##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM  TO
 Commission file number 1-2199
 ALLIS-CHALMERS ENERGY INC.
  DELAWARE
    
    39-0126090(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 March 31, 2006
 TABLE OF CONTENTS
 ITEM
    
    
    
    PAGEPART I1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    3Consolidated Condensed Income Statements for the three months ended March 31, 2006 and 2005
    
    
    4Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 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
    
    
    254.
    
    Controls and Procedures
    
    
    25PART II1.
    
    Legal Proceedings
    
    
    262.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    266.
    
    Exhibits
    
    
    26Signatures
    
    
    27Stock Purchase Agreement dated April 27, 2006Certification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO and CFO pursuant to 18 U.S.C. 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCash and cash equivalents
    
    $
    10,661
    
    
    $
    1,920Trade receivables, net
    
    
    38,239
    
    
    
    26,964Inventory
    
    
    7,777
    
    
    
    5,945Prepaid expenses and other
    
    
    875
    
    
    
    823Total current assets
    
    
    57,552
    
    
    
    35,652Property and equipment, net
    
    
    174,329
    
    
    
    80,574Goodwill
    
    
    12,417
    
    
    
    12,417Other intangible assets, net
    
    
    6,399
    
    
    
    6,783Debt issuance costs, net
    
    
    6,414
    
    
    
    1,298Other assets
    
    
    719
    
    
    
    631Total assets
    
    $
    257,830
    
    
    $
    137,355Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    3,144
    
    
    $
    5,632Trade accounts payable
    
    
    8,903
    
    
    
    9,018Accrued salaries, benefits and payroll taxes
    
    
    2,064
    
    
    
    1,271Accrued interest
    
    
    3,053
    
    
    
    289Accrued expenses
    
    
    6,505
    
    
    
    4,350Accounts payable, related parties
    
    
    
    
    
    
    60Total current liabilities
    
    
    23,669
    
    
    
    20,620Accrued postretirement benefit obligations
    
    
    319
    
    
    
    335Long-term debt, net of current maturities
    
    
    165,999
    
    
    
    54,937Other long-term liabilities
    
    
    631
    
    
    
    588Total liabilities
    
    
    190,618
    
    
    
    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;
17,225,330 issued and outstanding at March 31, 2006 and
16,859,988 issued and outstanding at December 31, 2005)
    
    
    172
    
    
    
    169Capital in excess of par value
    
    
    60,800
    
    
    
    58,889Retained earnings
    
    
    6,240
    
    
    
    1,817Total stockholders equity
    
    
    67,212
    
    
    
    60,875Total liabilities and stockholders equity
    
    $
    257,830
    
    
    $
    137,355
  3




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED INCOME STATEMENTS
 For the Three Months EndedMarch 31,2006
    
    
    2005(Restated)Revenues
    
    $
    47,028
    
    
    $
    19,334Cost of revenuesDirect costs
    
    
    27,032
    
    
    
    12,785Depreciation
    
    
    3,330
    
    
    
    914Total cost of revenues
    
    
    30,362
    
    
    
    13,699Gross margin
    
    
    16,666
    
    
    
    5,635General and administrative
    
    
    6,484
    
    
    
    2,994Stock option expense
    
    
    942
    
    
    
    Amortization
    
    
    607
    
    
    
    394Income from operations
    
    
    8,633
    
    
    
    2,247Other income (expense):Interest, net
    
    
    (3,628
    )
    
    
    (521
    )Other
    
    
    25
    
    
    
    148Total other income (expense)
    
    
    (3,603
    )
    
    
    (373
    )Income before minority interest
and income taxes
    
    
    5,030
    
    
    
    1,874Minority interest in income of subsidiaries
    
    
    
    
    
    
    (144
    )Provision for taxes
    
    
    (607
    )
    
    
    (163
    )Net income
    
    $
    4,423
    
    
    $
    1,567Net income per common share:Basic
    
    $
    0.26
    
    
    $
    0.12Diluted
    
    $
    0.23
    
    
    $
    0.11Weighted average shares outstanding:Basic
    
    
    17,105
    
    
    
