This management's discussion and analysis of financial condition and results of operations ("MD&A") section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and capital resources, and certain factors that may affect our future results, including economic and industry-wide factors. You should read this MD&A in conjunction with our condensed financial statements and accompanying notes included under Part I, Item 1, of this Quarterly Report, as well as with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Statements we make in the following MD&A discussion and in other parts of this report that express a belief, expectation or intention, as well as those which are not historical fact, are forward-looking statements within the meaning of the federal securities laws and are subject to risks, uncertainties and assumptions. These forward-looking statements may be identified by the use of words such as "expect," "anticipate," "believe," "estimate," "potential" or similar words. These matters include statements concerning management's plans and objectives relating to our operations or economic performance and related assumptions, including general economic and business conditions and industry trends, the continued strength or weakness of the contract land drilling industry in the geographic areas in which we operate, decisions about onshore exploration and development projects to be made by oil and gas companies, the highly competitive nature of our business, our future financial performance, including availability, terms and deployment of capital, the continued availability of qualified personnel, and changes in, or our failure or inability to comply with, government regulations, including those relating to workplace safety and the environment. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Further, we specifically disclaim any duty to update any of the information set forth in this report, including any forward-looking statements. Forward-looking statements are made based on management's current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part II. Item 1A, "Risk Factors," below. Management cautions that forward-looking statements are not guarantees, and our actual results could differ materially from those expressed or implied in the forward-looking statements.

Company Overview

Union Drilling, Inc. ("Union Drilling," "Company" or "we") provides contract land drilling services and equipment, primarily to oil and natural gas producers in the United States. In addition to drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs.

On September 24, 2012, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sidewinder Drilling Inc. ("Sidewinder") and Fastball Acquisition Inc. ("Fastball"), a wholly-owned subsidiary of Sidewinder, under which Sidewinder will acquire all of the Company's outstanding shares of common stock for $6.50 per share. See Note 1 "Business and Basis of Presentation" of the unaudited condensed financial statements for further information.

Key Indicators of Financial Performance for Management

Key performance measurements in our industry are rig utilization, revenue per revenue day and operating expenses per revenue day. Revenue days for each rig are days when the rig is earning revenues under a contract, which is usually a period from the date the rig begins moving to the drilling location until the rig is released from the contract. We compute rig utilization rates by dividing revenue days by total available days during a period. Total available days are the number of calendar days during the period that we have owned and marketed the drilling rig.

The following table summarizes management's key indicators of financial performance.

                                         Three Months Ended           Nine Months Ended
                                            September 30,               September 30,
                                         2012           2011          2012          2011
  Revenue days                             3,335         3,868        10,429        10,847
  Average number of marketed rigs           50.3          70.8          50.0          70.9
  Marketed rig utilization rates            72.0 %        59.4 %        76.4 %        56.0 %
  Revenue per revenue day              $  19,179      $ 17,255      $ 18,859      $ 16,840
  Operating expenses per revenue day   $  12,606      $ 11,754      $ 13,215      $ 12,165
  Drilling margin per revenue day      $   6,573      $  5,501      $  5,644      $  4,675
  EBITDA (in thousands)                $  13,755      $ 14,745      $ 36,876      $ 30,268

Our business is substantially dependent on and affected by the level of U.S. land-based oil and natural gas exploration and development activity. Since the global economic crisis in 2008, oil prices have rebounded while natural gas prices have not. Since that time, we experienced improvement in our marketed rig utilization rates as well as improvement in our revenue per revenue day due to upgrades in our drilling fleet, and a shift to oil drilling. Our operating expenses per revenue day have also increased due to more complex drilling required for unconventional and shale plays, higher wages across certain of our markets, an enhanced focus on retention and safety initiatives, and in 2012, as a result of certain relocation costs, as several of our rigs transitioned from primarily natural gas drilling to oil and liquids-rich areas.

Average number of marketed rigs represents the average number of rigs we owned and marketed during the period. On September 15, 2011, we sold a marketed rig in a private transaction. Additionally, during December 2011, we sold 20 of our marketed rigs in an auction, which decreased the number of our marketed rigs at December 31, 2011 to 50.

EBITDA is earnings before net interest, income taxes, depreciation and amortization and non-cash impairment. We believe EBITDA is a useful measure in evaluating financial performance because it is used by external users, such as investors, commercial banks, research analysts and others, to assess: (1) the financial performance of Union Drilling's assets without regard to financing methods, capital structure or historical cost basis, (2) the ability of Union Drilling's assets to generate cash sufficient to pay interest costs and support its indebtedness, and (3) Union Drilling's operating performance and return on capital as compared to those of other entities in our industry, without regard to financing or capital structure. EBITDA is not a measure of financial performance under generally accepted accounting principles. However, EBITDA is a common alternative measure of operating performance used by investors, financial analysts and rating agencies. A reconciliation of EBITDA to net earnings is included below. EBITDA as presented may not be comparable to other similarly titled measures reported by other companies (in thousands).

                                       Three Months Ended           Nine Months Ended
                                          September 30,               September 30,
                                        2012          2011          2012          2011
     Calculation of EBITDA:
     Net income (loss)               $      486     $    617      $ (1,121 )    $ (7,413 )
     Impairment charge                       -           808            -            808
     Interest expense, net                  532          392         1,534         1,059
     Income tax expense (benefit)           907         (400 )         651        (2,926 )
     Depreciation and amortization       11,830       13,328        35,812        38,740

     EBITDA                          $   13,755     $ 14,745      $ 36,876      $ 30,268

Drilling margin represents contract drilling revenues less contract drilling costs. We believe that drilling margin is a useful measure for evaluating financial performance, although it is not a measure of financial performance under generally accepted accounting principles. However, drilling margin is a common measure of operating performance used by management, investors and financial analysts. A reconciliation of drilling margin to operating income is included below. Drilling margin as presented may not be comparable to other similarly titled measures reported by other companies (in thousands, except day and per day data).

                                        Three Months Ended           Nine Months Ended
                                           September 30,               September 30,
                                         2012          2011         2012          2011
    Calculation of drilling margin:
    Operating income (loss)           $    1,836     $    122     $   (184 )    $ (10,364 )
    Depreciation and amortization         11,830       13,328       35,812         38,740
    Impairment charge                         -           808           -             808
    General and administrative             8,257        7,023       23,234         21,523

    Drilling margin                   $   21,923     $ 21,281     $ 58,862      $  50,707

    Revenue days                           3,335        3,868       10,429         10,847

    Drilling margin per revenue day   $    6,573     $  5,501     $  5,644      $   4,675

Critical Accounting Policies and Estimates

Our accounting policies that are critical or the most important to understand our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2011 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies.

Results of Operations

Our operations primarily consist of drilling oil or natural gas wells for our customers under either daywork contracts and, to a much lesser extent, footage contracts. The contract terms we offer generally depend on the location, depth and complexity of the well to be drilled; the on-site drilling conditions; the type of equipment used; the duration of the work to be performed; and the competitive forces of the market. In most instances, our contracts provide for additional payments related to rig mobilization and demobilization, as well as reimbursement of certain out-of-pocket costs.