UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 
 
 FORM
10-Q
  
 
 
 
 (Mark
One)
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended March 31, 2010
  
 OR
  
  ̈
              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 000-51471
 
   
 
 
 BRONCO
DRILLING COMPANY, INC.
 (Exact
name of registrant as specified in its charter)
 
 
 
 
 Delaware
              
              20-2902156(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)
 
 
 16217
North May Avenue
 Edmond,
OK 73013
 (Address
of principal executive offices) (Zip Code)
 
 (405)
242-4444
 (Registrant’s
telephone number, including area code)
  
 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 of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes x
    No   ̈
 
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes  ̈
    No   ̈
   Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting company. See the
definitions of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one):
  
 Large
      Accelerated Filer  ̈
              Accelerated
      Filer  x
              Non-Accelerated
      Filer   ̈
              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  x
 
 As of
April 30, 2010, 28,434,449 shares of common stock were
outstanding.
  
  
 
 BRONCO DRILLING COMPANY, INC.
 
 INDEX
 
 PagePART
      I—FINANCIAL INFORMATIONItem 1.
              
              Unaudited Financial
      Statements
              
              3Bronco
      Drilling Company, Inc.:Consolidated
      Balance Sheets as of March 31, 2010 and December 31, 2009
              
              3Consolidated
      Statements of Operations for the three months ended March 31, 2010 and
      2009
              
              4Consolidated
      Statement of Stockholders’ Equity and Comprehensive Income for the three
      months ended March 31,  2010
              
              5Consolidated
      Statements of Cash Flows for the three months ended March 31, 2010 and
      2009
              
              6Notes to
      Consolidated Financial Statements
              
              7Item 2.
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              11Item 3.
              
              Quantitative and
      Qualitative Disclosures about Market Risks
              
              17Item 4.
              
              Controls
      and Procedures
              
              17PART
      II—OTHER INFORMATIONItem 1.
              
              Legal
      Proceedings
              
              17Item 1A.
              
              Risk
      Factors
              
              17Item 2.
              
              Unregistered
      Sale of Equity Securities and Use of Proceeds
              
              17Item 3.
              
              Defaults Upon
      Senior Securities
              
              17Item 4.
              
              Reserved
              
              18Item 5.
              
              Other
      Information
              
              18Item 6.
              
              Exhibits
              
              18Signatures
              
              19
 
  
 -2-
 Table of Contents
 
 Bronco Drilling Company, Inc. and
SubsidiariesCONSOLIDATED
      BALANCE SHEETS(Amounts
      in thousands, except share par value)March
      31,
              
              
              December
      31,2010
              
              
              2009ASSETS
              
              (Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              10,668
              
              
              $
              9,497ReceivablesTrade
      and other, net of allowance for doubtful accounts of$3,840
      and $3,576 in 2010 and 2009, respectively
              
              
              16,078
              
              
              
              15,306Affiliate
      receivables
              
              
              2,735
              
              
              
              9,620Unbilled
      receivables
              
              
              762
              
              
              
              828Income
      tax receivable
              
              
              9,218
              
              
              
              3,800Current
      deferred income taxes
              
              
              1,301
              
              
              
              1,360Current
      maturities of note receivable from affiliate
              
              
              2,035
              
              
              
              2,000Prepaid
      expenses
              
              
              1,087
              
              
              
              666Total
      current assets
              
              
              43,884
              
              
              
              43,077PROPERTY
      AND EQUIPMENT - AT COSTDrilling
      rigs and related equipment
              
              
              446,507
              
              
              
              440,760Transportation,
      office and other equipment
              
              
              42,013
              
              
              
              42,354488,520
              
              
              
              483,114Less
      accumulated depreciation
              
              
              153,735
              
              
              
              145,918334,785
              
              
              
              337,196OTHER
      ASSETSNote
      receivable from affiliate, less current maturities
              
              
              -
              
              
              
              517Investment
      in Challenger
              
              
              39,116
              
              
              
              39,714Investment
      in Bronco MX
              
              
              22,025
              
              
              
              21,407Debt
      issue costs and other
              
              
              3,194
              
              
              
              3,67264,335
              
              
              
              65,310$
              443,004
              
              
              $
              445,583LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              7,209
              
              
              $
              9,756Accrued
      liabilities
              
              
              7,467
              
              
              
              7,952Current
      maturities of long-term debt
              
              
              90
              
              
              
              89Total
      current liabilities
              
              
              14,766
              
              
              
              17,797LONG-TERM
      DEBT,  less current maturities and discount
              
              
              57,017
              
              
              
              51,814WARRANT
              
              
              2,557
              
              
              
              2,829DEFERRED
      INCOME TAXES
              
              
              34,590
              
              
              
              32,872COMMITMENTS
      AND CONTINGENCIES (Note 6)STOCKHOLDERS'
      EQUITYCommon
      stock, $.01 par value, 100,000shares
      authorized; 27,026 and 26,713 sharesissued
      and outstanding at March 31, 2010 and December 31, 2009
              
              
              271
              
              
              
              270Additional
      paid-in capital
              
              
              307,707
              
              
              
              307,313Accumulated
      other comprehensive income
              
              
              1,365
              
              
              
              538Retained
      earnings
              
              
              24,731
              
              
              
              32,150Total
      stockholders' equity
              
              
              334,074
              
              
              
              340,271$
              443,004
              
              
              $
              445,583The
      accompanying notes are an integral part of these
    statements.
 
 -3-
 Table of Contents
 
 Bronco Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      STATEMENTS OF OPERATIONS(Amounts
      in thousands, except per share amounts)Three
      Months Ended March 31,2010
              
              
              2009(Unaudited)REVENUESContract
      drilling revenues
              
              $
              22,498
              
              
              $
              47,826Well
      service
              
              
              -
              
              
              
              2,77922,498
              
              
              
              50,605EXPENSESContract
      drilling
              
              
              18,419
              
              
              
              29,844Well
      service
              
              
              180
              
              
              
              2,315Depreciation
      and amortization
              
              
              9,256
              
              
              
              12,526General
      and administrative
              
              
              4,735
              
              
              
              5,188Gain
      on Bronco MX transaction
              
              
              (1,058
              )
              
              
              -31,532
              
              
              
              49,873Income
      (loss) from operations
              
              
              (9,034
              )
              
              
              732OTHER
      INCOME (EXPENSE)Interest
      expense
              
              
              (1,456
              )
              
              
              (2,299
              )Interest
      income
              
              
              46
              
              
              
              1Equity
      in income (loss) of Challenger
              
              
              (599
              )
              
              
              412Equity
      in loss of Bronco MX
              
              
              (209
              )
              
              
              -Other
              
              
              48
              
              
              
              (566
              )Change
      in fair value of warrant
              
              
              272
              
              
              
              -(1,898
              )
              
              
              (2,452
              )Loss
      before income taxes
              
              
              (10,932
              )
              
              
              (1,720
              )Income
      tax benefit
              
              
              (3,513
              )
              
              
              (11
              )NET
      LOSS
              
              $
              (7,419
              )
              
              $
              (1,709
              )Loss
      per common share-Basic
              
              $
              (0.28
              )
              
              $
              (0.06
              )Loss
      per common share-Diluted
              
              $
              (0.28
              )
              
              $
              (0.06
              )Weighted
      average number of shares outstanding-Basic
              
              
              26,850
              
              
              
              26,589Weighted
      average number of shares outstanding-Diluted
              
              
              26,850
              
              
              
              26,589The
      accompanying notes are an integral part of these
    statements.
 
 -4-
 Table of Contents
 
 Bronco Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
      (LOSS)(Amounts
      in thousands)AccumulatedAdditional
              
              
              Other
              
              
              
              
              
              TotalCommon
              
              
              Common
              
              
              Paid
      In
              
              
              Comprehensive
              
              
              Retained
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Income
              
              
              Earnings
              
              
              EquityBalance
      as of January 1, 2010
              
              
              26,713
              
              
              $
              270
              
              
              $
              307,313
              
              
              $
              538
              
              
              $
              32,150
              
              
              $
              340,271Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,419
              )
              
              
              (7,419
              )Other
      Comprehensive Income:Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              827
              
              
              
              -
              
              
              
              827Total
      Comprehensive Income (Loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,592
              )Stock
      compensation
              
              
              313
              
              
              
              1
              
              
              
              394
              
              
              
              -
              
              
              
              -
              
              
              
              395Balance
      as of March 31, 2010
              
              
              27,026
              
              
              $
              271
              
              
              $
              307,707
              
              
              $
              1,365
              
              
              $
              24,731
              
              
              $
              334,074The
      accompanying notes are an integral part of these
    statements.
 
 -5-
 Table of Contents
 
 Bronco Drilling Company, Inc. and SubsidiariesCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Amounts
      in thousands)Three
      Months Ended March 31,2010
              
              
              2009(Unaudited)Cash
      flows from operating activities:Net
      loss
              
              $
              (7,419
              )
              
              $
              (1,709
              )Adjustments
      to reconcile net loss to net cashprovided
      by operating activities:Depreciation
      and amortization
              
              
              9,507
              
              
              
              12,731Bad
      debt expense
              
              
              1,014
              
              
              
              635Loss
      (gain) on sale of assets
              
              
              263
              
              
              
              (166
              )Equity
      in loss (income) of Challenger
              
              
              599
              
              
              
              (412
              )Equity
      in loss of Bronco MX
              
              
              209
              
              
              
              -Change
      in fair value of warrant
              
              
              (272
              )
              
              
              -Gain
      on Bronco MX transaction
              
              
              (1,058
              )
              
              
              -Imputed
      interest expense
              
              
              225
              
              
              
              -Stock
      compensation
              
              
              395
              
              
              
              751Deferred
      income taxes
              
              
              1,777
              
              
              
              (37
              )Changes
      in current assets and liabilities:Receivables
              
              
              (1,585
              )
              
              
              25,550Affiliate
      receivables
              
              
              6,885
              
              
              
              -Unbilled
      receivables
              
              
              65
              
              
              
              1,095Prepaid
      expenses
              
              
              (422
              )
              
              
              (846
              )Other
      assets
              
              
              159
              
              
              
              442Accounts
      payable
              
              
              (3,655
              )
              
              
              (13,948
              )Accrued
      expenses
              
              
              (484
              )
              
              
              (3,894
              )Income
      taxes receivable
              
              
              (5,418
              )
              
              
              26Net
      cash provided by operating activities
              
              
              782
              
              
              
              20,218Cash
      flows from investing activities:Proceeds
      from sale of assets
              
              
              3,287
              
              
              
              489Purchase
      of property and equipment
              
              
              (7,876
              )
              
              
              (3,130
              )Net
      cash used in investing activities
              
              
              (4,589
              )
              
              
              (2,641
              )Cash
      flows from financing activities:Proceeds
      from borrowings
              
              
              5,000
              
              
              
              -Payments
      of debt
              
              
              (22
              )
              
              
              (5,025
              )Net
      cash provided by (used in) financing activities
              
              
              4,978
              
              
              
              (5,025
              )Net
      increase in cash and cash equivalents
              
              
              1,171
              
              
              
              12,552Beginning
      cash and cash equivalents
              
              
              9,497
              
              
              
              26,676Ending
      cash and cash equivalents
              
              $
              10,668
              
              
              $
              39,228Supplementary
      disclosure of cash flow information:Interest
      paid, net of amount capitalized
              
              $
              1,255
              
              
              $
              2,256Income
      taxes paid
              
              
              128
              
              
              
              -Supplementary
      disclosure of non-cash investing and financing:Purchase
      of property and equipment in accounts payable
              
              
              1,110
              
              
              
              1,433The
      accompanying notes are an integral part of these
    statements.
 
 -6-
 Table of Contents
 
 Bronco Drilling Company, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 ($
Amounts in thousands, except per share amounts)
  Unless
the context requires otherwise, a reference in this quarterly report to
“Bronco,” the “Company,” “we,” “us,” and “our” are to Bronco Drilling Company,
Inc., a Delaware corporation, and its consolidated subsidiaries.
  1.
Organization and Summary of Significant Accounting Policies
  Business
and Principles of Consolidation
 
 Bronco
Drilling Company, Inc. (the “Company”) provides contract land drilling and
workover services to oil and natural gas exploration and production companies.
The accompanying consolidated financial statements include the Company’s
accounts and the accounts of its wholly owned subsidiaries.  All
intercompany accounts and transactions have been eliminated in
consolidation.
 
