**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                           |
| **For the quarterly period ended  September 30, 2004** |
|                                                   |       |                                                                                           |
| **OR**                                                 |
|                                                   |       |                                                                                           |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                          to                          **

 

**Commission File Number 1-8182**

 

**PIONEER DRILLING COMPANY**

(Exact name of registrant as specified in its charter)

 
| **TEXAS**                                                        | ** ** | **74-2088619**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                             |       |                                     |
| **9310  Broadway, Bldg. 1, San Antonio, Texas**                  | ** ** | **78217**                                |
| (Address of principal  executive offices)                        |       | (Zip Code)                               |
|                                                             |       |                                     |
| **210-828-7689**                                                 |
| (Registrant’s telephone  number, including area code)       |

 

 

(Former name, address andformer fiscal year, if changed since last report)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý  No o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes  ý  No  o

 

As of October 4,2004, there were 38,406,645 shares of common stock, par value $0.10 per share,of the registrant issued and outstanding.

 

 

----

 

PART I. FINANCIALINFORMATION

ITEM 1.        FINANCIAL STATEMENTS

 

PIONEER DRILLING COMPANYAND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)  September 30,  2004** | ** **  | **March 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|---------------------|------------|
| ASSETS                                                                                                                                                                                |       |                                 |        |                |       |
| Current assets:                                                                                                                                                                       |       |                                 |        |                |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                                    | 11,072,872  |                | $          | 6,365,759 |   |
| Receivables, net                                                                                                                                                                      |       | 20,047,155                           |        | 10,901,991          |       |
| Contract drilling in progress                                                                                                                                                         |       | 5,499,121                            |        | 9,130,794           |       |
| Current deferred income taxes                                                                                                                                                         |       | 403,394                              |        | 285,384             |       |
| Prepaid expenses                                                                                                                                                                      |       | 475,666                              |        | 1,336,337           |       |
| Total current assets                                                                                                                                                                  |       | 37,498,208                           |        | 28,020,265          |       |
|                                                                                                                                                                                  |       |                                 |        |                |       |
| Property and equipment, at cost                                                                                                                                                       |       | 166,059,836                          |        | 151,186,550         |       |
| Less accumulated depreciation and amortization                                                                                                                                        |       | 44,130,814                           |        | 35,844,938          |       |
| Net property and equipment                                                                                                                                                            |       | 121,929,022                          |        | 115,341,612         |       |
| Intangible and other assets, net of amortization                                                                                                                                      |       | 262,778                              |        | 369,278             |       |
| Total assets                                                                                                                                                                          |       | $                                    | 159,690,008 |                | $          | 143,731,155 |   |
|                                                                                                                                                                                  |       |                                 |        |                |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                             |       |                                 |        |                |       |
| Current liabilities:                                                                                                                                                                  |       |                                 |        |                |       |
| Notes payable                                                                                                                                                                         |       | $                                    | —      |                | $          | 558,070 |   |
| Current installments of long-term debt and capital  lease obligations                                                                                                                 |       | 110,215                              |        | 3,865,236           |       |
| Accounts payable                                                                                                                                                                      |       | 17,822,388                           |        | 13,270,989          |       |
| Accrued payroll                                                                                                                                                                       |       | 2,006,645                            |        | 1,499,151           |       |
| Accrued expenses                                                                                                                                                                      |       | 3,073,428                            |        | 2,798,801           |       |
| Total current liabilities                                                                                                                                                             |       | 23,012,676                           |        | 21,992,247          |       |
|                                                                                                                                                                                  |       |                                 |        |                |       |
| Long-term debt and capital lease obligations, less  current installments                                                                                                              |       | 59,635                               |        | 44,891,674          |       |
| Deferred income taxes                                                                                                                                                                 |       | 6,887,499                            |        | 6,010,916           |       |
| Total liabilities                                                                                                                                                                     |       | 29,959,810                           |        | 72,894,837          |       |
|                                                                                                                                                                                  |       |                                 |        |                |       |
| Shareholders’ equity:                                                                                                                                                            |       |                                 |        |                |       |
| Preferred stock, 10,000,000 shares authorized; none  issued and outstanding                                                                                                           |       | —                               |        | —              |       |
| Common stock, $.10 par value, 100,000,000 shares  authorized; 38,401,645 shares issued and outstanding at September 30, 2004  and 27,300,126 issued and outstanding at March 31, 2004 |       | 3,840,164                            |        | 2,730,012           |       |
| Additional paid-in capital                                                                                                                                                            |       | 138,768,537                          |        | 82,124,368          |       |
| Accumulated deficit                                                                                                                                                                   |       | (12,878,503                          | )           | (14,018,062         | )          |
| Total shareholders’ equity                                                                                                                                                       |       | 129,730,198                          |        | 70,836,318          |       |
| Total liabilities and shareholders’ equity                                                                                                                                       |       | $                                    | 159,690,008 |                | $          | 143,731,155 |   |
|                                                                                                                                                                                       |            |                                      |             |                     |            |  |  |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

2

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PIONEER DRILLING COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 
| ** **                                               | ** ** | **Three Months Ended   September 30,** | ** ** | **Six Months Ended   September 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **2004**                               | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Contract drilling revenues                               |       | $                                      | 42,782,900 |                                 | $          | 24,244,382 |   | $ | 83,501,710 |   | $ | 48,094,465 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Costs and expenses:                                      |       |                                   |       |                                 |       |   |   |   |   |
| Contract drilling                                        |       | 34,590,974                             |       | 19,791,141                           |       | 68,445,343 |   | 40,157,547 |   |
| Depreciation and amortization                            |       | 5,306,041                              |       | 3,927,546                            |       | 10,354,358 |   | 7,551,727 |   |
| General and administrative                               |       | 925,549                                |       | 691,598                              |       | 1,695,691 |   | 1,339,846 |   |
| Total operating costs and expenses                       |       | 40,822,564                             |       | 24,410,285                           |       | 80,495,392 |   | 49,049,120 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Income (loss) from operations                            |       | 1,960,336                              |       | (165,903                             | )          | 3,006,318 |   | (954,655 | ) |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Other income (expense):                                  |       |                                   |       |                                 |       |   |   |   |   |
| Interest expense                                         |       | (398,008                               | )          | (700,075                             | )          | (1,116,240 | ) | (1,433,730 | ) |
| Loss from early extinguishment of debt                   |       | (100,833                               | )          | —                               |       | (100,833 | ) | — |   |
| Interest income                                          |       | 39,932                                 |       | 28,728                               |       | 63,769 |   | 76,418 |   |
| Other                                                    |       | 11,730                                 |       | 30,925                               |       | 15,120 |   | 39,872 |   |
| Total other income (expense)                             |       | (447,179                               | )          | (640,422                             | )          | (1,138,184 | ) | (1,317,440 | ) |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Income (loss) before income taxes                        |       | 1,513,157                              |       | (806,325                             | )          | 1,868,134 |   | (2,272,095 | ) |
| Income tax benefit (expense)                             |       | (590,124                               | )          | 185,122                              |       | (728,573 | ) | 594,591 |   |
| Net earnings (loss)                                      |       | $                                      | 923,033    |                                 | $          | (621,203 | ) | $ | 1,139,561 |   | $ | (1,677,504 | ) |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Earnings (loss) per common share - Basic                 |       | $                                      | 0.03       |                                 | $          | (0.03 | ) | $ | 0.04 |   | $ | (0.08 | ) |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Earnings (loss) per common share - Diluted               |       | $                                      | 0.03       |                                 | $          | (0.03 | ) | $ | 0.04 |   | $ | (0.08 | ) |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Weighted average number of shares outstanding -  Basic   |       | 33,211,441                             |       | 22,037,064                           |       | 30,271,934 |   | 21,873,399 |   |
|                                                     |       |                                   |       |                                 |       |   |   |   |   |
| Weighted average number of shares outstanding -  Diluted |       | 34,271,180                             |       | 22,037,064                           |       | 31,289,416 |   | 21,873,399 |   |
|                                                          |            |                                        |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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PIONEER DRILLING COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 
| ** **                                                                                            | ** ** | **Six Months Ended Sept. 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                            | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                                 |       |                           |       |   |   |
| Net earnings (loss)                                                                                   |       | $                              | 1,139,561  |   | $ | (1,677,504 | ) |
| Adjustments to reconcile net earnings (loss) to net  cash provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                                         |       | 10,354,358                     |       | 7,551,727 |   |
| Loss on sale of properties and equipment                                                              |       | 367,510                        |       | 403,107 |   |
| Change in deferred income taxes                                                                       |       | 758,573                        |       | (49,254 | ) |
| Changes in current assets and liabilities:                                                            |       |                           |       |   |   |
| Receivables                                                                                           |       | (9,145,164                     | )          | (3,615,159 | ) |
| Contract drilling in progress                                                                         |       | 3,631,673                      |       | 208,634 |   |
| Prepaid expenses                                                                                      |       | 860,671                        |       | 649,734 |   |
| Accounts payable                                                                                      |       | 4,551,399                      |       | (3,644,325 | ) |
| Prepaid drilling contracts                                                                            |       | —                         |       | 216,000 |   |
| Federal income taxes                                                                                  |       | —                         |       | 444,900 |   |
| Accrued expenses                                                                                      |       | 782,121                        |       | 254,307 |   |
| Net cash provided by operating activities                                                             |       | 13,300,702                     |       | 742,167 |   |
|                                                                                                  |       |                           |       |   |   |
| Cash flows from financing activities:                                                                 |       |                           |       |   |   |
| Payments of debt                                                                                      |       | (21,145,131                    | )          | (1,735,556 | ) |
| Decrease in other assets                                                                              |       | —                         |       | (3,787 | ) |
| Proceeds from exercise of options/warrants                                                            |       | 12,500                         |       | 45,000 |   |
| Proceeds from sale of common stock, net of offering  costs of $1,998,180                              |       | 29,741,820                     |       | — |   |
| Net cash provided by (used in) financing activities                                                   |       | 8,609,189                      |       | (1,694,343 | ) |
|                                                                                                  |       |                           |       |   |   |
| Cash flows from investing activities:                                                                 |       |                           |       |   |   |
| Purchase of property and equipment                                                                    |       | (17,339,813                    | )          | (15,421,677 | ) |
| Proceeds from sale of property and equipment                                                          |       | 137,035                        |       | 348,600 |   |
| Net cash used in investing activities                                                                 |       | (17,202,778                    | )          | (15,073,077 | ) |
|                                                                                                  |       |                           |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                                  |       | 4,707,113                      |       | (16,025,253 | ) |
|                                                                                                  |       |                           |       |   |   |
| Beginning cash and cash equivalents                                                                   |       | 6,365,759                      |       | 21,002,913 |   |
| Ending cash and cash equivalents                                                                      |       | $                              | 11,072,872 |   | $ | 4,977,660 |   |
|                                                                                                  |       |                           |       |   |   |
| Supplementary Disclosure:                                                                             |       |                           |       |   |   |
| Common stock issued for debenture conversion                                                          |       | $                              | 28,000,000 |   | $ | — |   |
| Common stock issued for acquisition                                                                   |       | —                         |       | 2,122,650 |   |
| Interest paid                                                                                         |       | 1,644,486                      |       | 1,444,235 |   |
| Income taxes refunded                                                                                 |       | 30,000                         |       | 990,237 |   |
|                                                                                                       |            |                                |            |  |  |  |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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PIONEER DRILLINGCOMPANY AND SUBSIDARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

