##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission file number 1-2199
 ALLIS-CHALMERS
ENERGY INC.
  DELAWARE
    
    39-0126090(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
  (713) 369-0550
  þ o
  o o þ
 o þ




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##### 



ALLIS-CHALMERS ENERGY INC.
 FORM 10-Q
 For the Quarterly Period Ended June 30, 2006
 TABLE OF CONTENTS
 ITEM
    
    
    
    PAGEPART I1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Consolidated Condensed Income Statements for the three and six months ended June 30, 2006 and 2005
    
    
    4Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2006 and 2005
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    62.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    173.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    274.
    
    Controls and Procedures
    
    
    27PART II1.
    
    Legal Proceedings
    
    
    282.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    286.
    
    Exhibits
    
    
    28Signatures
    
    
    29Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCash and cash equivalents
    
    $
    6,208
    
    
    $
    1,920Trade receivables, net
    
    
    49,114
    
    
    
    26,964Inventory
    
    
    9,897
    
    
    
    5,945Prepaid expenses and other
    
    
    2,655
    
    
    
    823Total current assets
    
    
    67,874
    
    
    
    35,652Property and equipment, net
    
    
    185,750
    
    
    
    80,574Goodwill
    
    
    12,417
    
    
    
    12,417Other intangible assets, net
    
    
    7,131
    
    
    
    6,783Debt issuance costs, net
    
    
    6,187
    
    
    
    1,298Other assets
    
    
    1,327
    
    
    
    631Total assets
    
    $
    280,686
    
    
    $
    137,355Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    4,059
    
    
    $
    5,632Trade accounts payable
    
    
    9,616
    
    
    
    9,018Accrued salaries, benefits and payroll taxes
    
    
    2,270
    
    
    
    1,271Accrued interest
    
    
    6,654
    
    
    
    289Accrued income taxes
    
    
    1,686
    
    
    
    668Accrued expenses
    
    
    6,095
    
    
    
    3,682Accounts payable, related parties
    
    
    
    
    
    
    60Total current liabilities
    
    
    30,380
    
    
    
    20,620Accrued postretirement benefit obligations
    
    
    319
    
    
    
    335Long-term debt, net of current maturities
    
    
    165,957
    
    
    
    54,937Other long-term liabilities
    
    
    749
    
    
    
    588Total liabilities
    
    
    197,405
    
    
    
    76,480Commitments and contingenciesStockholders EquityPreferred stock, $0.01 par value (25,000,000 shares authorized, no shares issued)
    
    
    
    
    
    
    Common stock, $0.01 par value (100,000,000 shares authorized;
18,516,714 issued and outstanding at June 30, 2006 and
16,859,988 issued and outstanding at December 31, 2005)
    
    
    185
    
    
    
    169Capital in excess of par value
    
    
    67,261
    
    
    
    58,889Retained earnings
    
    
    15,835
    
    
    
    1,817Total stockholders equity
    
    
    83,281
    
    
    
    60,875Total liabilities and stockholders equity
    
    $
    280,686
    
    
    $
    137,355
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ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED INCOME STATEMENTS
   For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    60,470
    
    
    $
    23,588
    
    
    $
    107,498
    
    
    $
    42,922Cost of revenuesDirect costs
    
    
    31,966
    
    
    
    15,691
    
    
    
    59,081
    
    
    
    28,476Depreciation
    
    
    3,828
    
    
    
    1,092
    
    
    
    7,158
    
    
    
    2,006Total cost of revenues
    
    
    35,794
    
    
    
    16,783
    
    
    
    66,239
    
    
    
    30,482Gross margin
    
    
    24,676
    
    
    
    6,805
    
    
    
    41,259
    
    
    
    12,440General and administrative
    
    
    8,139
    
    
    
    3,465
    
    
    
    15,482
    
    
    
    6,459Amortization
    
    
    666
    
    
    
    426
    
    
    
    1,273
    
    
    
    820Income from operations
    
    
    15,871
    
    
    
    2,914
    
    
    
    24,504
    
    
    
    5,161Other income (expense):Interest
    
    
    (3,797
    )
    
    
    (645
    )
    