 The Company
has prepared the accompanying unaudited consolidated financial statements and
related notes in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions of Form 10-Q and Regulation S-X. In preparing the financial
statements, the Company made various estimates and assumptions that affect the
amounts of assets and liabilities the Company reports as of the dates of the
balance sheets and amounts the Company reports for the periods shown in the
consolidated statements of operations, stockholders’ equity and cash flows. The
Company’s actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes in
the near term relate to the Company’s recognition of revenues and accrued
expenses, estimate of the allowance for doubtful accounts, estimate of asset
impairments, estimate of deferred taxes and determination of depreciation and
amortization expense.
 
 In
management’s opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of March
31, 2010, the related results of operations for the three months ended March 31,
2010 and 2009 and the cash flows for the three months ended March 31, 2010 and
2009.  The information included in this Quarterly Report on Form 10-Q
should be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009.  In preparing the accompanying
unaudited consolidated financial statements, we have reviewed, as we have
determined necessary, events that have occurred after March 31, 2010 through the
filing of this Form 10-Q.
 
 The results
of operations for the three months ended March 31, 2010 are not necessarily an
indication of the results expected for the full year.
 
 A summary of
the significant accounting policies consistently applied in the preparation of
the accompanying consolidated financial statements follows.
  Property
and Equipment
 
 Property and
equipment, including renewals and betterments, are capitalized and stated at
cost, while maintenance and repairs are expensed currently. Assets are
depreciated on a straight-line basis. The depreciable lives of drilling and
workover rigs and related equipment are three to 15 years. The depreciable life
of other equipment is three years. Depreciation is not commenced until acquired
rigs are placed in service. Once placed in service, depreciation continues when
rigs are being repaired, refurbished or between periods of deployment. Assets
not placed in service and not being depreciated were $27,148 and $26,038 as of
March 31, 2010 and December 31, 2009, respectively.  Due to
immateriality, gains and losses on dispositions, with the exception of the
Bronco Drilling MX, S. de R.L. de C.V., or Bronco MX, transaction, described in
more detail below, are included in contract drilling and well service
revenues.
 
 The Company
capitalizes interest as a component of the cost of drilling and workover rigs
constructed for its own use.
 
 The Company
evaluates for potential impairment of long-lived assets and intangible assets
subject to amortization when indicators of impairment are present, as defined in
ASC Topic 360, Accounting for
the Impairment or Disposal of Long-Lived Assets. Circumstances that could
indicate a potential impairment include significant adverse changes in industry
trends, economic climate, legal factors, and an adverse action or assessment by
a regulator. More specifically, significant adverse changes in industry trends
include significant declines in revenue rates, utilization rates, oil and
natural gas market prices and industry rig counts for drilling rigs and workover
rigs. In performing an impairment evaluation, the Company estimated the future
undiscounted net cash flows from the use and eventual disposition of long-lived
assets and intangible assets grouped at the lowest level that cash flows can be
identified.  If the sum of the estimated future undiscounted net cash
flows is less than the carrying amount of the long-lived assets and intangible
assets for these asset grouping levels, then the Company would recognize an
impairment charge. The amount of an impairment charge would be measured as the
difference between the carrying amount and the fair value of these assets. The
Company did not record an impairment charge on any long-lived assets for our
contract land drilling or well servicing segments for the three months ended
March 31, 2010.  The assumptions used in the impairment evaluation for
long-lived assets and intangible assets are inherently uncertain and require
management judgment.
  Income
Taxes
 
 Pursuant to
ASC Topic 740, Income Taxes,the Company follows the asset and liability method of accounting for
income taxes, under which the Company recognizes deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities were
measured using enacted tax rates expected to apply to taxable income in the
years in which the Company expects to recover or settle those temporary
differences.  A statutory Federal tax rate of 35% and effective state
tax rate of 3.7% (net of Federal income tax effects) were used for the enacted
tax rates for all periods.  The Company’s effective income tax rate
during the three months ended March 31, 2010 is higher than what would be
expected if the federal statutory rate were applied to income before income
taxes primarily because of certain stock compensation expenses recorded for
financial reporting purposes that are not deductible for tax
purposes.
  Comprehensive
Income (Loss)
 
 Comprehensive
income (loss) is comprised of net income (loss) and other comprehensive
income.  Other comprehensive income includes the translation
adjustments of the financial statements of Bronco MX at December 31,
2009.  The following table sets forth the components of comprehensive
income (loss):
 Three
      Months Ended March 31,2010
              
              
              2009Net
      loss
              
              $
              (7,419
              )
              
              $
              (1,709
              )Other
      comprehensive income - translation adjustment
              
              
              827
              
              
              
              -Comprehensive
      loss
              
              $
              (6,592
              )
              
              $
              (1,709
              )
 Equity
Method Investments
 
 Investee
companies that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of accounting.
Whether or not the Company exercises significant influence with respect to an
Investee depends on an evaluation of several factors including, among others,
representation on the Investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities of the
Investee company. Under the equity method of accounting, an Investee company’s
accounts are not reflected within the Company’s Consolidated Balance Sheets and
Statements of Operations; however, the Company’s share of the earnings or losses
of the Investee company is reflected in the caption “Equity in income (loss) of
Challenger” and “Equity in income (loss) of Bronco MX” in the Consolidated
Statements of Operations. The Company’s carrying value in an equity method
Investee company is reflected in the caption “Investment in Challenger” and
“Investment in Bronco MX” in the Company’s Consolidated Balance
Sheets.
  Recent
Accounting Pronouncements
 
 In January
2010, the FASB issued a new accounting standard which requires reporting
entities to provide information about movements of assets among Levels 1 and 2
of the three-tier fair value hierarchy established by ASC 820, Fair Value
Measurements.  Also required will be a reconciliation of purchases,
sales, issuance, and settlements of financial instruments valued with a Level 3
method, which is used to price the hardest to value instruments.  Entities
will have to provide fair value measurement disclosures for each class of
financial assets and liabilities.  The guidance will be effective for
fiscal years beginning after December 15, 2010.  The Company is
currently evaluating the impact, if any, the adoption will have on our
consolidated financial statements.
 -7-
 Table of Contents
 
 In December
2009, the FASB issued a new accounting standard which updates the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about an reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements.  This new standard is effective at the start
of a reporting entity’s first fiscal year beginning after January 1,
2010.  The adoption of this standard did not impact our consolidated
financial statements.
 
 In June 2009,
the FASB issued a new accounting standard that amends the accounting and
disclosure requirements for the consolidation of variable interest entities.
This new standard removes the previously existing exception from applying
consolidation guidance to qualifying special-purpose entities and requires
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity. Before this new standard, generally accepted
accounting principles required reconsideration of whether an enterprise is the
primary beneficiary of a variable interest entity only when specific events
occurred. This new standard is effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. This new standard became effective for
us on January 1, 2010. The adoption of this standard did not impact our
consolidated financial statements.
  2.
Equity Method Investments
 
 On
January 4, 2008, we acquired a 25% equity interest in Challenger Limited,
or Challenger, in exchange for six drilling rigs and cash.  The
Company also sold to Challenger four drilling rigs and ancillary
equipment.  The Company recorded equity in income (loss) of investment
of $(599) and $412 for the three months ended March 31, 2010 and 2009,
respectively, related to its equity investment in
Challenger.  Challenger is an international provider of contract land
drilling and workover services to oil and natural gas companies with its
principal operations in Libya.
 
 The Company
entered into a term note with Challenger related to the sale of four drilling
rigs and ancillary equipment.  The term note bears interest at
8.5%.  Interest and principal payments of $529 on the note are due
quarterly until maturity at February 2, 2011.  The note receivable is
collateralized by the assets sold to Challenger.  The note receivable
from Challenger at March 31, 2010 was $2,035, all of which was classified as
current.  The note receivable from Challenger at December 31, 2009 was
$2,517.
 
 On February
20, 2008, the Company entered into a Management Services Agreement and Master
Services Agreement with Challenger.  The Company agreed to make
available to Challenger certain employees of the Company for the purpose of
providing land drilling services, certain business consulting services and
managerial support to Challenger.  The Company invoices Challenger
monthly for the services provided.  The Company had accounts
receivable from Challenger of $2,196 and $2,499 at March 31, 2010 and December
31, 2009, respectively, related to these services provided.
 
 At March 31,
2010, the book value of the Company’s ordinary share investment in Challenger
was $39,116.  The Company’s 25% interest of the net assets of Challenger
was estimated to be $35,611.  The basis difference between the Company’s
ordinary equity investment in Challenger and the Company’s 25% interest of the
net assets of Challenger primarily consists of certain property, plant and
equipment and accumulated depreciation in the amount of $3,626 and $121,
respectively, at March 31, 2010.  These amounts are being amortized
against the Company’s 25% interest of Challenger’s net income over the estimated
useful lives of 15 years for the property, plant and
equipment.  Amortization recorded during the three months ended March
31, 2010 and March 31, 2009 was $61 and $322, respectively.
  Summarized
financial information of Challenger is presented below:
 
 Three
      Months Ended March 31,2010
              
              
              2009Condensed
      statement of operations:Revenues
              
              $
              9,875
              
              
              $
              19,850Gross
      margin
              
              $
              2,030
              
              
              $
              9,515Net
      Income (loss)
              
              $
              (2,153
              )
              
              $
              2,937March
      31,
              
              
              December
      31,2010
              
              
              
              2009Condensed
      balance sheet:Current
      assets
              
              $
              56,010
              
              
              $
              59,971Noncurrent
      assets
              
              
              128,829
              
              
              
              130,667Total
      assets
              
              $
              184,839
              
              
              $
              190,638Current
      liabilities
              
              $
              21,675
              
              
              $
              25,511Noncurrent
      liabilities
              
              
              20,722
              
              
              
              20,531Equity
              
              
              142,442
              
              
              
              144,596Total
      liabilities and equity
              
              $
              184,839
              
              
              $
              190,638
 
 In September,
2009, Carso Infraestructura y Construcción, S.A.B. de C.V., or CICSA, purchased
from us 60% of the outstanding membership interests of Bronco MX.  The
Company owns the remaining 40% of the outstanding membership interests of Bronco
MX.  Immediately prior to the sale of the membership interests in
Bronco MX to CICSA, the Company contributed six drilling rigs (Nos. 4, 43,
53, 58, 60 and 72), and the future net profit from rig leases relating
to three additional drilling rigs (Nos. 55, 76 and 78), which the Company
contributed to Bronco MX upon the expiration of the leases relating to such
rigs. The general specifications of the contributed rigs are as
follows:


Rig
                
                Design
                Approximate
      Drilling Depth (ft)
                Type
                Horsepower43
                
                Gardner
      Denver 800
                15,000
                Mechanical
                1,0004
                
                Skytop
      Brewster N46
                14,000
                Mechanical
                95053
                
                Skytop
      Brewster N42
                12,000
                Mechanical
                85055
                
                Oilwell
      660
                12,000
                Mechanical
                1,00058
                
                National
      N55
                12,000
                Mechanical
                80060
                
                Skytop
      Brewster N46
                14,000
                Mechanical
                85072
                
                Skytop
      Brewster N42
                10,000
                Mechanical
                75076
                
                National
      N55
                12,000
                Mechanical
                70078
                
                Seaco
      1200
                12,000
                Mechanical
                1,200
 
 The Company
received $31,735 from CICSA in exchange for the 60% membership interest in
Bronco MX, which included reimbursement for 60% of value added taxes previously
paid by, or on behalf of, Bronco MX as a result of the importation to
Mexico of the six drilling rigs that were contributed by the Company to
Bronco MX.  Upon completion of the transaction, the Company treated
Bronco MX as a deconsolidated subsidiary in order to compute a loss in
accordance with ASC Topic 810, Consolidation,due to the
Company not retaining a controlling financial interest in Bronco MX subsequent
to the sale.  The Company recorded a net loss of $23,964 for the nine
months ended September 30, 2009 relating to the transactions.  The
loss was computed based on the proceeds received from CICSA of $31,735 and the
value of the Company’s 40% retained interest in Bronco MX of $21,495 less the
book value of the net assets of Bronco MX, including rigs contributed to Bronco
MX, of $77,194.  The Company recorded a positive adjustment to the
loss during the first quarter of 2010 of $1,058 due to post closing
adjustments.  Fair value of the Company’s 40% investment in Bronco MX
was estimated using a combination of income, or discounted cash flows approach,
the market approach, which utilizes pricing of third-party transactions of
comparable businesses or assets and the cost approach which considers
replacement cost as the primary indicator of value. The analysis resulted in a
fair value of $21,495 related to the Company’s 40% retained interest in Bronco
MX.  At March 31, 2010, the book value of the Company’s ordinary share
investment in Bronco MX was $22,025.  The Company recorded equity in
loss of investment of $209 for the three months ended March 31, 2010 related to
its equity investment in Bronco MX.  The Company’s investment in
Bronco MX was increased by $827 as a result of a currency translation gain for
the three months ended March 31, 2010.  The Company is in the process
of gathering additional information in order to finalize the accounting related
to these transactions.
 
