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Executives

Jeffrey R. Freedman – Vice President of Investor Relations

Munawar H. Hidayatallah - Chairman and Chief Executive Officer

Victor M. Perez – Chief Financial Officer

Mark C. Patterson – Senior Vice President, Rental Services

Terrance P. Keane – Senior Vice President, Oilfield Services

Analysts

Mike Drickamer - Morgan Keegan & Company, Inc.

Thomas Curry – Wachovia Capital

Adam Leight — RBC Capital Markets

Waqar Syed - Tristone Capital

Victor Marchon - RBC Capital Markets

Maryana Kushnir — Nomura Asset Management

{Ed Doing] - Howie Capital Management

Steve Ferazani - Sidoti & Company

Allis-Chalmers Energy Inc. (ALY) Q2 2008 Earnings Call August 4, 2008 10:00 AM ET

Operator

Welcome to the Allis-Chalmers second quarter 2008 earnings conference call. (Operator Instructions) I will now turn the call over to Jeffrey Freedman.

Jeffrey R. Freedman

This is the second quarter 2008 earnings conference call for Allis-Chalmers. With me is Micki Hidayatallah, Chairman, Chief Executive Officer, and Vic Perez, CFO. We have several of our operating people as well that Vic will introduce at the subsequent Q&A session. As customary, we will have comments by Micki followed by a financial review presented by Vic Perez and during this discussion, as you well know, we will be discussing Allis-Chalmers’ oil field rental related business and our financial conditions. We will also be commenting about events and trends in Argentina and these statements that we make are forward-looking in nature. They reflect our best judgment at this time but there are always risks and uncertainties from these forward-looking statements and all of the risks relating to our outlook and business can be found in our SEC filings and other publicly available documents.

Munawar H. Hidayatallah

Allis-Chalmers and the management are extremely pleased with our performance in the second quarter with the sequential increase of 30.4% in earnings per share and a 31% increase in net income. However, the real achievement is the growth in each segment of our operations in spite of the challenges we faced.

The second quarter is a reflection on the solid foundation that we have created for increasing revenues, profits, and margins in the last six months of the year, but most importantly, in 2009, when we will maximize the benefits of both our capital expenditures and our strategic initiatives. In our oil field service segment, operating earnings from continuing operations actually increased from $11.7 million to $13.1 million in the quarter compared with the same period in 2007 when you exclude the non-recurring $8.9 million gain last year. The last six months of the year and 2009 should reflect dramatic growth in both revenues and EBITDA as we seek capacity utilization increase from our four units, casing running tubes, and coil tubing units. Costs will be reduced as training and start up incurrences will be reduced. We will also decrease and we believe there will be improved pricing.

In the first half of the year, we established a presence in the Marsalis, Fayetteville and Woodford shales. We are excited about our prospects to increase market share and build relationships in the Bakken and Haynesville shales where we have an opportunity to enter into a strategic alliance for all our services. We will also receive an additional 5 CT units, coil tubing units, in the second half of 2008.

Our strategic initiatives in the rental segment have also proved to be successful. We have had a management change and today we have a new team in the positions of President of the segment, a new Operations Manager, and a new Quality Assurance manager. We also have a new Sales and Marketing manager. With this changed management team, we established a strategic initiative to re-deploy our tools and change our revenue mix to 40% domestic land, 40% domestic offshore, and 20% international. In the second quarter, operating income increased sequentially over the first quarter by 49% and we shipped pipe to Libya under 300 day con tract, increased our revenues from rentals in Mexico, and our shipping tools to Columbia in the third quarter for eco petrol under a joint venture. In addition to this, we are in discussions to rent landing rigs under two separate contracts for the deep offshore Gulf of Mexico market.

In the first half of the year, our drilling and completion segment faced real challenges in Argentina, with strikes, road blockades, and work slowdowns. In addition to this, stringent price controls on natural gas and crude oil, together with increased costs, limited pricing flexibility affected our operations. At the end of the second quarter and beginning in the third quarter, we will be operating 16 workover rigs and two drilling rigs with Pan American under our strategic alliance. We expect these rigs to operate at 90% utilization with increased rates in pricing now that the government has announced a 30% increase for the power and electricity providers.

