Document:

exv10w4

 

Exhibit 10.4

EXECUTIVE EMPLOYMENT AGREEMENT

     This Executive Employment Agreement effective April 3, 2007, is between Allis-Chalmers Energy
Inc. and Victor M. Perez. Certain capitalized terms used herein are defined in Section 1 below.

R E C I T A L S:

     A. Executive is employed by the Company pursuant to an Employment Agreement (“2004 Employment
Agreement”) dated July 26, 2004 which terminated July 26, 2007;

     B. Company wishes to employ Executive, and Executive desires to accept employment with
Company, by entering into a written agreement to specify the terms and conditions of Executive’s
continued employment with Company;

     C. Executive is employed as Chief Financial Officer and is an integral member of its
management team and Company considers the maintenance of a sound management team, including
Executive, essential to protecting and enhancing its best interests and those of its stockholders;

     D. Company recognizes that the possibility of a change in control of Company may result in the
departure or distraction of management to the detriment of Company and its stockholders; and

     E. Company has determined that appropriate steps should be taken to obtain and retain the
continued attention and dedication of selected members of Company’s management team to their
assigned duties without the distraction arising from the possibility of a change in control of
Company.

     NOW, THEREFORE, in consideration of Executive’s past and future employment with Company and
other good and valuable consideration, the parties agree as follows:

     Section 1. Definitions. As used in this Agreement, the following terms will have the
following meanings:

          (a) Agreement refers to the Executive Employment Agreement represented by this
document.

          (b) Cause has the meaning ascribed to it in Section 7(a)(ii).

          (c) Change In Control means:

 

 

               (i) The acquisition after the date hereof by any individual, entity or group,
or a Person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
other than an Excluded Person, of ownership of more than 50% of either: (i) the then
outstanding shares of Common Stock (“Outstanding Common Stock”); or (ii) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (“Outstanding Voting
Securities”);

               (ii) Individuals who, as of the date hereof, constitute the Board of Directors
of the Company (“Incumbent Board”) cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company’s stockholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, as a member of the
Incumbent Board, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934)
or other actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board;

               (iii) Approval by the stockholders of the Company of a reorganization, merger
or consolidation, in each case, unless, following such reorganization, merger or
consolidation, (i) more than 50% of, respectively, the then outstanding shares of
common stock of the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation, in substantially
the same proportions as their ownership, immediately prior to such reorganization,
merger or consolidation of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be, or at least a majority of the members of the board
of directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution of
the initial agreement providing for such reorganization, merger or consolidation; or

               (iv) Approval by the stockholders of the Company of (i) a complete liquidation
or dissolution of the Company or (ii) the sale or other disposition of all or
substantially all of the assets of the Company, other than to a corporation, with
respect to which following such sale or other disposition, (1) more than 50% of,
respectively, the then outstanding shares of common stock of such corporation and
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election for directors is then
beneficially owned, directly or indirectly, by all or substantially all of the

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individuals and entities who were the beneficial owners, respectively, of the
Outstanding Common Stock and Outstanding Voting Securities immediately prior to such
sale or other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Common Stock
and Outstanding Voting Securities, as the case may be; or (2) at least a majority of
the members of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or action of
the Board providing for such sale or other disposition of assets of the Company.

          (d) Code means the Internal Revenue Code of 1986, as amended.

          (e) Commencement Date has the meaning ascribed to it in Section 4.

          (f) Company means Allis-Chalmers Energy Inc.

          (g) Confidential Information has the meaning ascribed to it in Section 9(b).

          (h) Constructively Terminated with respect to an Executive’s employment with Company
will be deemed to have occurred if Executive terminates his employment within six months
following the date on which Company:

                    (i) demotes Executive to a lesser position, either in title or responsibility,
than the highest position held by Executive with Company at any time during
Executive’s employment with Company after the date hereof unless the Company
reverses such demotion within 30 days after receiving written notice of such
demotion from Executive;

                    (ii) decreases Executive’s salary below the highest level in effect at any time
during Executive’s employment with Company or reduces Executive’s benefits and
perquisites below the highest levels in effect at any time during Executive’s
employment with Company (other than as a result of any amendment or termination of
any Executive or group or other executive benefit plan, which amendment or
termination is applicable to all executives of Company or any reduction in benefits
that Company cures within 30 days after receiving written notice of such reduction
from Executive);

                    (iii) requires Executive to relocate to a principal place of business more than
50 miles from the principal place of business occupied by Company on the date
hereof, unless the Company reverses such relocation within 30 days after receiving
written notice of Executive’s intention to terminate his employment in reliance on
this Section;

                    (iv) is subject to a Change In Control, unless Executive accepts employment
with a successor to Company; or

                    (v) breaches any other material term of this Agreement which is not cured by
Company within 30 days after receiving notice of such breach from Executive.