**1.  Organization and Basis of Presentation**

 

*Business and Principles ofConsolidation*

 

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Pioneer Drilling Company and itswholly owned subsidiaries.  All intercompanybalances and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of our management, alladjustments (consisting of normal recurring accruals) necessary for a fairpresentation have been included.

 

*Income Taxes*

 

We use the asset and liability method of Statement ofFinancial Accounting Standards (“SFAS”) No. 109 for accounting for incometaxes.  Under this method, we recognizedeferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  We measure deferred tax assets andliabilities using enacted tax rates we expect to apply to taxable income in theyears in which we expect to recover or settle those temporary differences.  Under SFAS No. 109, the effect on deferredtax assets and liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date. At the end of each interim period, we make our best estimate of theeffective tax rate we expect to be applicable for the full year and use thatrate to determine our income tax expense or benefit on a year-to-date basis.

 

*Stock-based Compensation*

 

We have adoptedSFAS No. 123, *Accounting for Stock-Based Compensation*.  SFAS No. 123 allows a company to adopt afair value based method of accounting for a stock-based employee compensationplan or to continue to use the intrinsic value based method of accountingprescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees.”  We haveelected to continue accounting for stock-based compensation under the intrinsicvalue method.  Under this method, werecord no compensation expense for stock option grants when the exercise priceof the options granted is equal to the fair market value of our common stock onthe date of grant.  If we had elected torecognize compensation cost based on the fair value of the options we grantedat their respective grant dates as SFAS No. 123 prescribes, our net earnings (loss)and net earnings (loss) per share would have been reduced to the pro formaamounts the table below indicates:

 
| ** **                                                                                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings (loss) - as reported                                                                                                           |       | $                                     | 923,033    |                                | $          | (621,203 | ) | $ | 1,139,561 |   | $ | (1,677,504 | ) |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards net of  related tax effect |       | (231,954                              | )          | (111,825                            | )          | (579,045 | ) | (208,347 | ) |
| Net earnings (loss) - pro forma                                                                                                             |       | $                                     | 691,079    |                                | $          | (733,028 | ) | $ | 560,516 |   | $ | (1,885,851 | ) |
| Net earnings (loss) per share, as reported - basic                                                                                          |       | $                                     | 0.03       |                                | (0.03      | ) | $ | 0.04 |   | (0.08 | ) |
| Net earnings (loss) per share, as reported-diluted                                                                                          |       | 0.03                                  |       | (0.03                               | )          | 0.04 |   | (0.08 | ) |
| Net earnings (loss) per share, pro forma-basic                                                                                              |       | 0.02                                  |       | (0.03                               | )          | 0.02 |   | (0.09 | ) |
| Net earnings (loss) per share, pro forma-diluted                                                                                            |       | 0.02                                  |       | (0.03                               | )          | 0.02 |   | (0.09 | ) |
| Weighted-average fair value of options granted  during the period                                                                           |       | $                                     | —     |                                | $          | 4.63 |   | $ | 6.16 |   | $ | 4.35 |   |
|                                                                                                                                             |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

5

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We estimate thefair value of each option grant on the date of grant using a Black-Scholesoptions-pricing model.  The model assumedfor each of the three-month and six-month periods ended September 30, 2004 and2003:

 
| ** **                                | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-------------------------------------------|------------|------------------|------------|----------------|------------|
| ** **                                | ** ** | **2004**         | ** ** | **2003**       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected volatility                       |       | 72               | %          | 66             | %          | 87 | % | 67 | % |
| Weighted-average risk-free interest rates |       | 3.3              | %          | 3.5            | %          | 4.0 | % | 3.2 | % |
| Expected life in years                    |       | 5                |       | 5              |       | 5 |   | 5 |   |
| Options granted                           |       | —           |       | 295,000        |       | 35,000 |   | 465,000 |   |

 

We did not issue anystock options in the quarter ending September 30, 2004.

 

As we have notdeclared dividends since we became a public company, we did not use a dividendyield.  In each case, the actual valuethat will be realized, if any, will depend on the future performance of ourcommon stock and overall stock market conditions.  There is no assurance the value an optioneeactually realizes will be at or near the value we have estimated using theBlack-Scholes model.

 

*RelatedParty Transactions*

 

On August 11, 2004and August 31, 2004, Chesapeake Energy Corporation (“Chesapeake”) purchased 631,133shares and 94,670 shares of our common stock, respectively, at $6.90 per share pursuantto the preemptive rights we granted to Chesapeake in the stock purchaseagreement we entered into in March 2003 when we sold shares of common stock toChesapeake. As of September 30, 2004, Chesapeake owned 17.02% of ouroutstanding common stock.  During the sixmonths ended September 30, 2004, we recognized revenues of approximately $9,000on a daywork contract with Chesapeake.

 

We purchasedservices from R&B Answering Service and Frontier Services, Inc. during 2004and 2003. These companies are more than 5% owned by our Chief Operating Officerand an immediate family member of our Vice President, South Texas Division,respectively. The following summarizes the transactions with these companies ineach period.

 
| ** **                | ** ** | **Three Months** | ** ** | **Six Months** | ** ** | **September 30, 2004** | ** ** |
|---------------------------|------------|------------------|------------|----------------|------------|------------------------|------------|
| ** **                | ** ** | **2004**         | ** ** | **2003**       | ** ** | **2004**               | ** ** | **2003** | ** ** | **Amount Owed** | ** ** |
| R&B Answering Service |       |             |       |           |       |                   |       |   |   |   |   |
| Purchases                 |       | $                | 4,578      |           | 1,993      |                   | $          | 8,436 |   | 5,237 |   | $ | 3,264 |   |
| Payments                  |       | 2,563            |       | 4,362          |       | 7,116                  |       | 6,199 |   |   |   |
| Frontier Services, Inc.   |       |             |       |           |       |                   |       |   |   |   |   |
| Purchases                 |       | $                | 35,618     |           | 16,205     |                   | $          | 67,201 |   | 60,487 |   | $ | 25,270 |   |
| Payments                  |       | 23,268           |       | 39,700         |       | 57,735                 |       | 87,356 |   |   |   |

 

*Reclassifications*

 

Certain amounts inthe financial statements for the prior years have been reclassified to conformto the current year’s presentation.