    
    (7,425
    )
    
    
    (1,166
    )Other
    
    
    (6
    )
    
    
    10
    
    
    
    20
    
    
    
    158Total other income (expense)
    
    
    (3,803
    )
    
    
    (635
    )
    
    
    (7,405
    )
    
    
    (1,008
    )Net income before minority interest
and income taxes
    
    
    12,068
    
    
    
    2,279
    
    
    
    17,099
    
    
    
    4,153Minority interest in income of subsidiaries
    
    
    
    
    
    
    (344
    )
    
    
    
    
    
    
    (488
    )Provision for income taxes
    
    
    (2,474
    )
    
    
    (166
    )
    
    
    (3,081
    )
    
    
    (329
    )Net income
    
    $
    9,594
    
    
    $
    1,769
    
    
    $
    14,018
    
    
    $
    3,336Net income per common share:Basic
    
    $
    0.53
    
    
    $
    0.13
    
    
    $
    0.80
    
    
    $
    0.24Diluted
    
    $
    0.50
    
    
    $
    0.12
    
    
    $
    0.74
    
    
    $
    0.22Weighted average shares outstanding:Basic
    
    
    18,050
    
    
    
    13,967
    
    
    
    17,578
    
    
    
    13,800Diluted
    
    
    19,140
    
    
    
    15,103
    
    
    
    19,000
    
    
    
    14,900
  4




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ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   For the Six Months EndedJune 30,2006
    
    
    2005Cash Flows from Operating Activities:Net income
    
    $
    14,018
    
    
    $
    3,336Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    7,158
    
    
    
    2,006Amortization
    
    
    1,273
    
    
    
    820Imputed interest
    
    
    355
    
    
    
    Stock option expense
    
    
    1,778
    
    
    
    Provision for bad debts
    
    
    279
    
    
    
    Minority interest in income of subsidiaries
    
    
    
    
    
    
    488Loss on sale of property and equipment
    
    
    119
    
    
    
    Changes in operating assets and liabilities, net of acquisitions:(Increase) in trade receivable
    
    
    (13,581
    )
    
    
    (3,024
    )(Increase) in inventory
    
    
    (1,499
    )
    
    
    (1,090
    )Decrease in other current assets
    
    
    278
    
    
    
    201(Increase) in other assets
    
    
    (663
    )
    
    
    (375
    )(Decrease) increase in accounts payable
    
    
    (1,517
    )
    
    
    610Increase in accrued interest
    
    
    6,365
    
    
    
    35Increase (decrease) in accrued expenses
    
    
    1,818
    
    
    
    (296
    )Increase in accrued salaries, benefits and payroll taxes
    
    
    657
    
    
    
    172Increase in other long-term liabilities
    
    
    145
    
    
    
    6Net Cash Provided By Operating Activities
    
    
    16,983
    
    
    
    2,889Cash Flows from Investing Activities:Acquisition of businesses, net of cash received
    
    
    (106,564
    )
    
    
    (7,088
    )Proceeds from sale of property and equipment
    
    
    1,814
    
    
    
    Purchase of property and equipment
    
    
    (14,246
    )
    
    
    (5,463
    )Net Cash Used In Investing Activities
    
    
    (118,996
    )
    
    
    (12,551
    )Cash Flows from Financing Activities:Proceeds from exercises of options and warrants
    
    
    4,960
    
    
    
    Proceeds from long-term debt
    
    
    161,412
    
    
    
    5,210Proceeds from line of credit
    
    
    5,000
    
    
    
    Repayments on long-term debt
    
    
    (45,291
    )
    
    
    Repayments on related party debt
    
    
    (3,031
    )
    
    
    Repayments on line of credit
    
    
    (11,400
    )
    
    
    Debt issuance costs
    
    
    (5,349
    )
    
    
    (199
    )Net Cash Provided By Financing Activities
    
    
    106,301
    
    
    
    5,011Net change in cash and cash equivalents
    
    
    4,288
    
    
    
    (4,651
    )Cash and cash equivalents at beginning of year
    
    
    1,920
    
    
    
    7,344Cash and cash equivalents at end of period
    
    $
    6,208
    
    
    $
    2,693
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ALLIS-CHALMERS ENERGY INC.
 
