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 MARCH 31, 2007 OR

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

FOR THE TRANSITION PERIOD FROM                      To                     

Commission file number 1-2199

ALLIS-CHALMERS ENERGY INC.

(Exact name of registrant as specified in its charter)

DELAWARE		39-0126090
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip code)

(713) 369-0550

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, or a non-accelerated filer. See definition of “accelerated filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At May 1, 2007 there were 34,644,510 shares of common stock, par value $0.01 per share, outstanding.

 

 

ALLIS-CHALMERS ENERGY INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2007

TABLE OF CONTENTS

				PAGE
		PART I
ITEM
1.		Financial Statements
		Consolidated Condensed Balance Sheets as of March 31, 2007 and December 31, 2006			3
		Consolidated Condensed Income Statements for the three months ended March 31, 2007 and 2006			4
		Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2007 and 2006			5
		Notes to Consolidated Condensed Financial Statements			6
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
3.		Quantitative and Qualitative Disclosures about Market Risk			27
4.		Controls and Procedures			28
		PART II
2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
6.		Exhibits			28
Signatures					29
Second Amended Credit Agreement
Amended Guaranty
Amended Pledge and Security Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO & CFO Pursuant to Section 1350

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIS-CHALMERS ENERGY INC.

(in thousands, except for share and per share amounts)

		March 31,				December 31,
		2007				2006
		(unaudited)
Assets
Cash and cash equivalents		$	75,287			$	39,745
Trade receivables, net			117,595				95,766
Inventories			30,440				28,615
Prepaid expenses and other			9,321				16,636
Total current assets			232,643				180,762
Property and equipment, net			562,951				554,258
Goodwill			125,854				125,835
Other intangible assets, net			31,801				32,840
Debt issuance costs, net			14,991				9,633
Other assets			5,020				4,998
Total assets		$	973,260			$	908,326
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	5,248			$	6,999
Trade accounts payable			29,024				25,666
Accrued salaries, benefits and payroll taxes			11,845				10,888
Accrued interest			8,636				11,867
Accrued expenses			19,075				16,951
Total current liabilities			73,828				72,371
Long-term debt, net of current maturities			510,423				561,446
Deferred income taxes			21,491				19,953
Other long-term liabilities			588				623
Total liabilities			606,330				654,393
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value (25,000,000 shares authorized, no shares issued)			—				—
Common stock, $0.01 par value (100,000,000 shares authorized; 34,309,797 issued and outstanding at March 31, 2007 and 28,233,411 issued and outstanding at December 31, 2006)			343				282
Capital in excess of par value			316,979				216,208
Retained earnings			49,608				37,443
Total stockholders’ equity			366,930				253,933
Total liabilities and stockholders’ equity		$	973,260			$	908,326

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

(in thousands, except per share amounts)

(unaudited)

		For the Three Months Ended
		March 31,
		2007				2006
Revenues		$	135,900			$	47,911
Cost of revenues
Direct costs			77,605				27,998
Depreciation			11,816				3,330
Total cost of revenues			89,421				31,328
Gross margin			46,479				16,583
General and administrative			13,971				7,343
Amortization			1,488				607
Income from operations			31,020				8,633
Other income (expense):
Interest expense			(13,571	)			(3,705	)
Interest income			759				77
Other			184				25
Total other income (expense)			(12,628	)			(3,603	)
Income before income taxes			18,392				5,030
Provision for taxes			(6,227	)			(607	)
Net income		$	12,165			$	4,423
Net income per common share:
Basic		$	0.38			$	0.26
Diluted		$	0.37			$	0.23
Weighted average shares outstanding:
Basic			32,330				17,105
Diluted			33,011				19,113

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

(in thousands)

(unaudited)

		For the Three Months Ended
		March 31,
		2007				2006
Cash Flows from Operating Activities:
Net income		$	12,165			$	4,423
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation			11,816				3,330
Amortization			1,488				607
Write-off of deferred financing fees due to refinancing			1,225				—
Imputed interest			—				355
Stock option expense			453				942
Allowance for bad debts			172				180
Deferred taxes			1,538				—
Gain on sale of property and equipment			(862	)			(514	)
Changes in operating assets and liabilities, net of acquisitions:
(Increase) in trade receivable			(22,001	)			(4,288	)
(Increase) in inventories			(1,825	)			(1,484	)
Decrease in other current assets			7,315				7
(Increase) in other assets			(41	)			(88	)
Increase (decrease) in accounts payable			3,358				(1,286	)
Increase (decrease) in accrued interest			(3,231	)			2,764
Increase (decrease) in accrued expenses			2,124				(11,017	)
Increase in accrued salaries, benefits and payroll taxes			957				483
Increase (decrease) in other long-term liabilities			(35	)			27
Net Cash Provided By (Used In) Operating Activities			14,616				(5,559	)
Cash Flows from Investing Activities:
Acquisition of businesses, net of cash received			—				(83,447	)
Proceeds from sale of property and equipment			2,698				1,200
Purchase of property and equipment			(22,345	)			(7,586	)
Net Cash Used In Investing Activities			(19,647	)			(89,833	)
Cash Flows from Financing Activities:
Proceeds from issuance of stock, net			100,078				—
Proceeds from exercises of options and warrants			301				972
Proceeds from long-term debt			250,000				161,412
Repayments on long-term debt			(302,774	)			(43,481	)
Repayments on related party debt			—				(3,031	)
Repayments on line of credit			—				(6,400	)
Debt issuance costs			(7,032	)			(5,339	)
Net Cash Provided By Financing Activities			40,573				104,133
Net change in cash and cash equivalents			35,542				8,741
Cash and cash equivalents at beginning of year			39,745				1,920
Cash and cash equivalents at end of period		$	75,287			$	10,661
Supplemental information:
Interest paid		$	15,566			$	586
Income taxes paid		$	178			$	232