In our joint venture in Brazil, we have 5 drilling rigs working under contract with Petrobras and a workover rig that is working under day rates for the independence in Brazil. We believe Brazil continues to represent a tremendous opportunity in 2009 for all our services with specific emphasis on rental of drill pipe and VOPs.

I do want to take a moment to discuss the current situation on the acquisition of Bronco Drilling. I once stated that I would not unilaterally increase my offer for Bronco without a competing bid. I guess I was wrong because I did increase my offer unilaterally without a competing bid and subsequent to my increased offer, the price of natural gas has declined more than 25%. I am further frustrated because of the public filings by Wexford Capital and its affiliates that projects a 2009 EBITDA and guarantees a stop price for Bronco as a standalone entity. Wexford’s projections are unilateral and do not compare value to a combination and the resulting EBITDA or the value to Bronco shareholders after the merger has been completed. We believe as well, as does Bronco’s board and management, that has recommended the transaction, that value appreciation for Bronco shareholders is best served through a combination with Allis-Chalmers.

The Bronco board continues to recommend the transaction and in its recommendation stands in the face of the crystal ball gazing and encouragement to the Bronco board to withdraw their recommendation. Wexford previously sold its stock at well below $25 and if they still believe that there is this much value in the stock I am certain they can make a competing bid. Please keep in mind there are 2,000 land rigs operating in the United States and we will continue to pursue opportunities as we execute our strategic initiative of drilling and completion operation in the domestic United States.

Allis-Chalmers had a vision. We have stayed true to a strategic plan of growth. We have been supported by a great group of stakeholders and we will continue to successfully execute our strategic initiatives. We have recently ordered 4 land drilling rigs for the Haynesville shale under a proposed strategic alliance and we will have drilling operation in the United States in 2009. Our commitment to these new generation highly mobile electrical 1100 horsepower to 1600 horsepower drilling terms our commitment in monetary terms exceeds $62 million.

With that, I am going to hand over to Vic Perez for a financial review.

Victor M. Perez

As Micki has stated, we continue to make progress across the board in the second quarter. Progress in the old drill services segment was upheld by the strong growth in the directional and underbalanced drilling operations. On the directional side, we saw the benefit of several small acquisitions made in the second half of 2007 for directional and in our underbalanced operations we saw the benefit of the additional foam units received late last year, as well as the growth in market penetration in Oklahoma, Arkansas, and the Northeast. As Micki mentioned, we received late in the second quarter our first of 6 coil tubing units. The balance will be received in September through November of this year. Our tubular services operations received over the course of the second quarter albeit late its casing running tools which are now working both domestically and in Mexico and we will see the benefit of those casing running tools in a bigger way in the third and fourth quarter and of course the full benefit in 2009. As Micki mentioned, revenues and operating income were up and our rental services segment as a result of the new focus on the land market as well as the international and also the result of strategic initiives and changes that we undertook in the first quarter.

In our drilling and completion segment, we’ve already touched on the challenges that segment has met over the last several months. We did take delivery of 8 service rigs or workover rigs in the first quarter, 2 in the second quarter, and then the balance of the 6 service rigs will be delivered in the third quarter of this year, and the first drilling rig started working in July as part of that order. We have received price increases in Argentina but are working further to increase prices in the future.

In terms of our balance sheet, our borrowings under our revolving credit, a $90 million credit agreement worth $10 million at quarter end, we have about $7 million in letters of credit giving us $73 million in availability under our corporate revolver at quarter end. In Argentina we also have a $25 million unsecured facility that we use to assist in the funding of the new rigs. We had $17.9 million of the $25 million drawn at quarter end with $7.1 million available. We had $13 million drawn as of the first quarter.

The capital expenditures for the first half of the year were approximately $75 million and you would expect a similar number in the last half of the year and with the heaviest period being in the third quarter and this is primarily as a result of the delivery during late in the third quarter/early fourth quarter of the additional tubing units as well as the payment of the service rigs in Argentina for the workover rigs.