 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations
   Basis of Presentation
    Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 6




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 2  ACQUISITIONS
  Current assets
    
    $
    4,520Property and equipment
    
    
    9,866Intangible assets
    
    
    1,131Total assets acquired
    
    
    15,517Current liabilities
    
    
    1,717Other long-term liabilities
    
    
    100Total liabilities assumed
    
    
    1,817Net assets acquired
    
    $
    13,700
   Accounts receivable
    
    $
    7,167Other current assets
    
    
    425Property and equipment
    
    
    90,540Total assets acquired
    
    
    98,132Current liabilities
    
    
    2,058Long-term debt
    
    
    74Total liabilities assumed
    
    
    2,132Net assets acquired
    
    $
    96,000
     7




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 2  ACQUISITIONS (Continued)
     For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    60,470
    
    
    $
    35,572
    
    
    $
    109,583
    
    
    $
    65,567Operating income
    
    
    15,871
    
    
    
    7,369
    
    
    
    24,510
    
    
    
    10,834Net income
    
    
    9,594
    
    
    
    4,307
    
    
    
    13,910
    
    
    
    5,322Net income per common share:Basic
    
    $
    0.53
    
    
    $
    0.31
    
    
    $
    0.79
    
    
    $
    0.37Diluted
    
    $
    0.50
    
    
    $
    0.28
    
    
    $
    0.73
    
    
    $
    0.35
 NOTE 3  STOCK-BASED COMPENSATION
 Share-Based Payment
  8




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 3  STOCK-BASED COMPENSATION (Continued)
 Accounting For Stock-Based Compensation
  Weighted
    
    Weighted-Shares
    
    Average
    
    Average
    
    AggregateUnder
    
    Exercise
    
    Contractual
    
    Intrinsic ValueOption
    
    Price
    
    Life (Years)
    
    (millions)Balance at beginning of period
    
    
    2,860,867
    
    
    $
    5.10Granted
    
    
    
    
    
    
    Canceled
    
    
    (38,333
    )
    
    
    4.52Exercised
    
    
    (1,217,999
    )
    
    
    3.43Outstanding at end of period
    
    
    1,604,535
    
    
    
    6.39
    
    
    
    8.74
    
    
    $
    11.6Exercisable at end of period
    
    
    782,702
    
    
    
    5.34
    
    
    
    8.46
    
    
    $
    6.5
   For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30, 2005
    
    June 30, 2005Expected dividend yield
    
    
    
    
    
    
    Expected price volatility
    
    
    89.91
    %
    
    
    98.65
    %Risk-free interest rate
    
    
    6.25
    %
    
    
    6.63
    %Expected life of options
    
    7 years
    
    7 yearsWeighted average fair value of options
granted at market value
    
    $
    4.01
    
    
    $
    3.12
 9




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 3  STOCK-BASED COMPENSATION (Continued)
  Three Months
    
    
    Six MonthsEnded June 30,2005
    
    
    2005Net income: As reported
    
    
    
    $
    1,769
    
    
    $
    3,336Less total stock based employee
compensation expense determined under
fair value based method for all awards
net of tax related effects
    
    
    
    
    (836
    )
    
    
    (1,505
    )Pro forma net income
    
    
    
    $
    933
    
    
    $
    1,831Net income per share:Basic
    
    As reported
    
    $
    0.13
    
    
    $
    0.24Pro forma
    
    $
    0.07
    
    
    $
    0.13Diluted
    
    As reported
    
    $
    0.12
    
    
    $
    0.22Pro forma
    
    $
    0.06
    
    
    $
    0.12
 NOTE 4  INCOME PER COMMON SHARE
 Earnings Per
Share
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    9,594
    
    
    $
    1,769
    
    
    $
    14,018
    
    
    $
    3,336Denominator:Basic earnings per share  weighted
average shares outstanding
    
    
    18,050
    
    
    
    13,967
    
    
    
    17,578
    
    
    
    13,800Effect of potentially dilutive common
shares:Warrants and employee and director
stock options
    
