**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  June 30, 2005**                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                                                                            |
| **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**

 

**PIONEERDRILLING COMPANY**

(Exactname of registrant as specified in its charter)

 

| **TEXAS**                                                        |   | **74-2088619**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |                                     |
| **1250 N.E. Loop 410,  Suite 1000, San Antonio, Texas**     |   | **78209**                                |
| (Address of principal  executive offices)                        |   | (Zip Code)                               |
|                                                             |   |                                     |
| **210-828-7689**                                                 |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý  No  o

 

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

 

As of August 4, 2005, there were 46,294,312 sharesof common stock, par value $0.10 per share, of the registrant issued andoutstanding.

 

 

----

 

PART I. FINANCIALINFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

PIONEER DRILLING COMPANYAND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                                                                                                     | ** ** | **June 30,** | ** **  | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|--------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2005**          | ** **  | **2005**           | ** ** |
| ** **                                                                                                                                                                                     | ** ** | **(unaudited)**   | ** **  | ** **         | ** ** |
| **ASSETS**                                                                                                                                                                                     | ** ** | ** **        | ** **  | ** **         | ** ** |
| Current assets:                                                                                                                                                                                |       |              |        |               |       |
| Cash and cash equivalents                                                                                                                                                                      |       | $                 | 64,621,995  |               | $          | 69,673,279 |   |
| Marketable securities                                                                                                                                                                          |       | —            |        | 1,000,000          |       |
| Receivables:                                                                                                                                                                                   |       |              |        |               |       |
| Trade, net                                                                                                                                                                                     |       | 30,664,502        |        | 26,108,291         |       |
| Contract drilling in progress                                                                                                                                                                  |       | 7,629,848         |        | 5,364,529          |       |
| Current deferred income taxes                                                                                                                                                                  |       | 2,689,123         |        | 569,548            |       |
| Prepaid expenses                                                                                                                                                                               |       | 1,432,859         |        | 1,876,843          |       |
| Total current assets                                                                                                                                                                           |       | 107,038,327       |        | 104,592,490        |       |
|                                                                                                                                                                                           |       |              |        |               |       |
| Property and equipment, at cost:                                                                                                                                                               |       | 242,820,978       |        | 225,447,939        |       |
| Less accumulated depreciation and amortization                                                                                                                                                 |       | 59,873,879        |        | 54,881,488         |       |
| Net property and equipment                                                                                                                                                                     |       | 182,947,099       |        | 170,566,451        |       |
| Intangible and other assets                                                                                                                                                                    |       | 810,774           |        | 850,381            |       |
| Total assets                                                                                                                                                                                   |       | $                 | 290,796,200 |               | $          | 276,009,322 |   |
|                                                                                                                                                                                           |       |              |        |               |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                      |       |              |        |               |       |
| Current liabilities:                                                                                                                                                                           |       |              |        |               |       |
| Notes payable                                                                                                                                                                                  |       | $                 | 137,393     |               | $          | 681,975 |   |
| Current installments of long-term debt and capital  lease obligations                                                                                                                          |       | 4,725,913         |        | 4,733,026          |       |
| Accounts payable                                                                                                                                                                               |       | 14,220,323        |        | 15,621,647         |       |
| Income tax payable                                                                                                                                                                             |       | 232,493           |        | 195,949            |       |
| Prepaid drilling contracts                                                                                                                                                                     |       | 345,043           |        | 172,750            |       |
| Accrued expenses:                                                                                                                                                                              |       |              |        |               |       |
| Payroll and payroll taxes                                                                                                                                                                      |       | 4,576,592         |        | 2,706,623          |       |
| Other                                                                                                                                                                                          |       | 4,399,188         |        | 4,153,851          |       |
| Total current liabilities                                                                                                                                                                      |       | 28,636,945        |        | 28,265,821         |       |
| Long-term debt and capital lease obligations, less  current installments                                                                                                                       |       | 12,261,894        |        | 13,445,017         |       |
| Non-current liability                                                                                                                                                                          |       | 400,000           |        | 400,000            |       |
| Deferred income taxes                                                                                                                                                                          |       | 17,448,691        |        | 12,283,070         |       |
| Total liabilities                                                                                                                                                                              |       | 58,747,530        |        | 54,393,908         |       |
| Commitments and contingencies                                                                                                                                                                  |       | —            |        | —             |       |
| Shareholders’ equity:                                                                                                                                                                     |       |              |        |               |       |
| Preferred stock, 10,000,000 shares authorized; none  issued and outstanding                                                                                                                    |       | —            |        | —             |       |
| Common stock $.10 par value; 100,000,000 shares  authorized; 46,294,312 shares  and 45,893,311 shares issued and outstanding at June 30, 2005 and  March 31, 2005, respectively |       | 4,629,431         |        | 4,589,331          |       |
| Additional paid-in capital                                                                                                                                                                     |       | 222,900,265       |        | 220,232,520        |       |
| Retained earnings (accumulated deficit)                                                                                                                                                        |       | 4,518,974         |        | (3,206,437         | )          |
| Total shareholders’ equity                                                                                                                                                                |       | 232,048,670       |        | 221,615,414        |       |
| Total liabilities and shareholders’ equity                                                                                                                                                |       | $                 | 290,796,200 |               | $          | 276,009,322 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

2

----

 

PIONEERDRILLING COMPANY AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 
| ** **                                               | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                     |       |                                  |       |   |   |
| Contract drilling revenues                               |       | $                                     | 59,876,763 |   | $ | 40,718,811 |   |
|                                                     |       |                                  |       |   |   |
| Costs and expenses:                                      |       |                                  |       |   |   |
| Contract drilling                                        |       | 39,158,198                            |       | 33,854,370 |   |
| Depreciation and amortization                            |       | 7,329,520                             |       | 5,048,317 |   |
| General and administrative                               |       | 1,486,672                             |       | 770,141 |   |
| Total operating costs and expenses                       |       | 47,974,390                            |       | 39,672,828 |   |
|                                                     |       |                                  |       |   |   |
| Income from operations                                   |       | 11,902,373                            |       | 1,045,983 |   |
|                                                     |       |                                  |       |   |   |
| Other income (expense):                                  |       |                                  |       |   |   |
| Interest expense                                         |       | (155,135                              | )          | (718,232 | ) |
| Interest income                                          |       | 501,629                               |       | 23,837 |   |
| Other                                                    |       | 13,977                                |       | 3,389 |   |
| Total other income (expense)                             |       | 360,471                               |       | (691,006 | ) |
|                                                     |       |                                  |       |   |   |
| Income before income taxes                               |       | 12,262,844                            |       | 354,977 |   |
| Income tax expense                                       |       | (4,537,434                            | )          | (138,449 | ) |
| Net earnings                                             |       | $                                     | 7,725,410  |   | $ | 216,528 |   |
|                                                     |       |                                  |       |   |   |
| Earnings per common share - Basic                        |       | $                                     | 0.17       |   | $ | 0.01 |   |
|                                                     |       |                                  |       |   |   |
| Earnings per common share - Diluted                      |       | $                                     | 0.17       |   | $ | 0.01 |   |
|                                                     |       |                                  |       |   |   |
| Weighted average number of shares outstanding -  Basic   |       | 46,012,015                            |       | 27,300,126 |   |
|                                                     |       |                                  |       |   |   |
| Weighted average number of shares outstanding -  Diluted |       | 46,765,224                            |       | 28,273,561 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

----

 

