsFunctional Support SegmentOur Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and Internationalreporting segments. The following table presents our segment information as of and for the years ended December 31, 2012, 2011 and 2010 (in thousands):As of and for the year ended December 31, 2012 U.S. International FunctionalSupport2 ReconcilingEliminations TotalRevenues from external customers$1,626,768 $333,302 $— $— $1,960,070Intersegment revenues43,867 6,273 15 (50,155) —Depreciation and amortization182,502 19,643 11,638 — 213,783Other operating expenses1,158,925 250,667 129,749 — 1,539,341Operating income (loss)285,341 62,992 (141,387) — 206,946Interest expense, net of amounts capitalized17 172 53,377 — 53,566Income (loss) from continuing operationsbefore tax285,846 68,036 (193,853) — 160,029Long-lived assets11,724,239 334,329 286,369 (173,143) 2,171,794Total assets2,513,688 541,882 153,665 (447,647) 2,761,588Capital expenditures, excluding acquisitions248,023 171,095 28,042 — 447,160As of and for the year ended December 31, 2011 U.S. International FunctionalSupport2 ReconcilingEliminations TotalRevenues from external customers$1,530,087 $199,124 $— $— $1,729,211Intersegment revenues7,870 9,481 707 (18,058) —Depreciation and amortization142,257 13,515 11,174 — 166,946Other operating expenses1,030,224 146,688 131,577 — 1,308,489Operating income (loss)357,606 38,921 (142,751) — 253,776Loss on early extinguishment of debt— — 46,451 — 46,451Interest expense, net of amounts capitalized37 18 40,794 — 40,849Income (loss) from continuing operationsbefore tax358,072 41,936 (224,555) — 175,453Long-lived assets11,851,148 223,034 233,739 (309,364) 1,998,557Total assets2,330,061 414,780 394,864 (540,585) 2,599,120Capital expenditures, excluding acquisitions298,342 45,045 15,710 — 359,09795Table of ContentsIndex to Financial StatementsAs of and for the year ended December 31, 2010 U.S. International FunctionalSupport2 ReconcilingEliminations TotalRevenues from external customers$961,244 $101,351 $— $— $1,062,595Intersegment revenues9,685 — — (9,685) —Depreciation and amortization109,551 13,458 10,889 — 133,898Other operating expenses719,406 98,388 114,835 — 932,629Operating (loss) income132,287 (10,495) (125,724) — (3,932)Interest expense, net of amounts capitalized(1,321) (536) 43,097 — 41,240Income (loss) from continuing operationsbefore tax132,742 (7,905) (167,202) (42,365)Long-lived assets11,178,970 171,957 181,023 (53,034) 1,478,916Total assets1,475,593 319,755 479,913 (382,325) 1,892,936Capital expenditures, excluding acquisitions132,058 14,301 33,951 — 180,310 (1)Long lived assets include: fixed assets, goodwill, intangibles and other assets.(2)Functional Support is geographically located in the United States.NOTE 24. UNAUDITED QUARTERLY RESULTS OF OPERATIONSSet forth below is unaudited summarized quarterly information for the two most recent years covered by these consolidated financial statements (inthousands, except for per share data): First Quarter Second Quarter Third Quarter Fourth QuarterYear Ended December 31, 2012: Revenues$486,751 $515,997 $490,851 $466,471Direct operating expenses311,497 343,996 335,799 317,553Income from continuing operations33,481 31,699 23,190 14,307Net loss (income)2,576 29,245 (37,019) 14,307Income (loss) attributable to Key3,190 29,041 (38,094) 13,485Earnings (loss) per share(1): Basic and Diluted0.02 0.19 (0.25) 0.09 First Quarter Second Quarter Third Quarter Fourth QuarterYear Ended December 31, 2011: Revenues$364,364 $414,587 $468,542 $481,718Direct operating expenses247,980 261,269 285,804 290,137Loss on early extinguishment of debt46,451 — — —(Loss) Income from continuing operations(16,789) 40,347 45,746 42,032Net (loss) income(18,712) 36,360 43,438 39,569(Loss) income attributable to Key(18,135) 36,080 44,168 39,348(Loss) earnings per share(1): Basic and Diluted(0.13) 0.25 0.30 0.26 (1)Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quartersmay not equal annual earnings per common share.96Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 25. CONDENSED CONSOLIDATING FINANCIAL STATEMENTSOur 2021 Notes are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly owned. The guarantees are joint and several,full, complete and unconditional. There are no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information.CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2012 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Assets: Current assets$66,435 $469,049 $54,310 $— $589,794Property and equipment, net— 1,329,379 107,295 — 1,436,674Goodwill— 597,458 29,023 — 626,481Deferred financing costs, net16,628 — — — 16,628Intercompany notes and accounts receivableand investment in subsidiaries3,298,679 1,108,231 (20,371) (4,386,539) —Other assets8,068 39,696 44,247 — 92,011TOTAL ASSETS$3,389,810 $3,543,813 $214,504 $(4,386,539) $2,761,588Liabilities and equity: Current liabilities$46,632 $226,773 $31,691 $— $305,096Long-term debt and capital leases, less currentportion848,110 — — — 848,110Intercompany notes and accounts payable947,700 2,590,398 14,138 (3,552,236) —Deferred tax liabilities258,528 6,781 (746) (5,110) 259,453Other long-term liabilities1,528 60,068 1 — 61,597Equity1,287,312 659,793 169,420 (829,193) 1,287,332TOTAL LIABILITIES AND EQUITY$3,389,810 $3,543,813 $214,504 $(4,386,539) $2,761,58897Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) December 31, 2011 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Assets: Current assets$67,027 $431,829 $101,707 $— $600,563Property and equipment, net— 1,126,013 71,287 — 1,197,300Goodwill— 595,049 27,724 — 622,773Deferred financing costs, net14,771 — — — 14,771Intercompany notes and accounts receivableand investment in subsidiaries2,896,684 896,086 (947) (3,791,823) —Other assets104 99,098 41,628 — 140,830Non-Current assets held for sale——22,883— 22,883TOTAL ASSETS$2,978,586 $3,148,075 $264,282 $(3,791,823) $2,599,120Liabilities and equity: Current liabilities$77,077 $146,113 $66,313 $— $289,503Long-term debt and capital leases, less currentportion773,573 402 — — 773,975Intercompany notes and accounts payable720,033 2,309,733 61,823 (3,091,589) —Deferred tax liabilities191,206 69,822 44 — 261,072Other long-term liabilities2,066 57,873 — — 59,939Equity1,214,631 564,132 136,102 (700,234) 1,214,631TOTAL LIABILITIES AND EQUITY$2,978,586 $3,148,075 $264,282 $(3,791,823) $2,599,12098Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2012 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$15 $1,867,198 $165,248 $(72,391) $1,960,070Direct operating expense— 1,254,087 117,293 (62,535) 1,308,845Depreciation and amortization expense— 205,755 8,028 — 213,783General and administrative expense1,046 216,069 24,853 (11,472) 230,496Operating (loss) income(1,031) 191,287 15,074 1,616 206,946Interest expense, net of amounts capitalized54,690 (1,292) 170 (2) 53,566Other income, net(5,500) (1,474) (3,142) 3,467 (6,649)(Loss) income from continuing operations beforetaxes(50,221) 194,053 18,046 (1,849) 160,029Income tax expense(48,893) (3,385) (5,073) (1) (57,352)(Loss) income from continuing operations(99,114) 190,668 12,973 (1,850) 102,677Discontinued operations— — (93,568) — (93,568)Net (loss) income(99,114) 190,668 (80,595) (1,850) 9,109Loss attributable to noncontrolling interest— — 1,487 — 1,487(LOSS) INCOME ATTRIBUTABLE TOKEY$(99,114) $190,668 $(82,082) $(1,850) $7,622 Year Ended December 31, 2011 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$707 $1,660,801 $106,289 $(38,586) $1,729,211Direct operating expense— 1,036,071 76,140 (27,021) 1,085,190Depreciation and amortization expense— 160,884 6,062 — 166,946General and administrative expense1,178 211,207 18,550 (7,636) 223,299Operating (loss) income(471) 252,639 5,537 (3,929) 253,776Loss on early extinguishment of debt46,451 — — — 46,451Interest expense, net of amounts capitalized42,551 (1,713) 13 (2) 40,849Other expense (income), net(6,351) 1,772 (638) (3,760) (8,977)(Loss) income from continuing operations beforetaxes(83,122) 252,580 6,162 (167) 175,453Income tax (expense) benefit(61,130) (3,287) 300 — (64,117)(Loss) income from continuing operations(144,252) 249,293 6,462 (167) 111,336Discontinued operations— — (10,681) — (10,681)Net (loss) income(144,252) 249,293 (4,219) (167) 100,655Loss attributable to noncontrolling interest— — (806) — (806)(LOSS) INCOME ATTRIBUTABLE TOKEY$(144,252) $249,293 $(3,413) $(167) $101,46199Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2010 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Revenues$— $1,009,261 $106,916 $(53,582) $1,062,595Direct operating expense— 664,387 123,624 (41,570) 746,441Depreciation and amortization expense— 127,550 6,348 — 133,898General and administrative expense3,618 173,274 13,434 (4,138) 186,188Operating income (loss)(3,618) 44,050 (36,490) (7,874) (3,932)Interest expense, net of amounts capitalized44,707 (3,390) (77) — 41,240Other income, net(1,243) (1,404) 9,051 (9,211) (2,807)(Loss) income from continuing operations beforetaxes(47,082) 48,844 (45,464) 1,337 (42,365)Income tax benefit8,175 — 9,786 — 17,961(Loss) income from continuing operations(38,907) 48,844 (35,678) 1,337 (24,404)Discontinued operations— 105,745 (10,992) — 94,753Net (loss) income(38,907) 154,589 (46,670) 1,337 70,349Loss attributable to noncontrolling interest— — (3,146) — (3,146)(LOSS) INCOME ATTRIBUTABLE TOKEY$(38,907) $154,589 $(43,524) $1,337 $73,495100Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2012 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Net cash provided by operating activities$— $349,208 $20,452 $— $369,660Cash flows from investing activities: Capital expenditures— (430,045) (17,115) — (447,160)Intercompany notes and accounts676 49,926 — (50,602) —Other investing activities, net(676) 19,127 — — 18,451Net cash used in investing activities— (360,992) (17,115) (50,602) (428,709)Cash flows from financing activities: Proceeds from long-term debt205,000 — — — 205,000Repayment of capital lease obligations— (1,959) — — (1,959)Proceeds from borrowings on revolving creditfacility275,000 — — — 275,000Repayments on revolving credit facility(405,000) — — — (405,000)Payment of deferred financing costs(4,597) — — — (4,597)Repurchases of common stock(7,519) — — — (7,519)Intercompany notes and accounts(49,926) (676) — 50,602 —Other financing activities, net4,986 8,035 — — 13,021Net cash provided by financing activities17,944 5,400 — 50,602 73,946Effect of changes in exchange rates on cash— — (4,391) — (4,391)Net increase (decrease) in cash and cashequivalents17,944 (6,384) (1,054) — 10,506Cash and cash equivalents at beginning ofperiod21,673 7,985 5,785 — 35,443Cash and cash equivalents at end of period$39,617 $1,601 $4,731 $— $45,949 101Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2011ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated(in thousands)Net cash provided by operating activities$— $187,597 $708 $— $188,305Cash flows from investing activities: Capital expenditures— (345,215) (13,882) — (359,097)Acquisitions, net of cash acquired— (187,058) — — (187,058)Intercompany notes and accounts— 278,511 — (278,511) —Other investing activities, net— 26,065 — — 26,065Net cash used in investing activities— (227,697) (13,882) (278,511) (520,090)Cash flows from financing activities: Repayments of long-term debt(421,427) — — — (421,427)Payment of bond tender premium(39,082) — — — (39,082)Proceeds from long term debt475,000 — — — 475,000Repayments of capital lease obligations— (4,016) — — (4,016)Proceeds from borrowings on revolving creditfacility418,000 — — — 418,000Repayments on revolving credit facility(123,000) — — — (123,000)Payment of deferred financing cost(16,485) — — — (16,485)Repurchases of common stock(5,681) — — — (5,681)Intercompany notes and accounts(278,511) — — 278,511 —Other financing activities, net12,859 9,128 788 — 22,775Net cash provided by financing activities21,673 5,112 788 278,511 306,084Effect of changes in exchange rates on cash— — 4,516 — 4,516Net increase (decrease) in cash21,673 (34,988) (7,870) — (21,185)Cash and cash equivalents at beginning ofperiod— 42,973 13,655 — 56,628Cash and cash equivalents at end of period$21,673 $7,985 $5,785 $— $35,443 102Table of ContentsIndex to Financial StatementsKey Energy Services, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year Ended December 31, 2010 ParentCompany GuarantorSubsidiaries Non-GuarantorSubsidiaries Eliminations Consolidated (in thousands)Net cash provided by operating activities$— $121,551 $8,254 $— $129,805Cash flows from investing activities: Capital expenditures— (169,443) (10,867) — (180,310)Proceeds from sale of fixed assets—258,202——258,202Acquisitions, net of cash acquired—(86,688)——(86,688)Intercompany notes and accounts(165)(84,742)—84,907—Other investing activities, net165———165Net cash provided by (used in) investingactivities— (82,671) (10,867) 84,907 (8,631)Cash flows from financing activities: Repayments of long-term debt—(6,970)——(6,970)Repayments of capital lease obligations—(8,493)——(8,493)Proceeds from borrowings on revolvingcredit facility110,000———110,000Repayments on revolving credit facility(197,813)———(197,813)Repurchases of common stock(3,098)———(3,098)Intercompany notes and accounts84,742165—(84,907)—Other financing activities, net6,169———6,169Net cash used in financing activities— (15,298) — (84,907) (100,205)Effect of changes in exchange rates on cash——(1,735)—(1,735)Net (decrease) increase in cash— 23,582 (4,348) — 19,234Cash and cash equivalents, beginning ofperiod—19,39118,003—37,394Cash and cash equivalents, end of period$— $42,973 $13,655 $— $56,628ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. 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 required to be disclosed inour reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management,including our principal executive officer and principal financial 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 the effectiveness of ourdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the103Table of ContentsIndex to Financial StatementsExchange Act) as of the end of the period covered by this report. Based on such evaluation, our principal executive and financial officers have concluded thatour disclosure 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 over financialreporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and proceduresthat (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect onthe financial statements.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherentlimitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment andbreakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override.Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financialreporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of thefinancial 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 Rule 12b-2 under the Exchange Act) 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 will not be prevented ordetected on a timely basis.Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2012. In making thisassessment, management used the criteria described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31,2012.Our internal control over financial reporting has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated intheir report included herein.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting during our last fiscal quarter of 2012, that materially affected, or arereasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATIONNot applicable.