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               (i) Designated Industry has the meaning ascribed to it in Section 10(a)(i)(1).

               (j) Determination has the meaning ascribed to such term in Section 1313(a) of the Code.

               (k) Disability with respect to Executive shall be deemed to exist if he meets the
definition of disability under the terms of the Company’s current long-term disability
policy (or any replacement long-term disability policy). Any refusal by Executive to submit
to a reasonable medical examination to determine whether Executive is so disabled shall be
deemed conclusively to constitute evidence of Executive’s disability.

               (l) Executive refers to Victor M. Perez.

               (m) Excluded Person means any Person who beneficially owns more than 10% of the
outstanding shares of the Company’s Common Stock at any time prior to the date hereof.

               (n) Company refers collectively to the Company and its subsidiaries and other
affiliates.

               (o) Incentive Plan means the Allis-Chalmers Energy Inc. 2006 Incentive Plan, as amended
from time to time.

               (p) Inventions has the meaning ascribed to it in Section 8(a).

               (q) Salary has the meaning ascribed to it in Section 5(a).

               (r) Separation Payment Period has the meaning ascribed to it in Section 7(b)(ii).

               (s) Separation Payments has the meaning ascribed to it in Section 7(b)(ii).

     Section 2. Employment. Company hereby employs Executive, and Executive hereby accepts
employment by Company, upon the terms and subject to the conditions hereinafter set forth.

     Section 3. Duties. Executive shall be employed as the Chief Financial Officer of the Company.
Executive agrees to devote substantially all of his business time as is necessary to perform his
duties attendant to his executive position with Company. Executive shall be allowed to engage in
other activities as an investor as well as participate in activities of charitable organizations of
his choice so long as they do not materially interfere with his duties for Company.

     Section 4. Term. The term of employment of Executive hereunder shall commence on the date of
this Agreement and terminate three years hence.

     Section 5. Compensation and Benefits. In consideration for the services of Executive
hereunder, Company shall compensate Executive as follows (except as set forth herein,

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Executive acknowledges payment in full of
all amounts due to him for services rendered prior to the date hereof):

          (a) Salary. Company shall pay Executive, semi-monthly in arrears with its normal
payroll procedures, a salary which is equivalent to an annual rate of $286,000 (the
“Salary”). The Salary may not be decreased at any time during the term of Executive’s
employment hereunder and shall be reviewed no less than annually by Company. Any increase
in the Salary shall be in the sole discretion of the Compensation Committee of the Board of
Directors of the Company.

          (b) Management Incentive Bonus. Executive shall be entitled to receive a bonus equal
to a maximum of 50% of his Salary based upon the achievement of goals set forth in Schedule
A attached hereto (which shall be amended each year in the discretion of the Company). Such
bonus shall be paid annually within 30 days after the completion of the Company’s audited
financial statements for each year. Executive shall also be eligible to receive from
Company such annual management incentive bonuses as may be provided in management incentive
bonus plans adopted from time to time by Company.

          (c) Stock Options In addition, the Board of Directors and the Compensation Committee
of the Company has approved the grant to Executive of options to purchase 15,000 shares of
the Company’s Common Stock pursuant to the Incentive Plan. The exercise price for the
options shall be equal to the fair market value of the Company’s Common Stock on the date
the options are approved by the Board of Directors, and the options shall vest and become
exercisable as follows: twenty percent (20%) shall vest on the first anniversary of the date
of grant and twenty percent (20%) shall vest on the second anniversary of the date of grant
and sixty percent (60%) shall vest on the third anniversary of the date of grant. The
options will have retention of employment and certain performance objectives that must be
met in order to vest as described in that certain Stock Option Agreement between Executive
and the Company.

          (d) Restricted Stock Performance Awards. The Compensation Committee and Board of
Directors has approved and awarded Executive performance awards of restricted stock in the
amount of 25,000 shares of Common Stock. The performance awards will vest in accordance
with the terms of the Performance Award Agreement and certain performance objectives as
described therein.

          (e) Vacation. Executive shall be entitled to four (4) weeks paid vacation per year.
Unless otherwise approved by the Compensation Committee of the Board of Directors of the
Company, a maximum of ten days accrued vacation not taken in any calendar year shall be
carried forward and may be used in the next subsequent calendar year. Executive shall
schedule his paid vacation to be taken at times which are reasonably and mutually convenient
to both Company and Executive.