 Bronco MX is
jointly managed, with CICSA having three representatives on its board of
managers and the Company having two representatives on its board of
managers.  The Company and CICSA, and their respective affiliates,
have agreed to conduct all future land drilling and workover rig services,
rental, construction, refurbishment, transportation, trucking and mobilization
in Mexico and Latin America exclusively through Bronco MX, subject to Bronco
MX’s ability to perform.
 -8-
 Table of Contents
 
 According to
a Schedule 13D/A filed with the SEC on March 8, 2010 by Carlos Slim Helú,
certain members of his family and affiliated entities (collectively, the “Slim
Affiliates”), these individuals and entities collectively own approximately
19.99% of our common stock. CICSA is also a Slim Affiliate.
 
 Summarized
financial information of Bronco MX is presented below:
 Three
      Months EndedMarch
      31, 2010Condensed
      statement of operations:Revenues
                
                $
                6,514Gross
      margin
                
                $
                (485
                )Net
      Income (loss)
                
                $
                (521
                )March
      31,
                
                
                December
      31,2010
                
                
                
                2009Condensed
      balance sheet:Current
      assets
                
                $
                8,804
                
                
                $
                8,931Noncurrent
      assets
                
                
                63,452
                
                
                
                57,746Total
      assets
                
                $
                72,256
                
                
                $
                66,677Current
      liabilities
                
                $
                3,873
                
                
                $
                13,162Noncurrent
      liabilities
                
                
                13,399
                
                
                
                -Equity
                
                
                54,984
                
                
                
                53,515Total
      liabilities and equity
                
                $
                72,256
                
                
                $
                66,677
 
 3.
Long-term Debt and Warrant
 
 Long-term
debt consists of the following:
  March
      31,
                
                
                December
      31,2010
                
                
                2009Revolving
      credit facility with Banco Inbursa S.A., collateralized by the Company'sassets,
      and matures on September 17, 2014.  Loans under the revolving
      creditfacility
      bear interest at variable rates as defined in the credit agreement.
      (1)
                
                
                55,770
                
                
                
                50,545Note
      payable to Ameritas Life Insurance Corp., collateralized by a building,
      payable in
                  principaland
      interest installments of $14, interest on the note is 6.0%, maturity date
                  of
      January 1, 2021. (2)
                
                
                1,337
                
                
                
                1,358$
                57,107
                
                
                $
                51,903Less
      current installments
                
                
                90
                
                
                
                8957,017
                
                
                
                51,814
  
 (1)
                On
      September 18, 2009, the Company entered into a new senior secured
      revolving credit facility with Banco Inbursa S.A., or Banco Inbursa, as
      lender and as the issuing bank.  The Company utilized (i)
      borrowings under the credit facility, (ii) proceeds from the sale of the
      membership interests of Bronco MX and (iii) cash-on-hand to repay all
      amounts outstanding under the Company’s prior revolving credit agreement
      with Fortis Bank SA/NV, New York Branch, which was replaced by
      this credit facility.
                  
                  The
      credit facility provides for revolving advances of up to $75,000 and
      matures on September 17, 2014.  The borrowing base under
      the credit facility has been initially set at $75,000, subject to
      borrowing base limitations.  Our availability under the credit
      facility is reduced by outstanding letters of credit which were
      approximately $11.5 million at March 31, 2010.  Outstanding
      borrowings under the credit facility bear interest at the Eurodollar rate
      plus 5.80% per annum, subject to adjustment under certain
      circumstances.  The effective interest rate was 6.50% at March
      31, 2010.  The Company incurred $2,232 in debt issue costs
      related to this credit facility.
                  
                  The
      Company pays a quarterly commitment fee of 0.5% per annum on the unused
      portion of the credit facility and a fee of 1.50% for each letter of
      credit issued under the facility. In addition, an upfront fee equal to
      1.50% of the aggregate commitments under the credit facility was paid by
      the Company at closing. The Company’s domestic subsidiaries have
      guaranteed the loans and other obligations under the credit facility. The
      obligations under the credit facility and the related guarantees are
      secured by a first priority security interest in substantially all of the
      assets of the Company and its domestic subsidiaries, including the equity
      interests of the Company’s direct and indirect subsidiaries. Commitment
      fees expense for the three months ended March 31, 2010 was
      $10.
                  
                  The
      credit facility contains customary representations and warranties and
      various affirmative and negative covenants, including, but not limited to,
      covenants that restrict the Company’s ability to make capital
      expenditures, incur indebtedness, incur liens, dispose of property, repay
      debt, pay dividends, repurchase shares and make certain acquisitions, and
      a financial covenant requiring that the Company maintain a ratio of
      consolidated debt to consolidated earnings before interest, taxes,
      depreciation and amortization as defined in the credit agreement for any
      four consecutive fiscal quarters of not more than 3.5 to
      1.0.  On February 9, 2010, the Company received a waiver from
      Banco Inbursa for the ratio of consolidated debt to consolidated earnings
      before interest, taxes, depreciation and amortization through the second
      quarter of 2010.  A violation of these covenants or any other
      covenant in the credit facility could result in a default under the credit
      facility which would permit the lender to restrict the Company’s ability
      to access the credit facility and require the immediate repayment of any
      outstanding advances under the credit facility.
                  In
      conjunction with its entry into the credit facility, the Company entered
      into a Warrant Agreement with Banco Inbursa and, pursuant
      thereto, issued a three-year warrant (the “Warrant”) to Banco
      Inbursa evidencing the right to purchase up to 5,440,770
      shares of the Company’s common stock, $0.01 par value per share (the
      “Common Stock”) subject to the terms and conditions set forth in the
      Warrant, including the limitations on exercise set forth
      below, at an exercise price of $6.50 per share of Common Stock from
      the date of issuance of the Warrant (the “Issue Date”) through the
      first anniversary of the Issue Date, $7.00 per share following the
      first anniversary of the Issue Date through the second anniversary of the
      Issue Date, and $7.50 per share following the second anniversary of the
      Issue Date through the third anniversary of the Issue Date. Banco Inbursa
      subsequently transferred the Warrant to CICSA.
                    
                    In
      accordance with accounting standards, the proceeds from the revolving
      credit facility were allocated to the credit facility and Warrant based on
      their respective fair values.  Based on this allocation, $50,321
      and $4,679 of the net proceeds were allocated to the credit facility and
      Warrant, respectively.  The Warrant has been classified as a
      liability on the consolidated balance sheet due to the Company’s
      obligation to pay the seller of the Warrant a make-whole payment, in cash,
      under certain circumstances.  The fair value of the Warrant was
      determined using a pricing model based on a version of the Black Scholes
      model, which is adjusted to account for the dilution resulting from the
      additional shares issued for the Warrant.  The valuation was
      determined by computing the value of the Warrant if exercised in Year 1 –
      3 with the values weighted by the probability that the warrant would
      actually be exercised in that year.  Some of the assumptions
      used in the model were a volatility of 45% and a risk free interest rate
      that ranged from 0.41% to 1.57%.
                    
                    The
      resulting discount to the revolving credit facility is amortized to
      interest expense over the term of the revolving credit facility such that,
      in the absence of any conversions, the carrying value of the revolving
      credit facility at maturity would be equal to
      $55,000.  Accordingly, the Company will recognize annual
      interest expense on the debt at an effective interest rate of Eurodollar
      rate plus 6.25%.  Imputed interest expense recognized for the
      three months ended March 31, 2010 was
  $225.
 -9-
 Table of Contents
  In
      accordance with accounting standards, the Company revalued the Warrant as
      of March 31, 2010 and recorded the change in the fair value of the Warrant
      on the consolidated statement of operations.  The fair value of
      the Warrant was determined using a pricing model based on a version of the
      Black Scholes model, which is adjusted to account for the dilution
      resulting from the additional shares issued for the
      Warrant.  The valuation was determined by computing the value of
      the Warrant if exercised in Year 1 – 3 with the values weighted by the
      probability that the Warrant would actually be exercised in that
      year.  Some of the assumptions used in the model were a
      volatility of 50% and a risk free interest rate that ranged from 0.22% to
      1.29%.  The fair value of the warrant was $2,557 at March 31,
      2010.  The Company recorded a change in the fair value of the
      Warrant on the consolidated statement of operations in the amount of $272
      for the three months ended March 31,
      2010.
 
 2)
                On
      January 2, 2007, the Company assumed a term loan agreement with Ameritas
      Life Insurance Corp. related to the acquisition of a
      building.  The loan provides for term installments in an
      aggregate not to exceed
$1,590.
 
 Long-term
debt maturing each year subsequent to March 31, 2010 is as
follows:
  2011
                
                $
                902012
                
                
                962013
                
                
                1022014
                
                
                1082015
                
                
                55,8852016
      and thereafter
                
                
                826$
                57,107
 
 4.
Workers’ Compensation and Health Insurance
 The Company
is insured under a large deductible workers’ compensation insurance policy. The
policy generally provides for a $1,000 deductible per covered accident. The
Company maintains letters of credit in the aggregate amount of $11,560 for the
benefit of various insurance companies as collateral for retrospective premiums
and retained losses which may become payable under the terms of the underlying
insurance contracts.  The letters of credit are typically renewed
annually.  No amounts have been drawn under the letters of credit.
Accrued expenses at March 31, 2010 and December 31, 2009 included approximately
$3,046 and $2,458, respectively, for estimated incurred but not reported costs
and premium accruals related to our workers’ compensation
insurance.
 
 On
November 1, 2005, the Company initiated a self-insurance program for major
medical, hospitalization and dental coverage for employees and their dependents,
which is partially funded by payroll deductions. The Company provided for both
reported and incurred but not reported medical costs in the accompanying
consolidated balance sheets. We have a maximum liability of $100 per
employee/dependent per year. Amounts in excess of the stated maximum are covered
under a separate policy provided by an insurance company. Accrued expenses at
March 31, 2010 and December 31, 2009 included approximately $740 and $784,
respectively, for our estimate of incurred but not reported costs related to the
self-insurance portion of our health insurance.
  5.
Transactions with Affiliates
 
 During 2009,
the Company had six operating leases with affiliated entities.  As of
January 9, 2010, these entities are no longer affiliated
entities.  Related rent expense was approximately $143 for the three
months ended March 31, 2009.
 
 The Company
had receivables from affiliates of $2,735 and $9,620 at March 31, 2010 and
December 31, 2009, respectively.
 
 Additional
information about our transactions with affiliates is included in Note 2, Equity Method
Investments.
  6.
Commitments and Contingencies
  Various
claims and lawsuits, incidental to the ordinary course of business, are pending
against the Company. In the opinion of management, all matters are adequately
covered by insurance or, if not covered, are not expected to have a material
effect on the Company’s consolidated financial position, results of operations
or cash flows.
  7.
Business Segments
 
 The Company’s
reportable business segments are contract land drilling and well
servicing.  The contract land drilling segment utilizes a fleet of
land drilling rigs to provide contract drilling services to oil and natural gas
exploration and production companies.  During the three months ended
March 31, 2010, our drilling rigs operated in Oklahoma, Texas, Utah, North
Dakota, Louisiana, Pennsylvania, and West Virginia.  The well
servicing segment encompasses a full range of services performed with a mobile
well servicing rig, including the installation and removal of downhole equipment
and elimination of obstructions in the well bore to facilitate the flow of oil
and gas.  During the second quarter of 2009, the Company temporarily
suspended its well servicing operations.  The Company intends to
restructure this business unit in anticipation of more favorable market
conditions.  The accounting policies of the segments are the same as
those described in the summary of significant accounting
policies.  The Company’s reportable segments are strategic business
units that offer different products and services.
 