PIONEER DRILLING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 
| ** **                                                                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                |       |                                 |       |   |   |
| Net earnings                                                                         |       | $                                    | 7,725,410  |   | $ | 216,528 |   |
| Adjustments to reconcile net earnings to net cash provided  by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                        |       | 7,329,520                            |       | 5,048,317 |   |
| Loss on sale of properties and equipment                                             |       | 527,038                              |       | 117,298 |   |
| Change in deferred income taxes                                                      |       | 3,046,046                            |       | 168,449 |   |
| Changes in current assets and liabilities:                                           |       |                                 |       |   |   |
| Receivables                                                                          |       | (4,556,211                           | )          | (1,669,355 | ) |
| Contract drilling in progress                                                        |       | (2,265,319                           | )          | (1,330,429 | ) |
| Prepaid expenses                                                                     |       | 443,984                              |       | 364,188 |   |
| Accounts payable                                                                     |       | (1,401,324                           | )          | 4,502,705 |   |
| Prepaid drilling contracts                                                           |       | 172,293                              |       | — |   |
| Federal income tax payable                                                           |       | 36,544                               |       | — |   |
| Accrued expenses                                                                     |       | 2,115,306                            |       | 1,789,132 |   |
| Net cash provided by operating activities                                            |       | 13,173,287                           |       | 9,206,833 |   |
|                                                                                 |       |                                 |       |   |   |
| Cash flows from financing activities:                                                |       |                                 |       |   |   |
| Payments of debt                                                                     |       | (1,734,819                           | )          | (1,299,699 | ) |
| Proceeds from exercise of options                                                    |       | 2,707,844                            |       | — |   |
| Net cash provided by (used in) financing activities                                  |       | 973,025                              |       | (1,299,699 | ) |
|                                                                                 |       |                                 |       |   |   |
| Cash flows from investing activities:                                                |       |                                 |       |   |   |
| Purchase of property and equipment                                                   |       | (20,874,416                          | )          | (8,415,522 | ) |
| Purchase of marketable securities                                                    |       | (49,150,000                          | )          | (2,500,000 | ) |
| Proceeds from sale of marketable securities                                          |       | 50,150,000                           |       | 4,000,000 |   |
| Proceeds from sale of property and equipment                                         |       | 676,820                              |       | 62,377 |   |
| Net cash used in investing activities                                                |       | (19,197,596                          | )          | (6,853,145 | ) |
|                                                                                 |       |                                 |       |   |   |
| Net decrease in cash and cash equivalents                                            |       | (5,051,284                           | )          | 1,053,989 |   |
|                                                                                 |       |                                 |       |   |   |
| Beginning cash and cash equivalents                                                  |       | 69,673,279                           |       | 1,815,759 |   |
| Ending cash and cash equivalents                                                     |       | $                                    | 64,621,995 |   | $ | 2,869,748 |   |
|                                                                                 |       |                                 |       |   |   |
| Supplementary Disclosure:                                                            |       |                                 |       |   |   |
| Interest paid                                                                        |       | $                                    | 272,761    |   | $ | 242,738 |   |
| Income taxes paid (refunded)                                                         |       | $                                    | 153,599    |   | $ | (30,000 | ) |
| Tax benefit from exercise of nonqualified options                                    |       | $                                    | 1,301,245  |   | $ | — |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

----

 

PIONEER DRILLING COMPANY AND SUBSIDARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**1. Organization and Basis of Presentation**

 

*Business and Principles of Consolidation*

 

# Pioneer Drilling Company provides contract land drilling services toselect oil and natural gas exploration and production regions in the UnitedStates.  We conduct our operationsthrough our principal operating subsidiary, Pioneer Drilling Services,Ltd.  The accompanying unaudited condensedconsolidated financial statements include our accounts and the accounts of ourwholly owned subsidiaries.  All intercompanybalances and transactions have been eliminated in consolidation.

 

# The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of our management, all adjustments (consisting of normal recurringaccruals) necessary for a fair presentation have been included.

* *

*Income Taxes*

 

Pursuant to Statement of Financial AccountingStandards (“SFAS”) No. 109, *Accounting for IncomeTaxes*, we follow the asset and liability method of accounting forincome taxes, under which we recognize deferred tax assets and liabilities forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and their respectivetax basis.  We measure our deferred taxassets and liabilities by using the enacted tax rates we expect to apply totaxable income in the years in which we expect to recover or settle thosetemporary differences.  Under SFAS No. 109,we reflect in income the effect of a change in tax rates on deferred tax assetsand liabilities in the period during which the change occurs.

 

We believe it is more likely than not that our taxableincome for the year ending March 31, 2006 will be sufficient to utilize ournet operating loss carryforwards recorded at June 30, 2005.  As a result, we classified the deferredincome tax benefit of these net operating loss carryforwards as currentdeferred income tax assets on our balance sheet as of June 30, 2005.  Additionally, we believe our federal incometax rate for the year ending March 31, 2006 will increase to 35%, ascompared to 34% for the year ended March 31, 2005.  The effect of this expected increase in ourfederal income tax rate is reflected in our estimated annual income tax rateutilized for the three months ended June 30, 2005.

* *

*Stock-based Compensation*

 

We have adopted SFAS 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, *Accounting for Stock Issued to Employees.*We have elected tocontinue accounting for stock-based compensation under the intrinsic-value-basedmethod.  Under this method, we record nocompensation expense for stock option grants when the exercise price of theoptions granted is equal to the fair market value of our common stock on the dateof grant.  If we had elected to recognizecompensation cost based on the fair value of the options we granted at theirrespective 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:

 

5

----

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net earnings - as reported                                                                                                                   |       | $                                    | 7,725,410  |   | $ | 216,528 |   |
| Deduct: Total stock-based employee compensation expense  determined under fair-value-based method for all awards, net of related tax  effect |       | (514,850                             | )          | (347,091 | ) |
| Net earnings (loss) - pro forma                                                                                                              |       | $                                    | 7,210,560  |   | $ | (130,563 | ) |
| Net earnings per share - as reported - basic                                                                                                 |       | $                                    | 0.17       |   | $ | 0.01 |   |
| Net earnings per share - as reported - diluted                                                                                               |       | $                                    | 0.17       |   | $ | 0.01 |   |
| Net earnings per share - pro forma - basic                                                                                                   |       | $                                    | 0.16       |   | $ | — |   |
| Net earnings per share - pro forma - diluted                                                                                                 |       | $                                    | 0.15       |   | $ | — |   |
| Weighted-average fair value of options granted  during the period                                                                            |       | $                                    | 7.52       |   | $ | 4.19 |   |

 

We estimate the fair value of each option grant on thedate of grant using a Black-Scholes options-pricing model.  The model assumed for the three months ended June 30,2005 and 2004:

 
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Expected volatility                       |       | 59                                   | %          | 88 | % |
| Weighted-average risk-free interest rates |       | 3.8                                  | %          | 4.0 | % |
| Expected life in years                    |       | 5                                    |       | 5 |   |
| Options granted                           |       | 30,000                               |       | 35,000 |   |

 

As we have not declared dividends since we became apublic company, we did not use a dividend yield.  In each case, the actual value that will berealized, if any, will depend on the future performance of our common stock andoverall stock market conditions.  Thereis no assurance the value an optionee actually realizes will be at or near thevalue we have estimated using the Black-Scholes model.

* *

*Related Party Transactions*

 

As of June 30, 2005, Chesapeake EnergyCorporation (“Chesapeake”) owned 16.64% of our outstanding common stock.  During the three months ended June 30,2005 and 2004, we recognized revenues of approximately $6,637,000 and $9,000, andrecorded contract drilling costs, excluding depreciation,  of approximately $4,422,000 and $13,000 respectively,on drilling contracts with Chesapeake.  Ouraccounts receivable at June 30, 2005 include approximately $5,022,000 duefrom Chesapeake.

 

We purchased services from R&B Answering Serviceand Frontier Services, Inc. during the three months ended June 30,2005 and 2004. These companies are more than 5% owned by our Chief OperatingOfficer and an immediate family member of our Vice President and OperationsManager,****respectively. The following summarizesthe transactions with these companies in each period.

 
| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------|------------|---------------------------------------|------------|
| ** **                   | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| R&B Answering Service    |       |                                  |       |   |   |
| Purchases                    |       | $                                     | 4,881      |   | $ | 3,858 |   |
| Payments                     |       | 4,733                                 |       | 4,553 |   |
|                         |       |                                  |       |   |   |
| Frontier Services, Inc. |       |                                  |       |   |   |
| Purchases                    |       | $                                     | 4,432      |   | $ | 31,583 |   |
| Payments                     |       | 4,107                                 |       | 34,467 |   |

 

6

----

 

*Recently Issued Accounting Standards*

 

In December 2004, the FinancialAccounting Standards Board (the”FASB”) issued SFAS No. 123R (revised2004), *Share-Based Payment.*  SFAS No. 123R is a revision of FASB SFASNo. 123, *Accounting for Stock-BasedCompensation,*and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees,*andits related implementation guidance. SFAS No. 123R established standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices.  It also addresses transactionsin which an entity incurs liabilities in exchange for goods or services thatare based on the fair value of the entity’s equity instruments or that may besettled by the issuance of those equity instruments.  SFAS No. 123R focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  SFAS No. 123Rrequires a public entity to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award (with limited exceptions). That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the award.  The provisions of SFAS No. 123R areeffective for public entities that do not file as small business issuers as ofthe beginning of the first annual reporting period that begins after June 15,2005.  We are currently evaluating thenegative impact SFAS No. 123R will have on our financial position andresults of operations in fiscal year 2007. The negative impact will be created due to the fact that we previouslyissued employee stock options for which no expense has been recognized, asthose options will not be fully vested as of the effective date of SFAS No. 123R.