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 10 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect to filethe definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2012. ITEM 11. EXECUTIVE COMPENSATIONItem 11 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect to filethe definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2012.104Table of ContentsIndex to Financial StatementsITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSItem 12 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect to filethe definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2012. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEItem 13 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect to filethe definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2012.ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESItem 14 is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. We expect to filethe definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2012.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 52.2. We have omitted all financial statement schedules because they are not required or are not applicable, or the required information is shown inthe financial statements or the notes to the financial statements.3. ExhibitsThe Exhibit Index, which follows the signature pages to this report and is incorporated by reference herein, sets forth a list of exhibits to thisreport.105Table of ContentsIndex to Financial StatementsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.KEY ENERGY SERVICES, INC. By: /s/ T.M. WHICHARD III T.M. Whichard III, Senior Vice President and Chief Financial Officer(As duly authorized officer andPrincipal Financial Officer)Date: February 25, 2013POWER OF ATTORNEYEach person whose signature appears below hereby constitutes and appoints Richard J. Alario and T.M. Whichard III, and each of them, his true andlawful attorney-in-fact and agent, with full powers of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and allamendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission granting to said attorneys-in-fact, and each of them, full power and authority to perform any other act on behalf of theundersigned required to be done in connection therewith.106Table of ContentsIndex to Financial StatementsPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant in their capacities and on February 25, 2013.Signature Title /s/ RICHARD J. ALARIO Chairman of the Board of Directors, President and ChiefRichard J. Alario Executive Officer (Principal Executive Officer) /s/ T.M. WHICHARD III Senior Vice President and Chief Financial Officer (PrincipalT.M. Whichard III Financial Officer) /s/ MARK A. COX Vice President and Controller (Principal Accounting Officer)Mark A. Cox /s/ LYNN R. COLEMAN DirectorLynn R. Coleman /s/ KEVIN P. COLLINS DirectorKevin P. Collins /s/ WILLIAM D. FERTIG DirectorWilliam D. Fertig /s/ W. PHILLIP MARCUM DirectorW. Phillip Marcum /s/ RALPH S. MICHAEL, III DirectorRalph S. Michael, III /s/ WILLIAM F. OWENS DirectorWilliam F. Owens /s/ ROBERT K. REEVES DirectorRobert K. Reeves /s/ J. ROBINSON WEST DirectorJ. Robinson West /s/ ARLENE M. YOCUM DirectorArlene M. Yocum 107Table of ContentsIndex to Financial StatementsEXHIBIT INDEXExhibit No.Description 2.1 Asset Purchase Agreement, dated as of July 2, 2010, by and among Key Energy Pressure Pumping Services, LLC, KeyElectric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as UniversalPressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K filed on July 6, 2010, File No. 001-08038.) 2.2Amending Letter Agreement, dated September 1, 2010, by and among Key Energy Pressure Pumping Services, LLC, KeyElectric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as UniversalPressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’sQuarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, File No. 001-08038) 2.3 Amending Letter Agreement, dated October 1, 2010, by and among Key Energy Pressure Pumping Services, LLC, KeyElectric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as UniversalPressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.3 of the Company’sQuarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, File No. 001-08038) 2.4 Purchase and Sale Agreement, dated as of July 23, 2010, by and among OFS Holdings, LLC, a Delaware limited liabilitycompany, OFS Energy Services, LLC, a Delaware limited liability company, Key Energy Services, Inc., a Marylandcorporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporated by reference to Exhibit 2.1of the Company’s Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) 2.5 Amendment No. 1 to Purchase and Sale Agreements, dated as of August 27, 2010, by and among OFS Holdings, LLC, aDelaware limited liability company, OFS Energy Services, LLC, a Delaware limited liability company, Key EnergyServices, Inc., a Maryland corporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporatedby reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) 2.6 Amendment No. 2 to Purchase and Sale Agreements, dated as of September 30, 2010, by and among OFS Holdings,LLC, a Delaware limited liability company, OFS Energy Services, LLC, a Delaware limited liability company, KeyEnergy Services, Inc., a Maryland corporation, and Key Energy Services, LLC, a Texas limited liability company.(Incorporated by reference to Exhibit 2.3 of the Company’s Current Report on Form 8-K/A filed on October 8, 2010,File No. 001-08038.) 2.7 Agreement and Plan of Merger, dated as of July 13, 2011, by and among Key Energy Services, Inc., Key Merger Sub I,Key Merger Sub II, Edge Oilfield Services, L.L.C., Summit Oilfield Services, L.L.C., the Edge Holders and the SummitHolders (Incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on July 15, 2011, File No. 001-08038.) 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 Fifth Amended and Restated By-laws of Key Energy Services, Inc. as amended through July 19, 2012 (Incorporated byreference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on July 20, 2012, File No. 001-08038.)108Table of ContentsIndex to Financial StatementsExhibit No. Description 4.1.1 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.) 4.1.2 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.) 4.1.3 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.) 4.1.4 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.) 4.1.5 Fourth Supplemental Indenture dated as of March 1, 2011 by and among Key Energy Services, Inc., the subsidiaryguarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated byreference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on March 1, 2011, File No. 001-08038.) 4.1.6* Fifth Supplemental Indenture dated as of January 17, 2013 by and among Key Energy Services, Inc., the subsidiaryguarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee. 4.2.1 Indenture, dated as of March 4, 2011, among Key Energy Services, Inc., the guarantors named therein and The Bank ofNew York Mellon Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s CurrentReport on Form 8-K filed on March 4, 2011, File No. 001-08038.) 4.2.2 First Supplemental Indenture, dated as of March 4, 2011, among Key Energy Services, Inc., the guarantors namedtherein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.2of the Company’s Current Report on Form 8-K filed on March 4, 2011, File No. 001-08038.) 4.2.3 Amended First Supplemental Indenture, dated as of March 8, 2012, by and among Key Energy Services, Inc., theguarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated byreference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed March 9, 2012, File No. 001-08038.) 4.2.4* Second Supplemental Indenture, dated as of January 17, 2013, among Key Energy Services, Inc., the guarantors namedtherein and The Bank of New York Mellon Trust Company, N.A., as trustee. 4.2.5 Form of global note for 6.750% Senior Notes due 2021 (Incorporated by reference from Exhibit A to Exhibit 4.8). 4.2.6 Form of global note for 6.750% Senior Notes due 2021. (Incorporated by reference from Exhibit A to Rule144A/Regulation S Appendix to Exhibit 4.1 of the Company's Current Report on Form 8-K filed March 9, 2012, File No.001-08038.)109Table of ContentsIndex to Financial StatementsExhibit No.Description 10.1.1† 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.)10.1.2† 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.)10.1.3† 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.)10.2.1† 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.)10.2.2† 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.)10.2.3† 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.)10.2.4*† Form of Restricted Stock Unit Award Agreement (Canadian) under 2009 Equity and Cash Incentive Plan.10.2.5*† Form of Restricted Stock Unit Award Agreement (Non-Canadian) under 2009 Equity and Cash Incentive Plan.10.2.6† Form of Performance Unit Award Agreement under the Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan.(Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed January 20, 2012, File No.001-08038.)10.3† Key Energy Services, Inc. 2012 Performance Unit Plan. (Incorporated by reference to Exhibit 10.1 of the Company'sCurrent Report on Form 8-K filed January 20, 2012, File No. 001-08038.)10.4.1† Key Energy Services, Inc. 2012 Equity and Cash Incentive Plan. (Incorporated by reference to Appendix A of theCompany's Proxy Statement on Schedule 14A filed on April 11, 2012, File No. 001-08038.)10.4.2† Form of Restricted Stock Award Agreement under 2012 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.1 of the Company's Current Report on Form 8-K filed January 25, 2013, File No. 001-08038.)10.4.3† Form of Performance Unit Award Agreement under 2012 Equity and Cash Incentive Plan. (Incorporated by reference toExhibit 10.2 of the Company's Current Report on Form 8-K filed January 25, 2013, File No. 001-08038.)10.4.4*† Form of Nonstatutory Stock Option Agreement under 2012 Equity and Cash Incentive Plan.10.4.5*† Form of Restricted Stock Unit Award Agreement (Canadian) under 2012 Equity and Cash Incentive Plan.110Table of ContentsIndex to Financial Statements10.4.6*† Form of Restricted Stock Unit Award Agreement (Non-Canadian) under 2012 Equity and Cash Incentive Plan.10.5*† Key Energy Services, Inc. 2013 Performance Unit Plan.10.6† Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key Energy Services,Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Reporton Form 8-K filed on January 7, 2008, File No. 001-08038.)10.7† Employment Agreement, dated as of March 26, 2009, by and between Trey Whichard and Key Energy Shared Services,LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 1, 2009, FileNo. 001-08038.)10.8† 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.)10.9† 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.)10.10† 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 Report onForm 8-K filed on January 7, 2008, File No. 001-08038.)111Table of ContentsIndex to Financial StatementsExhibit No.Description 10.11† Form of Amendment to Employment Agreement, in the form executed on March 29, 2010, by and between Key EnergyServices, Inc., Key Energy Shared Services, LLC, and each of Richard J. Alario, T.M. Whichard III, Newton W. WilsonIII, Kim B. Clarke and Kim R. Frye. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form8-K dated April 1, 2010, File No. 001-08038.) 10.12.1 Credit Agreement, dated as of November 29, 2007, among Key Energy Services, Inc., each lender from time to time partythereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, andWells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporatedby reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 30, 2007, File No. 001-08038.) 10.12.2 Amendment No. 1 to Credit Agreement, dated as of October 27, 2009, among Key Energy Services, Inc., each lender fromtime to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender andL/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.) 10.13.1 Credit Agreement, dated as of March 31, 2011, among Key Energy Services, Inc., each of the lenders from time to timeparty thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, andCapital One, N.A. and Wells Fargo Bank, N.A., as co-documentation agents. (Incorporated by reference to Exhibit 10.1 ofthe Company’s Current Report on Form 8-K filed on April 5, 2011, File No. 001-08038.) 10.13.2 First Amendment to Credit Agreement, dated as of July 27, 2011, among Key Energy Services, Inc., each of the lendersfrom time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., assyndication agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit Agricole Corporate and Investment Bank andDnB NOR Bank ASA, as co-documentation agents (Incorporated by reference to Exhibit 10.1 of the Company’s CurrentReport on Form 8-K filed on July 29, 2011, File No. 001-08038.) 112Table of ContentsIndex to Financial StatementsExhibit No.Description 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 CFO 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. 32* Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101* Interactive Data File.†Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. *Filed herewith. 113Exhibit 4.1.6KEY ENERGY SERVICES, INC.ANDTHE GUARANTORS NAMED HEREIN83/8% SENIOR NOTES DUE 2014FIFTH SUPPLEMENTAL INDENTUREDated as of January 17, 2013THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.,AS TRUSTEE-1-THIS FIFTH SUPPLEMENTAL INDENTURE, dated as of January 17, 2013, is among Key Energy Services, Inc., aMaryland corporation (the “Company”), each of the parties identified under the caption “Subsidiary Guarantors” on the signature pagehereto (the “Subsidiary Guarantors”) and The Bank of New York Mellon Trust Company, N.A., as Trustee.RECITALSWHEREAS, the Company, the Subsidiary Guarantors party thereto and the Trustee entered into an Indenture, dated as ofNovember 29, 2007, as supplemented prior to the date hereof (the “Indenture”), pursuant to which the Company has originally issued$425,000,000 in principal amount of 83/8% Senior Notes due 2014 (the “Notes”);WHEREAS, Section 9.1 of the Indenture provides that the Company, the Subsidiary Guarantors and the Trustee may amend orsupplement the Indenture without notice to or consent of any holder of the Notes to reflect the assumption of the Company’s or aSubsidiary Guarantor’s obligations to holders of the Notes in the case of a merger or consolidation or sale of all or substantially all of theCompany’s or such Subsidiary Guarantor’s properties or assets, as provided for in the Indenture;WHEREAS, Key Energy Services California, Inc., a Texas corporation (“Key California”), Key Marine Services, LLC (“KeyMarine”), a Delaware limited liability company, and Key Energy Services, LLC, a Texas limited liability company (“KES LLC”), areSubsidiary Guarantors under the Indenture;WHEREAS, the Company has taken all actions required to effect the merger, effective December 31, 2012, of Key Californiaand Key Marine with and into KES LLC; andWHEREAS, all acts and things prescribed by the Indenture, by law and by the charter and the bylaws (or comparableconstituent documents) of the Company, of the Subsidiary Guarantors and of the Trustee necessary to make this Fifth SupplementalIndenture a valid instrument legally binding on the Company, the Subsidiary Guarantors and the Trustee, in accordance with its terms,have been duly done and performed;NOW, THEREFORE, to comply with the provisions of the Indenture and in consideration of the above premises, theCompany, the Subsidiary Guarantors and the Trustee covenant and agree for the equal and proportionate benefit of the respectiveHolders of the Notes as follows:ARTICLE 1Section 1.01. This Fifth Supplemental Indenture is supplemental to the Indenture and does and shall be deemed to form a partof, and shall be construed in connection with and as part of, the Indenture for any and all purposes.Section 1.02. This Fifth Supplemental Indenture shall become effective immediately upon its execution and delivery by eachof the Company, the Subsidiary Guarantors and the Trustee.