 The following
table sets forth certain financial information with respect to the Company’s
reportable segments:
  Contract
      land drilling
                
                
                Well
      servicing
                
                
                TotalThree
      Months Ended March 31, 2010Operating
      revenues
                
                $
                22,498
                
                
                $
                -
                
                
                $
                22,498Direct
      operating costs
                
                
                (18,419
                )
                
                
                (180
                )
                
                
                (18,599
                )Segment
      profits
                
                $
                4,079
                
                
                $
                (180
                )
                
                $
                3,899Depreciation
      and amortization
                
                $
                7,799
                
                
                $
                1,457
                
                
                $
                9,256Capital
      expenditures
                
                $
                7,876
                
                
                $
                -
                
                
                $
                7,876Identifiable
      assets
                
                $
                395,273
                
                
                $
                47,731
                
                
                $
                443,004Three
      Months Ended March 31, 2009Operating
      revenues
                
                $
                47,826
                
                
                $
                2,779
                
                
                $
                50,605Direct
      operating costs
                
                
                (29,844
                )
                
                
                (2,315
                )
                
                
                (32,159
                )Segment
      profits
                
                $
                17,982
                
                
                $
                464
                
                
                $
                18,446Depreciation
      and amortization
                
                $
                10,842
                
                
                $
                1,684
                
                
                $
                12,526Capital
      expenditures
                
                $
                2,908
                
                
                $
                222
                
                
                $
                3,130Identifiable
      assets
                
                $
                532,318
                
                
                $
                57,355
                
                
                $
                589,673
 
 The following
table reconciles the segment profits above to the operating income as reported
in the consolidated statements of operations:
  Three
      Months Ended
                
                
                Three
      Months EndedMarch
      31, 2010
                
                
                March
      31, 2009Segment
      profits
                
                $
                3,899
                
                
                $
                18,446General
      and administrative expenses
                
                
                (4,735
                )
                
                
                (5,188
                )Depreciation
      and amortization
                
                
                (9,256
                )
                
                
                (12,526
                )Gain
      on Bronco MX transaction
                
                
                1,058
                
                
                
                -Operating
      income (loss)
                
                $
                (9,034
                )
                
                $
                732
 -10-
 Table of Contents
 
 8.
Net Income Per Common Share
 
 The following
table presents a reconciliation of the numerators and denominators of the basic
and diluted earnings per share (“EPS”) and diluted EPS comparisons as required
by ASC Topic 260:
  Three
      Months EndedMarch
      31,2010
                
                
                2009Basic:Net
      loss
                
                $
                (7,419
                )
                
                $
                (1,709
                )Weighted
      average shares
                
                
                26,850
                
                
                
                26,589Loss
      per share
                
                $
                (0.28
                )
                
                $
                (0.06
                )Diluted:Net
      loss
                
                $
                (7,419
                )
                
                $
                (1,709
                )Weighted
      average shares:Outstanding
      (thousands)
                
                
                26,850
                
                
                
                26,589Restricted
      Stock and Options (thousands)
                
                
                -
                
                
                
                -26,850
                
                
                
                26,589Loss
      per share
                
                $
                (0.28
                )
                
                $
                (0.06
                )
 
 The weighted
average number of diluted shares excludes 55,873 and 19,857 shares for the three
months ended March 31, 2010 and 2009, respectively, subject to restricted stock
awards due to their antidilutive effects.
  9.  Fair
Value Measurements
  As defined in
ASC 820, fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (referred to as an "exit price").
Authoritative guidance on fair value measurements and disclosures clarifies that
a fair value measurement for a liability should reflect the entity's
non-performance risk. In addition, a fair value hierarchy is established that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted market prices in
active markets for identical assets and liabilities (Level 1 measurements) and
the lowest priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are:
 
 Level
1:Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
 
 Level
2:Quoted prices
in markets that are not active, or inputs which are observable, either directly
or indirectly, for substantially the full term of the asset or liability. This
category includes quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from or corroborated
by observable market data by correlation or other means.
 
 Level
3:Measured based
on prices or valuation models that require inputs that are both significant to
the fair value measurement and less observable from objective
sources.
 
 Fair
Value on Recurring Basis
 
 The Company
issued a Warrant in conjunction with its revolving credit facility with Banco
Inbursa, which Banco Inbursa subsequently transferred to CICSA.  In
accordance with accounting standards, the Company revalued the Warrant as of
March 31, 2010 and recorded the change in the fair value of the Warrant on the
consolidated statement of operations.  The fair value of the Warrant
was determined using level 3 inputs.  The Company used a pricing model
based on a version of the Black Scholes model, which is adjusted to account for
the dilution resulting from the additional shares issued for the
Warrant.  The valuation was determined by computing the value of the
Warrant if exercised in Year 1 – 3 with the values weighted by the probability
that the Warrant would actually be exercised in that year.  Some of
the assumptions used in the model were a volatility of 50% and a risk free
interest rate that ranged from 0.22% to 1.29%.  The fair value of the
Warrant was $2,557 at March 31, 2010.  The Company recorded a change
in the fair value of the Warrant on the consolidated statement of operations in
the amount of $272 for the three months ended March 31, 2010.
 
 The fair
values of our cash equivalents, trade receivables and trade payables
approximated their carrying values due to the short-term nature of these
instruments.
  10.
Restricted Stock
 The Company’s
board of directors and a majority of our stockholders approved our 2006 Stock
Incentive Plan, which the Company refers to as the 2006 Plan, effective
April 20, 2006.  The purpose of the 2006 Plan is to provide a
means by which eligible recipients of awards may be given an opportunity to
benefit from increases in value of our common stock through the granting of one
or more of the following awards: (1) incentive stock options,
(2) nonstatutory stock options, (3) restricted awards,
(4) performance awards and (5) stock appreciation rights.
 
 The purpose
of the plan is to enable the Company, and any of its affiliates, to attract and
retain the services of the types of employees, consultants and directors who
will contribute to our long range success and to provide incentives that are
linked directly to increases in share value that will inure to the benefit of
our stockholders.
 
 Eligible
award recipients are employees, consultants and directors of the Company and its
affiliates. Incentive stock options may be granted only to our employees. Awards
other than incentive stock options may be granted to employees, consultants and
directors. The shares that may be issued pursuant to awards consist of our
authorized but unissued common stock, and the maximum aggregate amount of such
common stock that may be issued upon exercise of all awards under the plan,
including incentive stock options, may not exceed 2,500,000 shares, subject
to adjustment to reflect certain corporate transactions or changes in our
capital structure.
 
 Under all
restricted stock awards to date, nonvested shares are subject to forfeiture for
failure to fulfill service conditions.  Restricted stock awards
consist of our common stock that vest over a two or three year
period.  Total shares available for future stock option grants and
restricted stock grants to employees and directors under existing plans were
1,296,878 as of March 31, 2010.  Restricted stock awards are valued at
the grant date market value of the underlying common stock and are being
amortized to operations over the respective vesting
period.  Compensation expense for the three months ended March 31,
2010 and 2009 was $395 and $751, respectively.  Restricted stock
activity for the three months ended March 31, 2010 was as
follows:
  Weighted
      AverageGrant
      DateShares
                
                
                Fair
      ValueOutstanding
      at December 31, 2009
                
                
                504,598
                
                
                $
                7.67Granted
                
                
                -
                
                
                
                -Vested
                
                
                (319,103
                )
                
                
                7.71Forfeited/expired
                
                
                -
                
                
                
                -Outstanding
      at March 31, 2010
                
                
                185,495
                
                
                $
                5.28
 
 There was
$816,189 of total unrecognized compensation cost related to nonvested restricted
stock awards to be recognized over a weighted-average period of 0.55 years as of
March 31, 2010.
  ITEM 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
 
 The following
discussion and analysis should be read in conjunction with the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section and audited consolidated financial statements and related notes thereto
included in our Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, or SEC, on March 15, 2010 and with the unaudited
consolidated financial statements and related notes thereto presented in this
Quarterly Report on Form 10-Q.
 -11-
 Table of Contents
 
 Disclosure
Regarding Forward-Looking Statements
 
 Our
disclosure and analysis in this Form 10-Q may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act, and the Private Securities Litigation
Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking
statements give our current expectations and projections relating to our
financial condition, results of operations, plans, objectives, future
performance and business. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. These statements may
include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,”
“plan,” “believe” and other words and terms of similar meaning in connection
with any discussion of the timing or nature of future operating or financial
performance or other events. All statements other than statements of historical
facts included in this Form 10-Q that address activities, events or developments
that we expect, believe or anticipate will or may occur in the future are
forward-looking statements.
 
 These
forward-looking statements are largely based on our expectations and beliefs
concerning future events, which reflect estimates and assumptions made by our
management. These estimates and assumptions reflect our best judgment based on
currently known market conditions and other factors relating to our operations
and business environment, all of which are difficult to predict and many of
which are beyond our control.
 
 Although we
believe our estimates and assumptions to be reasonable, they are inherently
uncertain and involve a number of risks and uncertainties that are beyond our
control. In addition, management’s assumptions about future events may prove to
be inaccurate. Management cautions all readers that the forward-looking
statements contained in this Form 10-Q are not guarantees of future performance,
and we cannot assure any reader that those statements will be realized or the
forward-looking events and circumstances will occur. Actual results may differ
materially from those anticipated or implied in the forward-looking statements
due to the factors listed in the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Risk Factors” sections of
this Quarterly Report on Form 10-Q and our most recent Annual Report on Form
10-K. All forward-looking statements speak only as of the date of this Form
10-Q. We do not intend to publicly update or revise any forward-looking
statements as a result of new information, future events or otherwise, except as
required by law. These cautionary statements qualify all forward-looking
statements attributable to us or persons acting on our behalf.
  Overview
 
 We provide
contract land drilling and workover services to independent oil and gas
exploration and production companies throughout the United States. We commenced
operations in 2001 with the purchase of one stacked 650-horsepower drilling rig
that we refurbished and deployed. We subsequently made selective acquisitions of
both operational and inventoried drilling rigs, as well as ancillary equipment.
Our management team has significant experience not only with acquiring rigs, but
also with refurbishing and deploying inventoried rigs. We have successfully
refurbished and brought into operation 25 inventoried drilling rigs during the
period from November 2003 through March 2010. In addition, we have a 41,000
square foot machine shop in Oklahoma City, which allows us to refurbish and
repair our rigs and equipment in-house. This facility, which complements our two
drilling rig refurbishment yards, significantly reduces our reliance on outside
machine shops and the attendant risk of third-party delays in our rig
refurbishment program.   As of April 30, 2010, we also owned a
fleet of 60 trucks used to transport our rigs.
 
 We have a 40%
equity investment in Bronco MX, a company organized under the laws of
Mexico.  Bronco MX provides contract land drilling services and leases
land drilling rigs to oil and natural gas companies in Mexico.  We
also have a 25% equity investment in Challenger, a company organized under the
laws of the Isle of Man.  Challenger is an international provider of
contract land drilling and workover services to oil and natural gas companies
with its principal operations in Libya.
  Operating
Segments
 
 We currently
conduct our operations through two operating segments: contract land drilling
and well servicing.  The following is a description of these two
operating segments.  Financial information about our operating
segments is included in Note 7, Business Segments, of the
Notes to Consolidated Financial Statements.
 
 Contract Land
Drilling –Our contract land drilling segment provides contract land
drilling services.  As of April 30, 2010, we owned a fleet of 37
marketed land drilling rigs.  We currently operate our drilling rigs
in North Dakota, Pennsylvania, West Virginia, New York, Oklahoma, Louisiana,
Utah, and Texas.  A majority of the wells we drill for our customers
are drilled in unconventional basins also known as resource
plays.  These plays are generally characterized by complex geologic
formations that often require higher horsepower, premium rigs and experienced
crews to reach targeted depths.  Our current fleet of 37 marketed
drilling rigs range from 950 to 2,000 horsepower.  Accordingly, such
rigs can, or in the case of inventoried rigs upon refurbishment, will be able
to, reach the depths required and have the capability of drilling horizontal and
directional wells, which are increasing as a percentage of total wells drilled
in North America.  We believe our premium rig fleet, inventory and
experienced crews position us to benefit from the natural gas drilling activity
in our core operating areas.
 