 

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections,*which supersedes APB Opinion No. 20, *AccountingChanges,*and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements.*SFAS No. 154changes the requirements for the accounting for and reporting of changes inaccounting principle. The statement requires the retroactive application toprior periods’ financial statements of changes in accounting principles, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. SFAS No. 154 does not change the guidancefor reporting the correction of an error in previously issued financialstatements or the change in an accounting estimate. SFAS No.154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. We do not expect the adoption of SFAS No. 154to have a material impact on our financial position and results of operationsand financial condition.

* *

*Reclassifications*

 

Certain amounts in the financial statements for theprior year have been reclassified to conform to the current year’spresentation.

 

**2. Long-term Debt and Notes Payable**

 

Notes payable at June 30, 2005 consist of a$137,393****insurance premium note due on August 26,2005, plus interest at the rate of 3.15% per year.

 

Long-term debt at June 30, 2004 included twonotes payable to Frost National Bank of $4,070,746 and $2,911,248, a notepayable to Merrill Lynch Capital of $12,601,190 and subordinated debt payableto WEDGE Energy Services, LLC and William H. White of $28,000,000.  In August and September 2004, werepaid the two notes payable to Frost National Bank and the note payable toMerrill Lynch Capital.  On August 11,2004, the entire $28,000,000 in aggregate principal amount of our 6.75% convertiblesubordinated debentures was converted in accordance with the terms of thosedebentures into 6,496,519 shares of our common stock.

 

On October 29, 2004, we entered into a$47,000,000 credit facility with a group of lenders consisting of a $7,000,000revolving line and letter of credit facility and a $40,000,000 acquisitionfacility for the acquisition of drilling rigs, drilling rig transportationequipment and associated equipment. Frost National Bank is the administrative agent and lead arranger underthe new credit facility, and the lenders include Frost National Bank, the Bankof Scotland and Zions First National Bank. Borrowings under the new credit facility bear interest at a rate equalto Frost National Bank’s prime rate (6.25% at June 30, 2005) and aresecured by most of our assets, including all our drilling rigs and associatedequipment and receivables.  We borrowedthe entire $40,000,000 available under the acquisition facility and we haveused approximately $2,825,000****ofavailability under the revolving line and letter of credit facility through theissuance of letters of credit in the ordinary course of business.  On March 29, 2005, we repaid $20,000,000of the borrowings under the acquisition facility.  On May 11, 2005, the lender amended theacquisition facility to provide us with the ability to again draw $20,000,000for future acquisitions.  The acquisitionfacility and the revolving line and letter of credit facility have availabilityof approximately $20,000,000 and $4,175,000**,**respectively,that should remain available to us until those facilities mature in October 2006and October 2005, respectively.  Theacquisition facility loan balance of $16,911,111****atJune 30, 2005 is due in monthly installments of $388,889 plus interest at FrostNational Bank’s floating prime rate.  Theremaining unpaid balance is due December 1, 2007.  The 

 

7

----

 

$16,911,111****matures as follows: $4,666,667****byJune 1, 2006; $4,666,667 by June 1, 2007; and $7,577,777 by December 1,2007.

 

The sum of (1) the draws and (2) the amountof all outstanding letters of credit issued for our account under the revolvingline and letter of credit facility portion of our new credit facility arelimited to 75% of our eligible accounts receivable, not to exceed $7,000,000.  Therefore, if 75% of our eligible accountsreceivable was less than $7,000,000, our ability to draw under this line wouldbe reduced.  At June 30, 2005, wehad no outstanding advances under this line of credit, letters of credit were $2,825,000and 75% of our eligible accounts receivable was approximately $22,167,000.  The letters of credit are issued to threeworkers’ compensation insurance companies to secure possible future claimsunder the deductibles on these policies. It is our practice to pay any amounts due under these deductibles asthey are incurred.  Therefore, we do notanticipate that the lenders will be required to fund any draws under theseletters of credit.  The termination dateof the revolving line and letter of credit facility portion of our new creditfacility is October 28, 2005.   

 

At June 30, 2005, we were in compliance with allcovenants applicable to our outstanding debt. Those covenants include, among others, requirements that we maintain adebt to total capitalization ratio of not greater than 0.3 to 1, a fixed chargedcoverage ratio of not less than 1.5 to 1 and an operating leverage ratio ofless than 3 to 1.  The covenants alsorestrict us from paying dividends, restrict us from the sale of assets notpermitted by the credit facility and restrict us from the incurrence ofadditional indebtedness in excess of $3,000,000 not already allowed by thecredit facility.

 

**3. Commitments and Contingencies**

 

Due to the nature of our business, we are, from timeto time, involved in routine litigation or subject to disputes or claimsrelated to our business activities, including workers’ compensation claims andemployment-related disputes.  In theopinion of our management, none of such pending litigation, disputes or claimsagainst us will have a material adverse effect on our financial condition,results of operations or cash flow from operations, and there is only a remotepossibility that any such matter will require any additional loss accrual.

 

At June 30, 2005, we were in the process ofconstructing four drilling rigs and had incurred approximately $12,500,000 ofthe approximately $29,500,000 of construction costs.

 

**4.   EquityTransactions**

 

#  On August 11, 2004, theentire $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 11, 2004, we sold 4,000,000 shares ofour common stock at approximately $6.61 per share, net of underwriters’commissions, pursuant to a public offering we registered with the SEC under aregistration statement filed on Form S-1. On August 31, 2004, we sold 600,000 additional shares of our commonstock at approximately $6.61 per share, net of underwriters’ commissions,pursuant to the underwriters’ exercise of an over-allotment option granted inconnection with that public offering.

 

On March 22, 2005, we sold 6,945,000 shares ofour common stock, including shares we sold pursuant to the underwriters’exercise of an over-allotment option, at approximately $11.78 per share, net ofunderwriters’ commissions, pursuant to a public offering we registered with theSEC.

#  

# Directors and employees exercised stock options for the purchase of 401,001shares of common stock during the three months ended June 30, 2005, at pricesranging from $3.00 to $6.44 per share. There were no director and employee stock options exercised during thethree months ended June 30, 2004.

 

8

----

 

**5.  Earnings Per Common Share**

#  

# The following tablepresents a reconciliation of the numerators and denominators of the basic EPSand diluted EPS computations as required by SFAS No. 128:

 
| ** **              | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Basic                   |       |                             |       |   |   |
| Net earnings            |       | $                                | 7,725,410  |   | $ | 216,528 |   |
| Weighted average shares |       | 46,012,015                       |       | 27,300,126 |   |
| Earnings per share      |       | $                                | 0.17       |   | $ | 0.01 |   |

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Diluted                              |       |                                  |       |   |   |
| Net earnings                         |       | $                                     | 7,725,410  |   | $ | 216,528 |   |
| Effect of dilutive  securities:      |       |                                  |       |   |   |
| Convertible debentures               | (1)        |                                  | —     |   | — |   |
|                                 |       |                                  |       |   |   |
|                                 |       |                                  |       |   |   |
| Net earnings and  assumed conversion |       | $                                     | 7,725,410  |   | $ | 216,528 |   |
| Weighted average shares:             |       |                                  |       |   |   |   |
| Outstanding                          |       |                                  | 46,012,015 |   | 27,300,126 |   |
| Options                              |       |                                  | 753,209    |   | 973,435 |   |
| Convertible debentures               | (1)        |                                  | —     |   | — |   |
|                                 |       | 46,765,224                            |       | 28,273,561 |   |
| Earnings per share                   |       |                                  | $          | 0.17 |   | $ | 0.01 |   |

 

----

(1)         The computation ofdiluted earnings per share for the three months ended June 30, 2004excluded 6,496,519 shares from convertible debentures because they wereantidilutive.