-2-ARTICLE 2Section 2.01. Key California and Key Marine are hereby released from their guarantees and related obligations under theIndenture and will hereafter cease to be Subsidiary Guarantors under, or party to, the Indenture. The notation on the Securities relatingto the Guarantees shall be deemed to exclude the name of Key California and Key Marine and the signatures of Officers of KeyCalifornia and Key Marine on its behalf.ARTICLE 3Section 3.01. Except as specifically modified herein, the Indenture and the Notes are in all respects ratified and confirmed(mutatis mutandis) and shall remain in full force and effect in accordance with their terms with all capitalized terms used hereinwithout definition having the same respective meanings ascribed to them as in the Indenture.Section 3.02. Except as otherwise expressly provided herein, no duties, responsibilities or liabilities are assumed, or shall beconstrued to be assumed, by the Trustee by reason of this Fifth Supplemental Indenture. This Fifth Supplemental Indenture is executedand accepted by the Trustee subject to all the terms and conditions set forth in the Indenture with the same force and effect as if thoseterms and conditions were repeated at length herein and made applicable to the Trustee with respect hereto. The Trustee makes norepresentations as to the validity or sufficiency of this Fifth Supplemental Indenture. The recitals and statements herein are deemed tobe those of the Company and Subsidiary Guarantors and not of the Trustee.Section 3.03. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE ANDENFORCE THIS FIFTH SUPPLEMENTAL INDENTURE.Section 3.04. The parties may sign any number of copies of this Fifth Supplemental Indenture. Each signed copy shall be anoriginal, but all of such executed copies together shall represent the same agreement.[NEXT PAGE IS SIGNATURE PAGE]-3-IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental Indenture to be duly executed, all as of thedate first written above.-4-COMPANY: KEY ENERGY SERVICES, INC. By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer GUARANTORS: KEY ENERGY SERVICES, LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer KES MEXICO HOLDING COMPANY, LLC(formerly Key Energy Services Mexico, Inc.) By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer KEY ENERGY SERVICES (MEXICO), LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer MISR KEY ENERGY INVESTMENTS, LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer-5-MISR KEY ENERGY SERVICES, LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer KEY ENERGY MEXICO, LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer-6-TRUSTEE: THE BANK OF NEW YORK MELLONTRUST COMPANY, N.A. By: /s/ JULIE HOFFMAN-RAMOS Julie Hoffman-Ramos Vice President-7-Exhibit 4.2.4KEY ENERGY SERVICES, INC.ANDTHE GUARANTORS NAMED HEREIN6.750% SENIOR NOTES DUE 2021SECOND SUPPLEMENTAL INDENTUREDated as of January 17, 2013THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.,AS TRUSTEETHIS SECOND SUPPLEMENTAL INDENTURE, dated as of January 17, 2013, is among Key Energy Services, Inc., aMaryland corporation (the “Company”), each of the parties identified under the caption “Subsidiary Guarantors” on the signature pagehereto (the “Subsidiary Guarantors”) and The Bank of New York Mellon Trust Company, N.A., as Trustee.RECITALSWHEREAS, the Company, the Subsidiary Guarantors party thereto and the Trustee entered into an Indenture, dated as ofMarch 4, 2011, as supplemented prior to the date hereof (the “Indenture”), pursuant to which the Company has originally issued$675,000,000 in principal amount of 6.750% Senior Notes due 2021 (the “Notes”);WHEREAS, Section 9.01 of the Indenture provides that the Company, the Subsidiary Guarantors and the Trustee may amendor supplement the Indenture without notice to or consent of any Holder to reflect the release of any Subsidiary Guarantor, as providedfor in the Indenture;WHEREAS, Key Energy Services California, Inc., a Texas corporation (“Key California”) is a Subsidiary Guarantor under theIndenture;WHEREAS, Section 10.09(a) of the Indenture provides that a Subsidiary Guarantor may sell or otherwise dispose of all orsubstantially all of its properties or assets to, or consolidate with or merge with or into the Company or another Subsidiary Guarantorunder the Indenture;WHEREAS, the Company has taken all actions required to effect the merger, effective December 31, 2012, of Key Californiaand Key Marine Services, LLC, a Delaware limited liability company, with and into Key Energy Services, LLC, a Texas limited liabilitycompany and a Subsidiary Guarantor under the Indenture; andWHEREAS, all acts and things prescribed by the Indenture, by law and by the charter and the bylaws (or comparableconstituent documents) of the Company, of the Subsidiary Guarantors and of the Trustee necessary to make this Second SupplementalIndenture a valid instrument legally binding on the Company, the Subsidiary Guarantors and the Trustee, in accordance with its terms,have been duly done and performed;NOW, THEREFORE, to comply with the provisions of the Indenture and in consideration of the above premises, theCompany, the Subsidiary Guarantors and the Trustee covenant and agree for the equal and proportionate benefit of the respectiveHolders of the Notes as follows:ARTICLE 1Section 1.01. This Second Supplemental Indenture is supplemental to the Indenture and does and shall be deemed to form a partof, and shall be construed in connection with and as part of, the Indenture for any and all purposes.Section 1.02. This Second Supplemental Indenture shall become effective immediately upon its execution and delivery by eachof the Company, the Subsidiary Guarantors and the Trustee.- 2 -ARTICLE 2Section 2.01. Key California is hereby released from its guarantee and related obligations under the Indenture and will hereaftercease to be a Subsidiary Guarantor under, or party to, the Indenture. The notation on the Securities relating to the Guarantee shall bedeemed to exclude the name of Key California and the signatures of Officers of Key California on its behalf.ARTICLE 3Section 3.01. Except as specifically modified herein, the Indenture and the Notes are in all respects ratified and confirmed(mutatis mutandis) and shall remain in full force and effect in accordance with their terms with all capitalized terms used hereinwithout definition having the same respective meanings ascribed to them as in the Indenture.Section 3.02. Except as otherwise expressly provided herein, no duties, responsibilities or liabilities are assumed, or shall beconstrued to be assumed, by the Trustee by reason of this Second Supplemental Indenture. This Second Supplemental Indenture isexecuted and accepted by the Trustee subject to all the terms and conditions set forth in the Indenture with the same force and effect asif those terms and conditions were repeated at length herein and made applicable to the Trustee with respect hereto. The Trustee makesno representations as to the validity or sufficiency of this Second Supplemental Indenture. The recitals and statements herein aredeemed to be those of the Company and Subsidiary Guarantors and not of the Trustee.Section 3.03. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE ANDENFORCE THIS SECOND SUPPLEMENTAL INDENTURE.Section 3.04. The parties may sign any number of copies of this Second Supplemental Indenture. Each signed copy shall be anoriginal, but all of such executed copies together shall represent the same agreement.[NEXT PAGE IS SIGNATURE PAGE]- 3 -IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed, all as ofthe date first written above. KEY ENERGY SERVICES, INC. By: /s/ MARK A. COX Mark A. Cox Vice President and Controller By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer GUARANTORS: KEY ENERGY SERVICES, LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer KEY ENERGY SERVICES (MEXICO), LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and TreasurerMISR KEY ENERGY INVESTMENTS, LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer MISR KEY ENERGY SERVICES, LLC By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and Treasurer KEY ENERGY MEXICO, LLC- 4 - By: /s/ J. MARSHALL DODSON J. Marshall Dodson Vice President and TreasurerTHE BANK OF NEW YORK MELLON TRUSTCOMPANY, N.A., as TrusteeBy: /s/ JULIE HOFFMAN-RAMOS Julie Hoffman-Ramos Vice President- 5 -Exhibit 10.5KEY ENERGY SERVICES, INC.2013 PERFORMANCE UNIT PLAN 1.Purpose; Eligibility.1.1 General Purpose. The name of this plan is the Key Energy Services, Inc. 2013 Performance Unit Plan (this “Plan”). Thepurpose of this Plan is to enable Key Energy Services, Inc., a Maryland corporation (the “Company”), and any Affiliate to obtain andretain the services of the types of Employees who will contribute to the Company’s long range success and to provide incentives that arelinked directly to increases in share value which will inure to the benefit of all stockholders of the Company.1.2 Eligible Award Recipients. The persons eligible to receive Awards are the Employees of the Company and its Affiliates.1.3 Awards. Awards under the Plan will be Performance Units.2. Definitions.2.1 “Affiliate” means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, asthose terms are defined in Sections 424(e) and (f), respectively, of the Code.2.2 “Award” means a grant of Performance Units under this Plan.2.3 “Award Notice” means a writing, whether in paper or electronic medium (including email or the posting on a web sitemaintained by the Company or a third party under contract with the Company), from the Company to Participant evidencing the termsand conditions of an individual Award. Each Award Notice shall be subject to the terms and conditions of this Plan. 2.4 “Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act,except that in calculating the beneficial ownership of any particular “person” (as that term is used in Section 13(d)(3) of the ExchangeAct), such “person” shall be deemed to have beneficial ownership of all securities that such “person” has the right to acquire byconversion or exercise of other securities, whether such right is currently exercisable or is exercisable only after the passage of time.The terms “Beneficially Owns” and “Beneficially Owned” have corresponding meanings.2.5 “Board” means the Board of Directors of the Company.2.6 “Cause” means (a) with respect to any Participant who is a party to an employment or service agreement with theCompany or its Affiliates and such agreement provides for a definition of Cause, as defined therein and (b) with respect to all otherParticipants (i) the commission of, or plea of guilty or no contest to, a felony or a crime involving moral turpitude or the commission ofany other act involving willful malfeasance or material fiduciary breach with respect to the Company-1-or an Affiliate; (ii) conduct tending to bring the Company into substantial public disgrace, or disrepute; (iii) gross negligence or willfulmisconduct with respect to the Company or an Affiliate; or (iv) material violation of state or federal securities laws. The Committee, inits absolute discretion, shall determine the effect of all matters and questions relating to whether a Participant has been discharged forCause.2.7 “Change in Control” means:(a) a merger of the Company with another entity, a consolidation involving the Company, or the sale of all or substantially allof the assets of the Company to another entity if, in any such case, the holders of equity securities of the Company immediately prior tosuch transaction or event do not beneficially own immediately after such transaction or event equity securities of the resulting entityentitled to 50% or more of the votes then eligible to be cast in the election of directors generally (or comparable governing body) of theresulting entity in substantially the same proportions that they owned the equity securities of the Company immediately prior to suchtransaction or event;(b) the dissolution or liquidation of the Company;(c) when any person or entity, including a “group” as contemplated by Section 13(d)(3) of the Exchange Act, acquires orgains ownership or control (including, without limitation, power to vote) of more than 50% of the combined voting power of theoutstanding securities of the Company; or(d) as a result of or in connection with a contested election of directors, the persons who were members of the Boardimmediately before such election cease to constitute a majority of the Board.As used in this definition of “Change in Control,” (1) “resulting entity” in the context of a transaction or event that is a merger,consolidation or sale of all or substantially all assets shall mean the surviving entity (or acquiring entity in the case of an asset sale) unlessthe surviving entity (or acquiring entity in the case of an asset sale) is a subsidiary of another entity and the holders of Common Stockreceive capital stock of such other entity in such transaction or event, in which event the resulting entity shall be such other entity, and(2) subsequent to the consummation of a merger or consolidation that does not constitute a Change in Control, the term “Company”shall refer to the resulting entity and the term “Board” shall refer to the board of directors (or comparable governing body) of theresulting entity. Notwithstanding the occurrence of any of the foregoing events described above which would otherwise result in a Change inControl, the Board may determine in its discretion, if it deems it to be in the best interest of the Company, that an event or eventsotherwise constituting a Change in Control shall not be considered a Change in Control. Such determination shall be effective only if itis made by the Board prior to the occurrence of an event that otherwise would be or probably would lead to a Change in Control; or aftersuch event if made by the Board a majority of which is composed of directors who were members of the Board immediately prior to theevent that otherwise would be or probably would lead to a Change in Control. -2-2.8 “Code” means the Internal Revenue Code of 1986, as it may be amended from time to time, and any guidance and/orregulations promulgated thereunder.2.9 “Committee” means the Board or a committee of one or more members of the Board appointed by the Board to administerthis Plan in accordance with Section 3.5.2.10 “Common Stock” means the common stock, $0.10 par value per share, of the Company.2.11 “Company” has the meaning set forth in Section 1.1.2.12 “Consultant” means any person, including an advisor (a) engaged by the Company or an Affiliate to render consulting oradvisory services and who is compensated for such services or who provides bona fide services to the Company or an Affiliate pursuantto a written agreement or (b) who is a member of the Board of an Affiliate; provided that such person is a natural person and suchservices are not in connection with the offer or sale of securities in a capital raising transaction and do not directly or indirectly promoteor maintain a market for the Company's securities.2.13 “Date of Grant” means the date on which the Committee adopts a resolution, or takes other appropriate action,expressly granting an Award to a Participant that specifies the key terms and conditions of the Award and from which the Participantbegins to benefit from or be adversely affected by subsequent changes in the fair market value of the Common Stock or, if a later date isset forth in such resolution, then such date as is set forth in such resolution.2.14 “Detrimental Activity” means: (a) violation of the terms of any agreement with the Company or any of its Affiliatesconcerning non-disclosure, confidentiality, intellectual property, privacy, exclusivity, non-competition