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Allis-Chalmers Energy Inc. and subsidiaries (“Allis-Chalmers”, “we”, “our” or “us”) is a multi-faceted oilfield service company that provides services and equipment to oil and natural gas exploration and production companies, domestically in Texas, Louisiana, New Mexico, Colorado, Oklahoma, Mississippi, Utah, Wyoming, Arkansas, Alabama, West Virginia, offshore in the Gulf of Mexico, and internationally, primarily in Argentina and Mexico. We operate in six sectors of the oil and natural gas service industry: Rental Services; International Drilling; Directional Drilling; Tubular Services; Underbalanced Drilling; and Production Services.

We derive operating revenues from rates per day and rates per job that we charge for the labor and equipment required to provide a service and rates per day for equipment and tools that we rent to our customers. The price we charge for our services depends upon several factors, including the level of oil and natural gas drilling activity and the competitive environment in the particular geographic regions in which we operate. Contracts are awarded based on price, quality of service and equipment and general reputation and experience of our personnel. The principal operating costs are direct and indirect labor and benefits, repairs and maintenance of our equipment, insurance, equipment rentals, fuel, depreciation and general and administrative expenses.

On October 25, 2006 our Board of Directors approved the transfer of the listing of our common stock from the American Stock Exchange (“AMEX”) to the New York Stock Exchange (“NYSE”). Our common stock continued to trade on the AMEX under the symbol “ALY” until the transfer was completed on March 22, 2007, at which time we began trading on the NYSE under the symbol “ALY”.

Basis of Presentation

Our unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. These unaudited consolidated condensed financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

Certain reclassifications have been made to the prior year’s consolidated condensed financial statements to conform with the current period presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be perceived with certainty. Accordingly, our accounting estimates require the exercise of judgment. While management believes that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts, recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, income taxes and valuation allowances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. It prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We adopted the provisions of FIN 48 effective January 1, 2007 and such adoption did not have a material effect on our financial statements.

Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits. For United States federal tax purposes, our tax returns for the tax years 2001 through 2006 remain open for examination by the tax authorities. Our foreign tax returns remain open for examination for the tax years 2001 through 2006. Generally, for state tax purposes, our 2002 through 2006 tax years remain open for examination by the tax authorities under a four year statute of limitations, however, certain states may keep their statute open for six to ten years.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the provisions of SFAS 157 and have not yet determined the impact, if any, on our financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at the initial recognition of the asset or liability or upon a re-measurement event that gives rise to the new-basis of accounting. All subsequent changes in fair value for that instrument are reported in earnings. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be recorded at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS 159 is effective as of the beginning of each reporting entity’s first fiscal year that begins after November 15, 2007. We are currently evaluating the provisions of SFAS 159 and have not yet determined the impact, if any, on our financial statements.

NOTE 2 — STOCK-BASED COMPENSATION

We adopted SFAS No. 123R, Share-Based Payment, effective January 1, 2006. This statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant-date fair values. Compensation cost for awards granted prior to, but not vested, as of January 1, 2006 would be based on the grant date attributes originally used to value those awards for pro forma purposes under SFAS No. 123. We adopted SFAS No. 123R using the modified prospective transition method, utilizing the Black-Scholes option pricing model for the calculation of the fair value of our employee stock options. Under the modified prospective method, we record compensation cost related to unvested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over the remaining vesting periods of those awards with no change in historical reported earnings. We estimated forfeiture rates for the first three months of 2007 and 2006 based on our historical experience.

The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero as we have historically not paid dividends and have no current plans to do so in the future. The expected volatility is based on historical volatility of our common stock.

Our net income for the three months ended March 31, 2007 and 2006 includes approximately $453,000 and $0.9 million, respectively of compensation costs related to share-based payments. As of March 31, 2007 there is $623,000 of unrecognized compensation expense related to non-vested stock option grants. We expect approximately $609,000 to be recognized over the remainder of 2007, approximately $14,000 to be recognized in 2008.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 2 — STOCK-BASED COMPENSATION (Continued)

A summary of our stock option activity and related information as of March 31, 2007 is as follows:

						Weighted				Weighted
		Shares				Average				Average				Aggregate
		Under				Exercise				Contractual				Intrinsic Value
		Option				Price				Life (Years)				(millions)
Balance at beginning of period			1,350,365			$	6.88				—
Granted			—				—				—
Canceled			—				—				—
Exercised			(73,233	)			4.11				—
Outstanding at end of period			1,277,132				7.04				8.14			$	11.13
Exercisable at end of period			1,037,115			$	6.34				8.03			$	9.76

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of our common stock on the last trading day of the first quarter of 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2007. The total intrinsic value of options exercised during the three months ended March 31, 2007 was $987,000. The total cash received from option exercises during the three months ended March 31, 2007 was $301,000.