 

9

----

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

 

*Statements we make in the following discussionwhich express a belief, expectation or intention, as well as those that are nothistorical fact, are forward-looking statements that are subject to risks,uncertainties and assumptions.  Ouractual results, performance or achievements, or industry results, could differmaterially from those we express in the following discussion as a result of avariety of factors, including general economic and business conditions andindustry trends, the continued strength or weakness of the contract landdrilling industry in the geographic areas in which we operate, decisions aboutonshore exploration and development projects to be made by oil and gascompanies, the highly competitive nature of our business, our future financialperformance, including availability, terms and deployment of capital, thecontinued availability of qualified personnel, and changes in, or our failureor inability to comply with, government regulations, including those relatingto the environment.  We have discussedmany of these factors in more detail elsewhere in this report and in our annualreport on Form 10-K for the year ended March 31, 2005.  These factors are not necessarily all theimportant factors that could affect us. Unpredictable or unknown factors we have not discussed in this report orin our annual report on Form 10-K could also have material adverse effectson actual results of matters that are the subject of our forward-lookingstatements.  We do not intend to updateour description of important factors each time a potential important factorarises, except as required by applicable securities laws and regulations.  We advise our shareholders that they should (1) beaware that important factors not referred to above could affect the accuracy ofour forward-looking statements and (2) use caution and common sense whenconsidering our forward-looking statements.*

 

**Company Overview**

 

Pioneer Drilling Company provides contract landdrilling services to independent and major oil and gas exploration andproduction companies.  In addition to ourdrilling rigs, we provide the drilling crews and most of the ancillaryequipment needed to operate our drilling rigs. We have focused our operations in selected oil and natural gasproduction regions in the United States. Our company was incorporated in 1979 as the successor to a business thathad been operating since 1968.  Weconduct our operations through our principal operating subsidiary, PioneerDrilling Services, Ltd.  We are an oiland gas services company.  We do notinvest in oil and natural gas properties. The drilling activity of our customers is highly dependent on thecurrent price of oil and natural gas.  

 

Our business strategy is to own and operate ahigh-quality fleet of land drilling rigs in active drilling markets, andposition ourselves to maximize rig utilization and dayrates and to enhanceshareholder value.  We intend to continuemaking additions to our drilling fleet, either through acquisitions ofbusinesses or selected assets or through the construction of new or refurbisheddrilling rigs. 

 

Since September 1999, we have significantly expandedour fleet of drilling rigs through acquisitions, construction of new rigs andthe refurbishment of older rigs.  As of August 1,2005, our rig fleet consisted of 51 land drilling rigs that drill in depthranges between 6,000 and 18,000 feet.  Fifteen of our rigs are operating in SouthTexas, 17 in East Texas, four in North Texas, five in western Oklahoma and 10in the Rocky Mountains. We actively market all of these rigs.  We anticipate continued growth of our rigfleet in fiscal year 2006.  We arecurrently constructing a 1000-horsepower diesel electric rig and two 1500-horsepowerdiesel electric rigs from new and used components.  In addition, we plan to construct threeadditional rigs subject to obtaining satisfactory contracts with minimum termsof one year.

 

We earn our revenues by drilling oil and gas wells forour customers.  We obtain our contracts fordrilling oil and gas wells either through competitive bidding or through directnegotiations with customers.  Ourdrilling contracts generally provide for compensation on either a daywork,turnkey or footage basis.  Contract termsgenerally depend on the complexity and risk of operations, the on-site drillingconditions, the type of equipment used and the anticipated duration of the workto be performed.  Generally, ourcontracts provide for the drilling of a single well and typically permit thecustomer to terminate on short notice.  Asdemand for drilling rigs has improved during the past year, we have enteredinto more longer term drilling contracts. Currently, we have 16****contracts withterms of six months to two years in duration. In addition, we have one- or two-year term contracts for the three rigscurrently under construction.

 

A significant performance measurement in our industryis rig utilization.  We compute rigutilization rates by dividing revenue days by total available days during aperiod.  Total available days for a rigare the number of calendar days during the period that we have owned therig.  Revenue days for each rig are dayswhen the rig is earning revenues under a contract, which is usually a periodfrom the date the rig begins moving to the drilling location until the rig isreleased from the contract.

 

10

----

 

 

For the three months ended June 30, 2005 and 2004,our rig utilization and revenue days were as follows:

 
| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Utilization Rates |       | 95       | %          | 93       | %          |
| Revenue Days      |       | 4,303    |       | 2,997    |       |

 

The reasons for the increase in the number of revenuedays in 2005 over 2004 are the increase in size of our rig fleet from 36 rigsat June 30, 2004 to 50 rigs at June 30, 2005 and the improvement inour overall rig utilization rate due to the improved market conditions.   For the remainder of fiscal year 2006, weanticipate continued growth in revenue days and comparable utilization rates tofiscal year 2005.

 

In addition to high commodity prices, 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 three months ended June 30, 2005,turnkey contracts accounted for approximately 9% 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. As was the case for several turnkey contracts under which we performedduring the three months ended June 30, 2004, a turnkey contract may not beprofitable if it cannot be completed successfully without unanticipatedcomplications.

 

We devote substantial resources to maintaining andupgrading our rig fleet.  In the shortterm, these actions result in fewer revenue days and slightly lowerutilization; however, in the long term, we believe the upgrades will help themarketability of our rigs and improve their operating performance.  We expended approximately $4,315,000 on rigupgrades during the three months ended June 30, 2005.  We are currently performing, betweencontracts or as necessary, safety and equipment upgrades to the eight rigs weacquired in March 2004 and the 12 rigs we acquired in November and December 2004.

 

***Market Conditions in Our Industry***

 

The United States contract land drilling servicesindustry is highly cyclical.  Volatilityin oil and gas prices can produce wide swings in the levels of overall drillingactivity in the markets we serve and affect the demand for our drillingservices and the dayrates we can charge for our rigs.  The availability of financing sources, pasttrends in oil and gas prices and the outlook for future oil and gas pricesstrongly influence the number of wells oil and gas exploration and productioncompanies decide to drill.

 

On July 22, 2005, the spot price for West TexasIntermediate crude oil was $56.65, the spot price for Henry Hub natural gas was$7.42 and the Baker Hughes land rig count was 1,282, a 17% increase from 1,097on July 23, 2004. 

 

The average weekly spot prices of West TexasIntermediate crude oil and Henry Hub natural gas and the average weeklydomestic land rig count, per the Baker Hughes land rig count, for the threemonths ended June 30, 2005 and each of the previous five years ended June 30,were:

 
| ** **              | ** ** | **Three Months  Ended June  30,** | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2005**                          | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Oil (West Texas         |       |                              |       |                          |       |   |   |   |   |   |   |   |   |
| Intermediate)           |       | $                                 | 53.09      |                          | $          | 48.74 |   | $ | 33.78 |   | $ | 29.96 |   | $ | 23.88 |   | $ | 30.08 |   |
|                    |       |                              |       |                          |       |   |   |   |   |   |   |   |   |
| Natural Gas (Henry Hub) |       | $                                 | 6.93       |                          | $          | 6.20 |   | $ | 5.39 |   | $ | 4.81 |   | $ | 2.73 |   | $ | 5.40 |   |
|                    |       |                              |       |                          |       |   |   |   |   |   |   |   |   |
| U.S. Land Rig Count     |       | 1,218                             |       | 1,153                         |       | 1,000 |   | 778 |   | 821 |   | 930 |   |

 

11

----

 

During fiscal year 2005, 2004 and 2003, substantiallyall the wells we drilled for our customers were drilled in search of naturalgas because of the depth capacity of our rigs and the natural gas-rich areas inwhich we operate.  Although we haverecently diversified our operations somewhat with the November 2004acquisition of seven drilling rigs from Wolverine Drilling, with six of thoserigs employed in search of oil in the Williston Basin of the Rocky Mountains,our customers remain primarily focused on drilling for natural gas.   Natural gas reserves are typically found indeeper geological formations and generally require premium equipment andquality crews to drill the wells. 

 

***Critical Accounting Policies and Estimates***

 

***Revenue and cost recognition*****– We earn our revenues by drilling oil and gas wells forour customers under daywork, turnkey or footage contracts, which usuallyprovide for the drilling of a single well. We recognize revenues on daywork contracts for the days completed basedon the dayrate each contract specifies. We recognize revenues from our turnkey and footage contracts on thepercentage-of-completion method based on 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. Under aturnkey contract, we assume most of the risks associated with drillingoperations that are generally assumed by the operator in a daywork contract,including the risks of blowout, loss of hole, stuck drill pipe, machinery breakdownsand abnormal drilling conditions, as well as risks associated withsubcontractors’ services, supplies, cost escalations and personnel operations.