or non-solicitation; (b) disclosureof the Company’s or its Affiliates’ confidential information to anyone outside the Company or its Affiliates, without prior writtenauthorization from the Company or its Affiliates, or in conflict with the interests of the Company or its Affiliates, whether theconfidential information was acquired or disclosed by the Participant during or after employment by the Company or its Affiliates (orduring or after the engagement of services if the Participant is or was a Consultant); (c) failure or refusal to disclose promptly or assign tothe Company or its Affiliates all right, title and interest in any invention, work product or idea, patentable or not, made or conceived bythe Participant during employment by the Company or its Affiliates (or during the engagement of services if the Participant is or was aConsultant), relating in any manner to the interests of the Company or its Affiliates or the failure or refusal to do anything reasonablynecessary to enable the Company or its Affiliates to secure a patent where appropriate in the United States and in other countries;(d) activity that is discovered to be grounds for or results in termination of the Participant’s employment or consulting engagement forCause; (e) any breach of a restrictive covenant contained in any employment agreement, Award Agreement or other agreementbetween the Participant and the Company or its Affiliates, during any period for which a restrictive covenant prohibiting DetrimentalActivity, or other similar conduct or act, is applicable to the Participant during or after employment by the Company or its Affiliates (orduring or after the engagement of services if the Participant is or was a Consultant); (f) any attempt directly or indirectly to induce anyEmployee or Consultant of the Company or its Affiliates-3-to be employed or perform services or acts in conflict with the interests of the Company or its Affiliates; (g) any attempt, in conflictwith the interests of the Company or its Affiliates, directly or indirectly, to solicit the trade or business of any current or prospectivecustomer, client, supplier or partner of the Company or its Affiliates; (h) the conviction of, or guilty plea entered by, the Participant forany felony or a crime involving moral turpitude whether or not connected with the Company or its Affiliates; or (i) the commission ofany other act involving willful malfeasance or material fiduciary breach with respect to the Company or any of its Affiliates.2.15 “Disability” means that the Participant is unable to engage in any substantial gainful activity by reason of any medicallydeterminable physical or mental impairment. The determination of whether an individual has a Disability shall be determined underprocedures established by the Committee. The Committee may rely on any determination that a Participant is disabled for purposes ofbenefits under any long-term disability plan maintained by the Company or any Affiliate in which a Participant participates.2.16 “Effective Date” shall mean the date of Board or Committee adoption of this Plan.2.17 “Employee” means any person employed by the Company or an Affiliate; provided, however, that Officers shall be“Employees” under this Plan only to the extent determined by the Committee, in its discretion. Mere service as a director or payment ofa director’s fee by the Company or an Affiliate shall not be sufficient to constitute “employment” by the Company or an Affiliate.2.18 “Exchange Act” means the Securities Exchange Act of 1934, as amended.2.19 “Final Stock Price” means the sum of (a) and (b) where (a) is the average closing stock price of the Common Stock forthe last thirty (30) trading days of the Performance Period and (b) is any dividends paid per share over the Performance Period.2.20 “First Performance Period” means the period from January 1, 2013 through December 31, 2013.2.21 “Initial Stock Price” means the average closing stock price of the Common Stock for the thirty (30) trading daysimmediately preceding the Performance Period.2.22 “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act andthe rules and regulations promulgated thereunder.2.23 “Participant” means an Employee who has been granted an Award pursuant to this Plan and an Award Notice.2.24 “Performance Period” means the First Performance Period and/or the Second Performance Period, as appropriate.2.25 “Performance Unit” means a cash incentive award the unit value of which is determined with reference to the value ofthe Common Stock pursuant to the terms of Section 4.-4-2.26 “Plan” has the meaning set forth in Section 1.1.2.27 “Proxy Peer Group” means Baker Hughes Incorporated (BHI); Basic Energy Services, Inc. (BAS); Exterran Holdings,Inc. (EXH); Helix Energy Solutions Group, Inc. (HLX); Noble Corporation (NE); Oceaneering International, Inc. (OII); Oil StatesInternational, Inc. (OIS); Patterson-UTI Energy, Inc. (PTEN); RPC, Inc. (RES); Superior Energy Services, Inc. (SPN); andWeatherford International Ltd. (WFT); or any other corporation selected by the Committee.2.28 “Second Performance Period” means the period from January 1, 2014 through December 31, 2014.2.29 “Total Shareholder Return” or “TSR” means the change in value of a share of Common Stock determined by dividing(a) by (b), where (a) equals the Final Stock Price minus the Initial Stock Price and (b) equals the Initial Stock Price.3. Administration.3.1 Administration by Board. This Plan shall be administered by the Board unless and until the Board delegates administrationto a Committee, as provided in Section 3.5.3.2 Powers of Committee. The Committee shall have the power and authority to select and grant to Participants Awardspursuant to the terms of this Plan.3.3 Specific Powers. In particular, the Committee shall have the authority: (a) to construe, interpret and administer this Plan,reconcile any inconsistency in, correct any defect in and/or supply any omission in this Plan and any instrument or agreement relatingto, or Award granted under, this Plan; (b) to promulgate, amend, and rescind rules and regulations relating to the administration of thisPlan; (c) to authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of this Plan;(d) to the extent permissible under applicable law, including the corporate law of the state in which the Company is incorporated, todelegate its authority to one or more Officers; (e) to determine when Awards are to be granted under this Plan and the applicable Date ofGrant; (f) from time to time to select, subject to the limitations set forth in this Plan, those Participants to whom Awards shall begranted; (g) to determine the number of shares of Common Stock to be made subject to each Award; (h) to prescribe the terms andconditions of each Award, including medium of payment, provisions relating to earning Performance Units and right of repurchaseprovisions, and to specify the provisions of the Award Agreement relating to such grant or sale; (i) to amend any outstanding Awards,including for the purpose of modifying the time or manner of earning Performance Units, or the term of any outstanding Award;provided, however, that if any such amendment impairs a Participant’s rights or increases a Participant’s obligations under his or herAward or creates or increases a Participant’s federal income tax liability with respect to an Award, such amendment shall also be subjectto the Participant’s consent; (j) to determine the duration and purpose of leaves of absences which may be granted to a Participant withoutconstituting termination of their employment for purposes of this Plan, which periods shall be no shorter than the periods generallyapplicable to Employees under the Company’s employment policies; (k) to make decisions with respect to outstanding Awards that maybecome necessary upon a Change in Control or an event that triggers anti-dilution-5-adjustments; and (l) to exercise discretion to make any and all other determinations which it determines to be necessary or advisable foradministration of this Plan.3.4 Decisions Final. All decisions made by the Committee pursuant to the provisions of this Plan shall be final and binding onthe Company and the Participants, unless such decisions are determined by a court having jurisdiction to be arbitrary and capricious.3.5 The Committee. The Board may delegate administration of this Plan to a Committee or Committees of one or moremembers of the Board, and the term “Committee” shall apply to any person or persons to whom such authority has been delegated. Ifadministration is delegated to a Committee, the Committee shall have, in connection with the administration of this Plan, the powerstheretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committeeis authorized to exercise (and references in this Plan to the Board or the Committee shall thereafter be to the Committee orsubcommittee), subject, however, to such resolutions, not inconsistent with the provisions of this Plan, as may be adopted from time totime by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of this Plan. Themembers of the Committee shall be appointed by and serve at the pleasure of the Board. From time to time, the Board may increase ordecrease the size of the Committee, add additional members to, remove members (with or without cause) from, appoint new membersin substitution therefor, and fill vacancies, however caused, in the Committee. The Committee shall act pursuant to a vote of themajority of its members or, in the case that the Committee is comprised of only two members, the unanimous consent of its members,whether present or not, or by the written consent of the majority of its members (or of all of its members if there are only twomembers) and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board. Subject to the limitationsprescribed by this Plan and the Board, the Committee may establish and follow such rules and regulations for the conduct of its businessas it may determine to be advisable.3.6 Indemnification. In addition to such other rights of indemnification as they may have as directors or members of theCommittee, and to the extent allowed by applicable law, the Committee shall be indemnified by the Company against the reasonableexpenses, including attorneys’ fees, actually incurred in connection with any action, suit or proceeding or in connection with any appealtherein, to which the Committee may be party by reason of any action taken or failure to act under or in connection with this Plan or anyAward granted under this Plan, and against all amounts paid by the Committee in settlement thereof (provided, however, that thesettlement has been approved by the Company, which approval shall not be unreasonably withheld) or paid by the Committee insatisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in suchaction, suit or proceeding that such Committee did not act in good faith and in a manner which such person reasonably believed to be inthe best interests of the Company, and in the case of a criminal proceeding, had no reason to believe that the conduct complained of wasunlawful; provided, however, that within sixty (60) days after institution of any such action, suit or proceeding, such Committee shall,in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding.4. Performance Units Awards.-6-4.1 Award Eligibility. The Committee will, in its sole discretion, designate which Employees will be eligible to receive Awardsin respect of a Performance Period. However, designation of a Participant eligible to receive an Award hereunder for a PerformancePeriod shall not in any manner entitle the Participant to receive payment in respect of any Performance Unit for such PerformancePeriod. The determination as to whether or not such Participant becomes entitled to payment in respect of any Performance Unit shall bedecided solely in accordance with the provisions of Section 4.3. Moreover, designation of a Participant eligible to receive an Awardhereunder for a particular Performance Period shall not require designation of such Participant eligible to receive an Award hereunder inany subsequent Performance Period and designation of one person as a Participant eligible to receive an Award hereunder shall notrequire designation of any other person as a Participant eligible to receive an Award hereunder in such period or in any other period.4.2 Award Determination. At such times as it shall determine, the Committee may grant Awards to Participants as determinedby the Committee and in accordance with the terms of this Plan. An Award shall set forth a number of target Performance Units. Thenumber of Performance Units that a Participant will actually earn will be determined in accordance with Section 4.3 hereof. Fiftypercent (50%) of the target Performance Units comprising each Award will be measured with respect to the First Performance Periodand fifty percent (50%) of the target Performance Units comprising of each Award will be measured with respect to the SecondPerformance Period.4.3 Earning of Performance Units.(a) Criteria. The number of Performance Units earned in respect of a given Performance Period will be determined at the endof the Performance Period based on the relative placement of the Company within the group that consists of the Company and the ProxyPeer Group based on Total Shareholder Return as set forth in Section 4.3(b) below, as follows:Company PlacementIn Proxy Peer Group forthe Performance PeriodPercentile RankingInProxy Peer GroupPerformance UnitsEarned as aPercentage of TargetFirst100%200%Second91%180%Third82%160%Fourth73%140%Fifth64%120%Sixth55%100%Seventh45%75%Eighth36%50%Ninth27%25%Tenth18%0%Eleventh9%0%Twelfth0%0%-7-As an example, and solely for avoidance of doubt, if the Company’s placement in the group that consists of the Company and the ProxyPeer Group for the First Performance Period is second, the Participant will earn a number of Performance Units for the FirstPerformance Period equal to the product of (a) the number of target Performance Units, times (b) 50%, times (c) 180%. If theCompany’s placement in the group that consists of the Company and the Proxy Peer Group for the Second Performance Period isfourth, the Participant will earn a number of Performance Units for the Second Performance Period equal to the product of (a) thenumber of target Performance Units, times (b) 50%, times (c) 140%.(b) Proxy Peer Group TSR. In order to determine the Company’s placement, total shareholder return will be calculated by theCommittee for all members of the Proxy Peer Group on the same basis as Total Shareholder Return is calculated for the Company.(c) Employment Condition. Except as provided in Section 4.4(a) hereof, a Participant must be employed by the Company oran Affiliate on the payment date in respect of an Award to be eligible for payment with respect to such Award.(d) Certification. Following the completion of a Performance Period, the Committee or its designee shall review and certifyin writing whether, and to what extent, the performance goal for the Performance Period has been achieved and, if so, calculate andcertify in writing the number of Performance Units that the Participant earned for such period based upon the Company’s TSR relativeto the Proxy Peer Group.4.4 Payment.(a) Timing. Payment in respect of an Award will be made in cash, less applicable withholding amounts, within sixty (60) daysfollowing the end of the applicable Performance Period, subject to a Participant’s continuing employment with the Company or anAffiliate through the payment date; provided, that, payment with respect to a Performance Period will still be made in the case of aParticipant’s death or Disability following the end of the Performance Period but prior to the payment date for such Performance Period.