The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K. Any forward-looking statements made by or on our behalf are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainties in that the actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in the Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011. Overview
Forbes Energy Services Ltd., or FES Ltd, is an independent oilfield services contractor that provides a wide range of well site services to oil and natural gas drilling and producing companies to help develop and enhance the production of oil and natural gas. These services include fluid hauling, fluid disposal, well maintenance, completion services, workovers and recompletions, plugging and abandonment, and tubing testing. Our operations are concentrated in the major onshore oil and natural gas producing regions of Texas, with additional locations in Mississippi, in Pennsylvania and, prior to the disposition of our Mexican assets in January 2012, which is discussed below, in Mexico. We believe that our broad range of services, which extends from initial drilling, through production, to eventual abandonment, is fundamental to establishing and maintaining the flow of oil and natural gas throughout the life cycle of our customers' wells. Our headquarters and executive offices are located at 3000 South Business Hwy 281, Alice, Texas 78332. We can be reached by phone at
(361) 664-0549.
As used in this Quarterly Report on Form 10-Q, the "Company," the "Forbes Group," "we," and "our" mean FES Ltd and its subsidiaries, except as otherwise indicated. Unless otherwise indicated, all financial or operational data presented herein relates to our continuing operations, excluding our operations in Mexico, which were sold in January 2012.
We currently provide a wide range of services to a diverse group of companies. Through the nine months ended September 30, 2012, we provided services to over 870 companies. Our blue-chip customer base includes Anadarko Petroleum Corporation, Chesapeake Energy Corporation, ConocoPhillips Company, Rosetta Resources, Inc., and Shell Oil Company, among others. John E. Crisp, Charles C. Forbes, and our senior management team, have cultivated deep and ongoing relationships with these customers during their average of over 35 years of experience in the oilfield services industry. For the three and nine months ended September 30, 2012, we generated consolidated revenues of approximately $114.3 million and $365.6 million.
We currently conduct our operations through the following two business segments:

•         Well Servicing. Our well servicing segment comprised 44.2% and 42.2% of
          consolidated revenues for the three and nine months ended September 30,
          2012. At September 30, 2012, our well servicing segment utilized our
          modern fleet of 162 owned well servicing rigs, which included
          152 workover rigs, 10 swabbing rigs, and related assets and equipment.
          These assets are used to provide (i) well maintenance, including
          remedial repairs and removal and replacement of downhole production
          equipment, (ii) well workovers, including significant downhole repairs,
          re-completions and re-perforations, (iii) completion and swabbing
          activities, and (iv) plugging and abandoning services. We also have a
          fleet of nine tubing testing units that are used to conduct pressure
          testing of oil and natural gas production tubing and scan testing for
          pitting and wall thickness of the tubing. In addition, we currently
          have two coiled tubing spreads that we recently began utilizing in our
          well servicing segment.


•         Fluid Logistics and Other. Our fluid logistics and other segment
          comprised 55.8% and 57.8% of consolidated revenues for the three and
          nine months ended September 30, 2012. Our fluid logistics segment
          utilized our fleet of owned or leased fluid transport trucks and
          related assets, including specialized vacuum, high-pressure pump and
          tank trucks, frac tanks, water wells, salt water disposal wells and
          facilities, and related equipment. These assets are used to provide,
          transport, store, and dispose of a variety of drilling and produced
          fluids used in, and generated by, oil and natural gas production. These
          services are required in most workover and completion projects and are
          routinely used in daily operations of producing wells. Beginning in the
          fiscal year 2010, the Company began providing additional services in
          which Wolverine Construction, Inc., a related party, completed such
          services as a sub-contractor. These services involved site preparation
          and were complementary to the traditional services offered by the
          Company. The Company substantially ceased offering these services in
          June 2011. Prior to such termination, we would pay Wolverine for their
          services and materials and then would bill the cost to the customer
          with a margin of approximately 5%. There was no revenue associated with
          the sub-contractor work for the three or nine months ending
          September 30, 2012 and $0 and $5.2 million for the three and nine

months ending September 30, 2011, respectively.
We believe that our two business segments are complementary and create synergies in terms of selling opportunities. Our multiple lines of service allow us to capitalize on our existing customer base to grow within existing markets, generate more business from existing customers, and increase our operating profits. By offering our customers the ability to reduce the number of vendors they use, we believe we help improve our customers' efficiency. This is demonstrated by the fact that 78.4% and 81.4% of our revenues for the three and nine months ended September 30, 2012 , respectively, were from customers that utilized services from both of our business segments. Further, by having multiple service offerings that span the life cycle of the well, we believe we have a competitive advantage over smaller competitors offering more limited services.