 

**2.  Long-term Debt, Subordinated Debt and NotesPayable**

 

On August 11,2004, the entire $28,000,000 in aggregate principal amount of our 6.75% convertiblesubordinated debentures held by WEDGE Energy Services, L.L.C. and William H.White was converted in accordance with the terms of those debentures into6,496,519 shares of our common stock.

 

On August 12,2004, we made a $2,000,000 principal payment on our Collateral Installment Notebetween Pioneer Drilling Services, Ltd. and Merrill Lynch Capital due inDecember 2007.  In accordance with theterms of the note, we also gave Merrill Lynch Capital the required 30-daysnotice of our intent to repay the balance outstanding under the note.  On September 10, 2004, we repaid theapproximately $10,083,000 balance of the note and paid a prepayment fee ofapproximately $101,000.

 

On August 12,2004, we retired our note payable to Frost National Bank in the principalamount of approximately $2,852,000, which was due in March 2007.

 

6

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On August 16,2004, we retired our note payable to Frost National Bank in the principalamount of approximately $3,856,000, which was due in August 2007.

 

At September 30,2004, we had a $2,500,000 line of credit available from Frost National Bank.  Any borrowings under this line of credit weresecured by our trade receivables and bear interest at a rate of prime (4.75% atSeptember 30, 2004) plus 1.0%.   The sumof draws under this line and the amount of all outstanding letters of creditissued by the bank for our account were limited to 75% of eligible accountsreceivable.  Therefore, if 75% of oureligible accounts receivable was less than $2,500,000, plus any outstandingletters of credit issued by the bank on our behalf, our ability to draw underthis line would be reduced.  At September30, 2004, we had no outstanding advances under this line of credit, letters ofcredit were $1,664,000 and 75% of our eligible accounts receivable wasapproximately $14,853,000.  The lettersof credit are issued to two workers’ compensation insurance companies to securepossible future claims under the deductibles on these policies.  It is our practice to pay any amounts dueunder these deductibles as they are incurred. Therefore, we do not anticipate that the lender will be required to fundany draws under these letters of credit.

 

At September 30,2004, we were in compliance with all covenants applicable to our line of credit.  Those covenants include, among others, themaintenance of ratios of debt to net worth, leverage and cash flow coverage.  The covenants also restrict the payment ofdividends on our common stock.

 

On October 29,2004, we entered into a $47,000,000 credit facility with Frost National Bank,consisting of a $7,000,000 revolving line and letter of credit facility and a$40,000,000 acquisition facility for the acquisition of drilling rigs, drillingrig transportation equipment and associated equipment.

 

**3.  Commitments and Contingencies**

 

We are currentlyconstructing, from new and used components, a 1000-horse power electricdrilling rig.  As of September 30, 2004,we had incurred approximately $919,000 of the estimated $5,500,000 rig constructioncosts.  We expect to completeconstruction of the rig in December 2004.

 

Due to the natureof our business, we are, from time to time, involved in routine litigation orsubject to disputes or claims related to our business activities, includingworkers’ compensation claims and employment-related disputes.  In the opinion of our management, none ofsuch pending litigation, disputes or claims against us will have a materialadverse effect on our financial condition, results of operations or cash flowfrom operations, and there is only a remote possibility that any such matterwill require any additional loss accrual.

 

**4.   Equity Transactions**

 

On August 1, 2003, we issued 477,000 shares of ourcommon stock at $4.45 per share to Texas Interstate Drilling Company, L.P. aspart of the purchase price of two land drilling rigs.

 

# OnFebruary 20, 2004, we sold 4,400,000 shares of our common stock at $5.40 pershare in a private placement for $23,760,000 in proceeds, before relatedoffering expenses.  Although we issuedthose shares without registration under the Securities Act of 1933 in relianceon the exemption that Section 4(2) of that Act provides for transactions notinvolving any public offering, we filed a registration statement on Form S-3 toregister the resale of those shares.  Theregistration statement became effective on June 22, 2004.

#  

# OnAugust 11, 2004, we sold 4,000,000 shares of our common stock at approximately $6.61per share, net of underwriters’ commissions, pursuant to a public offering weregistered with the SEC under a registration statement filed on Form S-1.

#  

# On August11, 2004, the entire $28,000,000 in aggregate principal amount of our 6.75%convertible subordinated debentures held by WEDGE Energy Services, L.L.C. andWilliam H. White was converted in accordance with the terms of those debenturesinto 6,496,519 shares of our common stock.

 

On August 31, 2004, we sold 600,000 additional sharesof our common stock at approximately $6.61 per share, net of underwriters’commissions, pursuant to the underwriters’ exercise of an over-allotment optiongranted in connection with the public offering we referred to above.

7

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# Employeesexercised stock options for the purchase of 20,000 shares of common stock at $2.25per share during the six months ended September 30, 2003.

#  

**5.  Earnings (Loss) Per Common Share**

 

# The following table presents a reconciliation of thenumerators and denominators of the basic EPS and diluted EPS computations asrequired by SFAS No. 128:

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic                                      |       |                                  |       |                                |       |   |   |   |   |
| Net earnings (loss)                        |       | $                                     | 923,033    |                                | $          | (621,203 | ) | $ | 1,139,561 |   | $ | (1,677,504 | ) |
| Weighted average shares                    |       | 33,211,441                            |       | 22,037,064                          |       | 30,271,934 |   | 21,873,399 |   |
| Earnings (loss) per share                  |       | $                                     | 0.03       |                                | $          | (0.03 | ) | $ | 0.04 |   | $ | (0.08 | ) |
|                                       |       |                                  |       |                                |       |   |   |   |   |
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
| ** **                                 | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Diluted                                    |       |                                  |       |                                |       |   |   |   |   |
| Net earnings (loss)                        |       | $                                     | 923,033    |                                | $          | (621,203 | ) | $ | 1,139,561 |   | $ | (1,677,504 | ) |
| Effect of dilutive securities:             |       |                                  |       |                                |       |   |   |   |   |
| Convertible debentures                     | (1)        |                                  | —     |                                | —     |   | — |   | — |   |
|                                       |       |                                  |       |                                |       |   |   |   |   |
| Net earnings (loss) and assumed conversion |       | $                                     | 923,033    |                                | $          | (621,203 | ) | $ | 1,139,561 |   | $ | (1,677,504 | ) |
| Weighted average shares:                   |       |                                  |       |                                |       |   |   |   |   |
| Outstanding                                |       |                                  | 33,211,441 |                                | 22,037,064 |   | 30,271,934 |   | 21,873,399 |   |
| Options                                    | (1)        |                                  | 1,059,739  |                                | —     |   | 1,017,482 |   | — |   |
| Convertible debentures                     | (1)        |                                  | —     |                                | —     |   | — |   | — |   |
|                                       |       | 34,271,180                            |       | 22,037,064                          |       | 31,289,416 |   | 21,873,399 |   |
| Earnings (loss) per  share                 |       | $                                     | 0.03       |                                | $          | (0.03 | ) | $ | 0.04 |   | $ | (0.08 | ) |
|                                            |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Convertibledebentures that were converted into 6,496,519 shares on August 11, 2004 werenot included in the computation of diluted earnings per share for the three andsix months ended September 30, 2004, because they were antidilutive.  Employee stock options to purchase 2,224,000shares and 6,496,519 shares from convertible debentures were not included inthe computation of diluted loss per share for the three months and six months endedSeptember 30, 2003, because they were antidilutive.