 We obtain our
contracts for drilling oil and natural gas wells either through competitive
bidding or through direct negotiations with customers. We typically enter into
drilling contracts that provide for compensation on a daywork basis.
Occasionally, we enter into drilling contracts that provide for compensation on
a footage basis.  We have not historically entered into turnkey
contracts; however, we may decide to enter into such contracts in the
future.  It is also possible that we may acquire such contracts in
connection with future acquisitions. Contract terms we offer generally depend on
the complexity and risk of operations, the on-site drilling conditions, the type
of equipment used and the anticipated duration of the work to be performed.
Although, we currently have 15 of our drilling rigs operating under term
contracts, our contracts generally provide for the drilling of a single well and
typically permit the customer to terminate on short notice.
 
 A significant
performance measurement that we use to evaluate this segment is operating rig
utilization. We compute operating drilling rig utilization rates by dividing
revenue days by total available days during a period. Total available days are
the number of calendar days during the period that we have owned the operating
rig. Revenue days for each operating rig are days when the rig is earning
revenues under a contract, i.e. when the rig begins moving to the drilling
location until the rig is released from the contract. On daywork contracts,
during the mobilization period we typically receive a fixed amount of revenue
based on the mobilization rate stated in the contract. We begin earning our
contracted daywork rate and mobilization revenue when we begin drilling the
well. Occasionally, in periods of increased demand, we will receive a percentage
of the contracted dayrate during the mobilization period. We account for these
revenues as mobilization fees.
 
 For the three
months ended March 31, 2010 and 2009 and years ended December 31, 2009, 2008 and
2007, our rig utilization rates, revenue days and average number of marketed
rigs were as follows:
  Three
      Months EndedMarch
      31,
                
                
                Years
      Ended December 31,2010
                
                
                2009
                
                
                2009
                
                
                2008
                
                
                2007Average
      number of marketed rigs
                
                
                37
                
                
                
                45
                
                
                
                44
                
                
                
                44
                
                
                
                51Revenue
      days
                
                
                1,428
                
                
                
                2,362
                
                
                
                5,699
                
                
                
                12,712
                
                
                
                14,245Utilization
      Rates
                
                
                43
                %
                
                
                58
                %
                
                
                36
                %
                
                
                79
                %
                
                
                76
                %
 
 The decrease
in the number of revenue days for the three month-period ended March 31, 2010 as
compared to the same period in 2009 is primarily attributable to the sharp
decrease in oil and natural gas prices beginning in the third quarter of 2008
through 2009 as well as the inability of most customers to obtain financing
related to their drilling programs.  Additionally, the average number
of rigs decreased due to the contribution of 9 rigs to Bronco MX in the third
quarter of 2009.
 Well Servicing –Our well servicing segment is capable of providing a broad range of
services to oil and natural gas exploration and production companies, including
well maintenance, well workover, new well completion and plugging and
abandonment.  We are able to provide maintenance-related services as
part of the normal, periodic upkeep of producing oil and gas wells. Workover and
completion services typically generate more revenue per hour than maintenance
work due to the use of auxiliary equipment, but demand for workover and
completion services tends to be cyclical and highly correlated to the overall
activity level in the industry.
 
 The Company
earns well servicing revenue based on purchase orders, contracts or other
persuasive evidence of an arrangement with the customer, such as a master
service agreement, that include fixed or determinable prices.  We
generally charge our customers an hourly rate for these services, which varies
based on a number of considerations including market conditions in each region,
the type of rig and ancillary equipment required, and the necessary
personnel.
 
 Our well
servicing rig fleet has increased from a weighted average number of 24 rigs in
the first quarter of 2007 to 61 in the first quarter of 2010 due to newbuild
purchases.  We gauge activity levels in our well servicing rig
operations based on rig utilization rate.  We compute operating
workover rig utilization rates by dividing revenue hours by total available
hours during a period. Total available hours are the number of hours during the
period that we have owned the operating workover rig based on a 50-hour work
week per rig.
 -12-
 Table of Contents
 
 For the three
months ended March 31, 2010 and 2009 and years ended December 31, 2009,
2008 and 2007, our workover rig utilization rates, revenue hours and average
number of operating workover rigs were as follows:
  Three
      Months EndedMarch
      31,
                
                
                Years
      Ended December 31,2010
                
                
                2009
                
                
                2009
                
                
                2008
                
                
                2007Average
      number of operating workover rigs
                
                
                -
                
                
                
                52
                
                
                
                52
                
                
                
                52
                
                
                
                33Revenue
      hours
                
                
                -
                
                
                
                8,012
                
                
                
                11,386
                
                
                
                91,591
                
                
                
                63,746Utilization
      Rates
                
                
                0
                %
                
                
                24
                %
                
                
                17
                %
                
                
                68
                %
                
                
                78
                %
 
 In June of
2009 management made the decision to temporarily suspended operations in the
well servicing segment.  Market conditions had sharply deteriorated
due to the rapid decrease in oil and natural gas prices which began in the third
quarter of 2008, as well as the inability of most customers to obtain financing
related to their drilling and workover programs.  Currently, Bronco
senior management is rebuilding the management team within Bronco Energy
Services. Several candidates have been identified to lead this division going
forward. The plan for potential redeployment includes new geographic markets, a
greater focus on completion services as well as the exploration of potential
expansion into international markets where we feel we have a competitive
advantage.
 
 Market
Conditions in Our Industry
 
 The United
States contract land drilling and well servicing industry is highly cyclical.
Volatility in oil and natural gas prices can produce wide swings in the levels
of overall drilling and well servicing activity in the markets we serve and
affect the demand for our drilling and workover services and the revenue rates
we can charge for our drilling and workover rigs. The availability of financing
sources, past trends in oil and natural gas prices and the outlook for future
oil and natural gas prices strongly influence the capital expenditure budgets of
exploration and production companies.
 
 Our business
environment has been adversely affected by the decline in oil and natural gas
prices and the deteriorating global economic environment beginning in the third
quarter of 2008.  As part of this deterioration, there has been
significant uncertainty in the capital markets and access to financing has been
reduced.  As a result of these conditions, our customers have
curtailed their exploration budgets, which resulted in a significant decrease in
demand for our services, a reduction in revenue rates and
utilization.  During the first three months of 2010 and 2009, the
Company recorded $0 and $3.1 million, respectively, of contract drilling revenue
related to terminated contracts.  Due to the current economic
environment, certain customers may not be able to pay suppliers, including us,
if they are not able to access capital to fund their business
operations.
 
 On April 30,
2010, the closing prices for near month delivery contracts for crude oil and
natural gas as traded on the NYMEX were $86.15 per barrel and $3.92 per MMbtu,
respectively.  The Baker Hughes domestic land rig drilling rig count
as of April 30, 2010 was 1,431.  Baker Hughes is a large oil field
services firm that has issued the rotary rig counts as a service to the
petroleum industry since 1944.
 
 The following
table depicts the prices for near month delivery contracts for crude oil and
natural gas as traded on the NYMEX, as well as the most recent Baker Hughes
domestic land rig count, on the dates indicated:
  At
      March 31,
                
                
                At
      December 31,2010
                
                
                2009
                
                
                2008
                
                
                2007Crude
      oil (Bbl)
                
                $
                83.76
                
                
                $
                79.36
                
                
                $
                44.60
                
                
                $
                95.98Natural
      gas (Mmbtu)
                
                $
                3.87
                
                
                $
                5.57
                
                
                $
                5.62
                
                
                $
                7.48U.S.
      Land Rig Count
                
                
                1,391
                
                
                
                1,150
                
                
                
                1,653
                
                
                
                1,719
 
 Increased
expenditures for exploration and production activities generally lead to
increased demand for our services. Until mid-2008, rising oil and natural gas
prices and the corresponding increase in onshore oil and and natural gas
exploration and production spending led to expanded drilling and well service
activity as reflected by the increases in the U.S. land rig counts and U.S.
workover rig counts over the previous several years.  Falling
commodity prices and the oversupply of rigs, similar to what we have experienced
since the beginning of the third quarter of 2008, generally leads to lower
demand for our services.
 
 The decline
in oil and natural gas prices and the deteriorating global economic environment
resulted in reductions in our rig utilization and revenue rates in
2009.  Our near-term strategy is to maintain a strong balance sheet
and ample liquidity.  Budgeted capital expenditures for 2010 and
actual expenditures in 2009 represent a reduction from average historical levels
and consist of routine capital expenditures necessary to maintain our equipment
in safe and efficient working order and discretionary capital expenditures for
new equipment or upgrades of existing equipment in order to make our rigs
marketable to customers in areas identified as strategically important by
management.  Management benchmarks each discretionary capital project
against internal required rates of return on capital and/or strategic
objectives.
  Critical
Accounting Policies and Estimates
 
 Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting policies that are described in the notes to our
consolidated financial statements. The preparation of the consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We continually evaluate our
judgments and estimates in determining our financial condition and operating
results. Estimates are based upon information available as of the date of the
financial statements and, accordingly, actual results could differ from these
estimates, sometimes materially. Critical accounting policies and estimates are
defined as those that are both most important to the portrayal of our financial
condition and operating results and require management’s most subjective
judgments. The most critical accounting policies and estimates are described
below.
 
 Revenue and
Cost Recognition—
Our contract land drilling
segment earns revenues by drilling oil and natural gas wells for our customers
typically under daywork contracts, which usually provide for the drilling of a
single well. We occasionnaly enter into footage contracts, which also usually
provide for the drilling of a single well. We recognize revenues on daywork
contracts for the days completed based on the dayrate each contract specifies.
Mobilization revenues and costs are deferred and recognized over the drilling
days of the related drilling contract. Individual contracts are usually
completed in less than 120 days. We follow the percentage-of-completion method
of accounting for footage contract drilling arrangements. Under this method,
drilling revenues and costs related to a well in progress are recognized
proportionately over the time it takes to drill the well. Percentage of
completion is determined based upon the amount of expenses incurred through the
measurement date as compared to total estimated expenses to be incurred drilling
the well. Mobilization costs are not included in costs incurred for
percentage-of-completion calculations. Mobilization costs on footage contracts
and daywork contracts are deferred and recognized over the days of actual
drilling. Under the percentage-of-completion method, management estimates are
relied upon in the determination of the total estimated expenses to be incurred
drilling the well. When estimates of revenues and expenses indicate a loss on a
contract, the total estimated loss is accrued.
 
 Our
management has determined that it is appropriate to use the
percentage-of-completion method to recognize revenue on our footage contracts,
which is the predominant practice in the industry. Although our footage
contracts do not have express terms that provide us with rights to receive
payment for the work that we perform prior to drilling wells to the agreed upon
depth, we use this method because, as provided in applicable accounting
literature, we believe we achieve a continuous sale for our work-in-progress and
we believe, under applicable state law, we ultimately could recover the fair
value of our work-in-progress even in the event we were unable to drill to the
agreed upon depth in breach of the applicable contract. However, ultimate
recovery of that value, in the event we were unable to drill to the agreed upon
depth in breach of the contract, would be subject to negotiations with the
customer and the possibility of litigation.
 
 We are
entitled to receive payment under footage contracts when we deliver to our
customer a well completed to the depth specified in the contract, unless the
customer authorizes us to drill to a shallower depth. Since inception, we have
completed all our footage contracts. Although our initial cost estimates for
footage contracts do not include cost estimates for risks such as stuck drill
pipe or loss of circulation, we believe that our experienced management team,
our knowledge of geologic formations in our areas of operations, the condition
of our drilling equipment and our experienced crews enable us to make reasonably
dependable cost estimates and complete contracts according to our drilling plan.
While we do bear the risk of loss for cost overruns and other events that are
not specifically provided for in our initial cost estimates, our pricing of
footage contracts takes such risks into consideration. When we encounter, during
the course of our drilling operations, conditions unforeseen in the preparation
of our original cost estimate, we immediately adjust our cost estimate for the
additional costs to complete the contracts. If we anticipate a loss on a
contract in progress at the end of a reporting period due to a change in our
cost estimate, we immediately accrue the entire amount of the estimated loss,
including all costs that are included in our revised estimated cost to complete
that contract, in our consolidated statement of operations for that reporting
period. We had no footage contracts in progress at March 31, 2010 or December
31, 2009.  When we enter into footage contracts, we are more likely to
encounter losses on them in years in which revenue rates are lower for all types
of contracts.
 