 

Our management has determined that it is appropriateto use the percentage-of-completion method as defined in SOP 81-1 to recognizerevenue on our turnkey and footage contracts. Although our turnkey and footage contracts do not have express termsthat provide us with rights to receive payment for the work that we performprior to drilling wells to the agreed-on depth, we use this method because, asprovided in applicable accounting literature, we believe we achieve acontinuous sale for our work-in-progress and believe, under applicable statelaw, we ultimately could recover the fair value of our work-in-progress even inthe event we were unable to drill to the agreed-on depth in breach of theapplicable contract.  However, in theevent we were unable to drill to the agreed-on depth in breach of the contract,ultimate recovery of that value would be subject to negotiations with thecustomer and the possibility of litigation. 

 

If a customer defaults on its payment obligation to usunder a turnkey or footage contract, we would need to rely on applicable law toenforce our lien rights, because our turnkey and footage contracts do notexpressly grant to us a security interest in the work we have completed underthe contract and we have no ownership rights in the work-in-progress orcompleted drilling work, except any rights arising under the applicable lien statuteon foreclosure.  If we were unable todrill to the agreed-on depth in breach of the contract, we also would need torely on equitable remedies outside of the contract, including *quantum meruit*, available in applicable courts to recoverthe fair value of our work-in-progress under a turnkey or footagecontract.  

 

We accrue estimated contract costs on turnkey andfootage contracts for each day of work completed based on our estimate of thetotal costs to complete the contract divided by our estimate of the number ofdays to complete the contract.  Contractcosts include labor, materials, supplies, repairs and maintenance, operatingoverhead allocations and allocations of depreciation and amortization expense.   In addition, the occurrence of uninsured orunder-insured losses or operating cost overruns on our turnkey and footagecontracts could have a material adverse effect on our financial position andresults 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.

 

***Asset impairments***– We assess the impairment of property and equipment whenever events orcircumstances indicate that the carrying value may not be recoverable.  Factors that we consider important and whichcould trigger an impairment review would be our customers’ financial conditionand any significant negative industry or economic trends.  More specifically, among other things, weconsider our contract revenue rates, our rig utilizations rates, cash flowsfrom our drilling rigs, current oil and gas prices, industry analysts’ outlookfor the industry and their view of our customers’ access to debt or equity,discussions with major industry suppliers, discussions with officers of ourprimary lender regarding their experiences and expectations for oil and gasoperators in our areas of operations and the trends in the price of useddrilling equipment observed by our management. If a review of our drilling rigs indicates that our carrying valueexceeds the estimated undiscounted future net cash flows, we are required underapplicable accounting standards to write down the drilling equipment to itsfair market value.  A one percentwrite-down in the cost of our drilling equipment, at June 30, 2005, wouldhave resulted in a corresponding decrease in our net earnings of approximately$1,466,000 for the three months ended June 30, 2005.

 

12

----

 

***Deferred taxes***–We provide deferred taxes for net operating loss carryforwards and for thebasis differences in our property and equipment between financial reporting andtax reporting purposes.  For property andequipment, basis differences arise from differences in depreciation periods andmethods and the value of assets acquired in a business acquisition where weacquire an entity rather than just its assets. For financial reporting purposes, we depreciate the various componentsof our drilling rigs over eight to 15 years and refurbishments over threeyears, while federal income tax rules require that we depreciate drillingrigs and refurbishments over five years.  Therefore, in the first five years of our ownership of a drilling rig,our tax depreciation exceeds our financial reporting depreciation, resulting inour providing deferred taxes on this depreciation difference.  After five years, financial reportingdepreciation exceeds tax depreciation, and the deferred tax liability begins toreverse.

 

***Accounting estimates***– We consider the recognition of revenues and costs on turnkey and footagecontracts critical accounting estimates. On these types of contracts, we are required to estimate the number ofdays needed for us to complete the contract and our total cost to complete thecontract.  Our actual costs couldsubstantially exceed our estimated costs if we encounter problems such as lostcirculation, stuck drill pipe or an underground blowout on contracts still inprogress subsequent to the release of the financial statements. 

 

We receive payment under turnkey and footage contractswhen we deliver to our customer a well completed to the depth specified in thecontract, unless the customer authorizes us to drill to a shallower depth.Since 1995, when current management joined our company, we have completed allour turnkey or footage contracts. Although our initial cost estimates for turnkey and footage contracts donot include cost estimates for risks such as stuck drill pipe or loss ofcirculation, we believe that our experienced management team, our knowledge ofgeologic formations in our areas of operations, the condition of our drillingequipment and our experienced crews enable us to make reasonably dependablecost estimates and complete contracts according to our drilling plan.  While we do bear the risk of loss for costoverruns and other events that are not specifically provided for in our initialcost estimates, our pricing of turnkey and footage contracts takes such risksinto consideration.  When we encounter,during the course of our drilling operations, conditions unforeseen in thepreparation of our original cost estimate, we increase our cost estimate tocomplete the contracts.  If we anticipatea loss on a contract in progress at the end of a reporting period due to achange in our cost estimate, we 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 three months ended June 30,2005, we experienced losses of less than $25,000 each on two of the 47 turnkeyand footage contracts completed.  Duringthe three months ended June 30, 2004, we experienced losses on five of the45 turnkey and footage contracts completed, with losses exceeding $25,000 onfour contracts and losses exceeding $100,000 on one contract.  We are more likely to encounter losses onturnkey and footage contracts in periods in which revenue rates are lower forall types of contracts.  During periodsof reduced demand for drilling rigs, our overall profitability on turnkey andfootage contracts has historically exceeded our profitability on daywork contracts.

 

Revenues and costs during a reporting period could beaffected for contracts in progress at the end of a reporting period which havenot been completed before our financial statements for that period arereleased.  All****ofour turnkey contracts in progress at June 30, 2005 were completed prior tothe release of the financial statements included in this report.  At June 30, 2005, our contract drillingin progress totaled approximately $7,630,000. Of that amount accrued, turnkey and footage contract revenues wereapproximately $2,851,000.  The remainingbalance of approximately $4,779,000 related to the revenue recognized but notyet billed on daywork contracts in progress at June 30, 2005.  At March 31, 2005, drilling in progresstotaled $5,365,000, of which $2,344,000 related to turnkey and footagecontracts and $3,021,000 related to daywork contracts.

 

We estimate an allowance for doubtful accounts basedon the creditworthiness of our customers as well as general economicconditions.  We evaluate the creditworthinessof our customers based on information obtained from major industry suppliers,current prices of oil and gas and any past experience we have with thecustomer.  Consequently, an adversechange in those factors could affect our estimate of our allowance for doubtfulaccounts.  In some instances, we requirenew customers to establish escrow accounts or make prepayments.  We typically invoice our customers at 15-dayintervals during the performance of daywork contracts and upon completion of thedaywork contract.  Turnkey and footagecontracts are invoiced upon completion of the contract.  Our typical contract provides for payment ofinvoices in 10 to 30 days.  We generallydo not extend payment terms beyond 30 days and have not extended payment termsbeyond 60 days for any of our contracts in the last three fiscal years.  We established an allowance for doubtfulaccounts of $352,000 at June 30, 2005.

 

Another critical estimate is our determination of theuseful lives of our depreciable assets, which directly affects ourdetermination of depreciation expense and deferred taxes.  A decrease in the useful life of our drillingequipment would increase depreciation expense and reduce deferred taxes.  We provide for depreciation of our drilling,transportation and other equipment on a straight-line method over useful livesthat 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. 

 

13

----

 

Our other accrued expenses as of June 30, 2005include an accrual of approximately $1,428,000****forcosts incurred under the self-insurance portion of our health insurance andunder our workers’ compensation insurance. We have a deductible of (1) $100,000 per covered individual peryear under the health insurance and (2) $250,000 per occurrence under ourworkers’ compensation insurance, except in North Dakota where the deductible is$100,000.  We accrue for these costs asclaims are incurred based on cost estimates established for each claim by theinsurance companies providing the administrative services for processing theclaims, including an estimate for incurred but not reported claims, estimatesfor claims paid directly by us, our estimate of the administrative costsassociated with these claims and our historical experience with these types ofclaims.  Management evaluates these costestimates by the insurance companies based on historical claim information andadjusts the accrued claim costs if deemed necessary.