    13,632Diluted
    
    
    19,113
    
    
    
    14,695
  4




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ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 For the Three Months EndedMarch 31,2006
    
    
    2005Cash Flows from Operating Activities:Net income
    
    $
    4,423
    
    
    $
    1,567Adjustments to reconcile net income to net cash
used in operating activities:Depreciation
    
    
    3,330
    
    
    
    914Amortization
    
    
    607
    
    
    
    394Imputed interest
    
    
    355
    
    
    
    Stock option expense
    
    
    942
    
    
    
    Allowance for bad debts
    
    
    180
    
    
    
    Minority interest in income of subsidiaries
    
    
    
    
    
    
    144Gain on sale of property and equipment
    
    
    (514
    )
    
    
    Changes in operating assets and liabilities, net of acquisitions:(Increase) in trade receivable
    
    
    (4,288
    )
    
    
    (3,416
    )(Increase) in inventory
    
    
    (1,484
    )
    
    
    (91
    )Decrease (increase) in other current assets
    
    
    7
    
    
    
    (408
    )(Increase) in other assets
    
    
    (88
    )
    
    
    (16
    )(Decrease) increase in accounts payable
    
    
    (1,286
    )
    
    
    4Increase (decrease) in accrued interest
    
    
    2,764
    
    
    
    (10
    )(Decrease) in accrued expenses
    
    
    (11,017
    )
    
    
    (92
    )Increase in accrued salaries, benefits and payroll taxes
    
    
    483
    
    
    
    185Increase in other long-term liabilities
    
    
    27
    
    
    
    3Net Cash Used In Operating Activities
    
    
    (5,559
    )
    
    
    (822
    )Cash Flows from Investing Activities:Acquisition of businesses, net of cash received
    
    
    (83,447
    )
    
    
    Proceeds from sale of property and equipment
    
    
    1,200
    
    
    
    Purchase of property and equipment
    
    
    (7,586
    )
    
    
    (2,728
    )Net Cash Used In Investing Activities
    
    
    (89,833
    )
    
    
    (2,728
    )Cash Flows from Financing Activities:Proceeds from exercises of options and warrants
    
    
    972
    
    
    
    Proceeds from long-term debt
    
    
    161,412
    
    
    
    2,383Repayments on long-term debt
    
    
    (43,481
    )
    
    
    Repayments on related party debt
    
    
    (3,031
    )
    
    
    Repayments on line of credit
    
    
    (6,400
    )
    
    
    Debt issuance costs
    
    
    (5,339
    )
    
    
    (178
    )Net Cash Provided By Financing Activities
    
    
    104,133
    
    
    
    2,205Net change in cash and cash equivalents
    
    
    8,741
    
    
    
    (1,345
    )Cash and cash equivalents at beginning of year
    
    
    1,920
    
    
    
    7,344Cash and cash equivalents at end of period
    
    $
    10,661
    
    
    $
    5,999Supplemental information:Interest paid
    
    $
    586
    
    
    $
    437Income taxes paid
    
    $
    232
    
    
    $
    163
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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 Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 6




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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 (Continued)
 Inventory Costs
 Share-Based Payment Accounting for Stock-Based Compensation
 NOTE 2  ACQUISITIONS
  Accounts receivable
    
    $
    7,167Other current assets
    
    
    425Property and equipment
    
    
    90,540Total assets acquired
    
    
    98,132Current liabilities
    
    
    14,458Long-term debt
    
    
    74Total liabilities assumed
    
    
    14,532Net assets acquired
    
    $
    83,600
      7




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 2  ACQUISITIONS (Continued)
   For the Three Months EndedMarch 31,2006
    
    2005Revenues
    
    $
    47,028
    
    
    $
    29,364Operating income
    
    
    8,633
    
    
    
    4,245Net income
    
    
    4,423
    
    
    