 Revenues and
costs during a reporting period could be affected by contracts in progress at
the end of a reporting period that have not been completed before our financial
statements for that period are released. At March 31, 2010 and December 31,
2009, our unbilled receivables totaled $762,000 and $828,000, respectively, all
of which relates to the revenue recognized but not yet billed or costs deferred
on daywork contracts in progress.
 -13-
 Table of Contents
 
 We accrue
estimated contract costs on footage contracts for each day of work completed
based on our estimate of the total costs to complete the contract divided by our
estimate of the number of days to complete the contract. Contract costs include
labor, materials, supplies, repairs and maintenance and operating overhead
allocations. In addition, the occurrence of uninsured or under-insured losses or
operating cost overruns on our footage contracts could have a material adverse
effect on our financial position and results of operations. Therefore, our
actual results could differ significantly if our cost estimates are later
revised from our original estimates for contracts in progress at the end of a
reporting period that were not completed prior to the release of our financial
statements.
 
 Accounts
Receivable—We evaluate the creditworthiness of our customers based on
their financial information, if available, information obtained from major
industry suppliers, current prices of oil and natural gas and any past
experience we have with the customer. Consequently, an adverse change in those
factors could affect our estimate of our allowance for doubtful accounts. In
some instances, we require new customers to establish escrow accounts or make
prepayments. We typically invoice our customers at 15-day intervals during the
performance of daywork contracts and upon completion of the daywork contract.
Footage contracts are invoiced upon completion of the contract. Our typical
contract provides for payment of invoices in 30 days. We generally do not extend
payment terms beyond 30 days. We are currently involved in legal actions to
collect various overdue accounts receivable.  Our allowance for
doubtful accounts was $3.8 million and $3.6 million at March 31, 2010 and
December 31, 2009, respectively. Any allowance established is subject to
judgment and estimates made by management. We determine our allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, our previous loss history, our customer’s current
ability to pay its obligation to us and the condition of the general economy and
the industry as a whole. We write off specific accounts receivable when they
become uncollectible and payments subsequently received on such receivables
reduce the allowance for doubtful accounts.
 
 If a customer
defaults on its payment obligation to us under a footage contract, we would need
to rely on applicable law to enforce our lien rights, because our contracts do
not expressly grant to us a security interest in the work we have completed
under the contract and we have no ownership rights in the work-in-progress or
completed drilling work, except any rights arising under applicable law. If we
were unable to drill to the agreed on depth in breach of a footage contract, we
might also need to rely on equitable remedies to recover the fair value of our
work-in-progress under a footage contract.
 
 Asset Impairment and
Depreciation—We evaluate for potential
impairment of long-lived assets and intangible assets subject to amortization
when indicators of impairment are present, as defined in ASC Topic 360, Accounting for the Impairment or
Disposal of Long-Lived Assets. Circumstances that could indicate a
potential impairment include significant adverse changes in industry trends,
economic climate, legal factors, and an adverse action or assessment by a
regulator. More specifically, significant adverse changes in industry trends
include significant declines in revenue rates, utilization rates, oil and
natural gas market prices and industry rig counts for drilling rigs and workover
rigs. In performing an impairment evaluation, we estimate the future
undiscounted net cash flows from the use and eventual disposition of long-lived
assets and intangible assets grouped at the lowest level that cash flows can be
identified.  If the sum of the estimated future undiscounted net cash
flows is less than the carrying amount of the long-lived assets and intangible
assets for these asset grouping levels, then we would recognize an impairment
charge. The amount of an impairment charge would be measured as the difference
between the carrying amount and the fair value of these assets. We did not
record an impairment charge on any long-lived assets for our contract land
drilling or well servicing segments for the three months ended March 31,
2010.  The assumptions used in the impairment evaluation for
long-lived assets and intangible assets are inherently uncertain and require
management judgment.
 
 Our
determination of the estimated useful lives of our depreciable assets, directly
affects our determination of depreciation expense and deferred taxes. A decrease
in the useful life of our drilling equipment would increase depreciation expense
and reduce deferred taxes. We provide for depreciation of our drilling rigs,
transportation and other equipment on a straight-line method over useful lives
that we have estimated and that range from three to fifteen years after the rig
was placed into service. We record the same depreciation expense whether an
operating rig is idle or working. Depreciation is not recorded on an inventoried
rig until placed in service. Our estimates of the useful lives of our drilling,
transportation and other equipment are based on our experience in the drilling
industry with similar equipment.
 
 We capitalize
interest cost as a component of drilling and workover rigs refurbished for our
own use. During the three months ended March 31, 2010 and 2009, we did not
capitalize any interest.
 
 Stock Based
Compensation—We have adopted ASC Topic 718, Stock Compensation,upon
granting our first stock options on August 16, 2005.  ASC Topic 718
requires a public entity to measure the costs of employee services received in
exchange for an award of equity or liability instruments based on the grant-date
fair value of the award. That cost will be recognized over the periods during
which an employee is required to provide service in exchange for the
award.  Stock compensation expense was $395,000 and $751,000 for the
three months ended March 31, 2010 and 2009, respectively.
 
 Deferred Income
Taxes—We provide deferred income taxes for the basis difference in our
property and equipment, stock compensation expense and other items between
financial reporting and tax reporting purposes. For property and equipment,
basis differences arise from differences in depreciation periods and methods and
the value of assets acquired in a business acquisition where we acquire the
stock in an entity rather than just its assets. For financial reporting
purposes, we depreciate the various components of our drilling rigs and
refurbishments over fifteen years, while federal income tax rules require that
we depreciate drilling rigs and refurbishments over five years. Therefore, in
the first five years of our ownership of a drilling rig, our tax depreciation
exceeds our financial reporting depreciation, resulting in our providing
deferred taxes on this depreciation difference. After five years, financial
reporting depreciation exceeds tax depreciation, and the deferred tax liability
begins to reverse. Deferred tax assets are reduced by a valuation allowance if,
based on available evidence, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
 
 Equity Method
Investments—Investee companies that are not consolidated, but over which
we exercise significant influence, are accounted for under the equity method of
accounting. Whether or not we exercise significant influence with respect to an
Investee depends on an evaluation of several factors including, among others,
representation on the Investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities of the
Investee company. Under the equity method of accounting, an Investee company’s
accounts are not reflected within our Consolidated Balance Sheets and Statements
of Operations; however, our share of the earnings or losses of the Investee
company is reflected in the captions “Equity in income (loss) of Bronco MX” and
“Equity in income (loss) of Challenger” in the Consolidated Statements of
Operations. Our carrying value in an equity method Investee company is reflected
in the captions “Investment in Bronco MX” and “Investment in Challenger” in our
Consolidated Balance Sheets.
 
 Other Accounting
Estimates—Our other accrued expenses as of March 31, 2010 and
December 31, 2009 included accruals of approximately $3.0 million and $2.5
million, respectively, for costs under our workers’ compensation insurance. We
have a deductible of $1.0 million per covered accident under our workers’
compensation insurance. We maintain letters of credit in the aggregate amount of
$11.6 million for the benefit of various insurance companies as collateral for
retrospective premiums and retained losses which may become payable under the
terms of the underlying insurance contracts.  The letters of credit
are typically renewed annually.  No amounts have been drawn under the
letters of credit. We accrue for these costs as claims are incurred based on
cost estimates established for each claim by the insurance companies providing
the administrative services for processing the claims, including an estimate for
incurred but not reported claims, estimates for claims paid directly by us, our
estimate of the administrative costs associated with these claims and our
historical experience with these types of claims.  We also have a
self-insurance program for major medical, hospitalization and dental coverage
for employees and their dependents.  We recognize both reported and
incurred but not reported costs related to the self-insurance portion of our
health insurance.  Since the accrual is based on estimates of expenses
for claims, the ultimate amount paid may differ from accrued
amounts.
 
 Recent Accounting
Pronouncements—
 
 In January
2010, the FASB issued a new accounting standard which requires reporting
entities to provide information about movements of assets among Levels 1 and 2
of the three-tier fair value hierarchy established by ASC 820, Fair Value
Measurements.  Also required will be a reconciliation of purchases,
sales, issuance, and settlements of financial instruments valued with a Level 3
method, which is used to price the hardest to value instruments.  Entities
will have to provide fair value measurement disclosures for each class of
financial assets and liabilities.  The guidance will be effective for
fiscal years beginning after December 15, 2010.  We are currently
evaluating the impact, if any, the adoption will have on our consolidated
financial statements.
 
 In December
2009, the FASB issued a new accounting standard which updates the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about an reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements.  This new standard is effective at the start
of a reporting entity’s first fiscal year beginning after January 1,
2010.  The adoption of this standard did not impact our consolidated
financial statements.
 In June 2009,
the FASB issued a new accounting standard that amends the accounting and
disclosure requirements for the consolidation of variable interest entities.
This new standard removes the previously existing exception from applying
consolidation guidance to qualifying special-purpose entities and requires
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity. Before this new standard, generally accepted
accounting principles required reconsideration of whether an enterprise is the
primary beneficiary of a variable interest entity only when specific events
occurred. This new standard is effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. This new standard became effective for
us on January 1, 2010. The adoption of this standard did not impact our
consolidated financial statements.
  Off
Balance Sheet Arrangements
 
 We do not
have any off balance sheet arrangements.
 -14-
 Table of Contents
 
 Recent
Highlights
 
 Well
Servicing Segment
 
 In June of
2009 management made the decision to temporarily suspend operations in the well
servicing segment.  As previously discussed, market conditions had
sharply deteriorated.  The dramatic decline in activity was evident as
revenue hours decreased 87% from a peak of 25,533 hours in the third quarter of
2008 to 3,374 hours in the second quarter of 2009. This represents a utilization
rate of 75% and 10% for the respective quarters.  The decrease in
activity was coupled with similar erosions in pricing and margin.  As
such, the segment was unable to generate adequate rates of return on capital in
the near future.  Because the core drilling business is very capital
intensive and was at the same time experiencing a similar slowdown, management
felt it prudent to temporarily suspend operations in the well service
segment.  We intend to strategically refocus this business segment and
deploy assets in the future with a more efficient operational and cost
structure.  Currently, Bronco senior management is rebuilding the
management team within Bronco Energy Services.  Several candidates have
been identified to lead this division going forward. The plan for potential
redeployment includes new geographic markets, a greater focus on completion
services as well as the exploration of potential expansion into international
markets where we feel we have a competitive advantage.
 
 Bronco
MX Joint Venture
 
 In September
of 2009, CICSA purchased 60% of the outstanding membership interests of Bronco
MX from us.  The Company owns the remaining 40% of the outstanding
membership interests of Bronco MX.  Immediately prior to the sale of
the membership interests in Bronco MX to CICSA, the Company contributed six
drilling rigs (Nos. 4, 43, 53, 58, 60 and 72), and the future net
profit from rig leases relating to three additional drilling rigs (Nos. 55, 76
and 78), which the Company contributed to Bronco MX upon the
expiration of the leases relating to such rigs.
 
 The Company
received $31.7 million from CICSA in exchange for the 60% membership interest in
Bronco MX.  CICSA also reimbursed the Company for 60% of the value
added taxes previously paid by, or on behalf of, Bronco MX as a result
of the importation of six drilling rigs that were contributed by the
Company to Bronco MX to Mexico.
 
 Bronco MX is
jointly managed, with CICSA having three representatives on its board of
managers and the Company having two representatives on its board of
managers.  The Company and CICSA, and their respective affiliates,
agreed to conduct all future land drilling and workover rig services, rental,
construction, refurbishment, transportation, trucking and mobilization in Mexico
and Latin America exclusively through Bronco MX, subject to Bronco MX’s ability
to perform.
 
