UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                 TO               .

Complete Production Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		72-1503959 (I.R.S. Employer Identification No.)

11700 Katy Freeway, Suite 300 Houston, Texas (Address of principal executive offices)		77079 (Zip Code)

Registrant’s telephone number, including area code: (281) 372-2300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of the Common Stock of the registrant outstanding as of July 31, 2008:     74,948,194

 

 

INDEX TO FINANCIAL STATEMENTS

Complete Production Services, Inc.

				Page
		PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements.
		Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007		3
		Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2008 and 2007		4
		Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2008		5
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007		6
		Notes to Consolidated Financial Statements		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.		24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.		36
Item 4.		Controls and Procedures.		36
		PART II—OTHER INFORMATION
Item 1.		Legal Proceedings.		37
Item 1A.		Risk Factors.		37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.		37
Item 3.		Defaults Upon Senior Securities.		37
Item 4.		Submission of Matters to a Vote of Security Holders.		37
Item 5.		Other Information.		38
Item 6.		Exhibits.		38
		Signature		39
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors
Form of Signature Page for Stock Option Agreement Terms and Conditions
Restricted Stock Agreement Terms and Conditions
Form of Stock Agreement
Signature Page to the Restricted Stock Award Agreement Terms and Conditions
Restricted Stock Agreement for Non-Employee Directors
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

COMPLETE PRODUCTION SERVICES, INC.

Consolidated Balance Sheets
June 30, 2008 (unaudited) and December 31, 2007

		2008				2007
		(In thousands, except
		share data)
ASSETS
Current assets:
Cash and cash equivalents		$	17,719			$	13,624
Trade accounts receivable, net			329,090				305,682
Inventory, net			34,482				29,877
Prepaid expenses			25,610				23,743
Other current assets			13,823				5,092
Current assets held for sale			—				50,307
Total current assets			420,724				428,325
Property, plant and equipment, net			1,107,897				1,013,190
Intangible assets, net of accumulated amortization of $7,327 and $5,762, respectively			16,088				10,606
Deferred financing costs, net of accumulated amortization of $3,246 and $2,455, respectively			13,403				14,194
Goodwill			569,569				549,130
Other long-term assets			3,947				6,264
Long-term assets held for sale			—				33,050
Total assets		$	2,131,628			$	2,054,759
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	3,742			$	398
Accounts payable			60,214				56,407
Accrued liabilities			73,343				57,125
Accrued payroll and payroll burdens			21,782				24,050
Notes payable			5,414				15,354
Taxes payable			1,786				6,506
Current liabilities of held for sale operations			—				9,705
Total current liabilities			166,281				169,545
Long-term debt			788,150				825,985
Deferred income taxes			148,186				126,821
Long-term liabilities of held for sale operations			—				2,085
Total liabilities			1,102,617				1,124,436
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value per share, 200,000,000 shares authorized, 73,793,667 (2007 — 72,509,511) issued			738				725
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding			—				—
Additional paid-in capital			605,706				581,404
Retained earnings			394,447				317,535
Treasury stock, 35,570 shares at cost			(202	)			(202	)
Accumulated other comprehensive income			28,322				30,861
Total stockholders’ equity			1,029,011				930,323
Total liabilities and stockholders’ equity		$	2,131,628			$	2,054,759

See accompanying notes to consolidated financial statements.

COMPLETE PRODUCTION SERVICES, INC.

Consolidated Statements of Operations
Quarters and Six Months Ended June 30, 2008 and 2007 (unaudited)

		Quarter Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In thousands, except per share data)
Revenue:
Service		$	425,848			$	355,620			$	830,811			$	710,347
Product			15,237				11,194				27,452				22,689
			441,085				366,814				858,263				733,036
Service expenses			264,142				197,344				506,354				393,762
Product expenses			10,730				8,000				18,550				16,285
Selling, general and administrative expenses			48,036				51,134				95,454				97,528
Depreciation and amortization			43,037				32,375				82,288				60,329
Income before interest, taxes and minority interest			75,140				77,961				155,617				165,132
Interest expense			15,515				15,055				31,430				30,668
Interest income			(762	)			(316	)			(1,387	)			(528	)
Income before taxes and minority interest			60,387				63,222				125,574				134,992
Taxes			20,544				23,322				43,956				50,615
Income before minority interest			39,843				39,900				81,618				84,377
Minority interest			—				(205	)			—				56
Income from continuing operations			39,843				40,105				81,618				84,321
Income (loss) from discontinued operations (net of tax expense of $2,569, $2,213, $3,865 and $4,099, respectively)			(6,857	)			3,678				(4,706	)			6,812
Net income		$	32,986			$	43,783			$	76,912			$	91,133
Earnings per share information:
Continuing operations		$	0.54			$	0.56			$	1.12			$	1.18
Discontinued operations			(0.09	)			0.05				(0.06	)			0.09
Basic earnings per share		$	0.45			$	0.61			$	1.06			$	1.27
Continuing operations		$	0.54			$	0.55			$	1.10			$	1.15
Discontinued operations			(0.10	)			0.05				(0.06	)			0.10
Diluted earnings per share		$	0.44			$	0.60			$	1.04			$	1.25
Weighted average shares:
Basic			73,171				71,916				72,866				71,711
Diluted			74,407				73,367				74,059				73,195

Consolidated Statements of Comprehensive Income
Quarters and Six Months Ended June 30, 2008 and 2007 (unaudited)

		Quarter Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In thousands)								(In thousands)
Net income		$	32,986			$	43,783			$	76,912			$	91,133
Change in cumulative translation adjustment			1,107				7,096				(2,539	)			7,852
Comprehensive income		$	34,093			$	50,879			$	74,373			$	98,985

See accompanying notes to consolidated financial statements.