No options were granted in the three months ended March 31, 2007 and 2006.

Restricted stock awards activity during the three months ended March 31, 2007 were as follows:

						Weighted Average
						Grant-Date Fair Value
		Number of shares				per Share
Nonvested at December 31, 2006			27,000			$	18.30
Granted			13,700				16.16
Vested			—				—
Forfeited			—				—
Nonvested at March 31, 2007			40,700			$	17.58

We determine the fair value of RSAs based on the market price of our common stock on the date of grant. Compensation cost for RSAs is primarily recognized on a straight-line basis over the vesting or service period and is net of forfeitures. As of March 31, 2007, there was $444,000 of total unrecognized compensation cost related to nonvested RSAs. We expect approximately $330,000 to be recognized over the remainder of 2007, approximately $68,000 to be recognized in 2008 and approximately $46,000 to be recognized in 2009.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 3 — INCOME PER COMMON SHARE

We compute income per common share in accordance with the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 requires companies with complex capital structures to present basic and diluted earnings per share. Basic earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible preferred stock, stock options, etc.) as if they had been converted. Potential dilutive common shares that have an anti-dilutive effect (e.g., those that increase income per share) are excluded from diluted earnings per share.

The components of basic and diluted earnings per share are as follows (in thousands, except per share amounts):

		For the Three Months Ended
		March 31,
		2007				2006
Numerator:
Net income		$	12,165			$	4,423
Denominator:
Basic earnings per share — weighted average shares outstanding			32,330				17,105
Effect of potentially dilutive common shares:
Warrants and employee and director stock options			681				2,008
Diluted earnings per share - weighted average shares outstanding and assumed conversions			33,011				19,113
Net income per share — basic		$	0.38			$	0.26
Net income per share — diluted		$	0.37			$	0.23

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible assets are not permitted to be amortized. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or when there is reason to suspect that their values may have been diminished or impaired. Goodwill and indefinite-lived intangible assets listed on the balance sheet totaled $125.9 million and $125.8 million at March 31, 2007 and December 31, 2006, respectively. Based on impairment testing performed during 2006 pursuant to the requirements of SFAS No. 142, these assets were not impaired.

Intangible assets with definite lives continue to be amortized over their estimated useful lives. Definite-lived intangible assets that continue to be amortized under SFAS No. 142 relate to our purchase of customer-related and marketing-related intangibles. These intangibles have useful lives ranging from five to ten years. Amortization of intangible assets for the three months ended March 31, 2007 were $1.0 million, compared to $384,000 for the same period last year. At March 31, 2007, intangible assets totaled $31.8 million, net of $4.1 million of accumulated amortization.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 5 — INVENTORIES

Inventories are comprised of the following (in thousands):

		March 31,				December 31,
		2007				2006
Hammer bits
Finished goods		$	1,839			$	1,476
Work in process			2,129				2,266
Raw materials			3,318				2,638
Total hammer bits			7,286				6,380
Hammers			1,088				1,016
Drive pipe			607				716
Rental supplies			1,828				1,845
Chemicals and drilling fluids			2,702				2,673
Rig parts and related inventory			10,169				9,762
Coiled tubing and related inventory			2,268				1,627
Shop supplies and related inventory			4,492				4,596
Total inventory		$	30,440			$	28,615

NOTE 6 — DEBT

Our long-term debt consists of the following: (in thousands)

		March 31,				December 31,
		2007				2006
Senior notes		$	505,000			$	255,000
Bridge loan			—				300,000
Bank term loans			6,672				7,302
Revolving line of credit			—				—
Seller notes			900				900
Obligations under non-compete agreements			270				270
Notes payable to former directors			32				32
Equipment and vehicle installment notes			2,184				3,502
Insurance premium financing			331				1,025
Capital lease obligations			282				414
Total debt			515,671				568,445
Less: current maturities			5,248				6,999
Long-term debt obligations		$	510,423			$	561,446

Senior notes, bank loans and line of credit agreements

On January 18, 2006 and August 14, 2006, we closed on private offerings, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $160.0 and $95.0 million aggregate principal amount of our senior notes, respectively. The senior notes are due January 15, 2014 and bear interest at 9.0%. The proceeds were used to fund the acquisitions of Specialty Rental Tools, Inc., or Specialty, and DLS Drilling, Logistics & Services Corporation, or DLS, to repay existing debt and for general corporate purposes.

On January 18, 2006, we also executed an amended and restated credit agreement which provides for a $25.0 million revolving line of credit with a maturity of January 2010. Our January 2006 amended and restated credit agreement contains customary events of default and financial covenants and limits our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. Our obligations under the January 2006 amended and restated credit agreement are secured by substantially all of our assets located in the United States.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 6 — DEBT (Continued)

On December 18, 2006, we closed on a $300.0 million senior unsecured bridge loan. The bridge loan was due 18 months after closing and bore a weighted average interest rate of 10.6%. The bridge loan, which was repaid on January 29, 2007, was used to fund the acquisition of substantially all of the assets of Oil & Gas Rental Services, Inc., or OGR.