 Senior
Secured Revolving Credit Facility with Banco Inbursa
 
 On September
18, 2009, the Company entered into a new senior secured revolving credit
facility with Banco Inbursa, as lender and as the issuing bank.  The
Company utilized (i) borrowings under this credit facility, (ii) proceeds from
the sale of the membership interests of Bronco MX and (iii) cash-on-hand to
repay all amounts outstanding under the Company’s prior revolving credit
agreement with Fortis Bank SA/NV, New York Branch, which has been replaced by
this credit facility.
 
 The credit
facility provides for revolving advances of up to $75.0 million and matures
on September 17, 2014.  The borrowing base under the credit
facility has been initially set at $75.0 million, subject to borrowing base
limitations.  Outstanding borrowings under the credit facility bear
interest at the Eurodollar rate plus 5.80% per annum, subject to adjustment
under certain circumstances.
 
 Warrant
Issuance
 
 In
conjunction with its entry into the credit facility, the Company entered into a
Warrant Agreement with Banco Inbursa and, pursuant thereto, issued a
three-year warrant (the "Warrant") to Banco Inbursa evidencing the
right to purchase up to 5,440,770 shares of the Company’s common stock,
$0.01 par value per share (the "Common Stock") subject to the terms and
conditions set forth in the Warrant, including the limitations on exercise
set forth below, at an exercise price of $6.50 per share of Common Stock
from the date of issuance of the Warrant (the "Issue Date") through the
first anniversary of the Issue Date, $7.00 per share following the first
anniversary of the Issue Date through the second anniversary of the Issue Date,
and $7.50 per share following the second anniversary of the Issue Date through
the third anniversary of the Issue Date. The Warrant may be exercised by
the payment of the exercise price in cash or through a cashless exercise
whereby the Company withholds shares issuable under the Warrant having a value
equal to the aggregate exercise price. Banco Inbursa subsequently transferred
the Warrant to CICSA.
 
 The
descriptions of the credit facility set forth herein are a summary, is not
complete and are qualified in their entirety by reference to the full text of
such agreements, which is filed as exhibit 10.1 to the Company’s Current Report
on Form 8-K filed with the SEC on September 23, 2009.
  Global
Financial Markets
 
 Events, both
within the United States and the world, have brought about significant and
immediate changes in the global financial markets which in turn have affected
the United States economy, our industry and us.  In the United States,
these events and others have had a significant impact on the prices for oil and
natural gas as reflected in the following table:
  Natural
      Gas Priceper
      Mcf
                
                
                Oil
      Price per BblQuarter
                
                High
                
                
                Low
                
                
                High
                
                
                Low2010:Second
                
                $
                4.28
                
                
                $
                3.91
                
                
                $
                86.79
                
                
                $
                81.45First
                
                $
                6.01
                
                
                $
                3.84
                
                
                $
                83.76
                
                
                $
                71.192009:Fourth
                
                $
                5.99
                
                
                $
                4.25
                
                
                $
                81.37
                
                
                $
                69.57Third
                
                $
                4.88
                
                
                $
                2.51
                
                
                $
                74.37
                
                
                $
                59.52Second
                
                $
                4.45
                
                
                $
                3.25
                
                
                $
                72.68
                
                
                $
                45.88First
                
                $
                6.07
                
                
                $
                3.63
                
                
                $
                54.34
                
                
                $
                33.982008:Fourth
                
                $
                7.73
                
                
                $
                5.29
                
                
                $
                98.53
                
                
                $
                33.87Third
                
                $
                13.58
                
                
                $
                7.22
                
                
                $
                145.29
                
                
                $
                95.71Second
                
                $
                13.35
                
                
                $
                9.32
                
                
                $
                140.21
                
                
                $
                100.98First
                
                $
                10.23
                
                
                $
                7.62
                
                
                $
                110.33
                
                
                $
                86.99
 
 As noted in
the table, oil and natural gas prices declined significantly in late calendar
2008 and there was a deteriorating national and global economic
environment.  During 2009, the economic recession, including the
decline in oil and natural gas prices and deterioration in the credit markets,
had a significant effect on customer spending and drilling
activity.  When drilling activity and spending decline for any
sustained period of time our dayrates and utilization rates also tend to
decline.  In addition, lower commodity prices for any sustained period
of time could impact the liquidity condition of some of our customers, which, in
turn, might limit their ability to meet their financial obligations to
us.
 
 The impact on
our business and financial results as a consequence of the volatility in oil and
natural gas prices and the global economic crisis is uncertain in the long term,
but in the short term, it has had a number of consequences for us, including the
following:
  ·
                In
      December 2008, we incurred goodwill impairment of our contract land
      drilling and well servicing segments of $24.3 million due to the fair
      value of the segments being less than their carrying
  value;
  ·
                In
      June 2009, we temporarily suspended operations in our well servicing
      segment;
  ·
                In
      September 2009, we incurred an impairment charge to our investment in
      Challenger of $21.2 million due to the fair value of the investment being
      less than its carrying value;
  Results of
Operations
  Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
 -15-
 Table of Contents
 
 Contract Drilling
Revenue. For the three months ended March 31, 2010, we reported
contract drilling revenues of $22.5 million, a 53% decrease from revenues of
$47.8 million for the same period in 2009. The decrease is primarily due to a
decrease in average dayrates and total revenue days for the three months ended
March 31, 2010 as compared to the same period in 2009. Average dayrates for our
drilling services decreased $759, or 5%, to $15,949 for the three months ended
March 31, 2010 from $16,708 in the same period in 2009. Revenue days decreased
40% to 1,428 days for the three months ended March 31, 2010 from 2,362 days
during the same period in 2009. The decrease in the number of revenue days for
the three months ended March 31, 2010 as compared to the same period in 2009 is
primarily due to a decrease in the utilization rate for the same
period.  Utilization decreased to 43% for the three months ended March
31, 2010 from 58% for the same period in 2009.  The 26% decrease in
utilization was primarily due to decrease in demand for our services related to
a decline in drilling activity as a result of lower oil and natural gas prices
and a more competitive market resulting from an increase in the supply of
drilling rigs.  During the first quarter of 2009, the Company recorded
$3.1 million of contract drilling revenue related to terminated
contracts.
 
 Well Service
Revenue.For the three months ended March 31, 2010, we
did not report any well service revenue compared to revenues of $2.8 million for
the same period in 2009.  We temporarily suspended operations of our
workover segment in June of 2009.
 
 Equity in Income
(Loss) of Challenger.Equity in loss of Challenger was
$599,000 for the three months ended March 31, 2010 related to our investment in
Challenger compared to equity in income of $412,000 for the three months ended
March 31, 2009.  The equity in income (loss) of Challenger represents
our 25% share of Challenger’s income (loss).  For the three months
ended March 31, 2010, Challenger had operating revenues of $9.9 million and
operating costs of $7.8 million compared to $19.8 million and $10.3 million for
the three months ended March 31, 2009.
 
 Equity in Income
(Loss) of Bronco MX.Equity in loss of Bronco MX was $209,000
for the three months ended March 31, 2010 related to our investment in Bronco
MX.  The equity in loss of Bronco MX represents our 25% share of
Bronco MX’s loss.  For the three months ended March 31, 2010, Bronco
MX had operating revenues of $6.5 million and operating costs of $7.0
million.
 
 Contract Drilling
Expense. Direct rig cost decreased $11.4 million to $18.4 million
for the three months ended March 31, 2010 from $29.8 million for the same period
in 2009. This 38% decrease is primarily due to the decrease in revenue days for
the three months ended March 31, 2010 as compared to the same period in
2009.  As a percentage of contract drilling revenue, drilling expense
increased to 82% for the three-month period ended March 31, 2010 from 62% for
the same period in 2009 due primarily to fixed costs on idle rigs.
 
 Well Service
Expense. Well service expense decreased $2.1 million to $180,000 for the
three months ended March 31, 2010 from $2.3 million for the same period in
2009.  We temporarily suspended operations of our workover segment in
June of 2009.
 
 Depreciation and
Amortization Expense.Depreciation expense decreased $3.2 million to $9.3
million for the three months ended March 31, 2010 from $12.5 million for the
same period in 2009. The decrease is primarily due to the contribution of nine
drilling rigs to Bronco MX in the third quarter of 2009.
 
 General and
Administrative Expense. General and administrative expense decreased
$453,000 million to $4.7 million for the three months ended March 31, 2010 from
$5.2 million for the same period in 2009. The decrease is the result of a
decrease in payroll and related costs of $549,000 and a decrease in stock
compensation expense of $357,000.  The decrease in payroll and related
costs is due to the overall decrease in activity for the company.  The
decrease in stock compensation expense is primarily due to stock grants with
higher grant date fair values becoming fully amortized.
 
 Interest
Expense. Interest expense decreased $843,000 to $1.5 million for the
three months ended March 31, 2010 from $2.3 million for the same period in 2009.
The decrease is due to a decrease in the average outstanding balance under our
revolving credit facilities.
 
 Income Tax Expense. We recorded
an income tax benefit of $3.5 million for the three months ended March 31, 2010.
This compares to an income tax benefit of $11,000 for the three months ended
March 31, 2009.  This increase is primarily due to a $9.2 million
increase in the pre-tax loss to a pre-tax loss of $10.9 million for the three
months ended March 31, 2010 from a pre-tax loss of $1.7 million for the three
months ended March 31, 2009.  The Company’s effective income tax rate
is higher than what would be expected if the federal statutory rate were applied
to income before income taxes primarily because of certain stock compensation
expenses recorded for financial reporting purposes that are not deductible for
tax purposes.
  Liquidity
and Capital Resources
 
 Operating
Activities. Net cash provided by
operating activities was $782,000 for the three months ended March 31, 2010 as
compared to $20.2 million in 2009. The decrease of $19.4 million from 2009 to
2010 was primarily due to a decrease in cash receipts from customers and higher
cash payments to suppliers.
 
 Investing
Activities. We use a significant
portion of our cash flows from operations and financing activities for
acquisitions and the refurbishment of our rigs. Cash used by investing
activities was $4.6 million for the three months ended March 31, 2010 as
compared to $2.6 million for the same period in 2009.   For the
three months ended March 31, 2010, we used $7.9 million to purchase fixed
assets.  This amount was offset by $3.3 million of proceeds received
from the sale of assets.  For the three months ended March 31, 2009,
we used $3.1 million to purchase fixed assets.  This amount was
partially offset by $489,000 of proceeds received from the sale of
assets.
  Financing
Activities. Our cash flows provided
by financing activities was $5.0 million for the three months ended March 31,
2010 as compared to $5.0 million used by financing activities for the same
period in 2009.  For the three months ended March 31, 2010 our net
cash provided by financing activities related to borrowings of $5.0 million
under our credit facility with Banco Inbursa.    For the
three months ended March 31, 2009, our net cash used in financing activities
related to principal payments of $5.0 million to various lenders.
 
 Sources of
Liquidity. Our primary sources of
liquidity are cash from operations and debt and equity financing.
 