COMPLETE PRODUCTION SERVICES, INC.

Consolidated Statement of Stockholders’ Equity
Six Months Ended June 30, 2008 (unaudited)

																						Accumulated
										Additional												Other
		Number				Common				Paid-in				Retained				Treasury				Comprehensive
		of Shares				Stock				Capital				Earnings				Stock				Income				Total
		(In thousands, except share data)
Balance at December 31, 2007			72,509,511			$	725			$	581,404			$	317,535			$	(202	)		$	30,861			$	930,323
Net income			—				—				—				76,912				—				—				76,912
Cumulative translation adjustment			—				—				—				—				—				(2,539	)			(2,539	)
Issuance of common stock:
Exercise of stock options			1,148,761				12				10,986				—				—				—				10,998
Expense related to employee stock options			—				—				2,566				—				—				—				2,566
Excess tax benefit from share-based compensation			—				—				8,500				—				—				—				8,500
Vested restricted stock			135,395				1				(1	)			—				—				—				—
Amortization of non-vested restricted stock			—				—				2,251				—				—				—				2,251
Balance at June 30, 2008			73,793,667			$	738			$	605,706			$	394,447			$	(202	)		$	28,322			$	1,029,011

See accompanying notes to consolidated financial statements.

COMPLETE PRODUCTION SERVICES, INC.

Consolidated Statements of Cash Flows
Six Months Ended June 30, 2008 and 2007 (unaudited)

		Six Months Ended
		June 30,
		2008				2007
		(In thousands)
Cash provided by (used in):
Operating activities:
Net income		$	76,912			$	91,133
Items not affecting cash:
Depreciation and amortization			84,354				62,462
Deferred income taxes			23,491				7,665
Loss on sale of discontinued operations			6,782				—
Minority interest			—				56
Excess tax benefit from share-based compensation			(8,500	)			(4,599	)
Non-cash compensation expense			4,817				3,731
Other			2,572				4,354
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			(408	)			(12,463	)
Inventory			(2,798	)			(13,929	)
Prepaid expense and other current assets			(1,796	)			6,997
Accounts payable			(7,440	)			(948	)
Accrued liabilities and other			2,017				(4,535	)
Net cash provided by operating activities			180,003				139,924
Investing activities:
Business acquisitions, net of cash acquired			(71,862	)			(40,468	)
Additions to property, plant and equipment			(134,381	)			(194,479	)
Proceeds from sale of discontinued operations			50,150				—
Collection of notes receivable			2,016				—
Proceeds from disposal of capital assets			3,602				3,840
Net cash used in investing activities			(150,475	)			(231,107	)
Financing activities:
Issuances of long-term debt			138,200				192,901
Repayments of long-term debt			(173,120	)			(103,605	)
Repayment of notes payable			(9,940	)			(14,604	)
Proceeds from issuances of common stock			10,998				2,944
Excess tax benefit from share-based compensation			8,500				4,599
Net cash (used in) provided by financing activities			(25,362	)			82,235
Effect of exchange rate changes on cash			(71	)			(1,265	)
Change in cash and cash equivalents			4,095				(10,213	)
Cash and cash equivalents, beginning of period			13,624				19,874
Cash and cash equivalents, end of period		$	17,719			$	9,661
Supplemental cash flow information:
Cash paid for interest, net of interest capitalized		$	27,205			$	27,750
Cash paid for taxes		$	30,606			$	44,340
Non-cash investing and financing activities:
Debt acquired in acquisition		$	429			$	—
Assets received as proceeds from the sale of disposal group		$	7,987			$	—

See accompanying notes to consolidated financial statements.

COMPLETE PRODUCTION SERVICES, INC.

Notes to Consolidated Financial Statements
(Unaudited, in thousands, except share and per share data)

1. General:

(a) Nature of operations:

     Complete Production Services, Inc. is a provider of specialized services and products focused on developing hydrocarbon reserves, reducing operating costs and enhancing production for oil and gas companies. Complete Production Services, Inc. focuses its operations on basins within North America and manages its operations from regional field service facilities located throughout the U.S. Rocky Mountain region, Texas, Oklahoma, Louisiana, Arkansas, Kansas, North Dakota, western Canada, Mexico and Southeast Asia.

     References to “Complete,” the “Company,” “we,” “our” and similar phrases used throughout this Quarterly Report on Form 10-Q relate collectively to Complete Production Services, Inc. and its consolidated affiliates.

     On April 20, 2006, in connection with our initial public offering, we became subject to the reporting requirements of the Securities Exchange Act of 1934. On April 21, 2006, our common stock began trading on the New York Stock Exchange under the symbol “CPX”. On April 26, 2006, we completed our initial public offering.

(b) Basis of presentation:

     The unaudited interim consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the financial position of Complete as of June 30, 2008 and the statements of operations and the statements of comprehensive income for the quarters and six-month periods ended June 30, 2008 and 2007, as well as the statement of stockholders’ equity for the six months ended June 30, 2008 and the statements of cash flows for the six-month periods ended June 30, 2008 and 2007. Certain information and disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2007. We believe that these financial statements contain all adjustments necessary so that they are not misleading.