 

***Liquidity and Capital Resources***

* *

*Sources of Capital Resources*

 

Our rig fleet has grown from eight rigs in August 2000to 51 rigs as of August 1, 2005.  Wehave financed this growth with a combination of debt and equity financing.  We have raised additional equity or usedequity for growth eight times since January 2000 and have increased ourlong-term debt from approximately $3,909,000 at June 30, 2000 toapproximately $16,988,000 at June 30, 2005.  We plan to continue to grow our rigfleet.  At June 30, 2005, our totaldebt to total capital was approximately 6.8%. Due to the volatility in our industry, we are reluctant to take onsubstantial additional debt in excess of the $20,000,000 of remainingavailability under our acquisition credit facility.  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 October 29, 2004, we entered into a$47,000,000 credit facility with a group of lenders consisting of a $7,000,000revolving line and letter of credit facility and a $40,000,000 acquisitionfacility for the acquisition of drilling rigs, drilling rig transportationequipment and associated equipment. Frost National Bank is the administrative agent and lead arranger underthe new credit facility, and the lenders include Frost National Bank, the Bankof Scotland and Zions First National Bank. Borrowings under the new credit facility bear interest at a rate equalto Frost National Bank’s prime rate (6.25% at June 30, 2005) and aresecured by most of our assets, including all our drilling rigs and associatedequipment and receivables.  We borrowedthe entire $40,000,000 available under the acquisition facility, and we haveused approximately $2,825,000****ofavailability under the revolving line and letter of credit facility through theissuance of letters of credit in the ordinary course of business.  On March 29, 2005, we repaid $20,000,000of the borrowings under the acquisition facility.  On May 11, 2005, the lender amended theacquisition facility to provide us with the ability to again draw $20,000,000for future acquisitions.  The acquisitionfacility and the revolving line and letter of credit facility have availabilityof approximately $20,000,000 and $4,175,000**,**respectively,that should remain available to us until those facilities mature in October 2006and October 2005, respectively.  

 

***Uses of Capital Resources***

 

For the three months ended June 30, 2005, theadditions to our property and equipment consisted of the following:

 
| Drilling rigs (1)        |   | $          | 9,317,382  |   |
|--------------------------|--------|------------|------------|--------|
| Other drilling equipment |   | 10,030,576 |       |
| Transportation equipment |   | 1,051,746  |       |
| Other                    |   | 474,712    |       |
|                     |   | $          | 20,874,416 |   |

 

----

(1) Includescapitalized interest costs of $115,694

 

As of June 30, 2005, we were constructing, fromnew and used components, two 1000-horsepower diesel electric rigs and two 1500-horsepowerdiesel electric rigs.  We placed one ofthe 1000-horsepower rigs in service in August 2005 and expect to place thesecond in service in September 2005. We expect to place the 1500-horsepower rigs in service in September 2005and November 2005.  As of June 30,2005, we have incurred approximately $12,500,000 of the approximately $29,500,000of construction costs on these rigs. Subject to obtaining satisfactory contracts with minimum terms of oneyear, we expect to construct three additional rigs resulting in approximately$22,500,000 of construction costs.

 

  For theremainder of fiscal year 2006, we project regular rig capital expenditures(excluding construction costs to complete the construction of the seven rigsreferred to above) to be approximately $14,400,000, rig upgrade expenditures tobe approximately $6,000,000, transportation equipment capital expenditures ofapproximately $1,900,000 and other capital

 

14

----

 

expendituresof approximately $900,000.  These capitalexpenditures are expected to be funded primarily from operating cash flow inexcess of cash flow necessary to meet routine contractual obligations.

* *

*Working Capital*

* *

Our working capital was $78,401,382 at June 30,2005, compared to $76,326,669 at March 31, 2005.  Our current ratio, which we calculate bydividing our current assets by our current liabilities, was 3.74 at June 30,2005, compared to 3.70 at March 31, 2005. 

 

Our operations have historically generated cash flowsin excess of our requirements for debt service and normal capitalexpenditures.  The significantimprovement in operating cash flow for the three months ended June 30,2005 over June 30, 2004 is primarily due to the approximately $7,500,000improvement in net earnings, plus the approximately $2,300,000 increase indepreciation and amortization expense.  Ifnecessary, we can defer rig upgrades to improve our cash position. However,during periods when a higher percentage of our contracts are turnkey or footagecontracts, our short-term working capital needs could increase.  We believe our cash generated by operations andour ability to borrow on the currently unused portion of our line of credit andletter of credit facility of approximately $4,175,000, after reductions for approximately$2,825,000 of outstanding letters of credit as of June 30, 2005, shouldallow us to meet our routine financial obligations.

 

The changes in the components of our working capitalwere as follows:

 
| ** **                    | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|-------------------|------------|--------------------|------------|------------|------------|
| ** **                    | ** ** | **2005**          | ** ** | **2005**           | ** ** | **Change** | ** ** |
|                          |       |              |       |               |       |       |       |
| Cash and cash equivalents     |       | $                 | 64,621,995 |               | $          | 69,673,279 |       | $ | (5,051,284 | ) |
| Marketable securities         |       | —            |       | 1,000,000          |       | (1,000,000 | )          |
| Receivables                   |       | 30,664,502        |       | 26,108,291         |       | 4,556,211  |       |
| Contract drilling in progress |       | 7,629,848         |       | 5,364,529          |       | 2,265,319  |       |
| Deferred income taxes         |       | 2,689,123         |       | 569,548            |       | 2,119,575  |       |
| Prepaid expenses              |       | 1,432,859         |       | 1,876,843          |       | (443,984   | )          |
| Current assets                |       | 107,038,327       |       | 104,592,490        |       | 2,445,837  |       |
|                          |       |              |       |               |       |       |       |
| Current debt                  |       | 4,863,306         |       | 5,415,001          |       | (551,695   | )          |
| Accounts payable              |       | 14,220,323        |       | 15,621,647         |       | (1,401,324 | )          |
| Accrued payroll               |       | 4,576,592         |       | 2,706,623          |       | 1,869,969  |       |
| Income tax payable            |       | 232,493           |       | 195,949            |       | 36,544     |       |
| Prepaid drilling contracts    |       | 345,043           |       | 172,750            |       | 172,293    |       |
| Accrued expenses              |       | 4,399,188         |       | 4,153,851          |       | 245,337    |       |
|                          |       | 28,636,945        |       | 28,265,821         |       | 371,124    |       |
|                          |       |              |       |               |       |       |       |
| Working capital               |       | $                 | 78,401,382 |               | $          | 76,326,669 |       | $ | 2,074,713 |   |

 

The increase in our receivables and contract drillingin progress at June 30, 2005 from March 31, 2005 was due to ouroperating one additional rig and the improvement of revenue rates.

 

The increase in deferred income taxes was due to theclassification of our net operating loss carryforwards as current deferredincome taxes at June 30, 2005.  At March 31,2004, these net operating loss carryforwards were classified as long-termdeferred income taxes.  We believe it ismore likely than not that our taxable income for the year ending March 31,2006 will be sufficient to utilize our net operating loss carryforwardsrecorded at June 30, 2005.

 

Substantially all our prepaid expenses at June 30,2005 consisted of prepaid insurance.  Werenew and pay our insurance premium in late October of each year.  At March 31, 2005, we had amortized fivemonths of the premiums, compared to eight months of amortization as of June 30,2005.

 

The decrease in accounts payable was due to thedecrease in turnkey contracts completed during June and in progress at June 30,2005.  We had two turnkey and five footagecontracts in progress at June 30, 2005, compared to six turnkey and sixfootage contracts in progress at March 31, 2005.

 

15

----

 

The increase in accrued payroll was due to the increasein the number of our employees due to the rig addition and the increase in thenumber of payroll days included in the accrual from 17 days at June 30,2005, compared to 10 days at March 31, 2005.

 

The increase in accrued expenses at June 30, 2005compared to March 31, 2005 was principally due to increases in the accrualfor property taxes and self-insurance costs, partially offset by a decrease inthe accrual for management bonuses.

 

Although we have not been required to make income taxpayments for the last three years, it is likely we will be in a current taxableposition during fiscal year 2006, due to improving market conditions and thereversal of deferred tax liabilities.