          (f) Insurance Benefits. Company shall provide accident, health, dental, disability and
life insurance for Executive under the
group accident, health, dental, disability and life insurance plans as may be
maintained by Company for its full-time, salaried Executives from time to time.

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          (g) Office Space and Expenses. Company shall provide and pay the expenses of
maintaining an office for Executive during the term of this Agreement.

          (h) Assistant Expenses. Company shall assume and pay all salary and benefits of an
Assistant to Executive.

     Section 6. Expenses. The parties anticipate that in connection with the services to be
performed by Executive pursuant to the terms of this Agreement, Executive will be required to make
payments for travel, entertainment of business associates and similar expenses. Company shall
reimburse Executive for all reasonable expenses of types authorized by Company and incurred by
Executive in the performance of his duties hereunder, consistent with past practices. Executive
shall comply with such reporting requirements with respect to expenses as Company may establish
from time to time.

     Section 7. Termination.

          (a) General. Executive’s employment hereunder shall commence on the Commencement Date
and continue until the end of the term specified in Section 4, except that the employment of
Executive hereunder shall terminate prior to such time in accordance with the following:

               (i) Death or Disability. Upon the death of Executive during the term of his
employment hereunder or, at the option of Company, in the event of Executive’s
Disability, upon 30 days’ notice to Executive.

               (ii) For Cause. For “Cause” immediately upon written notice by Company to
Executive. A termination shall be for Cause if:

                    (1) Executive commits a criminal act involving dishonesty or moral
turpitude; or

                    (2) Executive commits a material breach of any of the covenants, terms
and provisions hereof or fails to obey written directions delivered to
Executive by the Company’s President or Chief Executive Officer which are
not inconsistent with Executive’s rights under this Agreement.

               (iii) Without Cause. Without Cause upon notice by the Board of Directors to
Executive or upon notice by Executive to the Board if Executive has been
Constructively Terminated.

          (b) Severance Pay.

               (i) Termination Upon Death or Disability or For Cause. Executive shall not be
entitled to any severance pay or other compensation upon termination of his
employment pursuant to Section 7(a)(i) or (ii) except for his Salary earned but
unpaid as of the date of termination, unpaid expense reimbursements under Section 6
for expenses incurred in accordance with the terms hereof prior to termination, and
compensation for accrued, unused vacation as of the date of termination.

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               (ii) Termination Without Cause. In the event Executive’s employment hereunder
is terminated pursuant to Section 7(a)(iii), Company shall pay Executive Separation
Payments as Executive’s sole remedy in connection with such termination.
“Separation Payments” are payments made at the semi-monthly rate of Executive’s then
current salary in effect immediately preceding the date of termination. Separation
Payments shall be made for the lesser of one year following termination of
employment or the remaining term of this Agreement (the “Separation Payment
Period”), and shall be paid by Company in equal semi-monthly payments in arrears or
in accordance with its then-current normal payroll procedure, provided that
Company’s obligation to make Separation Payments shall be reduced by any amounts
earned by Executive for services during the Separation Payment Period. Company
shall also pay Executive his Salary earned but unpaid as of the date of termination,
unpaid expense reimbursements under Section 6 for expenses incurred in accordance
with the terms hereof prior to termination, and compensation for accrued, unused
vacation as of the date of termination.

     Section 8. Inventions; Assignment.

          (a) Inventions Defined. All rights to discoveries, inventions, improvements, designs
and innovations (including all data and records pertaining thereto) that relate to the
business of Company, whether or not patentable, copyrightable or reduced to writing, that
Executive may discover, invent or originate during the term of his employment hereunder, and
for a period of six months thereafter, either alone or with others and whether or not during
working hours or by the use of the facilities of Company (“Inventions”), shall be the
exclusive property of Company. Executive shall promptly disclose all Inventions to Company,
shall execute at the request of Company any assignments or other documents Company may deem
necessary to protect or perfect its rights therein, and shall assist Company, at Company’s
expense, in obtaining, defending and enforcing Company’s rights therein. Executive hereby
appoints Company as his attorney-in-fact to execute on his behalf any assignments or other
documents deemed necessary by Company to protect or perfect its rights to any Inventions.

          (b) Covenant to Assign and Cooperate. Without limiting the generality of the
foregoing, Executive hereby assigns and transfers to Company the world-wide right, title and
interest of Executive in the Inventions. Executive agrees that Company may apply for and
receive patent rights (including Letters Patent in the United States) for the Inventions in
Company’s name in such countries as may be determined solely by Company. Executive shall
communicate to Company all facts known to Executive relating to the Inventions and shall
cooperate
with Company’s reasonable requests in connection with vesting title to the Inventions
and related patents exclusively in Company and in connection with obtaining, maintaining and
protecting Company’s exclusive patent rights in the Inventions.