     In preparing financial statements, we make informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. We review our estimates on an on-going basis, including those related to impairment of long-lived assets and goodwill, contingencies, and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

     The results of operations for interim periods are not necessarily indicative of the results of operations that could be expected for the full year. Certain reclassifications have been made to 2007 amounts in order to present these results on a comparable basis with amounts for 2008.

     In May 2008, our Board of Directors authorized and committed to a plan to sell certain operations in the Barnett Shale region of north Texas, consisting primarily of our supply store business, as well as certain non-strategic drilling logistics assets and other completion and production services assets. On May 19, 2008, we sold these operations to a company owned by a former officer of one of our subsidiaries, for which we received proceeds of $50,150 and assets with a fair market value of $7,987. Accordingly, we have revised our financial statement presentation for all periods presented to classify the assets and liabilities of this disposal group as held for sale and the related results of operations as discontinued operations. See Note 10, Discontinued Operations.

2. Business combinations:

     On February 29, 2008, we acquired substantially all the assets of KR Fishing & Rental, Inc. for $9,464 in cash, which includes a working capital adjustment of $184, resulting in goodwill of $6,227. KR Fishing & Rental, Inc. is a provider of fishing, rental and foam unit services in the Piceance Basin and the Raton Basin, and is based in Rangely, Colorado. We believe this acquisition complements our completion and production services business in the Rocky Mountain Region.

     On April 15, 2008, we acquired all the equity interests of Frac Source, Inc., a pressure pumping business based in Granbury, Texas, for $62,369 in cash, net of cash acquired, and recorded goodwill of $15,068. This acquisition supplements our pressure pumping business in the Barnett Shale of north Texas. Upon closing this transaction, we entered into a contract with one of our major customers to provide pressure pumping services in the Barnett Shale utilizing three frac fleets under a contract with a term that extends up to three years from the date each fleet is placed into service.

     We accounted for each of these acquisitions using the purchase method of accounting, whereby the purchase price was allocated to the fair value of net assets acquired, including intangibles and property, plant and equipment at depreciated replacement costs, with the excess recorded as goodwill. Results for these acquired businesses were included in our accounts and results of operations since the date of acquisition, and the related goodwill was allocated entirely to the completion and production services business segment. The following table summarizes our preliminary purchase price allocations for these acquisitions as of June 30, 2008, each of which is yet to be finalized:

		KR Fishing
		& Rental				Frac Source				Totals
Net assets acquired:
Property, plant and equipment		$	2,673			$	42,265			$	44,938
Non-cash working capital			234				(1,806	)			(1,572	)
Net deferred tax assets			—				311				311
Long-term capital lease obligations			—				(279	)			(279	)
Intangible assets			330				6,810				7,140
Goodwill			6,227				15,068				21,295
Net assets acquired		$	9,464			$	62,369			$	71,833
Consideration:
Cash, net of cash and cash equivalents acquired		$	9,464			$	62,369			$	71,833

     The purchase price of these acquired businesses was negotiated as an arm’s length transaction with the seller. We use various valuation techniques, including an earnings multiple approach, to evaluate acquisition targets. We also consider precedent transactions which we have undertaken and similar transactions of others in our industry. To determine the fair value of assets acquired, we generally retain third-party consultants to assist with the valuation of identifiable intangible assets and to evaluate property, plant and equipment acquired based upon, at minimum, the replacement cost of the assets. Working capital items are deemed to be acquired at fair market value.

     We calculated the pro forma impact of the businesses we acquired on our operating results for the quarters and six months ended June 30, 2008 and 2007. The following pro forma results give effect to each of these acquisitions, assuming that each occurred on January 1, 2008 and 2007, as applicable. For purposes of this pro forma calculation, we use historical financial information obtained from the sellers and certain management assumptions. We assume debt service costs based on the actual cash investments, calculated at a rate of 7% per annum, less an assumed tax benefit calculated at our statutory rate of 35%. Each of these acquisitions related to our continuing operations, and thus had no pro forma impact on discontinued operations presented in the accompanying statements of operations.

     In conjunction with the sale of a disposal group in May 2008, we received cash, as well as property, plant and equipment with a fair market value of $7,987. The receipt of this equipment has been treated as a non-cash item in the accompanying cash flow statement at June 30, 2008. To value these assets, a valuation was obtained from an independent third-party appraiser.

		Pro Forma Results
		Quarter Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenue		$	443,490			$	371,567			$	876,072			$	742,542
Income from continuing operations before taxes and minority interest		$	60,882			$	62,575			$	129,373			$	133,698
Net income from continuing operations		$	40,140			$	39,649			$	83,903			$	83,410
Earnings per share information:
Basic		$	0.55			$	0.55			$	1.15			$	1.16
Diluted		$	0.54			$	0.54			$	1.13			$	1.14

     These pro forma results do not purport to be indicative of the results that would have been obtained had the transactions described above been completed on the indicated dates or that may be obtained in the future.