    
    1,090
    
    
    
    1,136
    
    
    
    1,422
    
    
    
    1,100Diluted earnings per share 
weighted average sharesOutstanding and assumed
conversions
    
    
    19,140
    
    
    
    15,103
    
    
    
    19,000
    
    
    
    14,900Net income per share  basic
    
    $
    0.53
    
    
    $
    0.13
    
    
    $
    0.80
    
    
    $
    0.24Net income per share  diluted
    
    $
    0.50
    
    
    $
    0.12
    
    
    $
    0.74
    
    
    $
    0.22
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 5  GOODWILL AND INTANGIBLE ASSETS
 Goodwill and Other Intangible Assets
  NOTE 6  INVENTORY
  June 30,
    
    
    December 31,2006
    
    
    2005Hammer bitsFinished goods
    
    $
    1,507
    
    
    $
    1,402Work in process
    
    
    1,616
    
    
    
    787Raw materials
    
    
    2,429
    
    
    
    233Total hammer bits
    
    
    5,552
    
    
    
    2,422Hammers
    
    
    801
    
    
    
    584Drive pipe
    
    
    572
    
    
    
    666Rental supplies
    
    
    355
    
    
    
    64Chemicals
    
    
    132
    
    
    
    201Coiled tubing and related inventory
    
    
    1,278
    
    
    
    1,145Shop supplies and related inventory
    
    
    1,207
    
    
    
    863Total inventory
    
    $
    9,897
    
    
    $
    5,945
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7- DEBT
  June 30,
    
    
    December 31,2006
    
    
    2005Senior notes
    
    $
    160,000
    
    
    $
    Bank term loans
    
    
    
    
    
    
    42,090Revolving line of credit
    
    
    
    
    
    
    6,400Subordinated note payable to M-1 LLC
    
    
    4,000
    
    
    
    4,000Subordinated seller note
    
    
    
    
    
    
    3,031Seller notes
    
    
    900
    
    
    
    850Notes payable under non-compete agreements
    
    
    443
    
    
    
    698Notes payable to former directors
    
    
    32
    
    
    
    96Real estate loan
    
    
    
    
    
    
    548Equipment and vehicle installment notes
    
    
    2,417
    
    
    
    1,939Insurance premium financing
    
    
    1,553
    
    
    
    Capital lease obligations
    
    
    671
    
    
    
    917Total debt
    
    
    170,016
    
    
    
    60,569Less: short-term debt and current maturities
    
    
    4,059
    
    
    
    5,632Long-term debt obligations
    
    $
    165,957
    
    
    $
    54,937
 Senior notes, bank loans and line of credit agreements
   
    
    A $13.0 million revolving line of credit. Borrowings were limited to 85% of eligible
accounts receivable plus 50% of eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was to be used to finance working
capital requirements and other general corporate purposes, including the issuance of
standby letters of credit. Outstanding borrowings under this line of credit were $6.4
million at a margin above prime and LIBOR rates plus margin averaging approximately 8.1% as
of December 31, 2005.
    
    Two term loans totaling $42.0 million. Outstanding borrowings under these term loans
were $42.0 million as of December 31, 2005. These loans were at LIBOR rates plus a margin
which averages approximately 7.8% at December 31, 2005.
   12




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7  DEBT (Continued)
 Notes payable and real estate loan
        13




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7  DEBT (Continued)
 Other debt
  NOTE 8  STOCKHOLDERS EQUITY
  NOTE 9  SUPPLEMENTAL CASH FLOW INFORMATION
 For the Six Months EndedJune 30,2006
    
    
    2005Cash paid for interest and income taxes:Interest
    
    $
    832
    
    
    $
    1,166Income taxes
    
    $
    2,063
    
    
    $
    329Noncash activities:Insurance premium financed
    
    $
    1,933
    
    
    $
    Common stock issued for acquisition of business
    
    $
    1,650
    
    
    $
    Note payable issued for acquisition of business
    
    $
    750
    
    
    $
    Non-compete payable in the future
    
    $
    150
    
    
    $
    
 NOTE 10- SEGMENT INFORMATION
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesDirectional drilling services
    