As you will notice in this press release, we did not update our guidance. We are comfortable with the full year consensus of which I believe is at $1.34 for 2008. We’re not updating our guidance. We’re comfortable with that consensus. We would expect, however, that because of the timing of our CapEx in the third quarter that this proportion of growth in our earnings per share will take place in the fourth quarter and of course into 2009 versus I’d say the third quarter of this year and later in the fourth quarter as well as in 2009 we expect to see the full benefit of our capital expenditure program from last year and this year as well as the strategic initiatives that Micki has outlined to benefit us more fully in 2009.

At this point I think we’ll open it up for questions. We also have on the line with us Mark Patterson who is head of our rental services segment as well as Terry Keane who is head of our oilfield services segment.

Munawar H. Hidayatallah

Just before we open it up for questions, I just want to say that as we started this conference call I have received a message that Allis-Chalmers Energy has been pre-qualified to bid on [Kendas] with Aramco. It is our intention to enter into a joint venture memorandum of understanding with [Rawabi] Trading in [Al Sobarge] Saudi Arabia within the next several days. This is after a great deal of effort by Anwar Hussain, our Vice President of International Development, Mark Patterson, our President of the rental segment, and Scott Keller, who is Manager of International Operations. With that, we open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Drickamer from Morgan Keegan.

Mike Drickamer - Morgan Keegan & Company, Inc.

Micki, you guys have been busy here. Rigs in Haynesville and now JV in Saudi Arabia. Can you just talk a little bit more about these rigs in Haynesville? You said 4 rigs costing more than $62 million. When do you expect them to be delivered in 2009? Is this early 2009, late 2009? And then what can we put down for financial impact here?

Munawar H. Hidayatallah

{Beosa] which is owned by the Bulgheroni family has acquired acreage in Haynesville and are continuing their programs in the Cotton Valley. We have ordered 4 rigs and will enter into a strategic alliance with {Beosa]. We will provide them directional drilling services, casing and tubing installation, as well as underbalanced drilling where required. The two 1100 horsepower rigs are currently are under manufacture at Stewart and Stevenson in Calgary. These will be delivered to us in probably the late third quarter. These are 1100 horsepower electrical rigs with 1500 horsepower grow works. The other two have recently been ordered and will be delivered in the second quarter and third quarter of 2009. The impact obviously for us, we believe that over the long run this drilling program will actually go on for 5 to 10 years and will provide us with again as per our strategic alliance with Pan American will provide us with predictable, stable cash flow and will give us the stability to grow in our business, specifically this part of it, so the impact will be again, we have not outlined the terms of the strategic alliance. We don’t know the exact details, but obviously it will be at market rates, maybe with a slight discount with inflation factors built in over a period for pricing increases as well as some pricing increase linked to the price of both natural gas and crude oil. We’re not trying to be vague. The reason is we ordered these rigs early because there won’t be delivery for as you know the manufacturing cycles are fairly long and we just placed the orders and the terms of the strategic alliance are being discussed as we speak.

Mike Drickamer - Morgan Keegan & Company, Inc.

Okay, and once you have the terms of the strategic alliance you’ll be able to tell us perhaps what the contract terms are, the duration, and everything for these rigs?

Munawar H. Hidayatallah

Absolutely.

Mike Drickamer - Morgan Keegan & Company, Inc.

Okay, and now in the Saudi Arabian JV, you announced you planned to form a JV, but that’s just to bid on work there. You’re not saying you actually have this work yet, correct?

Munawar H. Hidayatallah

No. The reason I was extremely gratified by this was that it can take you up to a year and a half to two years to pre-qualify and to find the best partner in Saudi Arabia. As you know, we did not start executing on this strategic initiative until early this year when Mark took over which was mid-February and I asked Anwar to begin to concentrate, together with Scott, in developing the international marketplace. I stated earlier we want at least 20% of our rental revenues to be derived from international. In addition to this, we are pre-qualified for all our other services with Aramco. I do not know if Anwar is on the line but I know Mark is. Mark, would you like to add to that?