In January 2007, we closed on a private offering, to qualified institutional buyers pursuant to Rule 144A under the Securities Act, of $250.0 million principal amount of 8.5% senior notes due 2017. The proceeds of the senior notes offering, together with a portion of the proceeds of our concurrent common stock offering, were used to repay the debt outstanding under our $300.0 million bridge loan facility which we incurred to finance our acquisition of substantially all the assets of OGR.

As part of our acquisition of DLS, we assumed various bank loans with floating interest rates based on LIBOR plus a margin and terms ranging from 2 to 5 years. The weighted average interest rates were 6.9% and 7.0% at March 31, 2007 and December 31, 2006, respectively. The bank loans are denominated in U.S. dollars and the outstanding amount due as of March 31, 2007 and December 31, 2006 were $6.7 million and $7.3 million, respectively.

Notes payable

As part of the acquisition of Mountain Compressed Air Inc., or Mountain Air, in 2001, we issued a note to the sellers of Mountain Air in the original amount of $2.2 million accruing interest at a rate of 5.75% per annum. The note was reduced to $1.5 million as a result of the settlement of a legal action against the sellers in 2003. In March 2005, we reached an agreement with the sellers and holders of the note as a result of an action brought against us by the sellers. Under the terms of the agreement, we paid the holders of the note $1.0 million in cash, and agreed to pay an additional $350,000 on June 1, 2006, and an additional $150,000 on June 1, 2007, in settlement of all claims. At March 31, 2007 and December 31, 2006 the outstanding amounts due were $150,000.

In connection with the acquisition of Rogers Oil Tool Services, Inc., or Rogers, we issued to the seller a note in the amount of $750,000. The note bears interest at 5.0% and is due April 3, 2009.

In connection with the purchase of Safco-Oil Field Products, Inc., or Safco, we agreed to pay a total of $150,000 to the sellers in exchange for a non-compete agreement. We are required to make annual payments of $50,000 through September 30, 2007. In connection with the purchase of Capcoil Tubing Services, Inc., or Capcoil, we agreed to pay a total of $500,000 to two management employees in exchange for non-compete agreements. We are required to make annual payments of $110,000 through May 2008. Total amounts due under these non-compete agreements at March 31, 2007 and December 31, 2006 were $270,000.

In 2000 we compensated directors, including current directors Nederlander and Toboroff, who served on the board of directors from 1989 to March 31, 1999 without compensation, by issuing promissory notes totaling $325,000. The notes bore interest at the rate of 5.0%. At March 31, 2007 and December 31, 2006, the principal and accrued interest on these notes totaled approximately $32,000.

Other debt

We have various equipment and vehicle financing loans with interest rates ranging from 5.0% to 8.7% and terms of 2 to 5 years. As of March 31, 2007 and December 31, 2006, the outstanding balances for equipment and vehicle financing loans were $2.2 million and $3.5 million, respectively. In April 2006 and August 2006, we obtained insurance premium financings in the amount of $1.9 million and $896,000 with fixed interest rates of 5.6% and 6.0%, respectively. Under terms of the agreements, amounts outstanding are paid over 10 month and 11 month repayment schedules. The outstanding balance of these notes was approximately $331,000 and $1.0 million as of March 31, 2007 and December 31, 2006, respectively. We also have various capital leases with terms that expire in 2008. As of March 31, 2007 and December 31, 2006, amounts outstanding under capital leases were $282,000 and $414,000, respectively.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 7 — STOCKHOLDERS’ EQUITY

In January 2007 we closed on a public offering of 6.0 million shares of our common stock at a public offering price of $17.65 per share. Net proceeds from the public offering, together with the proceeds of our concurrent senior notes offering, were used to repay the debt outstanding under our $300.0 million bridge loan facility, which we incurred to finance the OGR acquisition and for general corporate purposes.

We also had options and warrants exercised in the first three months of 2007, which resulted in 76,386 shares of our common stock being issued for approximately $301,000. We recognized approximately $453,000 of compensation expense related to stock options in the first three months of 2007 that was recorded as capital in excess of par value (see Note 2).

NOTE 8 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Set forth on the following pages are the condensed consolidating financial statements of (i) Allis-Chalmers Energy Inc., (ii) its subsidiaries that are guarantors of the senior notes and revolving credit facility and (iii) the subsidiaries that are not guarantors of the senior notes and revolving credit facility (in thousands, except for share and per share amounts). Prior to the acquisition of DLS, all of our subsidiaries were guarantors of our senior notes and revolving credit facility, the parent company had no independent assets or operations, the guarantees were full and unconditional and joint and several.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 8 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS
March 31, 2007 (unaudited)