(b) Amount. The amount payable to a Participant in respect of a Performance Period will be equal to the product of (i) and (ii)where (i) is the number of Performance Units earned for the Performance Period, as determined by the Committee in accordance withSection 4.3, and (ii) is the closing price per share of Common Stock for the last trading day of the Performance Period.5. Miscellaneous.5.1 Acceleration of Earning of Award. The Committee shall have the power to accelerate the time at which a Participant mayearn an Award, or any portion thereof, in accordance with this Plan, notwithstanding the provisions in the Award stating the time atwhich such Award will be earned and in connection with any such acceleration to adjust the TSR calculations and any related matters toreflect the acceleration. In the event that the Committee accelerates the earning of any portion of an Award, payment in respect of suchportion shall be made as soon as reasonably-8-practicable following the date as of which such portion is earned, but in no event later than March 15 of the calendar year immediatelyfollowing the calendar year containing the date the Award is earned.5.2 Stockholder Rights. Except as provided in this Plan or an Award Agreement, no Participant shall be deemed to be theholder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Award.5.3 No Employment or Other Service Rights. Nothing in this Plan or any instrument executed or Award granted pursuantthereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the timethe Award was granted or shall affect the right of the Company or an Affiliate to terminate the employment of an Employee with orwithout notice and with or without Cause.5.4 Transfer, Approved Leave of Absence. For purposes of this Plan, no termination of employment by an Employee shall bedeemed to result from either (a) a transfer to the employment of the Company from an Affiliate or from the Company to an Affiliate, orfrom one Affiliate to another or (b) an approved leave of absence for military service or sickness, or for any other purpose approved bythe Company, if the Employee’s right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant towhich the leave of absence was granted or if the Committee otherwise so provides in writing.5.5 Withholding Obligations. The Company shall have the right to withhold from any payment due hereunder an amountequal to the minimum required withholding obligation in respect of any federal, state or local tax.5.6 Designation of Beneficiary. A Participant shall have the right to appoint any individual or legal entity, in writing, on a formprescribed by and filed with the Committee, as his beneficiary to receive payment of an Award upon the Participant’s death to the extentprovided under Section 4.4(a). Such designation may be revoked by the Participant at any time and a new beneficiary may be appointed bythe Participant by execution and submission to the Committee of a revised beneficiary designation form. In order to be effective, adesignation of beneficiary must be completed by the Participant and received by the Committee, or its designee, prior to the date of theParticipant’s death. In the absence of a designation, the Participant’s beneficiary shall be the legal representative of the Participant’sestate.5.7 Incapacity of Participant or Beneficiary. If any person holding an Award or otherwise entitled to receive a payment underthis Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for a payment hereunder, then,unless and until a claim therefore shall have been made by a duly appointed guardian or other legal representative of such person, theCommittee may provide for such payment or any part thereof to be made by or to any other person or institution then contributingtoward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such personand a complete discharge of any liability of the Committee, the Company and the Plan therefor.-9-5.8 Electronic Delivery. The Committee may, in its sole discretion, deliver any documents related to an Award by electronicmeans. To participate in the Plan, a Participant consents to receive all applicable documentation by electronic delivery and through an on-line (and/or voice activated) system established and maintained by the Committee or a third party vendor designated by the Committee.6. Adjustments Upon Changes in Stock.Awards granted under this Plan will be equitably adjusted or substituted, as to the number, price or kind of a share of CommonStock subject to the Awards to the extent necessary to preserve the economic intent of such Award in the event of changes in theoutstanding Common Stock or in the capital structure of the Company by reason of stock or extraordinary cash dividends, stock splits,reverse stock splits, recapitalization, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes incapitalization occurring after the Date of Grant of any such Award. Such adjustment shall be conclusive and binding for all purposes.Notwithstanding the above, in the event of any of the following: (a) the Company is merged or consolidated with another corporation orentity and, in connection therewith, consideration is received by stockholders of the Company in a form other than stock or other equityinterests of the surviving entity or outstanding Awards are not to be assumed upon consummation of the proposed transaction; (b) all orsubstantially all of the assets of the Company are acquired by another person; (c) the reorganization or liquidation of the Company; or(d) the Company shall enter into a written agreement to undergo an event described in clause (a), (b) or (c) above, then the Committeemay, in its discretion and upon at least ten (10) days’ advance notice to the affected persons, cancel any outstanding Awards and cause theholders thereof to be paid, in cash, the value of such Awards based upon the price per share of Common Stock received or to be receivedby other stockholders of the Company in the event.7. Effect of Change in Control7.1 Effect on Awards. In the event of a Change in Control, subject to the terms of the applicable Award Notice, all incompletePerformance Periods in respect of an Award in effect on the date the Change in Control occurs shall end on the date of such event, andthe Committee shall (i) determine the extent to which a Participant has earned Performance Units in accordance with the guidelines setforth in Section 4.3, and (ii) cause to be paid to the applicable Participant an amount, if any, in respect of such Performance Units basedupon such determination by the Committee, such payment to be made within sixty (60) days following the date the Change in Controloccurs.7.2 Cancelation. In addition, in the event of a Change in Control, the Committee may in its discretion and upon at least ten(10) days’ advance notice to the affected Participants, cancel any outstanding Awards and pay to the Participants, in cash, the value ofsuch Awards based upon the price per share of Common Stock received or to be received by other stockholders of the Company in theevent, such payment to be made within sixty (60) days following the date the Change in Control occurs.-10-7.3 Successors. The obligations of the Company under this Plan shall be binding upon any successor corporation ororganization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation ororganization succeeding to all or substantially all of the assets and business of the Company and its Affiliates, taken as a whole.8. Amendment of the Plan and Awards.8.1 Termination of the Plan. This Plan shall terminate automatically upon the satisfaction of the Company’s obligationshereunder following the end of the Second Performance Period. The Committee may suspend or terminate this Plan at any earlier datepursuant to Section 8.2 hereof. No Awards may be granted under this Plan while this Plan is suspended or after it is terminated.8.2 Amendment/Suspension of Plan. The Committee at any time, and from time to time, may amend, suspend or terminatethis Plan.8.3 No Impairment of Rights. Rights under any Award granted before amendment of this Plan shall not be impaired by anyamendment of this Plan unless (a) the Company requests the consent of the Participant and (b) the Participant consents in writing.8.4 Amendment of Awards. The Committee at any time, and from time to time, may amend the terms of any one or moreAwards; provided, however, that the Committee may not effect any amendment which would otherwise constitute an impairment ofthe rights under any Award unless (a) the Company requests the consent of the Participant and (b) the Participant consents in writing.9. General Provisions.9.1 Other Compensation Arrangements. Nothing contained in this Plan shall prevent the Board from adopting other oradditional compensation arrangements, subject to stockholder approval if such approval is required, and such arrangements may be eithergenerally applicable or applicable only in specific cases. This Plan is intended to constitute an “unfunded” plan for incentivecompensation and nothing contained in this Plan shall give any Participant any rights that are greater than those of a general unsecuredcreditor of the Company.9.2 Other Provisions. The Award Notices authorized under this Plan may contain such other provisions not inconsistent withthis Plan, as the Committee may deem advisable.9.3 Cancellation and Rescission of Awards for Detrimental Activity. (a) Upon payment pursuant to an Award, the Participant shall certify in a manner acceptable to the Company that the Participant hasnot engaged in any Detrimental Activity. (b) Unless the Award Notice specifies otherwise, the Committee may cancel, rescind, suspend, withhold or otherwise limit orrestrict any unpaid Awards at any time if the Participant engages in any Detrimental Activity. -11-(c) In the event a Participant engages in Detrimental Activity after any payment pursuant to an Award, during any period forwhich any restrictive covenant prohibiting such activity is applicable to the Participant, such payment may be rescinded within one(1) year thereafter. In the event of any such rescission, the Participant shall pay to the Company the amount of any payment receivedpursuant to an Award, in such manner and on such terms and conditions as may be required by the Company. The Company shall beentitled to set-off against the amount of any such payment.9.4 Effective Date of Plan. This Plan shall become effective as of the Effective Date.9.5 Choice of Law. The laws of the State of Maryland shall govern all questions concerning the construction, validity andinterpretation of this Plan, without regard to such state’s conflict of law rules.-12-Exhibit 10.2.4KEY ENERGY SERVICES, INC.2009 EQUITY AND CASH INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTThis Restricted Stock Unit Award Agreement (this “Award Agreement”), dated as of the ___ day of __________ 20__ (the“Date of Grant”), is entered into by and between Key Energy Services, Inc., a Maryland corporation (the “Company”), and«First_Name» «Last_Name» (the “Participant).RECITALSPursuant to Section 3.2 of the Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan (the “Plan”), the Administratorhas determined to grant to the Participant the number of Restricted Stock Units set forth below (“RSUs”) on the terms and conditionsset forth in this Award Agreement and the Plan. The RSUs being granted are contingent upon the Participant’s execution of this AwardAgreement and compliance with the terms hereof.Any capitalized terms not defined in this Award Agreement shall have their respective meanings set forth in the Plan. In theevent of any conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan shall control.NOW, THEREFORE, the parties hereto agree as follows:1.Grant of RSUs. The Participant is hereby granted «Number» RSUs. As determined by the Company in its discretion andsubject to the terms and conditions of this Award Agreement, each RSU represents either (i) an unfunded, unsecured promise by theCompany to pay the Participant a cash amount equal to the Fair Market Value of a share of Common Stock or (ii) the right to receive thenumber shares of Common Stock subject to the RSUs.2. Vesting and Forfeiture. Subject to the terms and conditions of this Award Agreement and the Plan, RSUs shall vest inaccordance with Schedule A hereto subject to the Participant’s continuing employment with the Company on each vesting date. Exceptas otherwise provided in the Plan, if the Participant’s Continuous Service terminates prior to any vesting, all unvested RSUs shallimmediately be forfeited and the Company shall make no payment to the Participant with respect to the forfeited RSUs.3. Settlement of RSUs. Within twenty business days following the vesting date of any outstanding RSUs, the Company shalldeliver to the Participant, or his or her beneficiary, without charge, either (i) a payment in cash equal to the Fair Market Value of a shareof Common Stock on such date for each RSU that vested, or (ii) the number shares of Common Stock subject to the RSUs that vestedon such date, in case reduced by the amount of any applicable withholding taxes; provided that if the delivery of shares of CommonStock pursuant to clause (ii) would result in taxation prior to vesting in the taxing jurisdiction applicable to the Participant, then onlyclause (i) shall apply to the settlement of such Participant’s RSUs.- 1 -4. Rights as a Stockholder. The Participant shall not have any rights as a stockholder due to the grant or vesting of any RSUs.5. Taxes. The Company or an affiliate shall be entitled to withhold and/or deduct any and all amounts required to be withheldfrom any payment hereunder. Regardless of any action the Company or an affiliate takes with respect to any or all income tax, socialinsurance, payroll tax, or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liabilityfor all Tax-Related Items legally due by the Participant is and remains the Participant’s responsibility and that the Company and itsaffiliates make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of theRSUs, including the grant or vesting of the RSUs.6. Miscellaneous(a) Restrictions on Transfer. RSUs may not be transferred or otherwise disposed of by the Participant, including byway of sale, assignment, transfer, pledge, hypothecation or otherwise, except as permitted by the Administrator, or by will or the lawsof descent and distribution. No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer intrust (voting or other) or other disposition of, or creation of a security interest in or lien on, the RSUs by any holder thereof in violationof the provisions of this Award Agreement shall be valid.(b) Compliance with Law and Regulations. This Award shall be subject to all applicable federal, state, foreign and locallaws, rules and regulations and to such approvals by any government or regulatory agency as may be required.(c) Incorporation of Plan. This Award Agreement is made pursuant to the provisions of the Plan which is herebyincorporated herein by reference and shall be interpreted in a manner consistent with the Plan. To the extent that this AwardAgreement is silent with respect to, or in any way inconsistent with, the terms of the Plan, the provisions of the Plan shall govern andthis Award Agreement shall be deemed to be modified accordingly.(d) Notices. Any notices required or permitted hereunder shall be addressed to the Company, at its principal offices, orto the Participant at the address then on record with the Company, as the case may be, and deposited, postage prepaid, in the mail, orsent by email, facsimile or personal delivery. Either party may, by notice to the other given in the manner aforesaid, change his or itsaddress for future notices.