          (c) Successors and Assigns. Executive’s obligations under this Section 8 shall inure
to the benefit of Company and its successors and assigns and shall survive the expiration of
the term of this Agreement for such time as may be necessary to protect the proprietary
rights of Company in the Inventions.

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     Section 9. Confidential Information.

          (a) Acknowledgment of Proprietary Interest. Executive acknowledges the proprietary
interest of Company in all Confidential Information. Executive agrees that all Confidential
Information learned by Executive during his employment with Company or otherwise, whether
developed by Executive alone or in conjunction with others or otherwise, is and shall remain
the exclusive property of Company. Executive further acknowledges and agrees that his
disclosure of any Confidential Information will result in irreparable injury and damage to
Company.

          (b) Confidential Information Defined. “Confidential Information” means all
confidential and proprietary information of Company, including without limitation (i)
information derived from reports, investigations, experiments, research and work in
progress, (ii) methods of operation, (iii) market data, (iv) proprietary computer programs
and codes, (v) drawings, designs, plans and proposals, (vi) marketing and sales programs,
(vii) client lists, (viii) historical financial information and financial projections, (ix)
pricing formulae and policies, (x) all other concepts, ideas, materials and information
prepared or performed for or by Company and (xi) all information related to the business,
products, purchases or sales of Company or any of its suppliers and customers, other than
information that is publicly available.

          (c) Covenant Not To Divulge Confidential Information. Company is entitled to prevent
the disclosure of Confidential Information. As a portion of the consideration for the
employment of Executive and for the compensation being paid to Executive by Company,
Executive agrees at all times during the term of his employment hereunder and thereafter to
hold in strict confidence and not to disclose or allow to be disclosed to any person, firm
or corporation, other than to his professional advisors (who have the obligation to maintain
the confidentiality of such information) and to persons engaged by Company to further the
business of Company, and not to use except in the pursuit of the business of Company, the
Confidential Information, without the prior written consent of Company.

          (d) Return of Materials at Termination. In the event of any termination or cessation
of his employment with Company for any reason, Executive shall promptly deliver to Company
all documents,
data and other information derived from or otherwise pertaining to Confidential
Information. Executive shall not take or retain any documents or other information, or any
reproduction or excerpt thereof, containing or pertaining to any Confidential Information.

     Section 10. Noncompetition.

          (a) Until termination of Executive’s employment hereunder, Executive shall not do any
of the following:

               (i) engage directly or indirectly, alone or as a shareholder, partner,
director, officer, Executive of or consultant to any other business organization, in
any business activities that:

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               (1) relate to the oil and gas drilling services industry (the
“Designated Industry”); or

               (2) were either conducted by Company prior to the termination of
Executive’s employment hereunder or proposed to be conducted by Company at
the time of such termination;

               (ii) approach any customer or supplier of Company in an attempt to divert it to
any competitor of Company in the Designated Industry; or

               (iii) solicit or encourage any employee or Executive of Company to end his
relationship with Company or commence any such relationship with any competitor of
Company.

          (b) Executive’s noncompetition obligations hereunder shall not preclude Executive from
owning less than five percent of the common stock of any publicly traded corporation
conducting business activities in the Designated Industry. If at any time the provisions of
this Section 10 are determined to be invalid or unenforceable by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 10 shall be considered
divisible and shall be immediately amended to only such area, duration and scope of activity
as shall be determined to be reasonable and enforceable by the court or other body having
jurisdiction over the matter, and Executive agrees that this Section 10 as so amended shall
be valid and binding as though any invalid or unenforceable provision had not been included
herein.

     Section 11. General.

          (a) Notices.   All notices and other communications hereunder shall be in writing or by
written telecommunication, and shall be deemed to have been duly given upon delivery if
delivered personally or via written telecommunication, or five days after mailing if mailed
by certified mail, return receipt requested or by written telecommunication, to the relevant
address set forth below, or to such other address as the recipient of such notice or
communication shall have specified to the other party in accordance with this Section 11(a):

	 	 	 
	If to Company, to:

	 	If to Executive:
	 
	 	 
	Allis-Chalmers Energy Inc.