Mark C. Patterson

Yes, actually we submitted the pre-qualification packet back in March or April and we have just been notified of the qualification and yes, as Micki spoke, we will be entering into a joint venture with our partner in the Middle East and then we will be taking the tender offers and be bidding on those with those other rental services providers that operate in the region.

Mike Drickamer - Morgan Keegan & Company, Inc.

Okay. Micki, one more. You addressed the Bronco issue already. I wanted to ask it from a different angle though. Given the earnings miss we saw this morning at Bronco, and specifically the issues that came up at Challenger, do you still think it is the best interest for Allis-Chalmers shareholders now?

Munawar H. Hidayatallah

I have signed and executed a Sale Purchase Agreement. It is my intention going into the future to act in the best interests of the Allis-Chalmers shareholder, but also to continue to keep my commitments to both Allis-Chalmers and Bronco shareholders. We believe that with our relationships and our understanding of the cultures in the Middle East as well as close cooperation with Frank Harrison that in the long term Libya could be a tremendous opportunity but as in Argentina, these countries have a different labor base, a different tax structure, a different cultural environment, and to be successful you have to have a long term strategic vision, so my answer is we will continue to do everything possible to close the transaction under the terms of agreement that both Board of Directors have recommended.

Mike Drickamer - Morgan Keegan & Company, Inc.

That’s it for me, guys. Thanks a lot.

Operator

Your next question comes from Thomas Curry from Wachovia Capital.

Thomas Curry – Wachovia Capital

Vic and/or Micki, I just wanted to first try to reconcile the fact that you’ve left your ’08 guidance unchanged but are expecting two of the four Haynesville rigs to commence operations before year end. Are you implying that the earnings contributions from these rigs will be offset somewhere else, and if so, where, or are you simply excluding them for the time being from the guidance?

Munawar H. Hidayatallah

Let me answer the first half and I’ll let Vic answer the second which is the statement about the second half of the year. On the first half, what I said was that the rigs will be delivered late in the third quarter/early in the fourth quarter. Obviously there will be developmental work that has to be done in the acreage. We have to test these rigs once they are rigged up, and that process could take you well into the fourth quarter, so the full benefits of even the delivery of the first two rigs will be in 2009 and the benefit of all four rigs will be in the last half or the fourth quarter of 2009. Having said that, I’m going to ask Vic to give you more specifics about rest of the year guidance.

Victor M. Perez

Just to be clear, the reason these rigs, the two of them, are available so quickly I guess being delivered in ’08 or late ’08 is because these are two rigs that were originally allocated, if you will, and included in our capital expenditure for Argentina. So there is some benefit that’s in our projections from those rigs already, not much, but some benefit in the fourth quarter of this year. Then the other comment I made was that we’re comfortable with our consensus for the year but we would expect that would be a more gradual increase in EPS third to fourth quarter was a disproportionate amount coming in the fourth quarter and that’s because of the timing of our capital expenditures. I think you can appreciate for example that the coil tubing units for the oil field services segment are going to largely benefit the fourth quarter being delivered between September and November time frame as well as having more time with the new casing running tools as well as the fact that we’re taking delivery of 6 service rigs in Argentina throughout the course of the third quarter, so more heavily weighted towards the fourth quarter as opposed to the third.

Thomas Curry – Wachovia Capital

That makes sense. Thanks for that color, guys, and then with regards to these rigs, they will be folded into the oilfield services division, correct?

Munawar H. Hidayatallah

No, they will be under our drilling and completion division DLS.

Thomas Curry – Wachovia Capital

Okay, but would the services associated with --

Munawar H. Hidayatallah

Would be under oilfield services as well as rental.

Thomas Curry – Wachovia Capital

Okay, so it will be split by division. Gotcha and turning to the new rental services JV in Saudi Arabia and I guess this in turn would be for Micki and/or Mark, two questions there. First, my understanding is that the JV you were working on was expected to result in a joint investment in a new operating facility that was ultimately expected to arrival your Morgan City core facility. Is this that agreement? Will it lead to that kind of investment? And if so, when would that investment be expected to start and how much would it be expected to run and then how much would it be expected to run is the first question, and then the second is I thought as part of these JV negotiations you were working with another public oilfield services company and I’m just wondering if that understanding was correct and if so, at some point will there be another public oilfield services company as a partner there?