    1,331Net income per common share:Basic
    
    $
    0.26
    
    
    $
    0.09Diluted
    
    $
    0.23
    
    
    $
    0.09
 NOTE 3  STOCK-BASED COMPENSATION
 Share-Based Payment
  Accounting For Stock-Based Compensation
 8




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 3  STOCK-BASED COMPENSATION (Continued)
  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
    
    
    (32,000
    )
    
    
    4.30Exercised
    
    
    (51,900
    )
    
    
    3.63Outstanding at end of period
    
    
    2,776,967
    
    
    
    5.14
    
    
    
    8.57
    
    
    $
    23.6Exercisable at end of period
    
    
    1,909,967
    
    
    
    4.18
    
    
    
    8.26
    
    
    $
    18.1
   Expected dividend yield
    
    
    Expected price volatility
    
    
    89.76
    %Risk-free interest rate
    
    
    7.0
    %Expected life of options
    
    7 yearsWeighted average fair value of options
granted at market value
    
    $
    3.86
  Three Months Ended,March 31, 2005Net income: As reported
    
    
    
    
    
    $
    1,567Less total stock based employee
compensation expense determined under
fair value based method for all awards
net of tax related effects
    
    
    
    
    
    
    (2,902
    )Pro-forma net income (loss) to
common stockholders
    
    
    
    
    
    $
    (1,335
    )Net income/ (loss) per share:Basic
    
    As reported
    
    $
    0.12Pro forma
    
    $
    (0.10
    )Diluted
    
    As reported
    
    $
    0.11Pro forma
    
    $
    (0.10
    )
 9




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 4  INCOME PER COMMON SHARE
 Earnings Per
Share
  For the Three Months EndedMarch 31,2006
    
    
    2005(restated)Numerator:Net income
    
    $
    4,423
    
    
    $
    1,567Denominator:Basic earnings per share  weighted
average shares outstanding
    
    
    17,105
    
    
    
    13,632Effect of potentially dilutive common shares:Warrants and employee and director
stock options
    
    
    2,008
    
    
    
    1,063Diluted earnings per share 
weighted average shares
outstanding and assumed
conversions
    
    
    19,113
    
    
    
    14,695Net income per share  basic
    
    $
    0.26
    
    
    $
    0.12Net income per share  diluted
    
    $
    0.23
    
    
    $
    0.11
 NOTE 5  GOODWILL AND INTANGIBLE ASSETS
 Goodwill and Other Intangible Assets
  10




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 6  RESTATEMENT
   Three Months Ended March 31, 2005As
    
    
    
    
    
    AsReported
    
    Adjustments
    
    RestatedIncome per common share- diluted
    
    $
    0.09
    
    
    $
    0.02
    
    
    $
    0.11Weighted average number of common shares outstanding:Diluted
    
    
    17,789
    
    
    
    (3,094
    )
    
    
    14,695
 NOTE 7  INVENTORY
  March 31,
    
    
    December 31,2006
    
    
    2005Hammer bitsFinished goods
    
    $
    1,507
    
    
    $
    1,402Work in process
    
    
    948
    
    
    
    787Raw materials
    
    
    471
    
    
    
    233Total hammer bits
    
    
    2,926
    
    
    
    2,422Hammers
    
    
    589
    
    
    
    584Drive pipe
    
    
    663
    
    
    
    666Rental supplies
    
    
    404
    
    
    
    64Chemicals
    
    
    477
    
    
    
    201Coiled tubing and related inventory
    
    
    1,672
    
    
    
    1,145Shop supplies and related inventory
    
    
    1,046
    
    
    
    863Total inventory
    
    $
    7,777
    
    
    $
    5,945
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  DEBT
  March 31,
    
    
    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 note
    
    
    850
    
    
    
    850Notes payable under non-compete agreements
    
    
    615
    
    
    
    698Notes payable to former directors
    
    
    96
    
    
    
    96Real estate loan
    
    
    
    
    