(e) Amendment. This Award Agreement may be amended or modified by the Administrator at any time; provided,that, notice is provided to the Participant in accordance with Section 6(d) hereof; and provided, further, that, except as provided in thePlan, no amendment or modification which would constitute an impairment of the rights of the Participant as provided by this AwardAgreement shall be effective unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.- 2 -(f) Successor. This Award Agreement shall bind and inure to the benefit of the Company, its successors and assigns,and the Participant and his or her personal representatives and beneficiaries.(g) Authority of the Administrator. The Administrator shall have final authority to interpret and construe the Plan andthis Award Agreement and to make any and all determinations thereunder, and its decisions shall be binding and conclusive upon theParticipant and his or her legal representative in respect of any questions arising under the Plan or this Award Agreement.(h) Governing Law. The validity, performance and construction of the Plan and this Award Agreement shall begoverned by the laws of the State of Maryland, without regard to conflicts of laws principles. The Company and the Participant consentto the exclusive jurisdiction of the courts of Harris County, Texas. Any claim arising out of or related to this Award Agreement must bebrought no later than six months after it has accrued.(i) Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to the RSUsor future RSUs that may be granted under the Plan by electronic means or to request the Participant’s consent to participate in the Planby electronic means. The Participant hereby consents to receive such documents by electronic delivery and, if requested, to agree toparticipate in the Plan through an on-line or electronic system established and maintained by Company or another third party designatedby Company.(j) Severability. The provisions of this Award Agreement are severable and if any one or more provisions aredetermined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding andenforceable.–SIGNATURE PAGE FOLLOWS –- 3 -IN WITNESS WHEREOF, the Parties have executed this Award Agreement on the day and year first above written.KEY ENERGY SERVICES, INC.By: Name:Title:The undersigned hereby acknowledges receipt of the Plan, and accepts and agrees to all the terms and provisions of this AwardAgreement and the Plan.«First_Name» «Last_Name»Employee ID: Number «Employee_Number»«Street_1» «Street_2» «City», «Province» «Zip» Canada- 4 -Schedule ARESTRICTED STOCK UNITSVESTING DATE - 5 -Exhibit 10.2.5KEY ENERGY SERVICES, INC.2009 EQUITY AND CASH INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTThis Award Agreement, dated as of the ___ day of __________ (the “Date of Grant”) is entered into by and between________________ (the “Employer”) on behalf of Key Energy Services, Inc., (the “Company”), and «First_Name» «Last_Name»(the “Participant).RECITALSPursuant to Section 3.2 of the Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan (the “Plan”), the Administratorhas determined to grant to the Participant the number of Restricted Stock Units set forth below (“RSUs”) on the terms and conditionsset forth in this Award Agreement and the Plan. The RSUs being granted is contingent upon the Participant’s execution of this AwardAgreement and compliance with the terms thereof.Any capitalized terms not defined in this Award Agreement shall have their respective meanings set forth in the Plan. In theevent of any conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan shall control.NOW, THEREFORE, the parties hereto agree as follows:1.Grant of RSUs. The Participant is hereby granted «Number» RSUs. As determined by the Employer in its discretion andsubject to the terms and conditions of this Award Agreement, each RSU represents either (i) an unfunded, unsecured promise by theEmployer to pay the Participant a cash amount equal to the Fair Market Value of a share of Common Stock or (ii) the right to receive thenumber shares of Common Stock subject to the RSUs.2. Vesting and Forfeiture. Subject to the terms and conditions of this Award Agreement and the Plan, RSUs shall vest inaccordance with Schedule A hereto subject to the Participant’s continuing employment with the Employer on each vesting date. Exceptas otherwise provided in the Plan, if the Participant’s Continuous Service terminates prior to any vesting, all unvested RSUs shallimmediately be forfeited and the Employer shall make no payment to the Participant with respect to the forfeited RSUs.3. Settlement of RSUs. Within twenty business days following the vesting date of any outstanding RSUs, the Employer shalldeliver to the Participant, or his or her beneficiary, without charge, either (i) a payment in cash equal to the Fair Market Value of a shareof Common Stock on such date for each RSU that vested, or (ii) the number shares of Common Stock subject to the RSUs that vestedon such date, in case reduced by the amount of any applicable withholding taxes; provided that if the delivery of shares of CommonStock pursuant to clause (ii) would result in taxation prior to vesting in the taxing jurisdiction applicable to the Participant, then onlyclause (i) shall apply to the settlement of such Participant’s RSUs.- 1 -4. Rights as a Stockholder. The Participant shall not have any rights as a stockholder due to the grant or vesting of any RSUs.5. Taxes. The Employer or an affiliate shall be entitled to withhold and/or deduct any and all amounts required to be withheldfrom any payment hereunder. Regardless of any action the Employer or an affiliate takes with respect to any or all income tax, socialinsurance, payroll tax, or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liabilityfor all Tax-Related Items legally due by the Participant is and remains the Participant’s responsibility and that the Employer and itsaffiliates make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of theRSUs, including the grant or vesting of the RSUs.6. Miscellaneous(a) Restrictions on Transfer. RSUs may not be transferred or otherwise disposed of by the Participant, including byway of sale, assignment, transfer, pledge, hypothecation or otherwise, except as permitted by the Administrator, or by will or the lawsof descent and distribution. No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer intrust (voting or other) or other disposition of, or creation of a security interest in or lien on, the RSUs by any holder thereof in violationof the provisions of this Award Agreement shall be valid.(b) Compliance with Law and Regulations. This Award shall be subject to all applicable federal, state, foreign and locallaws, rules and regulations and to such approvals by any government or regulatory agency as may be required.(c) Incorporation of Plan. This Award Agreement is made pursuant to the provisions of the Plan which is herebyincorporated herein by reference and shall be interpreted in a manner consistent with the Plan. To the extent that this AwardAgreement is silent with respect to, or in any way inconsistent with, the terms of the Plan, the provisions of the Plan shall govern andthis Award Agreement shall be deemed to be modified accordingly.(d) Notices. Any notices required or permitted hereunder shall be addressed to the Company at its principal offices, orto the Participant at the address then on record with the Company. Either party may, by notice given to the other, change his or itsaddress for future notices.(e) Amendment. This Award Agreement may be amended or modified by the Administrator at any time; provided,that, notice is provided to the Participant in accordance with Section 6(d) hereof; and provided, further, that, except as provided in thePlan, no amendment or modification which would constitute an impairment of the rights of the Participant as provided by this AwardAgreement shall be effective unless (a) the Employer requests the consent of the Participant and (b) the Participant consents inwriting.- 2 -(f) Successor. This Award Agreement shall bind and inure to the benefit of the Employer, its successors and assigns,and the Participant and his or her personal representatives and beneficiaries.(g) Authority of the Administrator. The Administrator shall have final authority to interpret and construe the Plan andthis Award Agreement and to make any and all determinations thereunder, and its decisions shall be binding and conclusive upon theParticipant and his or her legal representative in respect of any questions arising under the Plan or this Award Agreement.(h) Governing Law. The validity, performance and construction of the Plan and this Award Agreement shall begoverned by the laws of the State of Maryland, without regard to conflicts of laws principles. The Employer and the Participantconsent to the exclusive jurisdiction of the courts of Harris County, Texas. Any claim arising out of or related to this Award Agreementmust be brought no later than six months after it has accrued.(i) Personally Delivery. The Company and the Participant must deliver any documents related to the RSUs or futureRSUs that may be granted under the Plan in person at the address set in Section 6(d) of this Award Agreement.(j) Severability. The provisions of this Award Agreement are severable and if any one or more provisions aredetermined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding andenforceable.–SIGNATURE PAGE FOLLOWS –- 3 -IN WITNESS WHEREOF, the Parties have executed this Award Agreement on the day and year first above written.KEY ENERGY SERVICES, INC.By Name: Title: The undersigned hereby acknowledges receipt of the Plan, and accepts and agrees to all the terms and provisions of this AwardAgreement and the Plan.«First_Name» «Last_Name»Employee ID Number «Employee_Number»«Street_1» «Street_2» «City», «State» «Zip»- 4 -Exhibit 10.4.4KEY ENERGY SERVICES, INC.2012 EQUITY AND CASH INCENTIVE PLANNONSTATUTORY STOCK OPTION AGREEMENTTHIS NONSTATUTORY STOCK OPTION AGREEMENT (this “Agreement”), dated as of ___________ (the“Date of Grant”), is made by and between Key Energy Services, Inc., a Maryland corporation (the “Company”), and______________ (the “Participant”).R E C I T A L S:WHEREAS, the Company has adopted the Key Energy Services, Inc. 2012 Equity and Cash Incentive Plan (the“Plan”), pursuant to which options may be granted to purchase shares of the Company’s Common Stock; andWHEREAS, the committee of the Board of Directors of the Company responsible for administering the Plan (the“Committee”) has determined that it is in the best interests of the Company and its stockholders to grant to the Participant aNonstatutory Stock Option to purchase the number of shares of the Company’s Common Stock set forth herein.NOW THEREFORE, for and in consideration of the premises and the covenants of the parties contained in thisAgreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, forthemselves, their successors and assigns, hereby agree as follows:1.Grant of Option.The Company hereby grants to the Participant on the Date of Grant an option (the “Option”) to purchase _______shares of Common Stock (such shares of Common Stock, the “Option Shares”) on the terms and conditions set forth in thisAgreement and as otherwise provided in the Plan. The Option is not intended to qualify as an incentive stock option within the meaningof Section 422 of the Code.2. Incorporation by Reference, Etc.The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein,this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in thisAgreement shall have the definitions set forth in the Plan. The Committee shall have final authority to interpret and construe the Planand this Agreement and to make any and all determinations under them, and its decision shall be binding and conclusive upon theParticipant and his or her legal representative in respect of any questions arising under the Plan or this Agreement. In the event of anyconflict or inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall govern and control.- 1 -3. Terms and Conditions.(a) Vesting. Subject to the Participant’s continued service with the Company and its Affiliates on eachapplicable vesting date, the Option shall vest and become exercisable with respect to _____ of the Option Shares on each of the _____anniversaries of the Date of Grant.(b) Exercise Price. The price at which the Participant shall be entitled to purchase the Option Shares upon theexercise of all or any portion of the Option shall be $_____ per Option Share.(c) Expiration Date. The Option shall expire at the end of the period commencing on the Date of Grant andending at 11:59 p.m. Central Time on the day preceding the tenth anniversary of the Date of Grant (the “Expiration Date”).(d) Exercisability of the Option. The Option may be exercised only by written notice in accordance with theoption exercise form approved by the Company, which notice shall either be delivered in person, by mail or by electronic means andshall be accompanied by payment therefor.(e) Payment of Exercise Price. The exercise price of the Option Shares shall be paid, to the extent permittedby applicable statutes and regulations, either (a) in cash or by certified or bank check at the time the Option is exercised or (b) in thediscretion of the Committee, upon such terms as the Committee shall approve, the exercise price may be paid: (i) by delivery to theCompany of other Common Stock, duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal tothe exercise price (or portion thereof) due for the number of shares being acquired, or by means of attestation whereby the Participantidentifies for delivery specific shares of Common Stock that have a Fair Market Value on the date of attestation equal to the exerciseprice (or portion thereof) and receives a number of shares of Common Stock equal to the difference between the number of sharesthereby purchased and the number of identified attestation shares of Common Stock; (ii) a “cashless” exercise program established witha broker; (iii) by reduction in the number of shares of Common Stock otherwise deliverable upon exercise of such Option with a FairMarket Value equal to the aggregate exercise price at the time of exercise, or (iv) in any other form of legal consideration that may beacceptable to the Committee.(f) Effect of Termination of Continuous Service on the Option.(i) Death. If the Participant’s Continuous Service terminates as a result of the Participant’s death,then the Option may be exercised (to the extent that the Participant was entitled to exercise the Option as of the date of death) by theParticipant’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated toexercise the Option upon the Participant’s death, but only within such period of time ending on the earlier of (a) the date twelve (12)months following the date of death or (b) the Expiration Date.(ii) Disability. If the Participant’s Continuous Service terminates as a result of the Participant’sDisability, the Participant may exercise the Option (to the extent that- 2 -the Participant was entitled to exercise the Option as of the date of termination), but only within such period of time ending on the earlierof (a) the date twelve (12) months following such termination or (b) the Expiration Date.(iii) Retirement. If the Participant’s Continuous Service terminates as a result of Retirement, theParticipant may exercise the Option (to the extent that the Participant was entitled to exercise the Option as of the date of termination),but only within such period of time ending on the earlier of (a) the date twelve (12) months following such termination or (b) theExpiration Date.