	 	Victor M. Perez
	5075 Westheimer, Suite 890

	 	5477 Coshatte Rd.
	Houston, Texas 77056

	 	Bellville, Texas 77418
	Attn: Theodore F. Pound III
General Counsel
	 	 

     If to Executive, to the last address for Executive appearing on the Company’s records

          (b) Withholding.   All payments required to be made to Executive by Company under this
Agreement shall be subject to the withholding of such amounts, if any, relating to federal,
state and local taxes as may be required by law.

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          (c) Equitable Remedies. Each of the parties hereto acknowledges and agrees that upon
any breach by Executive or Company of his or its obligations hereunder, Company and
Executive shall have no adequate remedy at law and accordingly shall be entitled to specific
performance and other appropriate injunctive and equitable relief.

          (d) Severability.   If any provision of this Agreement is held to be illegal, invalid
or unenforceable, such provision shall be fully severable, and this Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision never
comprised a part hereof, and the remaining provisions hereof shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement a provision as
similar in its terms to such illegal, invalid or unenforceable provision as may be possible
and be legal, valid and enforceable.

          (e) Waivers.   No delay or omission by either party in exercising any right, power or
privilege hereunder shall impair such right, power or privilege, nor shall any single or
partial exercise of any such right, power or privilege preclude any further exercise thereof
or the exercise of any other right, power or privilege.

          (f) Counterparts.   This Agreement may be executed in multiple counterparts, each of
which shall be deemed an original, and all of which together shall constitute one and the
same instrument.

          (g) Captions.   The captions in this Agreement are for convenience of reference only
and shall not limit or otherwise affect any of the terms or provisions hereof.

          (h) Reference to Agreement.  Use of the words “herein,” “hereof,” “hereto,” “hereunder”
and the like in this Agreement refer to this Agreement only as a whole and not to any
particular section or subsection of this Agreement, unless otherwise noted.

          (i) Binding Agreement.   This Agreement shall be binding upon and inure to the benefit
of the parties and shall be enforceable by the personal representatives and heirs of
Executive and the successors and assigns of Company. This Agreement may be assigned by the
Company or any Company to any Company or, subject to Section 7(b)(iii), to any successor to
all or substantially all of the Company’s business as a result of a merger, consolidation,
sale of stock or assets, or similar transaction; provided that in the event of any such
assignment, the Company shall remain liable for all of its obligations hereunder and shall
be liable for all obligations of all such assignees hereunder. If Executive dies while any
amounts would still be payable to him hereunder, such amounts shall be paid to Executive’s
estate. This Agreement is not otherwise assignable by Executive.

          (j) Entire Agreement.   This Agreement contains the entire understanding of the
parties, supersedes all prior agreements and understandings relating to the subject matter
hereof and may not be amended except by a written instrument hereafter signed by each of the
parties hereto.

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          (k) Governing Law.  This Agreement and the performance hereof shall be construed and
governed in accordance with the laws of the State of Texas, without regard to its choice of
law principles.

          (l) Gender and Number. The masculine gender shall be deemed to denote the feminine or
neuter genders, the singular to denote the plural, and the plural to denote the singular,
where the context so permits.

     Section 12. Section 409A.

          (a) Section 409A Compliance. Executive and Company agree that this Agreement is
intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended
(“Section 409A”) and that any ambiguous provision will be construed in a manner that will
result in treatment of the relevant portions of this Agreement as a nonqualified deferred
compensation plan that complies with or is exempt from Section 409A.

          (b) Specified Employees. If Executive is a “specified employee,” as such term is
defined in Section 409A and determined as described below in this Section 13(b), any
payments of amounts which are deferred compensation subject to the provisions of Section
409A that are payable as a result of Executive’s termination (other than death) shall not be
payable before the earliest of (i) the date that is six months after Executive’s
termination, (ii) the date of Executive’s death, or (iii) the earliest date that otherwise
complies with the requirements of Section 409A. This Section 13(b) shall be applied by
accumulating all payments that otherwise would have been paid within six months of
Executive’s termination and paying such accumulated amounts at the earliest date which
complies with or is exempt from the application of the requirements of Section 409A.
Executive shall be a “specified employee” for the twelve-month period beginning on April 1
of a year if Executive is a “key employee” as defined in Section 416(i) of the Internal
Revenue Code (without regard to Section 416(i)(5)) as of December 31 of the preceding year
or using such specified employee identification dates as designated by the Compensation
Committee in accordance with Section 409A and in a manner that is consistent with respect to
all of Company’s
nonqualified deferred compensation plans. For purposes of determining the identity of
specified employees, the Compensation Committee may establish procedures as it deems
appropriate in accordance with Section 409A.