Munawar H. Hidayatallah

I’m going to address that Mark, and then you can add to it. Number one, we have no official agreement with any publicly created US oilfield services company. We have leveraged off relationships that we have in the United States with members of various companies. The second part of your question is correct. It is our intention to under a memorandum of understanding to create a new entity that will be registered in Saudi Arabia and that will perform all our services as and when we are winners in any tender that is issued in Saudi Arabia specifically for Saudi Aramco. Mark, do you want to add to that?

Mark C. Patterson

The only thing I would add there, Micki, would be that yes, as we will be through this joint venture, through this partnership with our Saudi partners, we will be creating a facility in the Middle East, in Saudi Arabia, specifically should the JV come about as Micki has stated through the Letter of Memorandum. Then, at that point in time, we will start to acquire and move equipment into the area with rental being the lead for that equipment because that’s the easiest movement and entry into Aramco’s business from a tender offer and a tender acquiring standpoint, so at that point in time, we will move equipment in and start doing business on the ground with Aramco in Saudi Arabia, and yes, that should be... Most of those tenders can be anywhere from 3 to 6 years initially and that’s what our desire is, to acquire one of those and move in there and become a full-fledged rental tool provider as well as all of our services ultimately for many years to come.

Thomas Curry – Wachovia Capital

And Mark, if things were to go as smoothly and as fast as possible, when is the earliest that we would expect this to start to have an impact on earnings?

Mark C. Patterson

I had hoped to be able to in the second quarter of next year but that was prior to, quite frankly, the Haynesville shale play becoming such a viable entity now in the States as well as the Marsalis over the last several months and the orders for equipment that have gone out to our vendors on our buyer competition as well as us for domestic involvement along with international. There’s not as many providers as there once were and not to mention the fact that steel processes are where they are and so there’s been a delay in the slotting of equipment in regards to what we had hoped. So it’s all dependent on the tenders and when we can secure the equipment and of course Aramco is very much aware of those issues as well, so the sooner they get the tenders out and we’re specifically hoping for one very shortly so that we can quote on it, and if we’re successful in acquiring that program, then we’ll place an order and as soon as we can get the equipment on the ground then we’ll start that process, so it’s certainly been delayed. I think now past the second quarter but that’s not to say that there might be something in the meantime that we actually have in our possession that we can put to rent as well.

Jeffrey R. Freedman

Tom, this is Jeff. I just wanted to elaborate on what Micki had noted earlier about how long it takes for the process of pre-qualification in a number of these foreign countries. There have been numerous visits by our people to Saudi. There have been visits from the Saudi officials to review our quality assurance control practices, our equipment, our inventory. So this has been going on as you know for a number of months and as Micki noted, the final agreements that govern these businesses and investments will be processed over the next several months hopefully or sooner.

Thomas Curry – Wachovia Capital

Okay, thanks guys, that’s a nice overview. Lastly, looking to ’09 for the Argentine land fleet, based on your experience thus far in terms of the success you’ve had with recovering your union labor cost hits, as well as where you see your pricing power headed, what realistically should we expect with regards to margin recovery?

Munawar H. Hidayatallah

The background, as you know, has been that our customers have had real price controls, natural gas at $1.90 at MCF, a barrel of crude oil at $42.00, and with the election of the new government, there has not been an opportunity for the government to really pursue an energy policy because they’ve been very involved with the tax retention on agriculture. The recent announcement that the government has agreed to increase electricity and power to its customers by about 30% makes us believe that there will be some easing on the prices that are under [inaudible] for natural gas and crude oil. With this, our pricing flexibility should increase because there has been excessive inflation, we believe above the 8% or 9% rate that has come out by the government and I think that next year we will set a gross margin target of approximately 32%. Now that is still below comparisons in the United States but we think that with the easing of price controls, the increased capacity utilization, the reduction in our labor training costs because we have hired 500 new operators to work on the workover rigs and drilling rigs that are going there, and this has not been a productive cost but has impacted our expense statement. With all this, we expect our gross margin to go up to 32% in 2009.