(iv) Termination For Cause. If the Participant’s Continuous Service terminates for Cause, both theunvested and the vested portions of the Option shall be forfeited and expire on the date of such termination.(v) All Other Terminations. Except as is otherwise specifically provided herein, if the Participant’sContinuous Service is terminated for any reason other than those described in clauses (i) through (iv) of this Section 3(f), the Participantmay exercise the Option (to the extent that the Participant was entitled to exercise the Option as of the date of termination), but onlywithin such period of time ending of the earlier of (a) the date three (3) months following the termination of the Participant’sContinuous Service or (b) the Expiration Date.(g) Change in Control.(i) Accelerated Vesting. In the event of a Change of Control, notwithstanding any provision of thePlan or any provision of this Agreement to the contrary, and either in or not in combination with another event such as a termination ofthe Participant’s Continuous Service by the Company without Cause, the Option shall become immediately exercisable with respect to100% of the Option Shares and, to the extent practicable, such acceleration of exercisability shall occur in a manner and at a time whichallows the Participant the ability to participate in the Change in Control transaction with respect to the Common Stock subject to thisAgreement.(ii) Discretionary Cashout. In addition, in the event of a Change in Control, the Committee may, in itsdiscretion and upon at least ten (10) days’ advance notice to the Participant, cancel any outstanding Option, and pay to the Participant, incash or stock, or any combination thereof, the value of such Option based upon the price per share of Common Stock received or to bereceived by other stockholders of the Company in the event.(h) Adjustments. In the event of changes in the outstanding Common Stock or in the capital structure of theCompany after the Date of Grant, the Option will be adjusted or substituted in accordance with Section 11 of the Plan to preserve theeconomic intent of the Award.(i) Compliance with Legal Requirements. The granting and exercise of the Option, and any other obligationsof the Company under this Agreement shall be subject to all applicable federal and state laws, rules and regulations and to such approvalsby any regulatory or- 3 -governmental agency as may be required. The Committee, in its sole discretion, may postpone the issuance or delivery of Option Sharesas the Committee may consider appropriate and may require the Participant to make such representations and furnish such information asit may consider appropriate in connection with the issuance or delivery of Option Shares in compliance with applicable laws, rules andregulations.(j) Transferability. The Option shall not be transferable by the Participant other than by will or the laws ofdescent and distribution.(k) Rights as Stockholder. The Participant shall not be deemed for any purpose to be the owner of any sharesof Common Stock subject to this Option unless, until and to the extent that (i) this Option shall have been exercised pursuant to itsterms; (ii) the Company shall have issued and delivered to the Participant the Option Shares; and (iii) the Participant’s name shall havebeen entered as a stockholder of record with respect to such Option Shares on the books of the Company.(l) Withholding Obligations. The Committee in its sole discretion may permit the Participant to satisfy anyfederal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock pursuant to this Agreement byany of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by theCompany) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of CommonStock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stockunder this Agreement; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amountof tax required to be withheld by law; or (iii) delivering to the Company previously owned and unencumbered shares of Common Stockof the Company.4. Cancellation and Rescission of Option for Detrimental Activity. Upon exercise of the Option, the Participant shallcertify in a manner acceptable to the Company that the Participant has not engaged in any Detrimental Activity. The Committee maycancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired or unpaid portion of the Option if the Participant engagesin any Detrimental Activity. If the Participant engages in Detrimental Activity after exercise of the Option, during any period for whichany restrictive covenant prohibiting such activity applies, such exercise may be rescinded within one (1) year thereafter and theParticipant will be required to pay to the Company the amount of any gain realized as a result of the exercise, in such manner and onsuch terms and conditions as may be required by the Company. The Company shall be entitled to set-off against the amount of any suchgain any amount owed to the Participant by the Company.5. Miscellaneous.(a) Notices. All notices, demands and other communications provided for or permitted hereunder shall bemade in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personaldelivery or by such other electronic means as may be approved by the Company:- 4 -if to the Company:Key Energy Services, Inc.1301 McKinney Street, Suite 1800Houston, Texas 77010Facsimile: 713-651-4559Attention: General Counselif to the Participant, at the Participant’s last known address on file with the Company.All such notices, demands and other communications shall be deemed to have been duly given when delivered by hand, if personallydelivered; when delivered by courier, if delivered by commercial courier service; five (5) business days after being deposited in themail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied.(b) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect thevalidity or enforceability of any other provision of this Agreement, and each other provision of this Agreement shall be severable andenforceable to the extent permitted by law.(c) No Rights to Continue Service. Nothing contained in this Agreement shall be construed as giving theParticipant any right to be retained, in any position, as an employee, consultant or director of the Company or its Affiliates nor shall itinterfere with or restrict in any way the right of the Company or its Affiliates, which right is hereby expressly reserved, to remove,terminate or discharge the Participant at any time for any reason whatsoever.(d) Bound by Plan. By signing this Agreement, the Participant acknowledges that he or she has received a copyof the Plan and has had an opportunity to review the Plan and agrees to be bound by all the terms and provisions of the Plan.(e) Successors. The terms of this Agreement shall be binding upon and inure to the benefit of the Companyand its successors and assigns, and of the Participant and the beneficiaries, executors, administrators, heirs and successors of theParticipant.(f) Entire Agreement. This Agreement and the Plan contain the entire agreement and understandings of theparties hereto with respect to the subject matter contained herein and supersede all prior communications, representations andnegotiations in respect thereto. No change, modification or waiver of any provision of this Agreement shall be valid unless the same be inwriting and signed by the parties hereto.(g) Governing Law. This Agreement shall be construed and interpreted in accordance with the laws of theState of Maryland without regard to principles of conflicts of law thereof, or principals of conflicts of laws of any other jurisdiction thatcould cause the application of the laws of any jurisdiction other than the State of Maryland.- 5 -(h) Amendment/Termination of Plan. The Board may amend or terminate the Plan at any time. However,except as otherwise provided in the Plan, no amendment shall be effective without stockholder approval to the extent stockholderapproval is necessary to satisfy any applicable law or securities exchange listing requirement.(i) Amendment of Award. The Committee may amend the terms of this Agreement; provided, that, theCommittee may not effect any amendment which would otherwise constitute an impairment of the Participant’s rights under this Awardunless (i) the Company requests the Participant’s consent and (ii) the Participant consents in writing.(j) Headings. The headings of the Sections hereof are provided for convenience only and are not to serve as abasis for interpretation or construction, and shall not constitute a part, of this Agreement.(k) Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be anoriginal, with the same effect as if the signatures thereto and hereto were upon the same instrument.[Remainder of page intentionally left blank; signature page to follow]- 6 -IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day first written above.KEY ENERGY SERVICES, INC.By:___________________________Name: Title: ______________________________ [Signature Page to Nonstatutory Stock Option Agreement]S-1Exhibit 10.4.5 KEY ENERGY SERVICES, INC.2012 EQUITY AND CASH INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTThis Restricted Stock Unit Award Agreement (this “Award Agreement”), dated as of the ___ day of __________ 20__ (the“Date of Grant”), is entered into by and between Key Energy Services, Inc., a Maryland corporation (the “Company”), and«First_Name» «Last_Name» (the “Participant).RECITALSPursuant to Section 3.2 of the Key Energy Services, Inc. 2012 Equity and Cash Incentive Plan (the “Plan”), the Administratorhas determined to grant to the Participant the number of Restricted Stock Units set forth below (“RSUs”) on the terms and conditionsset forth in this Award Agreement and the Plan. The RSUs being granted are contingent upon the Participant’s execution of this AwardAgreement and compliance with the terms hereof.Any capitalized terms not defined in this Award Agreement shall have their respective meanings set forth in the Plan. In theevent of any conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan shall control.NOW, THEREFORE, the parties hereto agree as follows:1.Grant of RSUs. The Participant is hereby granted «Number» RSUs. As determined by the Company in its discretion andsubject to the terms and conditions of this Award Agreement, each RSU represents either (i) an unfunded, unsecured promise by theCompany to pay the Participant a cash amount equal to the Fair Market Value of a share of Common Stock or (ii) the right to receive oneshare of Common Stock.2. Vesting and Forfeiture. Subject to the terms and conditions of this Award Agreement and the Plan, RSUs shall vest inaccordance with Schedule A hereto, provided that the Participant is in Continuous Service with the Company on each vesting date.Except as otherwise provided in the Plan, if the Participant’s Continuous Service terminates prior to any vesting date, all unvested RSUsshall immediately be forfeited and the Company shall make no payment to the Participant with respect to the forfeited RSUs.3. Settlement of RSUs. Within twenty business days following the vesting date of any outstanding RSUs, the Company shalldeliver to the Participant, or his or her beneficiary, without charge, either (i) a payment in cash equal to the Fair Market Value of a shareof Common Stock on such date for each RSU that vested, or (ii) the number of shares of Common Stock subject to the RSUs thatvested on such date, in each case reduced by the amount of any applicable withholding taxes; provided that if the delivery of shares ofCommon Stock pursuant to clause (ii) would result in taxation prior to vesting in the taxing jurisdiction applicable to the Participant, thenonly clause (i) shall apply to the settlement of such Participant’s RSUs.-1-4. Rights as a Stockholder. The Participant acknowledges that the Participant shall not have any right in, or with respect to, anyshares of Common Stock (including, but not limited to, any voting rights or rights with respect to cash dividends paid on shares ofCommon Stock) corresponding to RSUs unless and until the RSUs are settled by the issuance of shares of Common Stock to theParticipant pursuant to the terms of this Award Agreement.5. Taxes. To the extent that the receipt or the vesting of the RSUs result in income to the Participant for federal, state,provincial, local or other income tax purposes, the Participant shall pay to the Company or make arrangements satisfactory to theAdministrator regarding payment of any federal, state, provincial, local or other taxes of any kind required by law to be withheld withrespect to such income. The Administrator may permit payment of such taxes to be made through the tender of cash or Common Stock,the withholding of cash otherwise payable or Common Stock out of shares otherwise distributable (provided, however, that the value ofany Common Stock withheld shall not exceed the minimum amount of tax required to be withheld by applicable law) or any otherarrangement satisfactory to the Administrator. The Company shall, to the extent permitted by law, have the right to withhold cash ordelivery of a stock certificate under this Award if the Participant does not pay such taxes to the Company. If the Participant does not paythe entire amount of such taxes to the Company within thirty (30) days after the date on which the income subject to such taxes isrecognized, the Company shall withhold an amount of cash or Common Stock equal to the amount of such taxes remaining to be paid bythe Participant and shall deliver any remaining cash or a certificate for the remaining shares to the Participant. Regardless of any actionthe Company or an affiliate takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant isand remains the Participant’s responsibility and that the Company and its affiliates make no representations or undertakings regarding thetreatment of any Tax-Related Items in connection with any aspect of the RSUs, including the grant or vesting of the RSUs.6. Miscellaneous(a) Restrictions on Transfer. RSUs may not be transferred or otherwise disposed of by the Participant, including byway of sale, assignment, transfer, pledge, hypothecation or otherwise, except as permitted by the Administrator, or by will or the lawsof descent and distribution. No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer intrust (voting or other) or other disposition of, or creation of a security interest in or lien on, the RSUs by any holder thereof in violationof the provisions of this Award Agreement shall be valid.(b) Compliance with Law and Regulations. This Award shall be subject to all applicable federal, state, foreign and locallaws, rules and regulations and to such approvals by any government or regulatory agency as may be required.(c) Incorporation of Plan. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwiseexpressly set forth herein, this Award Agreement shall be construed in accordance with the provisions of the Plan and any capitalizedterms not otherwise defined in this Award Agreement shall have the definitions set forth in the Plan. To-2-the extent that this Award Agreement is silent with respect to, or in any way inconsistent with, the terms of the Plan, the provisions ofthe Plan shall govern and this Award Agreement shall be deemed to be modified accordingly.(d) Notices. Any notices required or permitted hereunder shall be addressed to the Company, at its principal offices, orto the Participant at the address then on record with the Company, as the case may be, and deposited, postage prepaid, in the mail, orsent by email, facsimile or personal delivery. Either party may, by notice to the other given in the manner aforesaid, change his or itsaddress for future notices.