		Allis-Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Assets
Cash and cash equivalents		$	—			$	70,246			$	5,041			$	—			$	75,287
Trade receivables, net			—				78,892				39,131				(428	)			117,595
Inventory			—				14,645				15,795				—				30,440
Intercompany receivables			97,722				—				—				(97,722	)			—
Note receivable from affiliate			6,666				—				—				(6,666	)			—
Prepaid expenses and other			5,703				2,729				889				—				9,321
Total current assets			110,091				166,512				60,856				(104,816	)			232,643
Property and equipment, net			—				430,969				131,982				—				562,951
Goodwill			—				124,331				1,523				—				125,854
Other intangible assets, net			586				31,134				81				—				31,801
Debt issuance costs, net			14,991				—				—				—				14,991
Note receivable from affiliates			11,457				—				—				(11,457	)			—
Investments in affiliates			748,324				—				—				(748,324	)			—
Other assets			10				4,989				21				—				5,020
Total Assets		$	885,459			$	757,935			$	194,463			$	(864,597	)		$	973,260
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	32			$	2,840			$	2,376			$	—			$	5,248
Trade accounts payable			31				14,728				14,266				(1	)			29,024
Accrued salaries, benefits and payroll taxes			—				3,346				8,499				—				11,845
Accrued interest			8,565				—				71				—				8,636
Accrued expenses			101				10,622				8,779				(427	)			19,075
Intercompany payables			—				455,440				—				(455,440	)			—
Note payable to affiliate			—				—				6,666				(6,666	)			—
Total current liabilities			8,729				486,976				40,657				(462,534	)			73,828
Long-term debt, net of current maturities			505,750				377				4,296				—				510,423
Note payable to affiliate			—				—				11,457				(11,457	)			—
Deferred income taxes			3,761				10,713				7,017				—				21,491
Other long-term liabilities			289				299				—				—				588
Total liabilities			518,529				498,365				63,427				(473,991	)			606,330
Commitments and contingencies
Stockholders’ Equity
Common stock			343				3,526				42,963				(46,489	)			343
Capital in excess of par value			316,979				167,508				74,969				(242,477	)			316,979
Retained earnings			49,608				88,536				13,104				(101,640	)			49,608
Total stockholders’ equity			366,930				259,570				131,036				(390,606	)			366,930
Total liabilities and stockholder’s equity		$	885,459			$	757,935			$	194,463			$	(864,597	)		$	973,260

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 8 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING INCOME STATEMENTS
For the Three Months Ended March 31, 2007 (unaudited)

		Allis-Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Revenues		$	—			$	87,029			$	48,888			$	(17	)		$	135,900
Cost of revenues
Direct costs			—				43,035				34,587				(17	)			77,605
Depreciation			—				9,117				2,699				—				11,816
Total cost of revenues			—				52,152				37,286				(17	)			89,421
Gross margin			—				34,877				11,602				—				46,479
General and administrative			418				11,573				1,980				—				13,971
Amortization			462				1,018				8				—				1,488
Income from operations			(880	)			22,286				9,614				—				31,020
Other income (expense):
Equity earnings in affiliates, net of tax			26,122				—				—				(26,122	)			—
Interest, net			(13,089	)			652				(375	)			—				(12,812	)
Other			12				47				125				—				184
Total other income (expense)			13,045				699				(250	)			(26,122	)			(12,628	)
Net income before income taxes			12,165				22,985				9,364				(26,122	)			18,392
Provision for income taxes			—				(3,195	)			(3,032	)			—				(6,227	)
Net income		$	12,165			$	19,790			$	6,332			$	(26,122	)		$	12,165

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 8 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Three Months Ended March 31, 2007 (unaudited)

		Allis-								Other
		Chalmers								Subsidiaries
		(Parent/				Subsidiary				(Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors)				Adjustments				Total
Cash Flows from Operating Activities:
Net income		$	12,165			$	19,790			$	6,332			$	(26,122	)		$	12,165
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			—				9,117				2,699				—				11,816
Amortization			461				1,019				8				—				1,488
Bridge Fees			1,225				—				—				—				1,225
Stock option expense			453				—				—				—				453
Provision for bad debts			—				172				—				—				172
Equity earnings in affiliates			(26,122	)			—				—				26,122				—
Deferred taxes			1,558				(1	)			(19	)			—				1,538
(Gain) on sale of equipment			—				(862	)			—				—				(862	)
Changes in operating assets and liabilities, net of acquisitions:
(Increase) in trade receivables			—				(17,055	)			(4,946	)			—				(22,001	)
(Increase) in inventories			—				(1,451	)			(374	)			—				(1,825	)
(Increase) decrease in other current assets			—				7,685				(370	)			—				7,315
(Increase) decrease in other assets			247				(270	)			(18	)			—				(41	)
Increase in accounts payable			—				1,217				2,141				—				3,358
(Decrease) in accrued interest			(3,190	)			—				(41	)			—				(3,231	)
(Decrease) increase in accrued expenses			(34	)			1,242				916				—				2,124
Increase in accrued salaries, benefits and payroll taxes			—				353				604				—				957
(Decrease) in other long- term liabilities			(15	)			(20	)			—				—				(35	)
Net Cash Provided By (Used In) Operating Activities			(13,252	)			20,936				6,932				—				14,616
Cash Flows from Investing Activities:
Notes receivable from affiliates			(282	)			—				—				282				—
Purchase of property and equipment			—				(19,625	)			(2,720	)			—				(22,345	)
Proceeds from sale of equipment			—				2,698				—				—				2,698
Net Cash Provided By (Used in) Investing Activities			(282	)			(16,927	)			(2,720	)			282				(19,647	)
Cash Flows from Financing Activities:
Proceeds from long-term debt			250,000				—				—				—				250,000
Payments on long-term debt			(300,000	)			(1,362	)			(1,412	)			—				(302,774	)
Accounts receivable from affiliates			(29,813	)			—				—				29,813				—