Thomas Curry – Wachovia Capital

Would you expect the EBIT margin to be associated with that?

Munawar H. Hidayatallah

Well again, you know, you heard all the caveats but absolutely because our SG&A costs are fairly fixed. In addition to this, I have made an offer to an individual to strengthen our current management team at DLS and he would be Manager of Human Resources, Safety, and Government Relationships, and we think we’re looking forward to his joining the team so that our union relationships can be improved and we can be more effective in meeting demands before work stoppages and strikes.

Jeffrey R. Freedman

Remember now, we’re also training and mobilizing a number of people for this new 16 service rig and two drilling rig program so those costs are currently being incurred. I’m going to ask everyone in the interest please just to ask one question. We’re going to continue, Operator, with the sequencing. Thank you. Tom. We’re going to move ahead, Operator, with the next question.

Operator

Your next question comes from Adam Leight from RBC Capital Markets.

Adam Leight - RBC Capital Markets

Could you clarify with the Haynesville rigs, how many rigs end up drilling rigs in Argentina, is this a shift or an additional, and then if there’s incremental CapEx this year related to those.

Munawar H. Hidayatallah

I think what Vic was saying was you’re asking about two effects of what I have discussed for Haynesville. Number one, the effect on income and what Vic was saying was that these rigs are reflected currently in our projections because they were going to be operating towards the tail end of the year in Argentina. I think that we will get better rates in Haynesville and there will be some improvement but I don’t think in 2008 you’re going to see any benefit. These two rigs are already in our capital expenditure budget for the year because obviously we had ordered them late last year. In addition to this, the two additional rigs we have booked the slots for 20% as a down payment, and basically will not get delivery of these rigs until next year. Eventually, and again, this is an estimate, in my mind we will be operating by 2010 or earlier dependent on delivery, somewhere around 5 to 10 drilling rigs for {Beosa] in the Cotton Valley as well as the Haynesville shale.

Adam Leight - RBC Capital Markets

And does that affect how many drilling rigs are going into Argentina?

Munawar H. Hidayatallah

Just two. The two 1100 horsepower are the only rigs we’ve made the change to. The 1600 workover rigs and two 750 horsepower rigs, the one mechanical has been delivered, the 1600 workover rigs have been delivered, and the one 750 horsepower electrical rig should be delivered late in the third quarter, September or October .

Adam Leight - RBC Capital Markets

And then can you quantify --

Jeffrey R. Freedman

We’re going to limit it to one follow up question, please. Thank you for your consideration on this. Next question, Operator.

Operator

Your next question comes from Waqar Syed from Tristone Capital.

Waqar Syed - Tristone Capital

Micki, just under the oilfield services segment, you have different business units that fall in there, could you just provide on a sequential basis the different sub-segments, what kind of growth you saw in them sequentially between first quarter and second quarter, and what are the pricing trends for each of the sub-segments.

Munawar H. Hidayatallah

If it’s okay with you, I’m going to refer that question to a combination of Terry Keane and Vic Perez.

Victor M. Perez

Terry, do you want to take a stab at that in terms of just general trends and pricing among the various product line segments within the oilfield?

Terrance P. Keane

With regards to the different types of businesses that we have in oilfield services which include directional drilling, underbalance services, tubular services, and production services. Our pricing from first quarter to second quarter has basically been flat. We have no seen any improvement in pricing overall. We have worked towards small increases in pricing in various ways, within directional drilling, within underbalance services, and particularly associated with travel transportation costs, fuel surcharges, anything extra that we can get for personnel day rates, and we have been successful to a certain extent with that, but basically the overall pricing in the businesses that we’re associated with has been pretty much flat for the first half of the year.

Victor M. Perez

And I would say, just to add to that, that because of different things going on in each of the service lines, we would expect increases in oilfield services contribution, for example, due to the having a full quarter of the casing running tools, having more coil tubing units, and also better performance from our product ion services operating line and continued growth in Mexico which we see significant growth going on there, that impacts our tubular services, that business that we’ve always had with Mexico, and we’re sending additional tools for some offshore contacts in Mexico as well as the directional drilling market where now about half of all wells or half of the rig count is basically directional and horizontal and we’re a pretty significant participant in that market, will continue to benefit us, as well as the fact that we are making increased penetration in some of these new shale plays.