(e) Amendment. This Award Agreement may be amended or modified by the Administrator at any time; provided,that, notice is provided to the Participant in accordance with Section 6(d) hereof; and provided, further, that, except as provided in thePlan, no amendment or modification which would constitute an impairment of the rights of the Participant as provided by this AwardAgreement shall be effective unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.(f) Successor. This Award Agreement shall bind and inure to the benefit of the Company, its successors and assigns,and the Participant and his or her personal representatives and beneficiaries.(g) Adjustment Upon Changes in Capitalization. RSUs may be adjusted as provided in the Plan including, withoutlimitation, Section 11 of the Plan. The Participant, by his execution and entry into this Award Agreement, irrevocably andunconditionally consents and agrees to any such adjustments as may be made at any time hereafter.(h) Authority of the Administrator. The Administrator shall have final authority to interpret and construe the Plan andthis Award Agreement and to make any and all determinations thereunder, and its decisions shall be binding and conclusive upon theParticipant and his or her legal representative in respect of any questions arising under the Plan or this Award Agreement.(i) Governing Law. The validity, performance and construction of the Plan and this Award Agreement shall begoverned by the laws of the State of Maryland, without regard to conflicts of laws principles. The Company and the Participant consentto the exclusive jurisdiction of the courts of Harris County, Texas. Any claim arising out of or related to this Award Agreement must bebrought no later than six months after it has accrued.(j) Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to the RSUsor future RSUs that may be granted under the Plan by electronic means or to request the Participant’s consent to participate in the Planby electronic means. The Participant hereby consents to receive such documents by electronic delivery and, if requested, to agree toparticipate in the Plan through an on-line or electronic system established and maintained by Company or another third party designatedby Company.-3-(k) Severability. The provisions of this Award Agreement are severable and if any one or more provisions aredetermined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding andenforceable.(l) No Right to Continuous Service. Nothing in this Award Agreement shall be deemed by implication or otherwise toimpose any limitation on any right of the Company or any of its Affiliates to terminate the Participant’s Continuous Service at any time.-4-IN WITNESS WHEREOF, the Parties have executed this Award Agreement on the day and year first above written.KEY ENERGY SERVICES, INC.By: ____________________________Name: ____________________________Title: ____________________________The undersigned hereby acknowledges receipt of the Plan, and accepts and agrees to all the terms and provisions of this AwardAgreement and the Plan.«First_Name» «Last_Name»Employee ID: Number «Employee_Number»«Street_1» «Street_2» «City», «Province» «Zip» Canada-5- Schedule ARESTRICTED STOCK UNITSVESTING DATE -6-Exhibit 10.4.6KEY ENERGY SERVICES, INC.2012 EQUITY AND CASH INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTThis Award Agreement, dated as of the ___ day of __________ (the “Date of Grant”) is entered into by and between________________ (the “Company”) on behalf of Key Energy Services, Inc., (the “Company”), and «First_Name» «Last_Name»(the “Participant).RECITALSPursuant to Section 3.2 of the Key Energy Services, Inc. 2012 Equity and Cash Incentive Plan (the “Plan”), the Administratorhas determined to grant to the Participant the number of Restricted Stock Units set forth below (“RSUs”) on the terms and conditionsset forth in this Award Agreement and the Plan. The RSUs being granted are contingent upon the Participant’s execution of this AwardAgreement and compliance with the terms hereof.Any capitalized terms not defined in this Award Agreement shall have their respective meanings set forth in the Plan. In theevent of any conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan shall control.NOW, THEREFORE, the parties hereto agree as follows:1.Grant of RSUs. The Participant is hereby granted «Number» RSUs. As determined by the Company in its discretion andsubject to the terms and conditions of this Award Agreement, each RSU represents either (i) an unfunded, unsecured promise by theCompany to pay the Participant a cash amount equal to the Fair Market Value of a share of Common Stock or (ii) the right to receive oneshare of Common Stock.2. Vesting and Forfeiture. Subject to the terms and conditions of this Award Agreement and the Plan, RSUs shall vest inaccordance with Schedule A hereto, provided that the Participant is in Continuous Service with the Company on each vesting date.Except as otherwise provided in the Plan, if the Participant’s Continuous Service terminates prior to any vesting date, all unvested RSUsshall immediately be forfeited and the Company shall make no payment to the Participant with respect to the forfeited RSUs.3. Settlement of RSUs. Within twenty business days following the vesting date of any outstanding RSUs, the Company shalldeliver to the Participant, or his or her beneficiary, without charge, either (i) a payment in cash equal to the Fair Market Value of a shareof Common Stock on such date for each RSU that vested, or (ii) the number of shares of Common Stock subject to the RSUs thatvested on such date, in each case reduced by the amount of any applicable withholding taxes; provided that if the delivery of shares ofCommon Stock pursuant to clause (ii) would result in taxation prior to vesting in the taxing jurisdiction applicable to the Participant, thenonly clause (i) shall apply to the settlement of such Participant’s RSUs.-1-4. Rights as a Stockholder. The Participant acknowledges that the Participant shall not have any right in, or with respect to, anyshares of Common Stock (including, but not limited to, any voting rights or rights with respect to cash dividends paid on shares ofCommon Stock) corresponding to RSUs unless and until the RSUs are settled by the issuance of shares of Common Stock to theParticipant pursuant to the terms of this Award Agreement.5. Taxes. To the extent that the receipt or the vesting of the RSUs result in income to the Participant for federal, state,provincial, local or other income tax purposes, the Participant shall pay to the Company or make arrangements satisfactory to theAdministrator regarding payment of any federal, state, provincial, local or other taxes of any kind required by law to be withheld withrespect to such income. The Administrator may permit payment of such taxes to be made through the tender of cash or Common Stock,the withholding of cash otherwise payable or Common Stock out of shares otherwise distributable (provided, however, that the value ofany Common Stock withheld shall not exceed the minimum amount of tax required to be withheld by applicable law) or any otherarrangement satisfactory to the Administrator. The Company shall, to the extent permitted by law, have the right to withhold cash ordelivery of a stock certificate under this Award if the Participant does not pay such taxes to the Company. If the Participant does not paythe entire amount of such taxes to the Company within thirty (30) days after the date on which the income subject to such taxes isrecognized, the Company shall withhold an amount of cash or Common Stock equal to the amount of such taxes remaining to be paid bythe Participant and shall deliver any remaining cash or a certificate for the remaining shares to the Participant. Regardless of any actionthe Company or an affiliate takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant isand remains the Participant’s responsibility and that the Company and its affiliates make no representations or undertakings regarding thetreatment of any Tax-Related Items in connection with any aspect of the RSUs, including the grant or vesting of the RSUs.6. Miscellaneous(a) Restrictions on Transfer. RSUs may not be transferred or otherwise disposed of by the Participant, including byway of sale, assignment, transfer, pledge, hypothecation or otherwise, except as permitted by the Administrator, or by will or the lawsof descent and distribution. No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer intrust (voting or other) or other disposition of, or creation of a security interest in or lien on, the RSUs by any holder thereof in violationof the provisions of this Award Agreement shall be valid.(b) Compliance with Law and Regulations. This Award shall be subject to all applicable federal, state, foreign and locallaws, rules and regulations and to such approvals by any government or regulatory agency as may be required.(c) Incorporation of Plan. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwiseexpressly set forth herein, this Award Agreement shall be construed in accordance with the provisions of the Plan and any capitalizedterms not otherwise defined in this Award Agreement shall have the definitions set forth in the Plan. To the-2-extent that this Award Agreement is silent with respect to, or in any way inconsistent with, the terms of the Plan, the provisions of thePlan shall govern and this Award Agreement shall be deemed to be modified accordingly.(d) Notices. Any notices required or permitted hereunder shall be addressed to the Company at its principal offices, orto the Participant at the address then on record with the Company. Either party may, by notice given to the other, change his or itsaddress for future notices.(e) Amendment. This Award Agreement may be amended or modified by the Administrator at any time; provided,that, notice is provided to the Participant in accordance with Section 6(d) hereof; and provided, further, that, except as provided in thePlan, no amendment or modification which would constitute an impairment of the rights of the Participant as provided by this AwardAgreement shall be effective unless (a) the Company requests the consent of the Participant and (b) the Participant consents in writing.(f) Successor. This Award Agreement shall bind and inure to the benefit of the Company, its successors and assigns,and the Participant and his or her personal representatives and beneficiaries.(g) Adjustment Upon Changes in Capitalization. RSUs may be adjusted as provided in the Plan including, withoutlimitation, Section 11 of the Plan. The Participant, by his execution and entry into this Award Agreement, irrevocably andunconditionally consents and agrees to any such adjustments as may be made at any time hereafter.(h) Authority of the Administrator. The Administrator shall have final authority to interpret and construe the Plan andthis Award Agreement and to make any and all determinations thereunder, and its decisions shall be binding and conclusive upon theParticipant and his or her legal representative in respect of any questions arising under the Plan or this Award Agreement.(i) Governing Law. The validity, performance and construction of the Plan and this Award Agreement shall begoverned by the laws of the State of Maryland, without regard to conflicts of laws principles. The Company and the Participant consentto the exclusive jurisdiction of the courts of Harris County, Texas. Any claim arising out of or related to this Award Agreement must bebrought no later than six months after it has accrued.(j) Personal Delivery. The Company and the Participant must deliver any documents related to the RSUs or futureRSUs that may be granted under the Plan in person at the address set in Section 6(d) of this Award Agreement.(k) Severability. The provisions of this Award Agreement are severable and if any one or more provisions aredetermined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding andenforceable.-3-(l) No Right to Continuous Service. Nothing in this Award Agreement shall be deemed by implication or otherwise toimpose any limitation on any right of the Company or any of its Affiliates to terminate the Participant’s Continuous Service at any time.–SIGNATURE PAGE FOLLOWS –-4-IN WITNESS WHEREOF, the Parties have executed this Award Agreement on the day and year first above written.KEY ENERGY SERVICES, INC.By: ____________________________ Name: ____________________________Title: ____________________________The undersigned hereby acknowledges receipt of the Plan, and accepts and agrees to all the terms and provisions of this AwardAgreement and the Plan.«First_Name» «Last_Name»Employee ID Number «Employee_Number»«Street_1» «Street_2» «City», «State» «Zip»-5-Schedule ARESTRICTED STOCK UNITSVESTING DATE -6-Exhibit 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 organization and the namesunder which each subsidiary does business. The names of certain subsidiaries are omitted as such subsidiaries, considered as a single subsidiary, would notconstitute a significant subsidiary. Subsidiary/Doing Business As State ofIncorporation/Organization Key Energy Services, LLCTexasKey Energy Services California, Inc.TexasKey Energy Services de Mexico S. De R.L. De C.V.MexicoExhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated February 25, 2013, with respect to the consolidated financial statements and internal control over financial reportingincluded in the Annual Report of Key Energy Services, Inc. on Form 10-K for the year ended December 31, 2012. We hereby consent to the incorporation byreference of said reports in the Registration Statements of Key Energy Services, Inc. on Forms S-8 (File No. 333-146293, effective September 25, 2007, FileNo. 333-146294, effective September 25, 2007, File No. 333-150098, effective April 4, 2008, File No. 333-159794, effective June 5, 2009 and File No. 333-181541, effective May 18, 2012 and on Forms S-3 (File No. 333‑171322, effective December 21, 2010, and File No. 333-172532, effective March 1, 2011)./s/ GRANT THORNTON LLPHouston, TexasFebruary 25, 2013Exhibit 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 fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect 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 all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to 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 be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant'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 financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. By: /s/ RICHARD J. ALARIO Richard J. Alario,President and Chief Executive Officer(Principal Executive Officer)Date: February 25, 2013Exhibit 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 fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect 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 all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to 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 be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant'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 financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. By: /S/ T. M. WHICHARD III T. M. Whichard III, Senior Vice President and Chief Financial Officer(Principal Financial Officer) Date: February 25, 2013Exhibit 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, as adopted pursuant toSection 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, 2012 as filed with the U.S. Securities and ExchangeCommission (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany 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 25, 2013 /S/ T. M. WHICHARD IIIT. M. Whichard III,Senior Vice President and Chief Financial Officer(Principal Financial Officer)Dated: February 25, 2013

Continue reading text version or see original annual report in PDF format above