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 8 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW

		Allis-								Other
		Chalmers								Subsidiaries
		(Parent/				Subsidiary				(Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors)				Adjustments				Total
Cash Flows from Financing Activities: (continued)
Accounts payable to affiliates			—				29,830				(17	)			(29,813	)			—
Note payable to affiliate			—				—				282				(282	)			—
Proceeds from issuance of common stock			100,078				—				—				—				100,078
Proceeds from exercises of options/warrants			301				—				—				—				301
Debt issuance costs			(7,032	)			—								—				(7,032	)
Net Cash Provided By (Used In) Financing Activities			13,534				28,468				(1,147	)			(282	)			40,573
Net change in cash and cash equivalents			—				32,477				3,065				—				35,542
Cash and cash equivalents at beginning of year			—				37,769				1,976				—				39,745
Cash and cash equivalents at end of period		$	—			$	70,246			$	5,041			$	—			$	75,287

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 9 — SEGMENT INFORMATION

At March 31, 2007, we had six operating segments including Rental Services, International Drilling, Directional Drilling, Tubular Services, Underbalanced Drilling and Production Services. All of the segments provide services to the energy industry. The revenues, operating income (loss), depreciation and amortization, capital expenditures and assets of each of the reporting segments, plus the corporate function, are reported below (in thousands):

		For the Three Months Ended
		March 31,
		2007				2006
Revenues
Rental Services		$	31,581			$	10,421
International Drilling			48,888				—
Directional Drilling			20,489				15,937
Tubular Services			14,386				9,459
Underbalanced Drilling			10,555				9,099
Production Services			10,001				2,995
		$	135,900			$	47,911
Operating Income (Loss):
Rental Services		$	13,923			$	4,998
International Drilling			9,614				—
Directional Drilling			4,285				2,605
Tubular Services			3,193				1,851
Underbalanced Drilling			2,611				2,237
Production Services			1,603				277
General corporate			(4,209	)			(3,335	)
		$	31,020			$	8,633
Depreciation and Amortization:
Rental Services		$	6,261			$	1,671
International Drilling			2,707				—
Directional Drilling			465				289
Tubular Services			1,203				699
Underbalanced Drilling			823				684
Production Services			1,297				293
General corporate			548				301
		$	13,304			$	3,937
Capital Expenditures:
Rental Services		$	8,513			$	684
International Drilling			2,720				—
Directional Drilling			4,283				2,698
Tubular Services			2,664				1,127
Underbalanced Drilling			1,458				2,224
Production Services			2,358				681
General corporate			349				172
		$	22,345			$	7,586

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 9 — SEGMENT INFORMATION (Continued)

		As of
		March 31,				December 31,
		2007				2006
Goodwill:
Rental Services		$	106,132			$	106,132
International Drilling			1,523				1,504
Directional Drilling			4,168				4,168
Tubular Services			6,464				6,464
Underbalanced Drilling			3,950				3,950
Production Services			3,617				3,617
General corporate			—				—
		$	125,854			$	125,835
Assets:
Rental Services		$	461,684			$	453,802
International Drilling			194,462				185,677
Directional Drilling			35,562				28,585
Tubular Services			77,247				74,372
Underbalanced Drilling			55,163				54,288
Production Services			61,692				57,954
General corporate			87,450				53,648
		$	973,260			$	908,326
Long Lived Assets:
United States		$	596,243			$	574,302
International			144,374				153,262
		$	740,617			$	727,564

		For the Three Months Ended
		March 31,
		2007				2006
Revenues:
United States		$	84,234			$	45,972
International			51,666				1,939
		$	135,900			$	47,911

NOTE 10 — LEGAL MATTERS

We are named from time to time in legal proceedings related to our activities prior to our bankruptcy in 1988. However, we believe that we were discharged from liability for all such claims in the bankruptcy and believe the likelihood of a material loss relating to any such legal proceeding is remote.

We are also involved in various other legal proceedings in the ordinary course of business. The legal proceedings are at different stages; however, we believe that the likelihood of material loss relating to any such legal proceeding is remote.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — SUBSEQUENT EVENTS

On April 26, 2007, we entered into a Second Amended and Restated Credit Agreement, which increased our revolving line of credit to $62.0 million, and has a final maturity date of April 26, 2012. The amended and restated credit agreement contains customary events of default and financial covenants and limits our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. Our obligations under the amended and restated credit agreement are secured by substantially all of our assets located in the United States.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause such differences include, but are not limited to, the general condition of the oil and natural gas drilling industry, demand for our oil and natural gas service and rental products, and competition. For more information on forward-looking statements please refer to the section entitled“Forward-Looking Statements” on page 27.