3. Accounts receivable:

		June 30,				December 31,
		2008				2007
Trade accounts receivable		$	267,062			$	251,361
Related party receivables			9,456				8,048
Unbilled revenue			47,934				41,334
Notes receivable			312				3,378
Other receivables			9,309				7,048
			334,073				311,169
Allowance for doubtful accounts			4,983				5,487
		$	329,090			$	305,682

4. Inventory:

		June 30,				December 31,
		2008				2007
Finished goods		$	21,123			$	22,235
Manufacturing parts, materials and other			14,398				9,312
			35,521				31,547
Inventory reserves			1,039				1,670
		$	34,482			$	29,877

5. Property, plant and equipment:

						Accumulated
June 30, 2008		Cost				Depreciation				Net Book Value
Land		$	10,001			$	—			$	10,001
Building			18,569				1,853				16,716
Field equipment			1,147,224				292,593				854,631
Vehicles			136,773				41,583				95,190
Office furniture and computers			15,539				6,451				9,088
Leasehold improvements			17,159				2,771				14,388
Construction in progress			107,883				—				107,883
		$	1,453,148			$	345,251			$	1,107,897

						Accumulated
December 31, 2007		Cost				Depreciation				Net Book Value
Land		$	9,259			$	—			$	9,259
Building			17,667				1,545				16,122
Field equipment			1,049,761				237,481				812,280
Vehicles			91,853				20,550				71,303
Office furniture and computers			12,391				4,212				8,179
Leasehold improvements			16,368				1,588				14,780
Construction in progress			81,267				—				81,267
		$	1,278,566			$	265,376			$	1,013,190

     Construction in progress at June 30, 2008 and December 31, 2007 primarily included progress payments to vendors for equipment to be delivered in future periods and component parts to be used in final assembly of operating equipment, which in all cases were not yet placed into service at the time. For the quarter and six months ended June 30, 2008, we recorded capitalized interest of $1,598 and $2,646, respectively, related to assets that we are constructing for internal use and amounts paid to vendors under progress payments for assets that are being constructed on our behalf.

6. Notes payable:

     We entered into a note arrangement to finance our annual insurance premiums for the policy term beginning December 1, 2007 and extending through April 30, 2009. As of December 31, 2007, we recorded a note payable totaling $15,354 and an offsetting prepaid asset which included a broker’s fee of approximately $625. Of this prepaid asset, $3,257 was recorded as a long-term asset at December 31, 2007. At June 30, 2008, this note balance totaled $5,414 and was classified as a current liability. We expect to repay this note payable in full prior to December 31, 2008.

7. Long-term debt:

     The following table summarizes long-term debt as of June 30, 2008 and December 31, 2007:

		2008				2007
U.S. revolving credit facility (a)		$	127,400			$	160,000
Canadian revolving credit facility (a)			10,088				12,219
8.0% senior notes (b)			650,000				650,000
Subordinated seller notes			3,450				3,450
Capital leases and other			954				714
			791,892				826,383
Less: current maturities of long-term debt and capital leases			3,742				398
		$	788,150			$	825,985

	(a)		We maintain a credit agreement related to a syndicated senior secured credit facility (the “Credit Agreement”). The Credit Agreement was initially comprised of a $310,000 U.S. revolving credit facility that matures in December 2011 and a $40,000 Canadian revolving credit facility (with Integrated Production Services, Ltd., one of our wholly-owned subsidiaries, as the borrower thereof) that matures in December 2011. The Credit Agreement is secured by substantially all of our assets. On June 29, 2007, we amended our Credit Agreement in conjunction with the restructuring of certain legal entities for tax purposes with no material changes to the financial provisions or covenants. On October 19, 2007, we amended our Credit Agreement to increase the borrowing capacity of the U.S. revolving portion of the facility from $310,000 to $360,000 and to include a provision for a “commitment increase” clause, as defined in the Credit Agreement, which permits us to effect up to two separate increases in the aggregate commitments under the facility by designating a participating lender to increase its commitment, by mutual agreement, in increments of at least $50,000, with the aggregate of such commitment increases not to exceed $100,000, and in accordance with other provisions as stipulated in the amendment.
			Subject to certain limitations, we have the ability to elect how interest under the Credit Agreement will be computed. Interest under the Credit Agreement may be determined by reference to (1) the London Inter-bank Offered Rate, or LIBOR, plus an applicable margin between 0.75% and 1.75% per annum (with the applicable margin depending upon our ratio of total debt to EBITDA (as defined in the agreement)) or (2) the Base Rate (i.e., the higher of the Canadian bank’s prime rate or the CDOR rate plus 1.0%, in the case of Canadian loans or the greater of the prime rate and the federal funds rate plus 0.5%, in the case of U.S. loans), plus an applicable margin between 0.00% and 0.75% per annum. If an event of default exists under the Credit Agreement, advances will bear interest at the then-applicable rate plus 2%. Interest is payable quarterly for base rate loans and at the end of applicable interest periods for LIBOR loans, except that if the interest period for a LIBOR loan is six months, interest will be paid at the end of each three-month period.