    
    548Equipment and vehicle installment notes
    
    
    2,786
    
    
    
    1,939Capital lease obligations
    
    
    796
    
    
    
    917Total debt
    
    
    169,143
    
    
    
    60,569Less: short-term debt and current maturities
    
    
    3,144
    
    
    
    5,632Long-term debt obligations
    
    $
    165,999
    
    
    $
    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 8  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 8  DEBT (Continued)
 Other debt
  NOTE 9  STOCKHOLDERS EQUITY
  NOTE
10  SEGMENT INFORMATION
  For the Three Months EndedMarch 31,2006
    
    
    2005RevenuesDirectional drilling services
    
    $
    15,054
    
    
    $
    9,901Rental tools
    
    
    10,421
    
    
    
    373Casing and tubing services
    
    
    9,459
    
    
    
    3,560Compressed air drilling services
    
    
    9,099
    
    
    
    4,181Production services
    
    
    2,995
    
    
    
    1,319$
    47,028
    
    
    $
    19,334Operating Income (Loss):Directional drilling services
    
    $
    2,605
    
    
    $
    1,878Rental tools
    
    
    4,998
    
    
    
    (80
    )Casing and tubing services
    
    
    1,851
    
    
    
    1,327Compressed air drilling services
    
    
    2,237
    
    
    
    527Production services
    
    
    277
    
    
    
    (39
    )General corporate
    
    
    (3,335
    )
    
    
    (1,366
    )$
    8,633
    
    
    $
    2,247Depreciation and Amortization:Directional drilling services
    
    $
    289
    
    
    $
    150Rental tools
    
    
    1,671
    
    
    
    88Casing and Tubing services
    
    
    699
    
    
    
    440Compressed air drilling services
    
    
    684
    
    
    
    448Production services
    
    
    293
    
    
    
    136General corporate
    
    
    301
    
    
    
    46$
    3,937
    
    
    $
    1,308
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 10  SEGMENT INFORMATION (Continued)
 For the Three Months EndedMarch 31,2006
    
    
    2005Capital Expenditures:Directional drilling services
    
    $
    2,698
    
    
    $
    263Rental tools
    
    
    684
    
    
    
    17Casing and tubing services
    
    
    1,127
    
    
    
    1,640Compressed air drilling services
    
    
    2,224
    
    
    
    779Production services
    
    
    681
    
    
    
    20General corporate
    
    
    172
    
    
    
    9$
    7,586
    
    
    $
    2,728
 As ofMarch 31,
    
    
    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
    
    $
    26,284
    
    
    $
    20,960Rental tools
    
    
    104,101
    
    
    
    8,034Casing and tubing services
    
    
    46,803
    
    
    
    45,351Compressed air drilling services
    
    
    48,645
    
    
    
    46,045Production services
    
    
    13,392
    
    
    
    12,282General corporate
    
    
    18,605
    
    
    
    4,683$
    257,830
    
    
    $
    137,355
 For the Three Months EndedMarch 31,2006
    
    
    2005Revenues:United States
    
    $
    45,089
    
    
    $
    17,561International
    
    
    1,939
    
    
    
    1,773$
    47,028
    
    
    $
    19,334
 15




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 11  LEGAL MATTERS
    NOTE 12  SUBSEQUENT EVENTS
    16




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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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Restatement
  Comparison of Three Months Ended March 31, 2006 and 2005
     18




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Share-Based Payment,
       Revenues
    
    
    Income (Loss) from OperationsThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(in thousands)Directional drilling services
    
    $
    15,054
    
    
    $
    9,901
    
    
    $
    5,153
    
    
    $
    2,605
    
    
    $
    1,878
    
    
    $
    727Rental tools
    
    
    10,421
    
    
    
    373
    
    
    
    10,048
    
    
    
    4,998
    
    
    
    (80
    )
    
    
    5,078Casing and tubing services
    
    
    9,459
    
    
    
    3,560
    
    
    
    5,899
    
    
    
    1,851
    
    
    