 

8

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ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

*Statementswe make in the following discussion which express a belief, expectation orintention, as well as those that are not historical fact, are forward-lookingstatements that are subject to risks, uncertainties and assumptions.  Our actual results, performance orachievements, or industry results, could differ materially from those weexpress in the following discussion as a result of a variety of factors,including general economic and business conditions and industry trends, thecontinued strength or weakness of the contract land drilling industry in thegeographic areas in which we operate, decisions about onshore exploration anddevelopment projects to be made by oil and gas companies, the highlycompetitive nature of our business, our future financial performance, includingavailability, terms and deployment of capital, the continued availability ofqualified personnel, and changes in, or our failure or inability to complywith, government regulations, including those relating to the environment.*

 

**CompanyOverview**

 

Pioneer DrillingCompany provides contract land drilling services to independent and major oiland gas exploration and production companies. In addition to our drilling rigs, we provide the drilling crews and mostof the ancillary equipment needed to operate our drilling rigs.  We have focused our operations in the naturalgas production regions of South, East and North Texas.  Our company was incorporated in 1979 as thesuccessor to a business that had been operating since 1968.  We conduct our operations through ourprincipal operating subsidiary, Pioneer Drilling Services, Ltd.  We are an oil and gas services company.  We do not invest in oil and natural gasproperties.  The drilling activity of ourcustomers is highly dependent on the current price of oil and natural gas.  Our customer base is diversified.  During the six months ended September 30,2004, no customer accounted for over 7% of our revenues.

 

Our businessstrategy is to own and operate a high-quality fleet of land drilling rigs inactive drilling markets, and position ourselves to maximize rig utilization anddayrates and to enhance shareholder value. We intend to continue making additions to our drilling fleet, eitherthrough acquisitions of businesses or selected assets or through theconstruction of refurbished drilling rigs.

 

Over the past fouryears, we have expanded our fleet of drilling rigs from eight to 36, throughacquisitions and the construction of refurbished rigs.  Our rigs drill in depth ranges between 8,000and 18,000 feet.  Currently, we have 15rigs operating in South Texas, 17 in East Texas and four in North Texas. Weactively market all of these rigs. Subject to obtaining satisfactory financing, we anticipate continuedgrowth of our rig fleet in fiscal 2005.  Weare currently constructing a 1000-horse power electric rig.

 

We earn ourrevenues by drilling oil and gas wells and obtain our contracts either throughcompetitive bidding or through direct negotiations with customers.  Our drilling contracts generally provide forcompensation on either a daywork, turnkey or footage basis.  Contract terms we offer generally depend onthe complexity and risk of operations, the on-site drilling conditions, thetype of equipment used and the anticipated duration of the work to beperformed.  Generally, our contractsprovide for the drilling of a single well and typically permit the customer toterminate on short notice.

 

A significantperformance measurement in our industry is rig utilization.  We compute rig utilization rates by dividingrevenue days by total available days during a period.  Total available days are the number ofcalendar days during the period that we have owned the rig.  Revenue days for each rig are days when therig is earning revenues under a contract, which is usually a period from thedate the rig begins moving to the drilling location until the rig is releasedfrom the contract.  On daywork contracts,during the mobilization period we typically earn a fixed amount of revenuebased on the mobilization rate stated in the contract.  We attempt to set the mobilization rate at anamount equal to our external costs for the move, plus our internal costs duringthe mobilization period.  We beginearning our contracted daywork rate when we begin drilling the well.

 

For the three-monthand six-month periods ended September 30, 2004 and 2003, our rig utilizationand revenue days were as follows:

 
| ** **        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-------------------|------------|------------------|------------|----------------|------------|
| ** **        | ** ** | **2004**         | ** ** | **2003**       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Utilization Rates |       | 96               | %          | 85             | %          | 94 | % | 86 | % |
| Revenue Days      |       | 3,166            |       | 2,064          |       | 6,163 |   | 4,022 |   |

 

The reasons for theincrease in the number of revenue days in 2004 over 2003 are the increase insize of our rig fleet from 27 rigs at September 30, 2003 to 36 rigs at September30, 2004 and the improvement in our overall rig utilization rate.

 

9

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We attribute ourrelatively high utilization rates to a strong sales effort, quality equipment,good field and operations personnel, a disciplined safety approach, and ourgenerally successful performance of turnkey operations.  For the six months ended September 30, 2004,turnkey contracts accounted for approximately 40 percent of our contracts.  Turnkey contracts provide us with theopportunity to keep our rigs working in periods of lower demand and improve ourprofitability, but at an increased risk.

 

We devotesubstantial resources to maintaining and upgrading our rig fleet.  In the short term, these actions resulted infewer revenue days and slightly lower utilization; however, in the long term,we believe the upgrades will help the marketability of the rigs and improvetheir operating performance.  We arecurrently performing, between contracts or as necessary, safety and equipmentupgrades to the eight rigs we acquired in March 2004.

 

***Market Conditions inOur Industry***

* *

The United Statescontract land drilling services industry is highly cyclical.  Volatility in oil and gas prices can producewide swings in the levels of overall drilling activity in the markets we serveand affect the demand for our drilling services and the dayrates we can chargefor our rigs.  The availability offinancing sources, past trends in oil and gas prices and the outlook for futureoil and gas prices strongly influence the number of wells oil and gasexploration and production companies decide to drill.

 

For the threemonths ended September 30, 2004, the average weekly spot price for West TexasIntermediate crude oil was $43.69, the average weekly spot price for Henry Hubnatural gas was $5.44 and the average weekly Baker Hughes land rig count was 1,114. On October 22, 2004, the spot price forWest Texas Intermediate crude oil was $56.17, the spot price for Henry Hubnatural gas was $7.17 and the Baker Hughes land rig count was 1,135, a 17%increase from 970 on October 24, 2003.

 

The average weeklyspot prices of West Texas Intermediate crude oil, Henry Hub natural gas and theaverage weekly domestic land rig count, per the Baker Hughes land rig count,for each of the previous six years ended September 30, 2004 were:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |     |       |     |       |     |       |
| Oil (West Texas Intermediate) |       | $        | 37.10      |     | $          | 30.45    |       | $        | 24.23      |     | $          | 28.93    |       | $ | 28.52 |   | $ | 16.33 |   |
|                          |       |     |       |     |       |     |       |     |       |     |       |     |       |
| Gas (Henry Hub)               |       | $        | 5.55       |     | $          | 5.22     |       | $        | 2.86       |     | $          | 4.95     |       | $ | 3.31 |   | $ | 2.10 |   |
|                          |       |     |       |     |       |     |       |     |       |     |       |     |       |
| U.S. Land Rig Count           |       | 1,038    |       | 839      |       | 734      |       | 994      |       | 693      |       | 482      |       |
|                               |            |          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |  |

 

During the first sixmonths of fiscal 2005, substantially all the wells we drilled for our customerswere drilled in search of natural gas because of the depth capacity of our rigsand the gas-rich areas in which we operate. Natural gas reserves are typically found in deeper geological formationsand generally require premium equipment and quality crews to drill the wells.

 

***Critical AccountingPolicies and Estimates***

* *

*Revenueand cost recognition*— We earn our revenues by drilling oiland gas wells for our customers under daywork, turnkey or footage contracts,which usually provide for the drilling of a single well.  We recognize revenues on daywork contractsfor the days completed based on the dayrate each contract specifies.  We recognize revenues from our turnkey andfootage contracts on the percentage-of-completion method for the days completed,based on the contract amount divided by our estimate of the number of days tocomplete each contract.  Contractdrilling in progress represents revenues we have recognized in excess ofamounts billed on contracts in progress.** Individual contracts are usually completed inless than 60 days.  The risks to us undera turnkey contract, and to a lesser extent under footage contracts, aresubstantially greater than on a contract drilled on a daywork basis.  This is primarily because, under a turnkeycontract, we assume most of the risks associated with drilling operationsgenerally assumed by the operator in a daywork contract, including the risks ofblowout, loss of hole, stuck drill pipe, machinery breakdowns and abnormaldrilling conditions, as well as risks associated with subcontractors’ services,supplies, cost escalations and personnel operations.

 

10

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Our management hasdetermined that it is appropriate to use the percentage-of-completion method torecognize revenue on our turnkey and footage contracts.  Although our turnkey and footage contracts donot have express terms that provide us with rights to receive payment for thework that we perform prior to drilling wells to the agreed-on depth, we usethis method because, as provided in applicable accounting literature, webelieve 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 ourwork-in-progress even in the event we were unable to drill to the agreed-ondepth in breach of the applicable contract. However, ultimate recovery of that value, in the event we were unable todrill to the agreed-on depth in breach of the contract, would be subject tonegotiations with the customer and the possibility of litigation.

 

If a customerdefaults on its payment obligation to us under a turnkey or footage contract,we would need to rely on applicable law to enforce our lien rights, because ourturnkey and footage contracts do not expressly grant to us a security interestin the work we have completed under the contract and we have no ownershiprights in the work-in-progress or completed drilling work, except any rightsarising under the applicable lien statute on foreclosure.  If we were unable to drill to the agreed-ondepth in breach of the contract, we also would need to rely on equitableremedies outside of the contract, including *quantum meruit*,available in applicable courts to recover the fair value of ourwork-in-progress under a turnkey or footage contract.