 Debt
Financing.  On September 18, 2009, we entered into a new senior
secured revolving credit facility with Banco Inbursa, as lender and as the
issuing bank.  We utilized (i) borrowings under the credit facility,
(ii) proceeds from the sale of the membership interests of Bronco MX, and (iii)
cash-on-hand to repay all amounts outstanding under our prior revolving credit
agreement with Fortis Bank SA/NV, which has been replaced by the credit
facility.
  The credit
facility provides for revolving advances of up to $75.0 million and matures
on September 17, 2014.  The borrowing base under the credit
facility has been initially set at $75.0 million, subject to borrowing base
limitations.  Outstanding borrowings under the credit facility bear
interest at the Eurodollar rate plus 5.80% per annum, subject to adjustment
under certain circumstances.
  We pay a
quarterly commitment fee of 0.5% per annum on the unused portion of the credit
facility and a fee of 1.50% for each letter of credit issued under the facility.
In addition, an upfront fee equal to 1.50% of the aggregate commitments under
the credit facility was paid by us at closing. Our domestic subsidiaries have
guaranteed the loans and other obligations under the credit facility. The
obligations under the credit facility and the related guarantees are secured by
a first priority security interest in substantially all of our assets and our
domestic subsidiaries, including the equity interests of our direct and indirect
subsidiaries.
  The credit
facility contains customary representations and warranties and various
affirmative and negative covenants, including, but not limited to, covenants
that restrict our ability to make capital expenditures, incur indebtedness,
incur liens, dispose of property, repay debt, pay dividends, repurchase shares
and make certain acquisitions, and a financial covenant requiring that we
maintain a ratio of consolidated debt to consolidated earnings before interest,
taxes, depreciation and amortization for any four consecutive fiscal quarters of
not more than 3.5 to 1.0.  On February 9, 2010, the Company
received a waiver from Banco Inbursa for the ratio of consolidated debt to
consolidated earnings before interest, taxes, depreciation and amortization
through the second quarter of 2010.  A violation of these covenants or
any other covenant in the credit facility could result in a default under the
credit facility which would permit the lender to restrict our ability to access
the credit facility and require the immediate repayment of any outstanding
advances under the credit facility. The credit facility also provides for
mandatory prepayments in certain circumstances.
  In
conjunction with our entry into the credit facility, we entered into a Warrant
Agreement, pursuant to which we, issued a three-year warrant (the “Warrant”)
to Banco Inbursa evidencing the right to purchase up to 5,440,770
shares of our common stock, $0.01 par value per share (the “Common Stock”),
subject to the terms and conditions set forth in the Warrant, including
the limitations on exercise set forth below, at an exercise price of
$6.50 per share of Common Stock from the date of issuance of the Warrant
(the "Issue Date") through the first anniversary of the Issue Date, $7.00
per share following the first anniversary of the Issue Date through the second
anniversary of the Issue Date, and $7.50 per share following the second
anniversary of the Issue Date through the third anniversary of the Issue Date.
The Warrant may be exercised by the payment of the exercise price in
cash or through a cashless exercise whereby we withhold shares issuable
under the Warrant having a value equal to the aggregate exercise price. Banco
Inbursa subsequently transferred the Warrant to CICSA.
  In accordance
with accounting standards, the proceeds from the revolving credit facility were
allocated to the credit facility and Warrant based on their respective fair
values.  Based on this allocation, $50.3 million and $4.7 million of
the net proceeds were allocated to the credit facility and Warrant,
respectively.  The Warrant has been classified as a liability on the
consolidated balance sheet due to our obligation to pay the seller of the
Warrant a make-whole payment, in cash, under certain
circumstances.  The fair value of the Warrant was determined using a
pricing model based on a version of the Black Scholes model, which is adjusted
to account for the dilution resulting from the additional shares issued for the
Warrant.  The valuation was determined by computing the value of the
Warrant if exercised in Year 1 – 3 with the values weighted by the probability
that the Warrant would actually be exercised in that year.  Some of
the assumptions used in the model were a volatility of 45% and a risk free
interest rate that ranged from 0.41% to 1.57%.
 -16-
 Table of Contents
 
 The resulting
discount to the revolving credit facility will be amortized to interest expense
over the term of the revolving credit facility such that, in the absence of any
conversions, the carrying value of the revolving credit facility at maturity
would be equal to $55.0 million.  Accordingly, we will recognize
annual interest expense on the debt at an effective interest rate of Eurodollar
rate plus 6.25%.
 
 In accordance
with accounting standards, we revalued the Warrant as of March 31, 2010 and
recorded the change in the fair value of the Warrant on the consolidated
statement of operations.  The fair value of the Warrant was determined
using a pricing model based on a version of the Black Scholes model, which is
adjusted to account for the dilution resulting from the additional shares issued
for the Warrant.  The valuation was determined by computing the value
of the Warrant if exercised in Year 1 – 3 with the values weighted by the
probability that the warrant would actually be exercised in that
year.  Some of the assumptions used in the model were a volatility of
45% and a risk free interest rate that ranged from 0.22% to
1.29%.  The fair value of the Warrant was $2.6 million at March 31,
2010.  We recorded a change in the fair value of the Warrant on the
consolidated statement of operations in the amount of $272,000 for the three
months ended March 31, 2010.
 
 The
description of the credit facility set forth herein is a summary, is not
complete and is qualified in its entirety by reference to the full text of such
agreement, which was filed as exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the SEC on September 23, 2009.
 
 We are party
to a term loan agreement with Ameritas Life Insurance Corp. for an aggregate
principal amount of approximately $1.6 million related to the acquisition of a
building. This term loan is payable in 166 monthly installments, matures in 2021
and has an interest rate of 6%.
 
 Working
Capital.Our working capital was $29.1 million at March 31,
2010 compared to $25.3 million at December 31, 2009.  Our current
ratio, which we calculate by dividing our current assets by our current
liabilities, was 3.0 at March 31, 2010 compared to 2.4 at December 31,
2009.
 
 We believe
that the liquidity shown on our balance sheet as of March 31, 2010, which
includes approximately $29.1 million in working capital (including $10.7 million
in cash) and availability under our $75.0 million credit facility of $3.4
million at March 31, 2010 (net of outstanding letters of credit of $11.6
million), together with cash expected to be generated from operations, provides
us with sufficient ability to fund our operations for at least the next twelve
months.  However, additional capital may be required for future rig
acquisitions.  While we would expect to fund such acquisitions with
additional borrowings and the issuance of debt and equity securities, we cannot
assure you that such funding will be available or, if available, that it will be
on terms acceptable to us.  The changes in the components of our
working capital were as follows (amounts in thousands):
  March
      31,
                
                
                December
      31,2010
                
                
                2009
                
                
                ChangeCash
      and cash equivalents
                
                $
                10,668
                
                
                $
                9,497
                
                
                $
                1,171Trade
      and other receivables
                
                
                16,078
                
                
                
                15,306
                
                
                
                772Affiliate
      receivables
                
                
                2,735
                
                
                
                9,620
                
                
                
                (6,885
                )Unbilled
      receivables
                
                
                762
                
                
                
                828
                
                
                
                (66
                )Income
      tax receivable
                
                
                9,218
                
                
                
                3,800
                
                
                
                5,418Current
      deferred income taxes
                
                
                1,301
                
                
                
                1,360
                
                
                
                (59
                )Current
      maturities of note receivable
                
                
                2,035
                
                
                
                2,000
                
                
                
                35Prepaid
      expenses
                
                
                1,087
                
                
                
                666
                
                
                
                421Current
      assets
                
                
                43,884
                
                
                
                43,077
                
                
                
                807Current
      debt
                
                
                90
                
                
                
                89
                
                
                
                1Accounts
      payable
                
                
                7,209
                
                
                
                9,756
                
                
                
                (2,547
                )Accrued
      liabilities and deferred revenues
                
                
                7,467
                
                
                
                7,952
                
                
                
                (485
                )Current
      liabilities
                
                
                14,766
                
                
                
                17,797
                
                
                
                (3,031
                )Working
      capital
                
                $
                29,118
                
                
                $
                25,280
                
                
                $
                3,838
 The decrease
in affiliate receivables was due to a payment received from Bronco MX in January
in the amount of $6.9 million related to labor services provided Bronco MX and
reimbursement of various capital expenditures and operating
expenses.
  Item 3. Quantitative and Qualitative Disclosures About Market
Risks
 
 We are
subject to market risk exposure related to changes in interest rates on our
outstanding floating rate debt. Borrowings under our revolving credit facility
bear interest at a floating rate equal to LIBOR plus a margin of 5.80%. An
increase or decrease of 1% in the interest rate would have a corresponding
decrease or increase in our net income (loss) of approximately $368,000
annually, based on the $60.0 million outstanding in the aggregate under our
credit facility as of March 31, 2010.
  Item 4. Controls and Procedures
 
 Evaluation of
Disclosure Control and Procedures.
 
 As of the end
of the period covered by this Quarterly Report on Form 10−Q, our management,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a−15(e) or 15d−15(e) under the Securities Exchange Act of 1934, as amended).
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of March 31, 2010 our disclosure controls and
procedures are effective.
 
 Disclosure
controls and procedures are controls and procedures designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms; and include
controls and procedures designed to ensure that information is accumulated and
communicated to our management, and made known to our Chief Executive Officer
and Chief Financial Officer, particularly during the period when this Quarterly
Report on Form 10−Q was prepared, as appropriate to allow timely decision
regarding the required disclosure.
 
 Changes in Internal
Control over Financial Reporting.
 
 There were no
changes in our internal control over financial reporting that occurred during
the first quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
  
 PART II: OTHER INFORMATION
  Item 1. Legal Proceedings
 
 Various claims and
lawsuits, incidental to the ordinary course of business, are pending against the
Company. In the opinion of management, all matters are adequately covered by
insurance or, if not covered, are not expected to have a material effect on the
Company’s consolidated financial position, results of operations or cash
flows.
  Item 1A. Risk Factors
 
 There have been no
material changes to the Risk Factors previously disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2009 filed with the SEC on
March 15, 2010.
  Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
 
 None.
  Item 3. Defaults Upon Senior Securities
 
 None.
 -17-
 Table of Contents
 
 Item 4. Reserved
 
 Item 5. Other Information
 
 None.
 
 Item 6. Exhibits
  Exhibits:
 Exhibit No.
                Description2.1
                Merger Agreement, dated as of August 11, 2005, by and among Bronco
      Drilling Holdings, L.L.C, Bronco Drilling Company, L.L.C. and Bronco
      Drilling Company, Inc. (incorporated by reference to Exhibit 2.1 to the
      Registration Statement on Form S-1, File No. 333-128861, filed by the
      Company with the SEC on October 6, 2005).3.1
                Amended and Restated Certificate of Incorporation of the Company,
      dated August 11, 2005 (incorporated by reference to Exhibit 2.1 to the
      Registration Statement on Form S-1, File No. 333-128861, filed by the
      Company with the SEC on October 6, 2005).3.2
                Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
      Amendment No. 1 to the Registration Statement on Form S-1, File No.
      333-125405, filed by the Company with the SEC on July 14,
      2005).4.1
                Form of Common Stock certificate (incorporated by reference to
      Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form S-1,
      File No. 333-125405, filed by the Company with the SEC on August 2,
      2005).+10.1
                Amended and Restated Employment Agreement, dated January 6, 2010,
      by and between the Company and Matthew S. Porter  (incorporated
      by reference to Exhibit 10.1 to the Current Report on Form 8-K, File No.
      000-51571, filed by the Company with the SEC on April 21,
      2010).+10.2
                Amended and Restated Employment Agreement, dated April 19, 2010,
      by and between the Company and Frank Harrison (incorporated by reference
      to Exhibit 10.1 to the Current Report on Form 8-K, File No. 000-51571,
      filed by the Company with the SEC on April 21,
  2010).10.3
                Waiver Letter, dated February 9, 2010, by and between Bronco
      Drilling Company, Inc. and Banco Inbursa S.A., Institución de Banca
      Múltiple, Grupo Financiero Inbursa (incorporated by reference to Exhibit
      10.1 to the Current Report on Form 8-K, File No. 000-51471, filed by the
      Company with the SEC on February 16, 2010).*31.1
                Certification of Chief Executive Officer of Bronco Drilling
      Company, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities
      Exchange Act of 1934, as amended.*31.2
                Certification of Chief Financial Officer of Bronco Drilling
      Company, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities
      Exchange Act of 1934, as amended.*32.1
                Certification of Chief Executive Officer of Bronco Drilling
      Company, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities
      Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title
      18 of the United States Code.*32.2
                Certification of Chief Financial Officer of Bronco Drilling
      Company, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities
      Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title
      18 of the United States Code.*
                Filed herewith.+
                Management contract, compensatory plan or
      arrangement
 
  -18-
 Table of Contents
  
 SIGNATURE
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on their behalf by the undersigned,
thereunto duly authorized.
 
 Dated:
      May 7, 2010
                
                BRONCO
      DRILLING COMPANY, INC.By:
                
                /s/
      Matthew S. PorterMatthew
      S. PorterChief
      Financial Officer(Principal
      Accounting and Financial Officer)Dated:
      May 7, 2010
                
                By:
                
                /s/
      D. Frank HarrisonD.
      Frank HarrisonChief
      Executive Officer(Authorized
      Officer and Principal Executive
Officer)