    1,327
    
    
    
    524Compressed air drilling services
    
    
    9,099
    
    
    
    4,181
    
    
    
    4,918
    
    
    
    2,237
    
    
    
    527
    
    
    
    1,710Production services
    
    
    2,995
    
    
    
    1,319
    
    
    
    1,676
    
    
    
    277
    
    
    
    (39
    )
    
    
    316General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,335
    )
    
    
    (1,366
    )
    
    
    (1,969
    )Total
    
    $
    47,028
    
    
    $
    19,334
    
    
    $
    27,694
    
    
    $
    8,633
    
    
    $
    2,247
    
    
    $
    6,386
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##### Table of Contents



Directional Drilling Services Segment
  Rental Tools Segment
  Casing and Tubing Services Segment
  Compressed Air Drilling Services Segment
  Production Services Segment
  General Corporate
  20




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##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
    Investing Activities
  Financing Activities
  21




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##### Table of Contents




    
    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.
        22




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##### Table of Contents



Capital Requirements
   Recent Developments
  23




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##### Table of Contents



Critical Accounting Policies
  Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statement
 Share-Based Payment. Accounting for Stock-Based Compensation
 Inventory Costs
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##### Table of Contents



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
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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.
    
    In January 2006, we hired a certified public accountant to be our new financial
reporting manager, the existing financial reporting manager was promoted to manager of
internal controls.
    
    During the quarter we replaced two divisional controllers with certified public
accountants.
    
    During the quarter we consolidated most of our accounting functions into one office. We
believe this has resulted in better utilization and supervision of accounting resources.
    
    During the quarter we began the process of consolidating our payroll functions to
improve quality control over the process.
    
    During the quarter we completed the implementation of our new general ledger accounting
software in all of our subsidiaries existing as of December 31, 2005. We continue to
implement improvements in the way the 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
  26




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##### Table of Contents



SIGNATURES
  AllisChalmers Energy Inc.(Registrant)/S/ MUNAWAR H. HIDAYATALLAHMunawar H. HidayatallahChief Executive Officer and Chairman
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##### Table of Contents



EXHIBIT INDEX
 2.1
    
    Stock Purchase Agreement dated as of December 20, 2005 by and between the Registrant and
Joe Van Matre (incorporated by reference to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2005).2.2
    
    Stock Purchase Agreement dated as of April 3, 2006 by and between the Registrant and Tommie
L. Rogers (incorporated by reference to the Registrants Current Report on Form 8-K filed on
April 6, 2006).2.3*
    
    Stock Purchase Agreement dated as of April 27, 2006 by and among the Registrant, Bridas
International Holdings Ltd., Bridas Central Company Ltd., and Associated Petroleum Investors
Limited.4.1
    
    Indenture dated as of January 18, 2006 by and among the Registrant, the Guarantors named
therein and Wells Fargo Bank, N.A., as trustee (incorporated by reference to the Registrants
Current Report on Form 8-K filed on January 24, 2006).4.2
    
    Form of 9.0% Senior Note due 2014 (incorporated by reference to the Registrants Current
Report on Form 8-K filed on January 24, 2006).10.1
    
    Purchase Agreement dated as of January 12, 2006 by and among the Registrant, the Guarantors
named therein and the Initial Purchasers named therein (incorporated by reference to the
Registrants Current Report on Form 8-K filed on January 24, 2006).10.2
    
    Registration Rights Agreement dated as of January 18, 2006 by and among the Registrant, the
Guarantors named therein and the Initial Purchasers named therein (incorporated by reference
to the Registrants Current Report on Form 8-K filed on January 24, 2006).10.3
    
    Amended and Restated Credit Agreement dated as of January 18, 2006 by and among the
Registrant, as borrower, Royal Bank of Canada, as administrative agent and collateral agent,
RBC Capital Markets, as lead arranger and sole bookrunner, and the lenders party thereto
(incorporated by reference to the Registrants Current Report on Form 8-K filed on January 24,
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