			The Credit Agreement also contains various covenants that limit our and our subsidiaries’ ability to: (1) grant certain liens; (2) make certain loans and investments; (3) make capital expenditures; (4) make distributions; (5) make acquisitions; (6) enter into hedging transactions; (7) merge or consolidate; or (8) engage in certain asset dispositions. Additionally, the Credit Agreement limits our and our subsidiaries’ ability to incur additional indebtedness if: (1) we are not in pro forma compliance with all terms under the Credit Agreement, (2) certain covenants of the additional indebtedness are more onerous than the covenants set forth in the Credit Agreement, or (3) the additional indebtedness provides for amortization, mandatory prepayment or repurchases of senior unsecured or subordinated debt during the duration of the Credit Agreement with certain exceptions. The Credit Agreement also limits additional secured debt to 10% of our consolidated net worth (i.e., the excess of our assets over the sum of our liabilities plus the minority interests). The Credit Agreement contains covenants which, among other things, require us and our subsidiaries, on a consolidated basis, to maintain specified ratios or conditions as follows (with such ratios tested at the end of each fiscal quarter): (1) total debt to EBITDA, as defined in the Credit Agreement, of not more than 3.0 to 1.0 and (2) EBITDA, as defined, to total interest expense of not less than 3.0 to 1.0. We were in compliance with all debt covenants under the amended and restated Credit Agreement as of June 30, 2008.
			Under the Credit Agreement, we are permitted to prepay our borrowings.
			All of the obligations under the U.S. portion of the Credit Agreement are secured by first priority liens on substantially all of the assets of our U.S. subsidiaries as well as a pledge of approximately 66% of the stock of our first-tier foreign subsidiaries. Additionally, all of the obligations under the U.S. portion of the Credit Agreement are guaranteed by substantially all of our U.S. subsidiaries. All of the obligations under the Canadian portions of the Credit Agreement are secured by first priority liens on substantially all of the assets of our subsidiaries. Additionally, all of the obligations under the Canadian portions of the Credit Agreement are guaranteed by us as well as certain of our subsidiaries.
			If an event of default exists under the Credit Agreement, as defined, the lenders may accelerate the maturity of the obligations outstanding under the Credit Agreement and exercise other rights and remedies. While an event of default is continuing, advances will bear interest at the then-applicable rate plus 2%.
			Borrowings under the U.S. revolving facility bore interest at rates ranging from 4.16% to 5.25%, a weighted average interest rate of 4.22%, and the Canadian revolving credit facility bore interest at 5.0% at June 30, 2008. For the six months ended June 30, 2008, the weighted average interest rate on average borrowings under the amended Credit Agreement was 4.32%. There were letters of credit outstanding under the U.S. revolving portion of the facility totaling $37,669, which reduced the available borrowing capacity as of June 30, 2008. We incurred fees calculated at 1.25% of the total amount outstanding under letter of credit arrangements through June 30, 2008. Our available borrowing capacity under the U.S. and Canadian revolving facilities at June 30, 2008 was $194,931 and $29,912, respectively.
	(b)		On December 6, 2006, we issued 8.0% senior notes with a face value of $650,000 through a private placement of debt. These notes mature in 10 years, on December 15, 2016 and require semi-annual interest payments, paid in arrears and calculated based on an annual rate of 8.0%, on June 15 and December 15 of each year, commencing on June 15, 2007. There was no discount or premium associated with the issuance of these notes. The senior notes are guaranteed on a senior unsecured basis by all of our current domestic subsidiaries. The senior notes have covenants which, among other things: (1) limit the amount of additional indebtedness we can incur; (2) limit restricted payments such as a dividend; (3) limit our ability to incur liens or encumbrances; (4) limit our ability to purchase, transfer or dispose of significant assets; (5) purchase or redeem stock or subordinated debt; (6) enter into transactions with affiliates; (7) merge with or into other companies or transfer all or substantially all our assets; and (8) limit our ability to enter into sale and leaseback transactions. We have the option to redeem all or part of these notes on or after December 15, 2011. We can redeem 35% of these notes on or before December 15, 2009 using the proceeds of certain equity offerings. Additionally, we may redeem some or all of the notes prior to December 15, 2011 at a price equal to 100% of the principal amount of the notes plus a make-whole premium.

Pursuant to a registration rights agreement with the holders of our 8.0% senior notes, on June 1, 2007, we filed a registration statement on Form S-4 with the Securities and Exchange Commission which enabled these holders to exchange their notes for publicly registered notes with substantially identical terms. These holders exchanged 100% of the notes for publicly traded notes on July 25, 2007. On August 28, 2007, we entered into a supplement to the indenture governing the 8.0% senior notes, whereby additional domestic subsidiaries became guarantors under the indenture.

8. Stockholders’ equity:

(a) Stock-based Compensation—Stock Options:

     We maintain option plans under which stock-based compensation could be granted to employees, officers and directors. Stock option grants under these plans have an exercise price based on the fair value of our common stock on the date of grant. These stock options may be exercised over a five or ten-year period and generally a third of the options vest on each of the first three anniversaries from the grant date. Upon exercise of stock options, we issue our common stock.

     We account for our stock-based compensation awards pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123R, whereby we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with limited exceptions, by using an option pricing model to determine fair value. We record stock compensation expense associated with our stock-based compensation awards pursuant to SFAS No. 123R in accordance with the transition guidance of that statement, as further described in our Annual Report on Form 10-K as of December 31, 2007.

     On January 31, 2008, the Compensation Committee of our Board of Directors approved the annual grant of stock options and non-vested restricted stock to certain employees, officers and directors. Pursuant to this authorization, we issued 287,500 shares of non-vested restricted stock at a grant price of $15.90 per share. We expect to recognize compensation expense associated with this grant of non-vested restricted stock totaling $4,571 ratably over the three-year vesting period. In addition, we granted 345,000 stock options to purchase shares of our common stock at an exercise price of $15.90 per share. These stock options vest ratably over a three-year period. We will recognize compensation expense associated with these stock option grants over the vesting period in accordance with SFAS No. 123R. Further, we obtained shareholder approval in May 2008 to increase the shares available for grant through our stock compensation plans. Pursuant to this approval, we issued 302,856 shares of non-vested restricted stock during the quarter ended June 30, 2008, of which 289,400 shares had grant prices ranging from $29.88 to $32.08 per share and were granted to certain members of senior management and other employees and 13,456 shares had grant prices of $29.88 per share and were granted to our directors. The fair value of the stock options granted during the six months ended June 30, 2008 was determined by applying a Black-Scholes option pricing model based on the following assumptions:

		Six Months Ended
		June 30,
Assumptions:		2008
Risk-free rate		2.82% to 3.24%
Expected term (in years)			5.1
Volatility		16.7% to 24.5%
Calculated fair value per option			$4.39 to $7.27

     We completed our initial public offering in April 2006. Prior to the quarter ended June 30, 2008, we did not have sufficient historical market data in order to determine the volatility of our common stock. In accordance with the provisions of SFAS No. 123R, we analyzed the market data of peer companies and calculated an average volatility factor based upon changes in the closing price of these companies’ common stock for a three-year period. This volatility factor was then applied as a variable to determine the fair value of our stock options granted prior to the quarter ended June 30, 2008. For the second quarter of 2008, we calculated an average volatility factor for our common stock for the period April 21, 2006 through June 30, 2008. This factor was used as a variable to calculate the value of stock options granted during the quarter ended June 30, 2008.

     We projected a rate of stock option forfeitures based upon historical experience and management assumptions related to the expected term of the options. After adjusting for these forfeitures, we expect to recognize expense totaling $1,624 over the vesting period of these 2008 stock option grants. For the quarter and six months ended June 30, 2008, we have recognized expense related to these stock option grants totaling $123 and $198, respectively, which represents a reduction of net income before taxes. The impact on net income for the quarter and six months ended June 30, 2008 was a reduction of $82 and $129, respectively, resulting in no impact on diluted earnings per share as reported. The unrecognized compensation costs related to the non-vested portion of these awards was $1,426 as of June 30, 2008 and will be recognized over the applicable remaining vesting periods.

     For the quarters ended June 30, 2008 and 2007, we recognized compensation expense associated with all stock option awards totaling $1,300 and $1,149, respectively, resulting in a reduction of net income of $858 and $725, respectively, and a $0.01 reduction in diluted earnings per share for each of the quarters ended June 30, 2008 and 2007. For the six months ended June 30, 2008 and 2007, we recognized compensation expense associated with all stock option awards totaling $2,566 and $2,259, respectively, resulting in a reduction of net income of $1,668 and $1,412, respectively, and a $0.02 and $0.01 reduction in diluted earnings per share for the six months ended June 30, 2008 and 2007, respectively. Total unrecognized compensation expense associated with outstanding stock option awards at June 30, 2008 was $7,272, or $4,509, net of tax.

     The following tables provide a roll forward of stock options from December 31, 2007 to June 30, 2008 and a summary of stock options outstanding by exercise price range at June 30, 2008:

		Options Outstanding
						Weighted
						Average
						Exercise
		Number				Price
Balance at December 31, 2007			3,730,761			$	13.36
Granted			385,000			$	17.35
Exercised			(1,148,761	)		$	9.66
Cancelled			(120,994	)		$	20.11
Balance at June 30, 2008			2,846,006			$	15.12

		Options Outstanding												Options Exercisable
						Weighted				Weighted								Weighted				Weighted
		Outstanding at				Average				Average				Exercisable at				Average				Average
		June 30,				Remaining				Exercise				June 30,				Remaining				Exercise
Range of Exercise Price		2008				Life (months)				Price				2008				Life (months)				Price
$2.00			61,074				13			$	2.00				61,074				13			$	2.00
$4.48 — $4.80			84,610				17			$	4.75				84,610				17			$	4.75
$5.00			127,865				52			$	5.00				93,619				49			$	5.00
$6.69			622,666				81			$	6.69				463,240				82			$	6.69
$11.66			305,423				87			$	11.66				146,667				88			$	11.66
$15.90			345,000				115			$	15.90				—				—				—
$17.60 — $19.87			679,855				103			$	19.83				150,940				103			$	19.83
$22.55 — $24.07			534,513				94			$	23.95				277,335				94			$	23.98
$26.26 — $27.11			45,000				107			$	26.35				15,000				107			$	26.35
$29.88			40,000				119			$	29.88				—				—				—
			2,846,006				90			$	15.12				1,292,485				78			$	12.26

The total intrinsic value of stock options exercised during the quarter and six months ended June 30, 2008 was $10,428 and $11,757, respectively. The total intrinsic value of all vested outstanding stock options at June 30, 2008 was $31,232. Assuming all stock options outstanding at June 30, 2008 were vested, the total intrinsic value of all outstanding stock options would have been $60,613.

(b) Non-vested Restricted Stock:

     We recognize compensation expense associated with grants of non-vested restricted stock based on the fair value of the shares on the date of grant and recorded ratably over the applicable vesting period. At

June 30, 2008, amounts not yet recognized related to non-vested restricted stock totaled $14,218, which represented the unamortized expense associated with awards of non-vested stock granted to employees, officers and directors under our compensation plans, including $12,529 related to grants during the six months ended June 30, 2008. We recognized compensation expense associated with non-vested restricted stock totaling $1,331 and $787 for the quarters ended June 30, 2008 and 2007, respectively, and $2,251 and $1,472 for the six months ended June 30, 2008 and 2007, respectively.