    $
    18,315
    
    
    $
    10,934
    
    
    $
    33,369
    
    
    $
    20,835Rental tools
    
    
    12,707
    
    
    
    1,566
    
    
    
    23,128
    
    
    
    1,940Casing and tubing services
    
    
    14,569
    
    
    
    3,933
    
    
    
    24,028
    
    
    
    7,493Compressed air drilling services
    
    
    10,949
    
    
    
    4,866
    
    
    
    20,048
    
    
    
    9,047Production services
    
    
    3,930
    
    
    
    2,289
    
    
    
    6,925
    
    
    
    3,607$
    60,470
    
    
    $
    23,588
    
    
    $
    107,498
    
    
    $
    42,922
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 10  SEGMENT INFORMATION (Continued)
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating Income (Loss):Directional drilling services
    
    $
    4,367
    
    
    $
    1,495
    
    
    $
    6,972
    
    
    $
    3,373Rental tools
    
    
    7,308
    
    
    
    405
    
    
    
    12,306
    
    
    
    326Casing and tubing services
    
    
    4,314
    
    
    
    1,354
    
    
    
    6,165
    
    
    
    2,679Compressed air drilling services
    
    
    3,204
    
    
    
    1,002
    
    
    
    5,441
    
    
    
    1,529Production services
    
    
    341
    
    
    
    36
    
    
    
    618
    
    
    
    (2
    )General corporate
    
    
    (3,663
    )
    
    
    (1,378
    )
    
    
    (6,998
    )
    
    
    (2,744
    )$
    15,871
    
    
    $
    2,914
    
    
    $
    24,504
    
    
    $
    5,161Depreciation and Amortization:Directional drilling services
    
    $
    359
    
    
    $
    207
    
    
    $
    648
    
    
    $
    357Rental tools
    
    
    1,715
    
    
    
    176
    
    
    
    3,386
    
    
    
    265Casing and tubing services
    
    
    1,069
    
    
    
    468
    
    
    
    1,768
    
    
    
    908Compressed air drilling services
    
    
    731
    
    
    
    422
    
    
    
    1,415
    
    
    
    870Production services
    
    
    299
    
    
    
    189
    
    
    
    592
    
    
    
    325General corporate
    
    
    321
    
    
    
    56
    
    
    
    622
    
    
    
    101$
    4,494
    
    
    $
    1,518
    
    
    $
    8,431
    
    
    $
    2,826Capital Expenditures:Directional drilling services
    
    $
    707
    
    
    $
    937
    
    
    $
    3,405
    
    
    $
    1,200Rental tools
    
    
    417
    
    
    
    7
    
    
    
    1,101
    
    
    
    7Casing and tubing services
    
    
    4,373
    
    
    
    217
    
    
    
    5,500
    
    
    
    1,857Compressed air drilling services
    
    
    792
    
    
    
    1,147
    
    
    
    3,016
    
    
    
    1,926Production services
    
    
    365
    
    
    
    253
    
    
    
    1,046
    
    
    
    290General corporate
    
    
    6
    
    
    
    174
    
    
    
    178
    
    
    
    183$
    6,660
    
    
    $
    2,735
    
    
    $
    14,246
    
    
    $
    5,463
 As ofJune 30,
    
    
    December 31,2006
    
    
    2005Goodwill:Directional drilling services
    
    $
    4,168
    
    
    $
    4,168Rental tools
    
    
    
    
    
    
    Casing and tubing services
    
    
    3,673
    
    
    
    3,673Compressed air drilling services
    
    
    3,950
    
    
    
    3,950Production services
    
    
    626
    
    
    
    626General corporate
    
    
    
    
    
    
    $
    12,417
    
    
    $
    12,417Assets:Directional drilling services
    
    $
    28,496
    
    
    $
    20,960Rental tools
    
    
    105,994
    
    
    
    8,034Casing and tubing services
    
    
    67,984
    
    
    
    45,351Compressed air drilling services
    
    
    49,502
    
    
    
    46,045Production services
    
    
    13,853
    
    
    
    12,282General corporate
    
    
    14,857
    
    
    