Operator

Your next question comes from Victor Marchon from RBC.

Victor Marchon - RBC Capital Markets

The first question I have is just on Argentina. Micki, I wonder if you could just outline for us the impact in the second quarter and everything as relates to the strikes and such, is that all behind you in the third quarter?

Munawar H. Hidayatallah

Yes. Let me say in the second quarter we faced a number of issues. Number one, there was, as you know, road blockades as a result of this agricultural retention tax and these road blockades affected our ability to move rigs which again meant rigs were on standby. In addition to that, there was a construction builder’s strike, there was also in the Neuquen region a strike by tool pushers. This was about 10 days. There we operate for both [YPS Reptchol, Apache], as well as Pan American and then in the Comodoro area we had a strike by supervisors in the area. But these strikes were in addition to the training expense of 500 new operators that we had taken on. These operators basically were not only going to training school and safety school but also were working side by side with experienced hands to learn the business on the rig floor, so the lasting productivity of our existing trainers, the increase in establishment of a training school and a safety school, the impact of the strikes, as well as the high inflation that took place in the gray market or gray areas rather than the official inflation given by the government, affected us in our formula and footage pricing. We are working on all aspects of this. Our training and start up costs will be behind us because 16 workover rigs will operate in the third quarter together with one partially mechanical 750 horsepower rig so we will see the benefits of our training and safety come into play. In addition to that, even though circumstances have been difficult in Argentina, we believe that with the Senate vote against the agricultural retention tax, the political atmosphere has been good. As the government settles down and begins to focus on an energy policy as well as our investment in the human resources and safety personnel, we believe that in 2009 you are going to see the full benefit of all our rigs. We think there is going to be pricing flexibility and a more stable political environment. We expect in the last quarter and you know, Victor, some of these expenses are very hard to actually pinpoint like the supervisor slowdown in the Comodoro area, they were working two shifts 8 hours a day instead of two 12 hours shifts and the startup and shutdown expenses are sort of intangible expenses, but I would say that the total effect of this could have been as much as $2 million in the quarter to the EBITDA line.

Victor Marchon - RBC Capital Markets

Great, thank you for that, and the second one I just had was just a follow up to the pricing question regarding the oilfield services flat sequentially in the second quarter and looking out to the second half of this year, would it be a fair assumption or fair estimates to basically a base case of flat pricing in the second half of this year, or do you expect if rig activity continues to improve that you’ll be able to get some pricing power back?

Terrance P. Keane

I think if the trends continue with the increased activity in the shale plays and overall rig count continues to inch up, there will be some opportunities for some modest increase in prices with our various product lines.

Victor Marchon - RBC Capital Markets

And that would be enough to offset what you’re seeing on the cost side?

Terrance P. Keane

Yes, I think so, and as Vic alluded to, we’ve done a lot in the first half of the year to optimize our operations to be able to add earnings, particularly in the underbalanced product lines with an alternate supplier for our diamond enhanced inserts that are used on our bits. We have increased our margins on that product line considerably. With the addition of the coil tubing units to our fleet, the fixed part of our costs are being spread over a much larger operation and our profitability in coil tubing was up significantly in June and that will also be true in July. Our revenue base is increasing significantly, so with our casing running tools and putting those into service in the second half of this year, we actually go from a 5 man crew on a job to a 1 or 2 man crew on a job, so our profitability in casing running operations will increase significantly. So we’re addressing the cost side of the equation just as much as the pricing side of the equation. We’re doing everything we can but we’re doing a lot on the cost side too.

Victor Marchon - RBC Capital Markets

That’s all I had. Thank you.

Operator

Your next question comes from Maryana Kushnir from Nomura Asset Management.