     The following table summarizes the change in non-vested restricted stock from December 31, 2007 to June 30, 2008:

		Non-vested
		Restricted Stock
						Weighted
						Average
		Number				Grant Price
Balance at December 31, 2007			625,871			$	9.46
Granted			594,356			$	23.09
Vested			(135,395	)		$	14.65
Forfeited			(19,196	)		$	11.94
Balance at June 30, 2008			1,065,636			$	16.36

9. Earnings per share:

     We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common share includes the weighted average of additional shares associated with the incremental effect of dilutive employee stock options, non-vested restricted stock and contingent shares, as determined using the treasury stock method prescribed by SFAS No. 128, “Earnings Per Share.” The following table reconciles basic and diluted weighted average shares used in the computation of earnings per share for the quarters and six months ended June 30, 2008 and 2007:

		Quarter Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
						(in thousands)
Weighted average basic common shares outstanding			73,171				71,916				72,866				71,711
Effect of dilutive securities:
Employee stock options			890				1,190				843				1,218
Non-vested restricted stock			346				261				350				266
Weighted average diluted common and potential common shares outstanding			74,407				73,367				74,059				73,195

     We excluded the impact of anti-dilutive potential common shares from the calculation of diluted weighted average shares for the quarters and six months ended June 30, 2008 and 2007. If these potential common shares were included in the calculation, the impact would have been a decrease in diluted weighted average shares outstanding of 40,639 shares and 96,183 shares for the quarters ended June 30, 2008 and 2007, respectively, and a decrease in diluted weighted average shares outstanding of 194,498 shares and 224,648 shares for the six months ended June 30, 2008 and 2007, respectively.

10. Discontinued operations:

     In May 2008, our Board of Directors authorized and committed to a plan to sell certain business assets located primarily in north Texas which included our product supply stores, certain drilling logistics assets and other completion and production services assets. Although this sale does not represent a material disposition of assets relative to our total assets as presented in the accompanying balance sheets, the disposal group does represent a significant portion of the assets and operations which were attributable to our product sales business segment for the periods presented, and therefore, was accounted for as a disposal group that is held for sale in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We revised our financial statements, pursuant to SFAS No. 144, and reclassified the assets and liabilities of the disposal group as held for sale as of the date of each balance sheet presented and removed the results of operations of the disposal group from net income from continuing operations,

and presented these separately as income from discontinued operations, net of tax, for each of the accompanying statements of operations. We ceased depreciating the assets of this disposal group in May 2008 and adjusted the net assets to the lower of carrying value or fair value less selling costs, which resulted in a pre-tax charge of approximately $200. In addition, we allocated $11,109 of goodwill associated with the original formation of Complete Production Services, Inc. to this business. Our company was formed from the combination of three entities under common control in September 2005, which resulted in goodwill of $93,792. Of this amount, $11,109 was deemed to be attributable to this disposal group and was impaired as of the date of the transaction. Thus, this amount has been included in the calculation of the loss on the sale of this disposal group.

     On May 19, 2008, we completed the sale of the disposal group for $50,150 in cash and we received assets with a fair market value of $7,987. In addition, we retained the receivables and payables associated with the operating results of these entities as of the date of the sale. There is a potential working capital settlement, primarily associated with inventory, which is expected during the third quarter of 2008. The carrying value of the related net assets was approximately $51,200 on May 19, 2008, excluding allocated goodwill of $11,109. We recorded a loss of $6,782 associated with the sale of this disposal group, which represents the excess of the carrying value of the assets less selling costs over the sales price and a charge of approximately $2,610 related to income tax on the transaction. The income tax on the disposal was primarily attributable to the $11,109 of allocated goodwill which was non-deductible for tax purposes and resulted in a taxable gain on the disposal. We sold this disposal group to Select Energy Services, L.L.C., an oilfield service company located in Gainesville, Texas which is owned by a former officer of one of our subsidiaries. Pursuant to the agreement, we will sublet office space to Select Energy Services, L.L.C., and provide certain administrative functions for a period of one year at an agreed-upon rate for services per hour. Proceeds from the sale of this disposal group were used to repay outstanding borrowings under our U.S. revolving credit facility and for other general corporate purposes.

     The following table summarizes operating results for the disposal group for the periods indicated:

		Period
		April 1, 2008								Period January 1,
		through				Quarter Ended				2008 through				Six Months Ended
		May 19,				June 30,				May 19,				June 30,
		2008				2007				2008				2007
Revenue		$	21,468			$	43,901			$	59,553			$	84,746
Income (loss) before taxes		$	(117	)		$	5,891			$	3,330			$	10,911
Net income (loss) before loss on disposal in 2008		$	(75	)		$	3,678			$	2,076			$	6,812
Net income (loss)		$	(6,857	)		$	3,678			$	(4,706	)		$	6,812

     The captions related to discontinued operations in the accompanying balance sheet at December 31, 2007 were comprised of the following accounts:

		December 31,
		2007
Current assets held for sale:
Accounts receivable		$	23,003
Inventory			27,191
Other			113
		$	50,307
Long-term assets held for sale:
Property, plant and equipment, net		$	21,505
Goodwill			11,358
Intangible assets			187
		$	33,050
Current liabilities of held for sale operations:
Accounts payable		$	8,260
Accrued expenses			1,168
Other			277
		$	9,705
Long-term liabilities of held for sale operations:
Long-term deferred tax liabilities and other		$	2,085
		$	2,085

11. Segment information:

     SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,” establishes standards for the reporting of information about operating segments, products and services, geographic areas, and major customers. The method of determining what information to report is based on the way our management organizes the operating segments for making operational decisions and assessing financial performance. We evaluate performance and allocate resources based on net income (loss) from continuing operations before net interest expense, taxes, depreciation and amortization, minority interest and impairment loss (“EBITDA”). The calculation of EBITDA should not be viewed as a substitute for calculations under U.S. GAAP, in particular, with respect to net income. EBITDA calculated by us may not be comparable to the EBITDA calculation of another company.