 

*Long-term Debt*

 

Our long-term debt consisted of:

 
| ** **                                                                                                                                                                                                                        | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| Indebtedness incurred under $47,000,000 credit  facility, secured by drilling equipment, due in monthly payments of $388,889  plus interest at prime (6.25% at June 30, 2005), with final maturity on  December 1, 2007 |       | $                      | 16,911,111 |                    | $          | 18,077,778 |   |
|                                                                                                                                                                                                                              |       |                   |       |                    |       |
| Capital lease obligations                                                                                                                                                                                                         |       | 76,696                 |       | 100,265                 |       |
|                                                                                                                                                                                                                              |       | $                      | 16,987,807 |                    | $          | 18,178,043 |   |

 

*Contractual Obligations*

 

We do not have any routine purchase obligations.  However, as of June 30, 2005, we were inthe process of constructing four drilling rigs, as described above.  The following table excludes interestpayments on long-term debt and capital lease obligations.  The following table includes all our contractualobligations of the types specified below at June 30, 2005.

 
| ** **                     | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| **Contractual  Obligations**   | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **More than 5  years** | ** ** |
| Long-term Debt                 |       | $                          | 16,911,111 |   | $ | 4,666,667 |   | $ | 12,244,444 |   | $ | — |   | $ | — |   |
| Capital Lease Obligations      |       | 76,696                     |       | 54,817 |   | 21,879 |   | — |   | — |   |
| Operating Lease Obligations    |       | 1,731,796                  |       | 200,318 |   | 344,569 |   | 418,791 |   | 768,118 |   |
| Office Construction Obligation |       | 103,232                    |       | 103,232 |   | — |   | — |   | — |   |
|                           |       |                       |       |   |   |   |   |   |   |   |   |
| Total                          |       | $                          | 18,822,835 |   | $ | 5,025,034 |   | $ | 12,610,892 |   | $ | 418,791 |   | $ | 768,118 |   |

 

*Debt Requirements*

 

The $16,911,111 amount of indebtedness outstandingunder the acquisition facility portion of our new credit facility is due inmonthly installments of $388,889, plus interest, based on a 72-monthamortization schedule, with all remaining unpaid principal being due on December 1,2007. All the indebtedness under the acquisition facility bears interest atFrost National Bank’s prime rate (6.25% as of June 30, 2005). 

 

The sum of (1) the draws and (2) the amountof all outstanding letters of credit issued for our account under the revolvingline and letter of credit facility portion of our new credit facility arelimited to 75% of our eligible accounts receivable, not to exceed $7,000,000.Therefore, if 75% of our eligible accounts receivable was less than $7,000,000,our ability to draw under this line would be reduced. At June 30, 2005, wehad no outstanding advances under this line of credit,

 

16

----

 

outstandingletters of credit were $2,825,000 and 75% of our eligible accounts receivablewas approximately $22,167,000. The letters of credit are issued to threeworkers’ compensation insurance companies to secure possible future claimsunder the deductibles on these policies. It is our practice to pay any amountsdue under these deductibles as they are incurred. Therefore, we do notanticipate that the lenders will be required to fund any draws under theseletters of credit. The termination date of the revolving line and letter ofcredit facility portion of our new credit facility is October 28, 2005.

 

Our credit facility contains various covenantspertaining to a debt to total capitalization ratio, operating leverage ratioand fixed charge coverage ratio and restricts us from paying dividends. Wedetermine compliance with the ratios on a quarterly basis, based on theprevious four quarters. Events of default, which could trigger an earlyrepayment requirement, include, among others:

 

•                  our failure tomake required payments;

 

•                  any sale ofassets by us not permitted by the credit facility;

 

•                  our failure tocomply with financial covenants related to a debt to total capitalization rationot to exceed 0.3 to 1, an operating leverage ratio not to exceed 3 to 1, and afixed charge coverage ratio of not less than 1.5 to 1;

 

•                  our incurrenceof additional indebtedness in excess of $3,000,000 not already allowed by thecredit facility;

 

•                  any event whichresults in a change in the ownership of at least 40% of all classes of ouroutstanding capital stock; and

 

•                  any payment ofcash dividends on our common stock.

 

The limitation on additional indebtedness describedabove has not affected our operations or liquidity and we do not expect it toaffect our future operations or liquidity, as we expect to continue to generateadequate cash flow from operations to fund our anticipated working capital andother normal cash flow requirements.

 

**Results of Operations**

 

Our operations consist of drilling oil and gas wellsfor our customers under daywork, turnkey or footage contracts usually on awell-to-well basis.  Daywork contractsare the least complex for us to perform and involve the least risk.  Turnkey contracts are the most difficult toperform and involve much greater risk but provide the opportunity for higheroperating profits.

 

***Daywork Contracts*.**  Under daywork drilling contracts, we providea drilling rig with required personnel to our customer, who supervises thedrilling of the well.  We are paid basedon a negotiated fixed rate per day while the rig is used.  During the mobilization period, we typicallyearn a fixed amount of revenue based on the mobilization rate stated in thecontract.  We attempt to set themobilization rate at an amount equal to our external costs for the move plusour internal costs during the mobilization period.  We begin earning our contracted daywork ratewhen we begin drilling the well. Occasionally, in periods of increased demand, some of our contracts willprovide for the trucking costs to be paid by the customer, and we will receivea reduced dayrate during the mobilization period. 

 

***Turnkey Contracts.**** *Under a turnkeycontract, we agree to drill a well for our customer to a specified depth andunder specified conditions for a fixed price, regardless of the time requiredor 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, cementingand well logging.  Under typical turnkeydrilling arrangements, we do not receive progress payments and are entitled tobe paid by our customer only after we have performed the terms of the drillingcontract in full.  The risks under aturnkey contract are greater than those under a daywork contract, because undera turnkey contract we assume most of the risks associated with drillingoperations that the operator generally assumes under a daywork contract.

 

***Footage Contracts*.**  Under footage contracts, we are paid a fixedamount for each foot drilled, regardless of the time required or the problemsencountered in drilling the well.  Wetypically pay more of the out-of-pocket costs associated with footage contractsas compared to daywork contracts.  Similarto turnkey contracts, under a footage contract we assume most of the risksassociated with drilling operations that the operator generally assumes under adaywork contract.

 

17

----

 

We have a history of losses.  We incurred net losses of approximately$1,800,000, $5,100,000 and $400,000 in the fiscal years ended March 31,2004, 2003 and 2000, respectively.  Ourprofitability in the future will depend on many factors, but largely onutilization rates and dayrates for our drilling rigs.  

 

The current demand for drilling rigs greatlyinfluences the types of contracts we are able to obtain.  As the demand for rigs increases, dayworkrates move up and we are able to switch primarily to daywork contracts.

 

For the three months ended June 30, 2005 and2004, the percentages of our drilling revenues by type of contract were asfollows:

 
| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
|              |       |     |       |     |       |
| Daywork contracts |       | 77       | %          | 35       | %          |
| Turnkey contracts |       | 14       | %          | 60       | %          |
| Footage contracts |       | 9        | %          | 5        | %          |

 

While demand for drilling rigs has been increasing, wecontinue to bid on turnkey contracts in an effort to meet our customer demandand maintain rig utilization.  With theimprovements in daywork contract rates, we anticipate a gradual decline in thenumber of turnkey contracts.  We had twoturnkey contracts in progress at June 30, 2005 compared to 16 turnkeycontracts in progress at June 30, 2004. We also had five footage contracts in progress at June 30, 2005compared to one****footage contract in progress at June 30,2004.

 

At June 30, 2005, Chesapeake Energy Corporationowned 16.64% of our outstanding common stock. During the three months ended June 30, 2005 and 2004, we recognizedrevenues of approximately $6,637,000 and $9,000, respectively, and recordedcontract drilling costs, excluding depreciation, of approximately $4,422,000and $13,000, respectively, on contracts with Chesapeake. 

 

18

----

 

*Statement of Operations Analysis*

 

The following table provides information for our operationsfor the three months ended June 30, 2005 and 2004.

 
| ** **                                | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|-----------|------------|------------|------------|
| Contract drilling revenues:               |       |      |       |       |       |
| Daywork contracts                         |       | $         | 45,874,532 |       | $          | 14,140,756 |   |
| Turnkey contracts                         |       | 8,592,632 |       | 24,619,333 |       |
| Footage contracts                         |       | 5,409,599 |       | 1,958,722  |       |
| Total contract drilling revenues          |       | $         | 59,876,763 |       | $          | 40,718,811 |   |
| Contract drilling costs:                  |       |      |       |       |       |
| Daywork contracts                         |       | $         | 29,114,313 |       | $          | 11,529,238 |   |
| Turnkey contracts                         |       | 6,160,579 |       | 20,860,520 |       |
| Footage contracts                         |       | 3,883,306 |       | 1,464,612  |       |
| Total contract drilling costs             |       | $         | 39,158,198 |       | $          | 33,854,370 |   |
|                                      |       |      |       |       |       |
| Depreciation and amortization             |       | $         | 7,329,520  |       | $          | 5,048,317 |   |
| General and administrative expense        |       | $         | 1,486,672  |       | $          | 770,141 |   |
| Revenue days by type of contract:         |       |      |       |       |       |
| Daywork contracts                         |       | 3,424     |       | 1,477      |       |
| Turnkey contracts                         |       | 462       |       | 1,376      |       |
| Footage contracts                         |       | 417       |       | 144        |       |
| Total Revenue days                        |       | 4,303     |       | 2,997      |       |
|                                      |       |      |       |       |       |
| Contract drilling revenue per revenue day |       | $         | 13,915     |       | $          | 13,587 |   |
| Contract drilling cost per revenue day    |       | $         | 9,100      |       | $          | 11,296 |   |
| Rig utilization rates                     |       | 95        | %          | 93         | %          |
| Average number of rigs during the period  |       | 50        |       | 35.3       |       |

 

Our contract drilling revenues grew by approximately $19,158,000,or 47%, in the quarter ended June 30, 2005 from the quarter ended June 30,2004, due to an improvement in rig revenue rates resulting from an increase indemand for drilling rigs and the 43% increase in revenue days due to anincrease in the number of rigs in our fleet and a 2% increase in rigutilization.  The improvement in contractdrilling revenues per day is due to the improvement in revenue rates.  Although contract drilling revenues perrevenue day only increased by $328, contract drilling revenues per day fordaywork contracts increased over $3,800 in the quarter ended June 30, 2005compared to the corresponding quarter in 2004 and daywork revenue daysincreased 132%.