 

We accrueestimated contract costs on turnkey and footage contracts for each day of workcompleted, based on our estimate of the total costs to complete the contractdivided by our estimate of the number of days to complete the contract.  Contract costs include labor, materials,supplies, repairs and maintenance, operating overhead allocations and allocationsof depreciation expense.   In addition,the occurrence of uninsured or under-insured losses or operating cost overrunson our turnkey and footage contracts could have a material adverse effect onour financial position and results of operations.* *Therefore, our actual resultscould differ significantly if our cost estimates are later revised from ouroriginal estimates for contracts in progress at the end of a reporting periodwhich were not completed prior to the release of our financial statements.

 

*Assetimpairments* – We assess the impairment of property andequipment whenever events or circumstances indicate that the carrying value maynot be recoverable.  Factors that weconsider important and which could trigger an impairment review would be ourcustomers’ financial condition and any significant negative industry oreconomic trends.  More specifically,among other things, we consider our contract revenue rates, our rigutilizations rates, cash flows from our drilling rigs, current oil and gasprices, industry analysts’ outlook for the industry and their view of ourcustomers’ access to debt or equity, discussions with major industry suppliers,discussions with officers of our primary lender regarding their experiences andexpectations for oil and gas operators in our areas of operations and thetrends in the price of used drilling equipment observed by our management.  If a review of our drilling rigs indicatesthat our carrying value exceeds the estimated undiscounted future cash flows,we are required, under applicable accounting standards, to write down thedrilling equipment to its fair market value. A one percent write-down in the cost of our drilling equipment, at September30, 2004, would have resulted in a corresponding decrease in our net earningsof approximately $1,013,000 for the three-months and six-months ended September30, 2004.

 

*Deferredtaxes* – We provide deferred taxes for net operating losscarryforwards and for the basis difference in our property and equipmentbetween financial reporting and tax reporting purposes.  For property and equipment, basis differencesarise from differences in depreciation periods and methods and the value ofassets acquired in a business acquisition where we acquire an entity ratherthan just its assets.  For financialreporting purposes, we depreciate the various components of our drilling rigsover eight to 15 years and refurbishments over three years, while federalincome tax rules require that we depreciate drilling rigs and refurbishmentsover five years.   Therefore, in thefirst five years of our ownership of a drilling rig, our tax depreciationexceeds our financial reporting depreciation, resulting in our providingdeferred taxes on this depreciation difference. After five years, financial reporting depreciation exceeds taxdepreciation, and the deferred tax liability begins to reverse.

 

*Accountingestimates* – We consider the recognition of revenues and costson turnkey and footage contracts critical accounting estimates.  On these types of contracts, we are requiredto estimate the number of days it will require for us to complete the contractand our total cost to complete the contract. Our actual costs could substantially exceed our estimated costs if weencounter problems such as lost circulation, stuck drill pipe or an undergroundblowout on contracts still in progress subsequent to the release of thefinancial statements.

 

We receive paymentunder turnkey and footage contracts when we deliver to our customer a wellcompleted to the depth specified in the contract, unless the customerauthorizes us to drill to a shallower depth. Since 1995, when currentmanagement joined our company, we have completed all our turnkey or footagecontracts.  Although our initial costestimates for turnkey and footage contracts do not include cost estimates forrisks such as stuck drill pipe or loss of circulation, we believe that ourexperienced management team, our knowledge of geologic formations in our areasof operations, the condition

 

11

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of our drilling equipment and our experienced crews enable us to makereasonably dependable cost estimates and complete contracts according to ourdrilling plan.  While we do bear the riskof loss for cost overruns and other events that are not specifically providedfor in our initial cost estimates, our pricing of turnkey and footage contractstakes such risks into consideration. When we encounter, during the course of our drilling operations,conditions unforeseen in the preparation of our original cost estimate, weimmediately increase our cost estimate for the additional costs to complete thecontracts.  If we anticipate a loss on acontract in progress at the end of a reporting period due to a change in ourcost estimate, we immediately accrue the entire amount of the estimated loss,including all costs that are included in our revised estimated cost to completethat contract, in our consolidated statement of operations for that reportingperiod.  During the six months ended September30, 2004, we experienced losses on 13 of the 90 turnkey and footage contractscompleted, with losses exceeding $25,000 on eight contracts and lossesexceeding $100,000 on four contracts.  Weare more likely to encounter losses on turnkey and footage contracts in yearsin which revenue rates are lower for all types of contracts.  During periods of reduced demand for drillingrigs, our overall profitability on turnkey and footage contracts has historicallyexceeded our profitability on daywork contracts.

 

Revenues and costsduring a reporting period could be affected for contracts in progress at theend of a reporting period which have not been completed before our financialstatements for that period are released. All of our turnkey and footage contracts in progress at September 30,2004 were completed prior to the release of the financial statements includedin this report.  At September 30, 2004,our contract drilling in progress totaled approximately $5,499,000, of which turnkeyand footage contract revenues were approximately $3,633,000 and dayworkcontract revenues were approximately $1,866,000.

 

We estimate anallowance for doubtful accounts based on the creditworthiness of our customersas well as general economic conditions. We evaluate the creditworthiness of our customers based on informationobtained from major industry suppliers, current prices of oil and gas and anypast experience we have with the customer. Consequently, an adverse change in those factors could affect our estimateof our allowance for doubtful accounts. In some instances, we require new customers to establish escrow accountsor make prepayments.  We typicallyinvoice our customers at 15-day intervals during the performance of dayworkcontracts and upon completion of the daywork contract.  Turnkey and footage contracts are invoicedupon completion of the contract.  Ourtypical contract provides for payment of invoices in 10 to 30 days.  We generally do not extend payment termsbeyond 30 days and have not extended payment terms beyond 60 days for any ofour contracts in the last three fiscal years.

 

Another criticalestimate is our determination of the useful lives of our depreciable assets,which directly affects our determination of depreciation expense and deferredtaxes.  A decrease in the useful life ofour drilling equipment would increase depreciation expense and reduce deferredtaxes.  We provide for depreciation ofour drilling, transportation and other equipment on a straight-line method overuseful lives that we have estimated and that range from three to 15 years.  We record the same depreciation expensewhether a rig is idle or working.  Ourestimates of the useful lives of our drilling, transportation and otherequipment are based on our more than 35 years of experience in the drillingindustry with similar equipment.

 

Other accruedexpenses in our September 30, 2004 financial statements include an accrual ofapproximately $721,000 for costs incurred under the self-insurance portion ofour health insurance and under our workers’ compensation insurance.  We have a deductible of (1) $100,000 percovered individual per year under the health insurance and (2) $250,000 peroccurrence under our workers’ compensation insurance.  We accrue for these costs as claims areincurred, based on cost estimates established for each claim by the insurancecompanies providing the administrative services for processing the claims,including an estimate for incurred but not reported claims, estimates forclaims paid directly by us, our estimate of the administrative costs associatedwith these claims and our historical experience with these types of claims.

 

***Liquidity andCapital Resources***

* *

*Sourcesof Capital Resources*

 

Our rig fleet has grownfrom eight rigs in August 2000 to 36 rigs as of September 30, 2004.  We have financed this growth with acombination of debt and equity financing. We have raised additional equity or used equity for growth six timessince January 2000.  We plan to continueto grow our rig fleet.  We have arrangeda new credit facility to finance near-term growth and anticipate the use ofequity financing for additional long-term growth.  However, our ability to continue funding ourgrowth through the issuance of shares of our common stock is uncertain, as ourcommon stock is not heavily traded and the market price for our common stockhas been volatile in recent periods.

 

# On August11, 2004, the entire $28,000,000 in aggregate principal amount of our 6.75%convertible subordinated debentures held by WEDGE Energy Services, L.L.C. andWilliam H. White was converted in accordance with the terms of those debenturesinto 6,496,519 shares of our common stock. We issued those shares without registration under the Securities Act of1933 in reliance on the exemption that Section 4(2) of that Act provides fortransactions not involving any public offering.

 

12

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# OnAugust 11, 2004, we also sold 4,000,000 shares of our common stock atapproximately $6.61per share, net of underwriters’ commissions, pursuant to apublic offering we registered with the SEC under a registration statement filedon Form S-1.  On August 31, 2004, we sold600,000 additional shares of our common stock at approximately $6.61 per share,net of underwriters’ commissions, pursuant to the underwriters’ exercise of anover-allotment option granted in connection with that public offering.