     EXECUTED effective as of August 3, 2007.

	 	 	 	 	 
	 	ALLIS-CHALMERS ENERGY INC.

 	 
	 	By /s/ Munawar H. Hidayatalah
 	 
	 	Munawar H. Hidayatallah, Chief Executive Officer 	 
	 	 	 
	 

	 	 	 	 	 
	 	EXECUTIVE

 	 
	 	/s/ Victor M. Perez
 	 
	 	Victor M. Perez 	 
	 	 	 

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SCHEDULE A

BONUS CALCULATION

Executive’s bonus shall be based upon the performance of his duties as Chief Financial Officer
and in particular his leadership ability to enable the Company to meet the following goals:

	1.	 	Maintain Sarbanes-Oxley internal controls
	 
	2.	 	Meeting EBITDA and income targets
	 
	3.	 	Maintain target debt to equity ratios
	 
	4.	 	Obtain debt and equity financing for acquisitions
	 
	5.	 	Increase operating margins

Schedule Aexv10w5

 

Exhibit 10.5

ALLIS-CHALMERS ENERGY INC.

EMPLOYEE PERFORMANCE AWARD AGREEMENT

Pursuant to the terms of the Allis-Chalmers Energy Inc. 2006 Incentive Plan

     1. Grant of Performance Award. Allis-Chalmers Energy Inc., a Delaware corporation
(“Company”), hereby grants to                    (“Participant”) performance awards in the
form of [xx,xxx] shares (the “Performance Award”) of common stock, $0.01 par value per
share, of the Company (“Common Stock”), subject to meeting the Performance Objectives as described
in Section 4 hereof, and in accordance with the terms and conditions of this document. This
Performance Award Agreement is dated as of [xx/xx/xx]. The Performance Award in the form
of Common Stock is awarded pursuant to and to implement in part the Allis-Chalmers Energy Inc. 2006
Incentive Plan (as amended and in effect from time to time, the “Plan”) and is subject to the
restrictions, forfeiture provisions and other terms and conditions of the Plan, which is hereby
incorporated herein and is made a part hereof, and this Performance Award Agreement. By execution
of this Performance Award Agreement, Participant agrees to be bound by all of the terms,
provisions, conditions and limitations of the Plan as implemented by the Performance Award
Agreement, together with all rules and determinations from time to time issued by the Committee
pursuant to the Plan. All capitalized terms have the meanings set forth in the Plan unless
otherwise specifically provided. All references to specified paragraphs pertain to paragraphs of
this Performance Award Agreement unless otherwise provided.

     2. Settlement of Performance Award. The stock certificate(s) evidencing the Performance Award
shall not be issued or registered on the Company’s books and records until the Performance
Objectives set forth in paragraph 4 below have been met by the Participant and approved by the
Committee and all other restrictions contained in this Performance Award Agreement have lapsed.
Upon resolution by the Committee that the Participant has achieved the Performance Objectives, and
subject to the other terms and conditions of this Performance Award Agreement, the Company will
promptly issue a stock certificate with respect to the vested portion of the shares of the
Performance Award for which the Performance Objectives have been met.

     3. Risk of Forfeiture. Participant shall immediately forfeit all rights to any Performance
Award which have not vested and with respect to which the Performance Objectives have not been met
or in the event of termination, resignation, or removal of Participant from employment with the
Company or any Affiliate under circumstances that do not cause Participant to become fully vested,
under the terms of the Plan.

     4. Performance Objectives. Subject to the provisions of this Performance Award Agreement
including, without limitation, the following provisions of this Paragraph 4, the Performance Award
shall vest upon Participant meeting performance criteria based on any one or more of the
Performance Objectives described below, as more specifically determined by the Compensation
Committee and approved by the Board of Directors of the Company:

(i) increase in earnings per share; (ii) increase in price per share, (iii) increase
in revenues; (iv) increase in cash flow; (v) return on net assets; (vi) return on
assets; (vii) return on investment; (viii) return on equity; (ix) economic value
added; (x) gross margin; (xi) net income; (xii) pretax earnings; (xiii) pretax
earnings before interest, depreciation, depletion and amortization; (xiv) pretax

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operating earnings after interest expense and before incentives, service fees, and
extraordinary or special items; (xv) operating income; (xvi) total stockholder
return; (xvii) debt reduction

Any of the above goals may be determined on an absolute or relative basis or as compared to the
performance of a published or special index of companies as determined by the Compensation
Committee.

The period from the date hereof until Performance Awards have become one hundred percent (100%)
vested and the Committee has determined that such Performance Objectives have been met shall be
referred to as the “Restricted Period.”