Overview of Our Business

We are a multi-faceted oilfield services company that provides services and equipment to oil and natural gas exploration and production companies, domestically in Texas, Louisiana, New Mexico, Colorado, Oklahoma, Mississippi, Utah, Wyoming, Arkansas, Alabama, West Virginia, offshore in the Gulf of Mexico and internationally primarily in Argentina and Mexico. We currently operate in six sectors of the oil and natural gas service industry: Rental Services; International Drilling; Directional Drilling; Tubular Services; Underbalanced Drilling; and Production Services.

We derive operating revenues from rates per day and rates per job that we charge for the labor and equipment required to provide a service and rates per day for equipment and tools that we rent to our customers. The price we charge for our services depends upon several factors, including the level of oil and natural gas drilling activity and the competitive environment in the particular geographic regions in which we operate. Contracts are awarded based on price, quality of service and equipment, and the general reputation and experience of our personnel. The demand for drilling services has historically been volatile and is affected by the capital expenditures of oil and natural gas exploration and development companies, which can fluctuate based upon the prices of oil and natural gas, or the expectation for the prices of oil and natural gas.

The number of working drilling rigs, typically referred to as the “rig count,” is an important indicator of activity levels in the oil and natural gas industry. The rig count in the United States increased from 862 as of December 31, 2002 to 1,747 on April 30, 2007 according to the Baker Hughes rig count. Furthermore, directional and horizontal rig counts increased from 283 as of December 31, 2002 to 740 on April 30, 2007, which accounted for 32.8% and 42.3% of the total U.S. rig count, respectively.

Our cost of revenues represents all direct and indirect costs associated with the operation and maintenance of our equipment. The principal elements of these costs are direct and indirect labor and benefits, repairs and maintenance of our equipment, insurance, equipment rentals, fuel and depreciation. Operating expenses do not fluctuate in direct proportion to changes in revenues because, among other factors, we have a fixed base of inventory of equipment and facilities to support our operations, and in periods of low drilling activity we may also seek to preserve labor continuity to market our services and maintain our equipment.

Cyclical Nature of Equipment Rental and Services Industry

The oilfield services industry is highly cyclical. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for oil and the domestic supply and demand for natural gas. The peaks and valleys of demand are further apart than those of many other cyclical industries. This is primarily a result of the industry being driven by commodity demand and corresponding price increases. As demand increases, producers raise their prices. The price escalation enables producers to increase their capital expenditures. The increased capital expenditures ultimately result in greater revenues and profits for services and equipment companies. The increased capital expenditures also ultimately result in greater production which historically has resulted in increased supplies and reduced prices.

Demand for our services has been strong throughout 2004, 2005, 2006 and 2007, due to high oil and natural gas prices and increased demand and declining production costs for natural gas as compared to other energy sources. Management believes the current market fundamentals are indicative of a favorable long-term trend of activity in our markets. However, these factors could be more than offset by other developments affecting the worldwide supply and demand for oil and natural gas products.

Results of Operations

In December 2006, we acquired substantially all of the assets of Oil & Gas Rental Services, Inc., or OGR. We report the operations of OGR in our Rental Services segment. In April 2006, we acquired all of the outstanding stock of Rogers Oil Tool Services, Inc., or Rogers. We report the operations of Rogers in our Tubular Services segment. In August 2006, we acquired all of the outstanding stock of DLS Drilling, Logistics & Services Corporation, or DLS, and in December 2006, we acquired all of the outstanding stock of Tanus Argentina S.A., or Tanus. We report the operations of DLS and Tanus in our International Drilling segment. In October 2006, we acquired all of the outstanding stock of Petro-Rentals, Incorporated, or Petro Rentals. We report the operations of Petro Rentals in our Production Services segment. We consolidated the results of these acquisitions from the day they were acquired.

The foregoing acquisitions affect the comparability from period to period of our historical results, and our historical results may not be indicative of our future results.

Comparison of Three Months Ended March 31, 2007 and 2006

Our revenues for the three months ended March 31, 2007 were $135.9 million, an increase of 183.7% compared to $47.9 million for the three months ended March 31, 2006. Revenues increased in all of our business segments due to acquisitions completed in 2006, the investment in new capital equipment, increased utilization of our rental equipment, improved pricing and the opening of new operating locations. The most significant increase in revenues was due to the acquisition of DLS on August 14, 2006 which expanded our operations to a sixth operating segment, International Drilling. Revenues also increased significantly at our Rental Services segment due to the OGR acquisition on December 18, 2006 and increased utilization of our rental equipment. Revenues for our Production Services segment increased due to the acquisition of Petro-Rentals on October 17, 2006 and the addition of two coil tubing units in the fourth quarter of 2006. Our Tubular Services segment also had a substantial increase in revenue, primarily due to the acquisition of Rogers as of April 3, 2006, along with improved market conditions. Our Directional Drilling segment revenues increased in the 2007 period compared to the 2006 period due to improved pricing for directional drilling and the purchase of additional down-hole motors and measurement-while-drilling tools, or MWD, tools which increased our capacity and market presence. Revenues increased at our Underbalanced Drilling segment due to the purchase of additional equipment, principally new compressor packages.