     We have three reportable operating segments: completion and production services (“C&PS”), drilling services and product sales. The accounting policies of our reporting segments are the same as those used to prepare our unaudited consolidated financial statements as of June 30, 2008. Inter-segment transactions are accounted for on a cost recovery basis.

						Drilling				Product
Quarter Ended June 30, 2008		C&PS				Services				Sales				Corporate				Total
Revenue from external customers		$	368,656			$	57,192			$	15,237			$	—			$	441,085
Inter-segment revenues		$	286			$	269			$	4,500			$	(5,055	)		$	—
EBITDA, as defined		$	107,536			$	15,512			$	3,532			$	(8,403	)		$	118,177
Depreciation and amortization		$	36,998			$	4,888			$	559			$	592			$	43,037
Operating income (loss)		$	70,538			$	10,624			$	2,973			$	(8,995	)		$	75,140
Capital expenditures		$	64,111			$	16,764			$	1,380			$	795			$	83,050
Quarter Ended June 30, 2007
Revenue from external customers		$	302,304			$	53,316			$	11,194			$	—			$	366,814
Inter-segment revenues		$	262			$	1,136			$	12,979			$	(14,377	)		$	—
EBITDA, as defined		$	99,606			$	16,589			$	2,411			$	(8,270	)		$	110,336
Depreciation and amortization		$	27,836			$	3,414			$	486			$	639			$	32,375
Operating income (loss)		$	71,770			$	13,175			$	1,925			$	(8,909	)		$	77,961
Capital expenditures		$	70,561			$	22,714			$	454			$	848			$	94,577
As of June 30, 2008
Segment assets		$	1,762,267			$	279,153			$	46,752			$	43,456			$	2,131,628
Six Months Ended June 30, 2008
Revenue from external customers		$	720,308			$	110,503			$	27,452			$	—			$	858,263
Inter-segment revenues		$	370			$	272			$	10,539			$	(11,181	)		$	—
EBITDA, as defined		$	219,712			$	27,728			$	6,822			$	(16,357	)		$	237,905
Depreciation and amortization		$	70,728			$	9,304			$	1,105			$	1,151			$	82,288
Operating income (loss)		$	148,984			$	18,424			$	5,717			$	(17,508	)		$	155,617
Capital expenditures		$	106,379			$	25,234			$	1,725			$	1,043			$	134,381
Six Months Ended June 30, 2007
Revenue from external customers		$	605,126			$	105,221			$	22,689			$	—			$	733,036
Inter-segment revenues		$	332			$	1,157			$	18,542			$	(20,031	)		$	—
EBITDA, as defined		$	202,126			$	32,839			$	4,980			$	(14,484	)		$	225,461
Depreciation and amortization		$	51,832			$	6,527			$	958			$	1,012			$	60,329
Operating income (loss)		$	150,294			$	26,312			$	4,022			$	(15,496	)		$	165,132
Capital expenditures		$	158,911			$	29,986			$	4,495			$	1,087			$	194,479
As of December 31, 2007
Segment assets		$	1,651,653			$	287,563			$	89,492			$	26,051			$	2,054,759

     The following table reconciles segment information for our business segments as originally reported for the quarter and six months ended June 30, 2007, to the information revised for discontinued operations:

		Original				Discontinued				Revised
		Presentation				Operations				Presentation
Quarter Ended June 30, 2007
Completion and production services:
Revenue from external customers		$	307,212			$	4,908			$	302,304
EBITDA, as defined		$	101,180			$	1,574			$	99,606
Depreciation and amortization			28,134				298				27,836
Operating income		$	73,046			$	1,276			$	71,770
Drilling services:
Revenue from external customers		$	60,193			$	6,877			$	53,316
EBITDA, as defined		$	19,004			$	2,415			$	16,589
Depreciation and amortization			4,017				603				3,414
Operating income		$	14,987			$	1,812			$	13,175
Product Sales:
Revenue from external customers		$	43,310			$	32,116			$	11,194
EBITDA, as defined		$	5,440			$	3,029			$	2,411
Depreciation and amortization			702				216				486
Operating income		$	4,738			$	2,813			$	1,925
Six Months Ended June 30, 2007
Completion and production services:
Revenue from external customers		$	614,851			$	9,725			$	605,126
EBITDA, as defined		$	205,342			$	3,216			$	202,126
Depreciation and amortization			52,418				586				51,832
Operating income		$	152,924			$	2,630			$	150,294
Drilling services:
Revenue from external customers		$	118,589			$	13,368			$	105,221
EBITDA, as defined		$	37,072			$	4,233			$	32,839
Depreciation and amortization			7,652				1,125				6,527
Operating income		$	29,420			$	3,108			$	26,312
Product Sales:
Revenue from external customers		$	84,342			$	61,653			$	22,689
EBITDA, as defined		$	10,596			$	5,616			$	4,980
Depreciation and amortization			1,380				422				958
Operating income		$	9,216			$	5,194			$	4,022

     We do not allocate net interest expense, tax expense or minority interest to the operating segments. The following table reconciles operating income as reported above to net income from continuing operations for the quarters and six months ended June 30, 2008 and 2007:

		Quarters Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Segment operating income		$	75,140			$	77,961			$	155,617			$	165,132
Interest expense			15,515				15,055				31,430				30,668
Interest income			(762	)			(316	)			(1,387	)			(528	)
Income taxes			20,544				23,322				43,956				50,615
Minority interest			—				(205	)			—				56
Net income from continuing operations		$	39,843			$	40,105			$	81,618			$	84,321