    4,683$
    280,686
    
    
    $
    137,355
 15




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 10  SEGMENT INFORMATION (Continued)
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:United States
    
    $
    58,572
    
    
    $
    21,832
    
    
    $
    103,662
    
    
    $
    39,393International
    
    
    1,898
    
    
    
    1,756
    
    
    
    3,836
    
    
    
    3,529$
    60,470
    
    
    $
    23,588
    
    
    $
    107,498
    
    
    $
    42,922
 NOTE 11  LEGAL MATTERS
   NOTE 12  SUBSEQUENT EVENTS
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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 This document contains forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in such forward-looking statements.
Factors that might cause such differences include, but are not limited to, the general condition of
the oil and natural gas drilling industry, demand for our oil and natural gas service and rental
products, and competition. Other factors are identified in our SEC filings, including our Annual
Report on Form 10-K for the year ended December 31, 2005 under the heading Risk Factors located
at the end of Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 The following discussion and analysis should be read in conjunction with our selected historical
financial data and our accompanying financial statements and the notes to those financial
statements included elsewhere in this document. The following discussion contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect
our plans, estimates and beliefs. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of risks and uncertainties, including,
but not limited to, those discussed above.
 Overview of Our Business
     17




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Comparison of Three Months Ended June 30, 2006 and 2005
    Share-Based Payment,
  18




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Revenues
    
    
    Income (Loss) from OperationsThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    
    
    
    
    
    
    
    
    June 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(in thousands)Directional drilling services
    
    $
    18,315
    
    
    $
    10,934
    
    
    $
    7,381
    
    
    $
    4,367
    
    
    $
    1,495
    
    
    $
    2,872Rental tools
    
    
    12,707
    
    
    
    1,566
    
    
    
    11,141
    
    
    
    7,308
    
    
    
    405
    
    
    
    6,903Casing and tubing services
    
    
    14,569
    
    
    
    3,933
    
    
    
    10,636
    
    
    
    4,314
    
    
    
    1,354
    
    
    
    2,960Compressed air drilling services
    
    
    10,949
    
    
    
    4,866
    
    
    
    6,083
    
    
    
    3,204
    
    
    
    1,002
    
    
    
    2,202Production services
    
    
    3,930
    
    
    
    2,289
    
    
    
    1,641
    
    
    
    341
    
    
    
    36
    
    
    
    305General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,663
    )
    
    
    (1,378
    )
    
    
    (2,285
    )Total
    
    $
    60,470
    
    
    $
    23,588
    
    
    $
    36,882
    
    
    $
    15,871
    
    
    $
    2,914
    
    
    $
    12,957
 Directional Drilling Services Segment
  Rental Tools Segment
  19




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Casing and Tubing Services Segment
  Compressed Air Drilling Services Segment
  Production Services Segment
  General Corporate
  Comparison of Six Months Ended June 30, 2006 and 2005
  20




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Share-Based Payment,
      21




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Revenues
    
    
    Income (Loss) from OperationsSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(in thousands)Directional drilling services
    
    $
    33,369
    
    
    $
    20,835
    
    
    $
    12,534
    
    
    $
    6,972
    
    
    $
    3,373
    
    
    $
    3,599Rental tools
    
    
    23,128
    
    
    
    1,940
    
    
    
    21,188
    
    
    
    12,306
    
    
    
    326
    
    
    
    11,980Casing and tubing services
    
    
    24,028
    
    
    
    7,493
    
    
    
    16,535
    
    
    
    6,165
    
    
    
    2,679
    
    
    
    3,486Compressed air drilling services
    
    
    20,048
    
    
    
    9,047
    
    
    
    11,001
    
    
    
    5,441
    
    
    
    1,529
    
    
    
    3,912Production services
    
    
    6,925
    
    
    
    3,607
    
    
    
    3,318
    
    
    
    618
    
    
    
    (2
    )
    
    
    620General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,998
    )
    
    
    (2,744
    )
    
    
    (4,254
    )Total
    
    $
    107,498
    
    
    $
    42,922
    
    
    $
    64,576
    
    
    $
    24,504
    
    
    $
    5,161
    
    
    $
    19,343
 Directional Drilling Services Segment
  Rental Tools Segment
  Casing and Tubing Services Segment
  Compressed Air Drilling Services Segment
  22