Maryana Kushnir — Nomura Asset Management

I was wondering regarding Challenger at Bronco, there was a discussion that they are in the process of getting financing and I was wondering if that financing is going to be recourse or non-recourse to the [inaudible], whether there are plans to provide any guarantees fro Bronco to Challenger and therefore if the transaction closes whether Allis-Chalmers would assume those guarantees that they have provided.

Munawar H. Hidayatallah

Unfortunately I personally have not been privy to any discussions between Challenger, the bankers, and Bronco, so I do not have an understanding of the amount or the conditions of such financing. I’m going to refer the question to Vic if he can add anything to that.

Victor M. Perez

We’re not involved directly on that, as Micki said. I do believe that there will not be any specific corporate guarantees downstream, but again, we’re not involved in that directly and we’re not familiar with the specific terms at this time.

Maryana Kushnir — Nomura Asset Management

Okay. Thank you.

Operator

Your next question comes from {Ed Doing] from Howie Capital.

{Ed Doing] - Howie Capital Management

My question is regarding the proposed [inaudible] bond offering. In the event you don’t complete the merger with Bronco, what do you intend to do with the use of proceeds?

Victor M. Perez

We will not close on the bond offering if we don’t close on the Bronco acquisition.

{Ed Doing] - Howie Capital Management

Okay, so it’s basically contingent upon closing of the transaction?

Victor M. Perez

Yes.

{Ed Doing] - Howie Capital Management

And my follow up question is regarding Micki’s earlier comment. He alluded to other drilling companies out there. Would you be entertaining other possible acquisitions in that area if Bronco were to fall through?

Munawar H. Hidayatallah

What I also referred to was that Allis-Chalmers has made a commitment to enter into the drilling and completion market with drilling rigs and workover rigs in the United States. If you see the history of our company and the growth, we have always stayed true to our strategic vision and will continue to execute within that. We have not identified or looked beyond Bronco at this stage.

{Ed Doing] - Howie Capital Management

Okay, thank you.

Jeffrey R. Freedman

Operator, in the interest of time, let’s take one more question and then we will end this call officially and then you can call offline later for other insights and supplemental information. One last question then, Operator please.

Operator

Your last question comes from Steve Ferazani from Sidoti and Company.

Steve Ferazani - Sidoti & Company

Given the significant sequential growth in the rental tool segment, is your increased exposure on the US land side going to see any pricing power there, margin improvement? What’s your take right now with the rental tools?

Munawar H. Hidayatallah

Mark, pricing flexibility and rental tools US land please.

Mark C. Patterson

We have over the last month attempted to firm up some pricing in this segment and we’ve had some success already in that, very, very limited. It’s all contingent of course on our competition as well and we react and we were actually trying to lead out in a little bit of price strengthening as we’ve done in the past. We’re trying to lead in that area, but we will be very, very aware of what our competition is doing and making sure that we don’t leave any money on the table as we bid but also not try to lead out in the competitive pricing marketplace but more stay along the lines of our competition and try to make as much profit as we can for every job that we ship, and I believe that in the second half of the year we will see some better pricing overall just because I think the rig activity specifically will warrant that.

Steve Ferazani - Sidoti & Company

Follow up would just be head count with the directional drillers, where is it today, and will it be up by the end of the year?

Munawar H. Hidayatallah

As far as I know in our last carry to expand on it but there are 101 directional drillers with access to approximately 9 contract drillers and we have today a 40 job capability. We are also in the process of a very aggressive training program for both MWD operators as well as directional drillers. With this training we will have the highest skilled operators that will work within the culture and the environment that we have established as starter. Terry?

Terrance P. Keane

All that is correct, Micki. The one thing that I would add, we probably have access to more like 30 or 35 contract direct ional drillers if we do have peaks in activity and which we need to go as high as 130 or 140 actual working people.

Steve Ferazani - Sidoti & Company

Great, thank you.

Munawar H. Hidayatallah

With that, I’m going to say goodbye. I have to go on the road and just want to say that we will continue to pursue the strategic combination between Bronco Drilling and ourselves and we’ll hope that both sets of stockholders make the right decision. Thank you.

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Source: Allis-Chalmers Energy Inc. Q2 2008 Earnings Call Transcript

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