     5. Transferability. During the Restricted Period, the Participant shall not sell, assign,
transfer, pledge, exchange, hypothecate, or otherwise dispose of any right, title or interest in
the Performance Award prior to vesting in accordance with this Performance Award Agreement. Upon
receipt by the Participant of stock certificate(s) representing the vested shares pursuant to
Paragraph 2 above, the Participant may hold or dispose of the shares represented by such
certificate(s), subject to compliance with (i) the terms and conditions of the Plan and this
Performance Award Agreement, (ii) applicable federal or state securities laws or other applicable
law, (iii) applicable rules of any exchange on which the Company’s securities are traded or listed,
and (iv) the Company’s rules or policies as established by the Company in its sole discretion.

     6. No Ownership Rights. Prior to the vesting of the Performance Award, the Participant shall
not have any rights with respect to the shares of Common Stock represented by the Performance Award
hereunder including the right to vote the shares of Common Stock and the right to receive any
dividends.

     7. Termination of Employment. If employment of Participant by the Company or any Affiliate is
terminated for any reason, including death, disability or retirement, all Performance Awards
outstanding at the time of such termination and all rights thereunder shall be forfeited and no
further vesting shall occur.

     8. Change in Control.

     (a) Change in Control. Upon the occurrence of a Change in Control (as defined in the
Plan), all restrictions and conditions of the Performance Award shall automatically be
waived without any required action by the Company, Committee or the Board with the result
that the Performance Award shall be fully vested and the restrictions thereon shall have
lapsed.

     (b) Right of Cash-Out. If approved by the Board prior to or within thirty (30) days
after such time as a Change in Control shall be deemed to have occurred, the Board shall
have the right for a forty-five (45) day period immediately following the date that the
Change in Control is deemed to have occurred to require Participant to transfer and deliver
to Company all unvested shares of the Performance Award hereunder with respect to which the
restrictions have not lapsed in exchange for an amount equal to the “cash value” (defined
below) of such shares of the Performance Award. Such right shall be exercised by written
notice to Participant. The cash value of such shares of the Performance Award shall equal
the “market value” (defined below) per share, multiplied by the number of unvested shares of
the Performance Award hereunder with respect to

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which the restrictions have not lapsed. For purposes of the preceding sentence, “market
value” per share shall mean the higher of (i) the average of the Fair Market Value per share
of Common Stock on each of the five trading days immediately following the date a Change in
Control is deemed to have occurred or (ii) the highest price, if any, offered in connection
with the Change in Control. The amount payable to Participant by Company pursuant to this
Section 8(b) shall be paid in cash or by certified check and shall be reduced by any taxes
required to be withheld.

     9. Reorganization of Company and Subsidiaries. The existence of the Performance Awards shall
not affect in any way the right or power of the Company or its stockholders to make or authorize
any or all adjustments, recapitalizations, reorganizations or other changes in the Company’s
capital structure or its business, or any merger or consolidation of the Company or any issue of
bonds, debentures, preferred or prior preference stock ahead of or affecting the Performance Award
or the rights thereof, or the dissolution or liquidation of Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.

     10. Adjustment of Shares. In the event of stock dividends, spin-offs of assets or other
extraordinary dividends, stock splits, combinations of shares, recapitalizations, mergers,
consolidations, reorganizations, liquidations, issuances of rights or warrants and similar
transactions or events involving Company, the Committee shall, in such manner as it may deem
equitable, make adjustments to the terms and provisions of this Performance Award Agreement.

     11. Certain Restrictions. By executing this Performance Award Agreement, Participant agrees
that if at the time of delivery of certificates representing the Performance Award is not covered
by an effective registration statement filed under the Securities Act of 1933 (“Act”), the
certificates so delivered may contain such legends as the Company shall require and the Participant
will acquire the shares of the Performance Award for Participant’s own account and without a view
to resale or distribution in violation of the Act or any other securities law, and upon any such
acquisition Participant will enter into such written representations, warranties and agreements as
Company may reasonably request in order to comply with the Act or any other securities law or with
this Performance Award Agreement. Participant agrees that the Company shall not be obligated to
take any affirmative action in order to cause the issuance or transfer of shares of the Performance
Award hereunder to comply with any law, rule or regulation that applies to the shares of Common
Stock subject to this Performance Award Agreement.