#  

On October 29,2004, we entered into a $47,000,000 credit facility with Frost National Bankconsisting of a $7,000,000 revolving line and letter of credit facility and a$40,000,000 acquisition facility for the acquisition of drilling rigs, drillingrig transportation equipment and associated equipment.

 

Our new creditfacility from Frost National Bank, contains various covenants pertaining to a debtto capitalization ratio, operating leverage ratio and fixed charge coverageratio and restricts us from paying dividends. We will determine compliance with the ratios on a quarterly basis, basedon the previous four quarters. Events of default, which could trigger an earlyrepayment requirement, include among others:

 

•                  ourfailure to make required payments;

 

•                  anysale of assets not permitted by the agreement;

 

•                  ourfailure to comply with financial covenants related to a capitalization ratio of0.3 to 1, an operating leverage ratio of not more than 3 to 1, and a fixedcharge coverage ratio of not less than 1.5 to 1;

 

•                  ourincurrence of additional indebtedness in excess of $3,000,000 not already allowedby the credit agreement;

 

•                  anyevent which results in a change in the ownership of at least 40% of all classesof our outstanding capital stock; and

 

•                  anypayment of cash dividends on our common stock.

 

*Uses ofCapital Resources*

 

For the three andsix months ended September 30, 2004, the additions to our property andequipment consisted of the following:

 
| ** **               | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|--------------------------|------------|------------------|------------|----------------|------------|
| Drilling rigs (1)        |       | $                | 1,628,229  |           | $          | 4,242,280 |   |
| Other drilling equipment |       | 6,150,295        |       | 10,592,511     |       |
| Transportation equipment |       | 518,364          |       | 1,654,381      |       |
| Other                    |       | 627,402          |       | 850,640        |       |
|                     |       | $                | 8,924,290  |           | $          | 17,339,812 |   |
|                          |            |                  |            |                |            |  |  |  |  |

 

----

(1) Includescapitalized interest costs of $0 for the three months and $28,740 for the sixmonths ended September 30, 2004.

 

We are currentlyconstructing, from new and used components, a 1000-horse power electricdrilling rig.  As of September 30, 2004,we had incurred approximately $919,000 of the estimated $5,500,000 rigconstruction costs.  We expect tocomplete construction of the rig in December 2004.

 

*WorkingCapital*

 

Our working capitalincreased to $14,485,532 at September 30, 2004 from $6,028,018 at March 31,2004.  Our current ratio, which wecalculate by dividing our current assets by our current liabilities, was 1.63at September 30, 2004, compared to 1.27 at March 31, 2004.  The principal reason for the increase in ourworking capital at September 30, 2004 was our August 2004 public offering ofcommon stock in which we raised proceeds of approximately $29,700,000.  Approximately $18,800,00 of those proceeds wasused to retire substantially all our long-term debt.  Our operations generated cash flows in excessof our requirements for debt service and normal capital expenditures.  If necessary, we can defer rig upgrades toimprove our cash position.  Therefore, webelieve our cash generated by operations and our ability to borrow on ourcurrently unused line of

 

13

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credit and letter of credit facility of approximately $4,500,000, afterreductions for letters of credit, should allow us to meet our routine financialobligations.

 

The changes in thecomponents of our working capital were as follows:

 
| ** **                    | ** ** | **September 30,  2004** | ** ** | **March 31,  2004** | ** ** | **Change** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------|------------|------------|------------|
|                          |       |                    |       |                |       |       |       |
| Cash and cash equivalents     |       | $                       | 11,072,872 |                | $          | 6,365,759  |       | $ | 4,707,113 |   |
| Receivables                   |       | 20,047,155              |       | 10,901,991          |       | 9,145,164  |       |
| Contract drilling in progress |       | 5,499,121               |       | 9,130,794           |       | (3,631,673 | )          |
| Deferred income taxes         |       | 403,394                 |       | 285,384             |       | 118,010    |       |
| Prepaid expenses              |       | 475,666                 |       | 1,336,337           |       | (860,671   | )          |
| Current assets                |       | 37,498,208              |       | 28,020,265          |       | 9,477,943  |       |
|                          |       |                    |       |                |       |       |       |
| Current debt                  |       | 110,215                 |       | 4,423,306           |       | (4,313,091 | )          |
| Accounts payable              |       | 17,822,388              |       | 13,270,989          |       | 4,551,399  |       |
| Accrued payroll               |       | 2,006,645               |       | 1,499,151           |       | 507,494    |       |
| Accrued expenses              |       | 3,073,428               |       | 2,798,801           |       | 274,627    |       |
|                          |       | 23,012,676              |       | 21,992,247          |       | 1,020,429  |       |
|                          |       |                    |       |                |       |       |       |
| Working capital               |       | $                       | 14,485,532 |                | $          | 6,028,018  |       | $ | 8,457,514 |   |
|                               |            |                         |            |                     |            |            |            |  |  |  |  |  |  |

 

The increase inour receivables at September 30, 2004 from March 31, 2004 was due to ouroperating one additional rig, the improvement in rig utilization and revenuerates, and the timing of the completion of contracts as reflected in thedecrease in contract drilling in progress. We invoiced approximately $18,700,000 of completed work in September2004.

 

The change incontract drilling in progress was primarily due to the number and stage ofcompletion of turnkey contracts in progress at September 30, 2004 compared toMarch 31, 2004.

 

Substantially all ourprepaid expenses at September 30, 2004 consisted of prepaid insurance.  We renew and pay our insurance premium inlate October of each year.  At September 30,2004, we had amortized eleven months of the premiums, compared to five monthsof amortization as of March 31, 2004.

 

The increase inaccounts payable was due to the increase in turnkey contracts completed during Septemberand in progress at September 30, 2004 and rig upgrades.

 

The increase inaccrued payroll was due to the 10 days of payroll accrual at September 30, 2004compared to nine days at March 31, 2004, the addition of a rig, the addition ofour East Texas trucking department and the timing of a payroll tax deposit ofapproximately $430,000.

 

The increase inaccrued expenses at September 30, 2004 compared to March 31, 2004 isprincipally due to the increase in the accrual for property taxes and insurancecosts offset by the decrease in accrued interest expense.

 

*Long-termDebt*

 

Our long-term debtat September 30, 2004 consisted of capital lease obligations of $169,850.

 

14

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*ContractualObligations*

 

We do not have anyroutine purchase obligations.  Thefollowing table excludes interest payments on long-term debt and capital leaseobligations.  The following tableincludes all of our contractual obligations at September 30, 2004.

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **More than 5  years** | ** ** |
| Capital Lease Obligations   |       | $                          | 169,850    |   | $ | 110,215 |   | $ | 59,635 |   | — |   | — |   |
| Operating Lease Obligations |       | 140,466                    |       | 77,664 |   | 62,802 |   | — |   | — |   |
| Total                       |       | $                          | 310,316    |   | $ | 187,879 |   | $ | 122,437 |   | $ | — |   | $ | — |   |
|                             |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*DebtRequirements*

 

At September 30,2004, we had a $2,500,000 line of credit available from Frost NationalBank.  Any borrowings under this line ofcredit were secured by our trade receivables and bear interest at a rate of prime(4.75% at September 30, 2004) plus 1.0%.  The sum of draws under this line and the amount of all outstandingletters of credit issued by the bank for our account were limited to 75% ofeligible accounts receivable.  Therefore,if 75% of our eligible accounts receivable was less than $2,500,000 plus anyoutstanding letters of credit issued by the bank on our behalf, our ability todraw under this line would be reduced. At September 30, 2004, we had no outstanding advances under this line ofcredit, letters of credit were $1,664,000 and 75% of eligible accountsreceivable was approximately $14,853,000. The letters of credit are issued to two workers’ compensation insurancecompanies to secure possible future claims that do not exceed the deductibles onthese policies.  It is our practice topay any amounts due that do not exceed these deductibles as they areincurred.  Therefore, we do notanticipate the lender will be required to fund any draws under these letters ofcredit.

 

At September 30,2004, our line of credit loan agreement from Frost National Bank containedvarious covenants pertaining to debt to net worth, leverage and cash flowcoverage ratios and restricted us from paying dividends.  We determined compliance with the ratios on aquarterly basis, based on the previous four quarters.  As of September 30, 2004, we were incompliance with all covenants applicable to our outstanding debt.