Our gross margin for the quarter ended March 31, 2007 increased 180.3% to $46.5 million, or 34.2% of revenues, compared to $16.6 million, or 34.6%, of revenues for the three months ended March 31, 2006. The increase in gross profit is due to the increase in revenues in all of our business segments. The decrease in gross profit as a percentage of revenues is primarily due to the lower gross margin that DLS achieves in the international drilling segment. The lower margin from DLS was partly offset by the acquisition of OGR on December 18, 2006, in the high margin rental services business, increased utilization of our rental equipment and the improved pricing for our services generally. Also, contributing to our gross profit margin was the purchase of additional MWD tools, the acquisition of Rogers and Petro Rentals, and the addition of two coil tubing units in the fourth quarter of 2006. The increase in gross profit was partially offset by an increase in depreciation expense of 254.8% to $11.8 million for the first quarter of 2007 compared to $3.3 million for the first quarter of 2006. The increase is due to additional depreciable assets resulting from the acquisitions and capital expenditures. Our cost of revenues consists principally of our labor costs and benefits, equipment rentals, maintenance and repairs of our equipment, depreciation, insurance and fuel. Because many of our costs are fixed, our gross profit as a percentage of revenues is generally affected by our level of revenues.

General and administrative expense was $14.0 million in the first quarter of 2007 compared to $7.3 million for the first quarter of 2006. General and administrative expense increased due to the additional expenses associated with the acquisitions, and the hiring of additional sales and administrative personnel. General and administrative expense also increased because of increased accounting fees and other expenses in connection with initiatives to strengthen our internal control processes, costs related to Sarbanes Oxley compliance efforts and increased corporate accounting and administrative staff. As a percentage of revenues, general and administrative expenses were 10.3% in the first quarter of 2007 compared to 15.3% in the first quarter of 2006.

We adopted SFAS No. 123R, Share-Based Payment, effective January 1, 2006. This statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant-date fair values. We adopted SFAS No. 123R using the modified prospective transition method, utilizing the Black-Scholes option pricing model for the calculation of the fair value of our employee stock options. Therefore, we recorded an expense of $453,000 and $0.9 million related to stock options for the three months ended March 31, 2007 and 2006, respectively. The amount of option expense recorded in general and administrative expense was $391,000 for the first quarter of 2007 and $859,000 for the first quarter of 2006 with the balance being recorded as a direct cost.

Amortization expense was $1.5 million in the first quarter of 2007 compared to $607,000 in the first quarter of 2006. The increase in amortization expense is due to the amortization of intangible assets in connection with our acquisitions and the amortization of deferred financing costs.

Income from operations for the three months ended March 31, 2007 totaled $31.0 million, a 259.3% increase over income from operations of $8.6 million for the three months ended March 31, 2006, reflecting the increase in our revenues and gross profit, offset in part by increased general and administrative expenses and amortization. Our income from operations as a percentage of revenues increased to 22.8% for the first quarter of 2007 from 18.0% for the first quarter of 2006, due principally to the decrease in general, administrative and amortization expenses as a percentage of revenue.

Our net interest expense was $12.8 million in the first quarter of 2007, compared to $3.6 million for the first quarter of 2006. Interest expense increased in the first quarter of 2007 due to our increased debt at a higher average interest rate. In January of 2007 we issued $250.0 million of senior notes bearing interest at 8.5% to pay off, in part, the bridge loan utilized to complete the OGR acquisition and for working capital. The bridge loan was outstanding until January 29, 2007 and had an average interest rate of 10.6%. In August of 2006 we issued an additional $95.0 million of senior notes bearing interest at 9.0% to fund a portion of the acquisition of DLS. Interest expense for the first quarter of 2007 includes the write-off of deferred financing fees of $1.2 million related to the repayment of the bridge loan.

Our provision for income taxes for the quarter ended March 31, 2007 was $6.2 million, or 33.9% of our net income before income taxes, compared to $607,000, or 12.1% of our net income before income taxes for the three months ended March 31, 2006. The increase in income taxes is attributable to our higher operating income and a higher effective tax rate. The increase in our effective tax rate is primarily attributable to our operations in Argentina which had an effective tax rate of 32.4% and the release of the valuation allowance against income taxes in United States in the fourth quarter of 2006, which has resulted in deferred tax expense.

We had net income of $12.2 million for the first quarter of 2007, an increase of 175.0%, compared to net income of $4.4 million for the first quarter of 2006.

The following table compares revenues and income from operations for each of our business segments and loss of income for general corporate purposes. Income (loss) from operations consists of revenues less cost of revenues, general and administrative expenses, and depreciation and amortization:

		Revenues												Income (Loss) from Operations
		Three Months Ended												Three Months Ended
		March 31,												March 31,
		2007				2006				Change				2007				2006				Change
		(in thousands)
Rental Services		$	31,581			$	10,421			$	21,160			$	13,923			$	4,998			$	8,925
International Drilling			48,888				—				48,888				9,614				—				9,614
Directional Drilling			20,489				15,937				4,552				4,285				2,605				1,680
Tubular Services			14,386				9,459				4,927				3,193				1,851				1,342
Underbalanced Drilling			10,555				9,099				1,456				2,611				2,237				374
Production Services			10,001				2,995				7,006				1,603				277				1,326
General corporate			—				—				—				(4,209	)			(3,335	)			(874	)
Total		$	135,900			$	47,911			$	87,989			$	31,020			$	8,633			$	22,387