     12. Amendment and Termination. The Performance Award Agreement may not be terminated by the
Board or the Committee at any time without the written consent of Participant. This Performance
Award Agreement may be amended in writing by the Company and Participant, provided the Company may
amend this Performance Award Agreement unilaterally (i) if the amendment does not adversely affect
the Participant’s rights hereunder in any material respect, (ii) if the Company determines that an
amendment is necessary to comply with Rule 16b-3 under the Exchange Act or other applicable law, or
(iii) if the Company determines that an amendment is necessary to meet the requirements of the Code
or to prevent adverse tax consequences to the Participant. No amendment or termination of the Plan
will adversely affect the rights and privileges of Participant under this Performance Award
Agreement or to the Common Stock granted hereunder without the written consent of Participant.

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     13. No Guarantee of Employment. Neither this Performance Award Agreement nor the Performance
Award evidenced hereby shall confer upon Participant any right with respect to continuance of
employment or other service with the Company or any Affiliate, nor shall it interfere in any way
with any right Company or any Affiliate would otherwise have to terminate such Participant’s
employment or other service at any time.

     14. Tax Matters.

     (a) Company shall have the right to (i) make deductions from the number of shares of
Common Stock otherwise deliverable upon vesting of the Performance Award and satisfaction of
the conditions precedent under this Performance Award Agreement in an amount sufficient to
satisfy withholding of any federal, state or local taxes required by law, or (ii) take such
other action as may be necessary or appropriate to satisfy any such tax withholding
obligations.

     (b) Under Section 83 of the Code, the difference between the purchase price paid, if
any, for the shares of Performance ``Award and their fair market value on the date of
vesting when any forfeiture restrictions applicable to such shares lapse will be reportable
as ordinary income at that time. Participant may elect to be taxed at the effective time of
this award when the shares are acquired rather than when such shares vest and cease to be
subject to such forfeiture restrictions by filing an election under Section 83(b) of the
Code with the Internal Revenue Service within thirty (30) days after the date hereof. If
such an election is made, Participant will have to make a tax payment to the extent the
purchase price, if any, is less than the fair market value of the shares on the date hereof.
No tax payment will have to be made to the extent the purchase price, if any, is at least
equal to the fair market value of the shares on the date hereof. Failure to make this
filing within the thirty (30) day period will result in the recognition of ordinary income
by you as the shares of Restricted Stock vest and the forfeiture restrictions lapse.

     PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT’S SOLE RESPONSIBILITY, AND NOT THE
COMPANY’S, TO FILE A TIMELY ELECTION UNDER SECTION 83(b) IF PARTICIPANT ELECTS TO DO SO,
EVEN IF PARTICIPANT REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
PARTICIPANT’S BEHALF. PARTICIPANT MUST AND IS RELYING SOLELY ON PARTICIPANT’S OWN ADVISORS
WITH RESPECT TO THE DECISION AS TO WHETHER OR NOT TO FILE ANY SECTION 83(b) ELECTION.

     (c) Neither Company nor the Board or Committee makes any commitment or guarantee that
any federal or state tax treatment will apply or be available to any person eligible for the
benefits under this Performance Award Agreement.

     15. Community Interest of Spouse. The community interest, if any, of any spouse of
Participant in any Performance Award shall be subject to all of the terms, conditions and
restrictions of this Performance Award Agreement and the Plan.

     16. Consent to Electronic Delivery; Electronic Signature. In lieu of receiving documents in
paper format, Participant agrees, to the fullest extent permitted by law, to accept electronic
delivery of any documents that the Company may be required to deliver (including,
but not limited to, prospectuses, prospectus supplements, grant or award notifications and
agreements, account statements, annual and quarterly reports, and all other forms of

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communications) in connection with this and any other award made or offered by the Company.
Electronic delivery may be via a Company electronic mail system or by reference to a location on a
Company intranet to which Participant has access. Participant hereby consents to any and all
procedures the Company has established or may establish for an electronic signature system for
delivery and acceptance of any such documents that the Company may be required to deliver, and
agrees that his or her electronic signature is the same as, and shall have the same force and
effect as, his or her manual signature.

     17. Severability. In the event that any provision of this Performance Award Agreement shall
be held illegal, invalid, or unenforceable for any reason, such provision shall be fully severable,
but shall not affect the remaining provisions of this Performance Award Agreement, and this
Performance Award Agreement shall be construed and enforced as of the illegal, invalid, or
unenforceable provision had never been included herein.

     18. Governing Law. This Performance Award Agreement shall be construed in accordance with the
laws of the State of Delaware to the extent federal law does not supersede and preempt Delaware
law.

	 	 	 	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	ALLIS-CHALMERS ENERGY INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	Printed Name:	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	PARTICIPANT:	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	(signature)	 	 	 	 

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