 

Events of defaultin our loan agreement, which could trigger an early repayment requirement,include among others:

 

•                  ourfailure to make required payments;

 

•                  ourfailure to comply with financial covenants related to the maintenance of aratio of debt to tangible net worth, a leverage ratio, a cash flow coverageratio and a senior cash flow coverage ratio;

 

•                  ourincurrence of additional indebtedness in excess of $2,000,000 not alreadyallowed by the credit agreements; and

 

•                  anypayment of cash dividends on our common stock.

 

The limitation onadditional indebtedness has not affected our operations or liquidity and we do notexpect it to affect us in the future, as we expect to continue to generateadequate cash flow from operations.

 

15

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**Resultsof Operations**

 

*Contracts*

 

Our operationsconsist of drilling oil and gas wells for our customers under daywork, turnkey,or footage contracts usually on a well-to-well basis.  Daywork contracts are the easiest for us toperform and involve the least risk. Turnkey contracts are the most difficult to perform and involve muchgreater risk but provide the opportunity for higher operating profits.

 

*DayworkContracts*.  Underdaywork drilling contracts, we provide a drilling rig with required personnelto our customer, who supervises the drilling of the well.  We are paid based on a negotiated fixed rateper day while the rig is used.

 

*TurnkeyContracts. *Under aturnkey contract, we agree to drill a well for our customer to a specifieddepth and under specified conditions for a fixed price, regardless of the timerequired or the problems encountered in drilling the well.  We provide technical expertise andengineering services, as well as most of the equipment and drilling suppliesrequired to drill the well.  We oftensubcontract for related services, such as the provision of casing crews,cementing and well logging.  Undertypical turnkey drilling arrangements, we do not receive progress payments andare entitled to be paid by our customer only after we have performed the termsof the drilling contract in full.  Therisks under a turnkey contract are greater than those under a daywork contract,because we assume most of the risks associated with drilling operations thatthe operator generally assumes under a daywork contract.

 

*FootageContracts*.  Underfootage contracts, we are paid a fixed amount for each foot drilled, regardlessof the time required or the problems encountered in drilling the well.  We typically pay more of the out-of-pocketcosts associated with footage contracts compared with daywork contracts.  Similar to turnkey contracts, under a footagecontract we assume most of the risks associated with drilling operations that theoperator generally assumes under a daywork contract.

 

The current demandfor drilling rigs greatly influences the types of contracts we are able toobtain.  As the demand for rigsincreases, daywork rates move up and we are able to switch to primarily dayworkcontracts.

 

For the three andsix month periods ended September 30, 2004 and 2003, the percentages of ourdrilling revenues by type of contract were as follows:

 

| ** **        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-------------------|------------|------------------|------------|----------------|------------|
| ** **        | ** ** | **2004**         | ** ** | **2003**       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Daywork Contracts |       | 40               | %          | 49             | %          | 38 | % | 45 | % |
| Turnkey Contracts |       | 56               | %          | 46             | %          | 58 | % | 51 | % |
| Footage Contracts |       | 4                | %          | 5              | %          | 4 | % | 4 | % |

 

While currentdemand for drilling rigs has increased, we continue to bid on turnkey contractsin an effort to improve profitability and maintain rig utilization.  With the improvements in daywork rates, weanticipate a gradual decline in the number of turnkey contracts.

 

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*Statement of Operations Analysis*

 

The followingtable provides information for our operations for the three-month and six-monthperiods ended September 30, 2004 and September 30, 2003.

 
| ** **                                | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-------------------------------------------|------------|------------------|------------|----------------|------------|
| ** **                                | ** ** | **2004**         | ** ** | **2003**       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Contract drilling revenues:               |       |             |       |           |       |   |   |   |   |
| Daywork contracts                         |       | $                | 17,276,731 |           | $          | 11,831,824 |   | $ | 31,417,487 |   | $ | 21,627,884 |   |
| Turnkey contracts                         |       | 23,820,635       |       | 11,258,181     |       | 48,439,968 |   | 24,561,779 |   |
| Footage contracts                         |       | 1,685,534        |       | 1,154,377      |       | 3,644,255 |   | 1,904,802 |   |
| Total contract drilling revenues          |       | $                | 42,782,900 |           | $          | 24,244,382 |   | $ | 83,501,710 |   | $ | 48,094,465 |   |
| Contract drilling costs:                  |       |             |       |           |       |   |   |   |   |
| Daywork contracts                         |       | $                | 13,743,157 |           | $          | 10,130,675 |   | $ | 25,272,395 |   | $ | 18,848,876 |   |
| Turnkey contracts                         |       | 19,475,630       |       | 8,872,345      |       | 40,336,150 |   | 19,868,898 |   |
| Footage contracts                         |       | 1,372,186        |       | 788,121        |       | 2,836,798 |   | 1,439,773 |   |
| Total contract drilling costs             |       | $                | 34,590,973 |           | $          | 19,791,141 |   | $ | 68,445,343 |   | $ | 40,157,547 |   |
|                                      |       |             |       |           |       |   |   |   |   |
| Depreciation and amortization             |       | $                | 5,306,041  |           | $          | 3,927,546 |   | $ | 10,354,358 |   | $ | 7,551,727 |   |
| General and administrative expense        |       | 925,549          |       | 691,598        |       | 1,695,691 |   | 1,339,846 |   |
| Revenue days by type of contract:         |       |             |       |           |       |   |   |   |   |
| Daywork contracts                         |       | 1,674            |       | 1,362          |       | 3,151 |   | 2,548 |   |
| Turnkey contracts                         |       | 1,347            |       | 610            |       | 2,723 |   | 1,319 |   |
| Footage contracts                         |       | 145              |       | 92             |       | 289 |   | 155 |   |
| Total Revenue days                        |       | 3,166            |       | 2,064          |       | 6,163 |   | 4,022 |   |
|                                      |       |             |       |           |       |   |   |   |   |
| Contract drilling revenue per revenue day |       | $                | 13,513     |           | $          | 11,746 |   | $ | 13,549 |   | $ | 11,958 |   |
| Contract drilling cost per revenue day    |       | 10,926           |       | 9,589          |       | 11,106 |   | 9,984 |   |
| Rig utilization rates                     |       | 96               | %          | 85             | %          | 94 | % | 86 | % |
| Average number of rigs during the period  |       | 36               |       | 26.3           |       | 35.7 |   | 25.4 |   |
|                                           |            |                  |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our contractdrilling revenues grew by approximately $18,539,000, or 76%, in the quarterended September 30, 2004 from 2003, due to an improvement in rig revenue ratesdue to an increase in demand for drilling rigs, an increase in the number ofrigs in our fleet and an 11% increase in rig utilization. Our contract drillingrevenues grew by approximately $35,407,000, or 74%, in the six months endedSeptember 30, 2004 from 2003, due to an improvement in rig revenue rates due toan increase in demand for drilling rigs, an increase in the number of rigs inour fleet and an 8% increase in rig utilization.   The improvement in contract drilling revenueper day is due to the improvement in revenue rates and the increase in revenuesfrom turnkey contracts.

 

Our contractdrilling costs grew by approximately $14,800,000, or 75%, in the quarter endedSeptember 30, 2004 from the corresponding quarter of 2003 due to the increasesin the number of rigs in our fleet, rig utilization and the 121% increase inturnkey revenue days in 2004 compared to 2003. Under turnkey and footage contracts we provide supplies and materialssuch as fuel, drill bits, casing, drilling fluids, etc., which significantlyadds to drilling costs.

 

Our contractdrilling costs grew by approximately $28,300,000, or 70%, in the six monthsended September 30, 2004 from the corresponding period of 2003 due to the increasesin the number of rigs in our fleet, rig utilization and the 106% increase inturnkey revenue days in 2004 compared to 2003.

 

Our depreciationand amortization expense in the quarter ended September 30, 2004 increased byapproximately $1,378,000, or 35%, from the corresponding quarter of 2003.  Our depreciation and amortization expense forthe six months ended September 30, 2004 increased by approximately $2,803,000,or 37%, from the corresponding six months of 2003. The increases in 2004 over2003 primarily resulted from the 37% increase in the average size of our rigfleet.

 

Our general andadministrative expense in the quarter ended September 30, 2004 increased byapproximately $234,000, or 34%, from the corresponding quarter of 2003.  The increase resulted from increased payrollcosts, insurance costs, professional fees and director fees.  In the quarter ended September 30, 2004,payroll cost increased by approximately $76,000,

 

17

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due to pay raises and an increase in the number of employees in ourcorporate office from 14 to 17. Directors’ and officers’ liability and employment practices insuranceincreased by approximately $23,000, professional fees increased byapproximately $43,000 and director fees increased by approximately $50,000.