 

Our contract drilling costs grew by approximately $5,304,000,or 16%, in the quarter ended June 30, 2005 from the corresponding quarterof 2004 due to the increase in the number of revenue days resulting from theincrease in the number of rigs in our fleet and the increase in rig utilization.  The decline in average contract drilling costper revenue day is due to the shift to more daywork revenue days as apercentage of total revenue days.  Underturnkey and footage contracts, we provide supplies and materials such as fuel,drill bits, casing and drilling fluids, which significantly adds to drillingcosts for turnkey and footage contracts. These costs are also included in the revenues we recognize for turnkeyand footage contracts, resulting in higher revenue rates per day for turnkeyand footage contracts compared to daywork contracts which do not include suchcosts.   

 

Our depreciation and amortization expenses for thequarter ended June 30, 2005 increased by approximately $2,281,000, or 45%,compared to the corresponding quarter in 2004.  The increases in 2005 over 2004 resulted primarilyfrom the 42% increase in the average size of our rig fleet. 

 

Our general and administrative expense for the quarterended June 30, 2005 increased by approximately $717,000, or 93%, comparedto the corresponding quarter in 2004.  Theincrease resulted primarily from increases in payroll costs, bonus accrualcosts and professional fees.  During thequarter ended June 30, 2005, payroll cost increased by approximately $197,000,due to pay raises and an increase in the number of employees in our corporateoffices as compared to the quarter ended June 30, 2004.  Bonus accrual costs increased byapproximately $104,000 and professional fees increased by approximately $332,000.

 

19

----

 

Our effective income tax rates of 37% and 39% for thequarters ended June 30, 2005 and 2004, respectively, differ from thefederal statutory rates of 35% and 34% for the quarters ended June 30,2005 and 2004, respectively, due to permanent differences.  Permanent differences are costs included inresults of operations in the accompanying financial statements which are notfully deductible for federal income tax purposes.

* *

*Accounting Matters*

 

In December 2004, the FinancialAccounting Standards Board (the “FASB”) issued SFAS No. 123R (revised2004), *Share-Based Payment.*  SFAS No. 123R is a revision of FASB SFASNo. 123, *Accounting for Stock-BasedCompensation,*and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees,*andits related implementation guidance. SFAS No. 123R established standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices.  It also addresses transactionsin which an entity incurs liabilities in exchange for goods or services thatare based on the fair value of the entity’s equity instruments or that may besettled by the issuance of those equity instruments.  SFAS No. 123R focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  SFAS No. 123Rrequires a public entity to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award (with limited exceptions). That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the award.  The provisions of SFAS No. 123R areeffective for public entities that do not file as small business issuers as ofthe beginning of the first annual reporting period that begins after June 15,2005.  We are currently evaluating thenegative impact SFAS No. 123R will have on our financial position andresults of operations in fiscal year 2007. The negative impact will be created due to the fact that we previouslyissued employee stock options for which no expense has been recognized, asthese options will not be fully vested as of the effective date of SFAS No. 123R.

 

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections,*which supersedes APB Opinion No. 20, *AccountingChanges*and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements.*SFAS No. 154changes the requirements for the accounting for and reporting of changes inaccounting principle. The statement requires the retroactive application toprior periods’ financial statements of changes in accounting principles, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. SFAS No. 154 does not change the guidancefor reporting the correction of an error in previously issued financialstatements or the change in an accounting estimate. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. We do not expect the adoption ofSFAS No. 154 to have a material impact on our financial position andresults of operations and financial condition.

* *

*Inflation*

 

As a result of the relatively low levels of inflationduring the past two years, inflation did not significantly affect our resultsof operations in any of the periods reported. 

* *

*Off Balance Sheet Arrangements*

 

We do not currently have any off balance sheetarrangements.

 

ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are subject to market risk exposure related tochanges in interest rates on our outstanding floating rate debt.  At June 30, 2005 we had outstanding debtof $16,911,111 that was subject to variable interest rates based on the lender’sprime interest rate.  An increase ordecrease of 1% in the interest rate would have a corresponding decrease or increasein our net income of approximately $107,000 annually.  We did not enter into any of our debtarrangements for trading purposes.

 

ITEM 4. CONTROLS AND PROCEDURES

 

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of June 30, 2005 to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

20

----

 

There has been no change in our internal control overfinancial reporting that occurred during the three months ended June 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.      

 

PART II.  OTHER INFORMATION

ITEM 6.                     EXHIBITS

 

The following exhibits are filed as part of thisreport 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)).                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                             |
| 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))                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                             |
| 4.1 *  |   | Second Amendment dated May 11, 2005 to Credit  Agreement between Pioneer Drilling Services, Ltd. and Frost National Bank, as  Administrative Agent, Lead Arranger and Lender dated October 29, 2004  (Form 8-K filed May 13, 2005 (File No. 1-8182,  Exhibit 4.1)) |
|   |   |                                                                                                                                                                                                                                                                                             |
| 31.1   | -      | Certification by Wm. Stacy  Locke, President and Chief Executive Officer, pursuant to  Rule 13a-14(a) or 15d-14(a) under the Securities Act of 1934.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                             |
| 31.2   | -      | Certification by William D.  Hibbetts, Senior Vice President and Chief Financial Officer, pursuant to  Rule 13a-14(a) or 15d-14(a) under the Securities Act of 1934.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                             |
| 32.1   | -      | Certification by Wm. Stacy  Locke, President and Chief Executive Officer, pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of  Section 1350, Chapter 63 of Title 18, United States Code).                                                 |
|   |   |                                                                                                                                                                                                                                                                                             |
| 32.2   | -      | Certification by William D.  Hibbetts, Senior Vice President and Chief Financial Officer, pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and  (b) of Section 1350, Chapter 63 of Title 18, United States Code).                                 |

 

----

*              Incorporated herein by referenceto 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.

 
|   | 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: | August 4, 2005                                               |   |
|        |                                                                   |  |  |

 

21

----

 

Indexto 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)).                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                             |
| 4.1 *  |   | Second Amendment dated May 11, 2005 to Credit  Agreement between Pioneer Drilling Services, Ltd. and Frost National Bank, as  Administrative Agent, Lead Arranger and Lender dated October 29, 2004  (Form 8-K filed May 13, 2005 (File No. 1-8182,  Exhibit 4.1)) |
|   |   |                                                                                                                                                                                                                                                                                             |
| 31.1   | -      | Certification by Wm. Stacy  Locke, President and Chief Executive Officer, pursuant to  Rule 13a-14(a) or 15d-14(a) under the Securities Act of 1934.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                             |
| 31.2   | -      | Certification by William D.  Hibbetts, Senior Vice President and Chief Financial Officer, pursuant to  Rule 13a-14(a) or 15d-14(a) under the Securities Act of 1934.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                             |
| 32.1   | -      | Certification by Wm. Stacy  Locke, President and Chief Executive Officer, pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of  Section 1350, Chapter 63 of Title 18, United States Code).                                                 |
|   |   |                                                                                                                                                                                                                                                                                             |
| 32.2   | -      | Certification by William D.  Hibbetts, Senior Vice President and Chief Financial Officer, pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and  (b) of Section 1350, Chapter 63 of Title 18, United States Code).                                 |

 

----

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

 

22

----