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Production Services Segment
  General Corporate
  Liquidity and Capital Resources
  Operating Activities
    23




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##### Table of Contents



Investing Activities
  Financing Activities
    
    
    A $13.0 million revolving line of credit. Borrowings were limited to 85% of eligible
accounts receivable plus 50% of eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was to be used to finance working
capital requirements and other general corporate purposes, including the issuance of
standby letters of credit. Outstanding borrowings under this line of credit were $6.4
million at a margin above prime and LIBOR rates plus margin averaging approximately 8.1% as
of December 31, 2005.
    
    Two term loans totaling $42.0 million. Outstanding borrowings under these term loans
were $42.0 million as of December 31, 2005. These loans were at LIBOR rates plus a margin
which averages approximately 7.8% at December 31, 2005.
    24




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25




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Capital Requirements
   Recent Developments
       Critical Accounting Policies
  Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 26




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
  Interest Rate Risk.
    Foreign Currency Exchange Rate Risk.
  
 ITEM 4. CONTROLS AND PROCEDURES.
 (a) Evaluation of Disclosure Controls and Procedures
   Earnings Per Share
   27




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##### Table of Contents



(b) Change in Internal Control Over Financial Reporting.
  
    
    We continued the engagement of an independent internal controls consulting firm which is
in the process of documenting, analyzing, identifying and testing internal control.
    
    During the quarter we continued the process of consolidating our payroll functions to
improve quality control over the process. In addition we identified a new third party
processor to handle our payroll calculations.
    
    We continue to implement improvements in the way the accounting software is utilized.
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
 ITEM 6. EXHIBITS
  28




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SIGNATURES
  Allis-Chalmers Energy Inc.(Registrant)/S/ MUNAWAR H. HIDAYATALLAH

Munawar H. HidayatallahChief Executive Officer and Chairman
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##### Table of Contents



EXHIBIT INDEX
 1.1
    
    Underwriting Agreement dated as of August 8, 2006 by and between the Registrant and the
underwriters listed on Schedule A thereto (incorporated by reference to Exhibit 1.1 to the
Registrants Form 8-K filed on August 9, 2006).4.1
    
    First Supplemental Indenture dated as of August 8, 2006 by and among Allis-Chalmers GP, LLC,
a Delaware limited liability company, Allis-Chalmers LP, LLC, a Delaware limited liability
company, Allis-Chalmers Management, LP, a Texas limited partnership, Rogers Oil Tool Services,
Inc., a Louisiana corporation, the Registrant, the other Guarantors (as defined in the
Indenture referred to therein) and Wells Fargo Bank, N.A (incorporated by reference to Exhibit
4.2 to the Registrants Form 8-K filed on August 14, 2006).4.2
    
    Form of 9.0% Senior Note due 2014 (incorporated by reference to Exhibit 4.2 to the
Registrants Form 8-K filed on August 14, 2006).10.1
    
    Purchase Agreement dated as of August 8, 2006 by and between the Registrant, the guarantors
listed on Schedule B thereto and RBC Capital Markets Corporation (incorporated by reference to
Exhibit 10.4 to the Registrants Form 8-K filed on August 14, 2006).10.2
    
    Registration Rights Agreement dated as of August 14, 2006 by and among the Registrant, the
guarantors named thereto and RBC Capital Markets Corporation (incorporated by reference to
Exhibit 10.1 to the Registrants Form 8-K filed on August 14, 2006).10.3
    
    Investors Rights Agreement dated as of August 18, 2006 by and among the Registrant and the
investors named on Schedule A thereto (incorporated by reference to Exhibit 10.1 to the
Registrants Form 8-K filed on August 14, 2006).10.4
    
    First Amendment to Amended and Restated Credit Agreement dated as of August 8, 2006, by and
among the Registrant, the guarantors named thereto and Royal Bank of Canada (incorporated by
reference to Exhibit 10.3 to the Registrants Form 8-K filed on August 14, 2006).31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith 30