 

Our general andadministrative expenses increased by approximately $356,000, or 27%, in the sixmonths ended September 30, 2004 from the corresponding period of 2003.  The increase resulted from increased payrollcosts, insurance costs, professional fees and director fees.  In 2004, payroll cost increased byapproximately $107,000, due to pay raises and the increase in the number of employeesin our corporate office.  Directors’ andofficers’ liability and employment practices insurance increased byapproximately $42,000, professional fees increased by approximately $64,000 anddirectors’ fees increased by approximately $110,000.

 

Our effectiveincome tax rates of 39% and 23% for the three-month periods ended September 30,2004 and 2003, respectively, and 39% and 26% for the six-month periods endedSeptember 30, 2004 and 2003, respectively, differ from the federal statutoryrate of 34% due to permanent differences. Permanent differences are costs included in results of operations in theaccompanying financial statements which are not fully deductible for federalincome tax purposes.

 

*Inflation*

 

As a result of therelatively low levels of inflation during the past two years, inflation did notsignificantly affect our results of operations in any of the periods reported.

 

*Off Balance Sheet Arrangements*

 

We do notcurrently have any off balance sheet arrangements.

 

18

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

We are usuallysubject to market risk exposure related to changes in interest rates on ouroutstanding floating rate debt.  At September30, 2004, except for a few capital leases with fixed interest rates, we had nooutstanding debt, as all of our long-term debt was paid during the quarter.  We did not enter into any debt arrangementsfor trading purposes.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under thesupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of September 30, 2004 to providereasonable assurance that information required to be disclosed in our reportsfiled or submitted under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

There has been nochange in our internal controls over financial reporting that occurred duringthe three months ended September 30, 2004 that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

 

PART II.  OTHER INFORMATION

 

ITEM 2.                             UNREGISTEREDSALES OF EQUITY SECURITES AND USE OF PROCEEDS

 

On August 11, 2004, the entire $28,000,000 inaggregate principal amount of our 6.75% convertible subordinated debentures heldby WEDGE Energy Services, L.L.C. and William H. White was converted inaccordance with the terms of those debentures into 6,496,519 shares of ourcommon stock.  We issued those shareswithout registration under the Securities Act of 1933 in reliance on theexemption that Section 4(2) of that Act provides for transactions not involvingany public offering.

 

ITEM 4.                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

On August 6, 2004, the annual meeting of theshareholders of the Company was held.  Atthe meeting, Mike E. Little and C. Robert Bunch were elected to the Board ofDirectors of the Company.  The followingmatters were submitted to the shareholders of the Company for their approval.

 

(1)                                  Electionof Directors:

 

Michael E.Little.  21,693,815 votes were cast forand 71,390 votes were withheld.

 

C. RobertBunch.  21,692,782 votes were cast forand 72,423 votes were withheld.

 

(2)                                  Theshareholders ratified the appointment of KPMG LLP as our independent auditorsfor the fiscal year ending March 31, 2005. 21,733,235 votes were cast for the matter, and 23,270 were cast againstthe matter.  0 votes were withheld.  8,700 votes were abstentions and 0 votes werebroker non-votes.

 

ITEM 6.                             EXHIBITS

 

The followingexhibits are filed as part of this report or incorporated by reference herein:

 
|  3.1  * | -      | Articles  of Incorporation of Pioneer Drilling Company, as amended (Form 10-K for the  year ended March 31, 2001 (File No. 1-8182, Exhibit 3.1)).                          |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                       |
|  3.2  * | -      | Articles  of Amendment to the Articles of Incorporation of Pioneer Drilling Company  (Form 10-Q for the quarter ended September 30, 2001 (File No. 1-8182, Exhibit  3.1)). |

 

19

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|  3.3  * | -      | Amended  and Restated Bylaws of Pioneer Drilling Company (Form 10-Q for the quarter  ended December 31, 2003 (File No. 1-8182, Exhibit 3.3))                                          |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                  |
| 10.1  *      | -      | Irrevocable  Conversion Notice and Agreement between Pioneer Drilling Company and William  H. White dated July 9, 2004. (Form S-1 (Reg. No. 333-117279), Exhibit 4.19).               |
|         |   |                                                                                                                                                                                  |
| 10.2  *      | -      | Irrevocable  Conversion Notice and Agreement between Pioneer Drilling Company and WEDGE  Energy Services, L.L.C. dated July 9, 2004. (Form S-1 (Reg. No. 333-117279),  Exhibit 4.20). |
| 10.3  *      | -      | Agreement  Regarding Preemptive Rights dated July 26, 2004 between Pioneer Drilling  Company and Chesapeake Energy Corporation (Form S-1 (Reg. No. 333-117279),  Exhibit 4.21).       |
|         |   |                                                                                                                                                                                  |
| 31.1         | -      | Rule  13a-14(a)/15d-14(a) Certification by Pioneer Drilling Company’s Chief  Executive Officer.                                                                                  |
|         |   |                                                                                                                                                                                  |
| 31.2         | -      | Rule  13a-14(a)/15d-14(a) Certification by Pioneer Drilling Company’s Chief  Financial Officer.                                                                                  |
|         |   |                                                                                                                                                                                  |
| 32.1         | -      | Section  1350 Certification by Pioneer Drilling Company’s Chief Executive Officer.                                                                                               |
|         |   |                                                                                                                                                                                  |
| 32.2         | -      | Section  1350 Certification by Pioneer Drilling Company’s Chief Financial Officer.                                                                                               |

 

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*                                         Incorporatedherein by reference to the specified prior filing by Pioneer Drilling Company.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized initially filed with the Securities and Exchange Commission on November5, 2004.

 

 
|   | PIONEER DRILLING  COMPANY                                         |
|--------|-------------------------------------------------------------------|
|   |                                                              |
|   |                                                              |
|   |  /s/ William D.  Hibbetts                                    |   |
|   | William D. Hibbetts                                               |
|   | Senior Vice President  and Chief Financial Officer                |
|   | (Principal Financial  Officer and Duly Authorized Representative) |
|   |                                                              |
| Dated: | November 5, 2004                                                  |   |
|        |                                                                   |  |  |

 

20

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Index to Exhibits

 
|  3.1  * | -      | Articles  of Incorporation of Pioneer Drilling Company, as amended (Form 10-K for the  year ended March 31, 2001 (File No. 1-8182, Exhibit 3.1)).                                     |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                  |
|  3.2  * | -      | Articles  of Amendment to the Articles of Incorporation of Pioneer Drilling Company  (Form 10-Q for the quarter ended September 30, 2001 (File No. 1-8182, Exhibit  3.1)).            |
|         |   |                                                                                                                                                                                  |
|  3.3  * | -      | Amended  and Restated Bylaws of Pioneer Drilling Company. (Form 10-Q for the quarter  ended December 31, 2003 (File No. 1-8182, Exhibit 3.3)).                                        |
|         |   |                                                                                                                                                                                  |
| 10.1  *      | -      | Irrevocable  Conversion Notice and Agreement between Pioneer Drilling Company and William  H. White dated July 9, 2004. (Form S-1 (Reg. No. 333-117279), Exhibit 4.19).               |
|         |   |                                                                                                                                                                                  |
| 10.2  *      | -      | Irrevocable  Conversion Notice and Agreement between Pioneer Drilling Company and WEDGE  Energy Services, L.L.C. dated July 9, 2004. (Form S-1 (Reg. No. 333-117279),  Exhibit 4.20). |
|         |   |                                                                                                                                                                                  |
| 10.3  *      | -      | Agreement  Regarding Preemptive Rights dated July 26, 2004 between Pioneer Drilling  Company and Chesapeake Energy Corporation (Form S-1 (Reg. No. 333-117279),  Exhibit 4.21).       |
|         |   |                                                                                                                                                                                  |
| 31.1         | -      | Rule  13a-14(a)/15d-14(a) Certification by Pioneer Drilling Company’s Chief  Executive Officer.                                                                                  |
|         |   |                                                                                                                                                                                  |
| 31.2         | -      | Rule  13a-14(a)/15d-14(a) Certification by Pioneer Drilling Company’s Chief Financial  Officer.                                                                                  |
|         |   |                                                                                                                                                                                  |
| 32.1         | -      | Section  1350 Certification by Pioneer Drilling Company’s Chief Executive Officer.                                                                                               |
|         |   |                                                                                                                                                                                  |
| 32.2         | -      | Section  1350 Certification by Pioneer Drilling Company’s Chief Financial Officer.                                                                                               |

 

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*              Incorporated hereinby reference to the specified prior filing by Pioneer Drilling Company.

 

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