Factors Affecting Results of Operations
Oil and Natural Gas Prices
Demand for well servicing and fluid logistics services is generally a function of the willingness of oil and natural gas companies to make operating and capital expenditures to explore for, develop and produce oil and natural gas, which in turn is affected by current and anticipated levels of oil and natural gas prices. Exploration and production spending is generally categorized as either operating expenditures or capital expenditures. Activities by oil and natural gas companies designed to add oil and natural gas reserves are classified as capital expenditures, and those associated with maintaining or accelerating production, such as workover and fluid logistics services, are categorized as operating expenditures. Operating expenditures are typically more stable than capital expenditures and are less sensitive to oil and natural gas price volatility. In contrast, capital expenditures by oil and natural gas companies for drilling are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices. Workover Rig Rates
Our well servicing segment revenues are dependent on the prevailing market rates for workover rigs. Rates and utilization for workover rigs increased in March 2010 through the third quarter of 2011, then rates and utilization stabilized in the fourth quarter 2011 and rates have generally continued through the nine months ending September 30, 2012, with utilization dropping in the third quarter of 2012.
Fluid Logistics Rates
Our fluid logistics and other segment revenues are dependent on the prevailing market rates for fluid transport trucks and the related assets, including specialized vacuum, high-pressure pump and tank trucks, frac tanks and salt water disposal wells. Pricing and utilization increased in the latter portion of the first quarter 2010 and continued through 2011. Rates stabilized through the first half of 2012 dropping in the third quarter of 2012. Operating Expenses
As utilization and demand increased beginning in 2010 and continued in the first half of 2012, we have experienced cost pressures in areas such as labor where we have incurred additional cost increases primarily in the form of increased pay rates. Future earnings and cash flows will be dependent on our ability to manage our overall cost structure and either maintain our existing prices or obtain price increases from our customers as our operating costs increase. Equipment rental cost continues to be a significant component of our operating expenses. As described in the following paragraph, we made certain capital expenditures in the first nine months of 2012 that are intended to replace certain leased or rented equipment. Nevertheless, we expect that we will continue to meet certain equipment needs through rental or leasing arrangements and, to that end, in the first nine months of 2012, we entered into operating leases with respect to our 70 additional vacuum trucks, and 23 vacuum trailers for our Fluid Logistics segment and 17 support trucks, two pressure pumping units, one crane truck, one nitrogen pumping unit and a transport trailer for the coiled tubing units to be utilized in the coiled tubing operations of the well servicing segment.

Capital Expenditures
During the first nine months of 2012 we purchased three 550 horsepower well service rigs and related equipment, four pump-down units, 1,273 frac tanks, eighteen vacuum trucks, eight salt water disposal wells, one pressure pumping unit, and two coiled tubing unit spreads. Capital expenditures for the nine months ended September 30, 2012 were $103.1 million. Certain of these purchased assets are intended either to take the place of equipment that the Company had been leasing or renting or to allow the Company to provide services to customers that it had previously offered through third party contractors. Other purchases were made to increase the Company's overall capacity. As of October 2012, the Company has orders placed for additional equipment, including acid frac tanks, three coiled tubing spreads and related equipment that should be delivered in

the fourth quarter of 2012, the first of which has already been delivered. The first of these remaining coiled tubing units was received in October and 34 acid frac tanks were received in November 2012. Of this equipment on order, $5.0 million will purchased through debt financing and the remaining $10.1 million through operating leases. Other than equipment on order that has not yet been delivered, the Company does not currently have plans for any further significant capital expenditures in the immediate future.

We plan to finance some of the remaining equipment on order, including three additional coiled tubing units, pursuant to an agreement with Regions Equipment Finance Corporation and Regions Commercial Equipment Finance, LLC, collectively, Regions Finance, discussed in further detail below. However, this agreement does not constitute a commitment to finance any additional operating lease or loan schedules. Nevertheless, we believe that our cash flows from operations and availability under our $75 million revolving credit facility, on their own, will be sufficient to fund or otherwise satisfy the obligations related to this equipment on order.
Operating Income Margins
We have experienced less margin pressure on our fluid logistics and other segment, which resulted in more favorable margins in that segment relative to the well servicing segment and this continues through the current period. A significant portion of the additional activity in the fluid logistics and other segment relates to expanded fracing operations in our market areas. Presentation
The following discussion and analysis is presented on a consolidated basis to reflect the results of continuing operations and financial condition of the Forbes Group. The financial information as of and for the three and nine months ended September 30, 2012 and September 30, 2011 is presented on a consolidated basis for FES Ltd and its subsidiaries. Unless otherwise indicated, all financial or operational data presented herein relates to our continuing operations, excluding our operations in Mexico, which were sold in January 2012. Notwithstanding the foregoing, financial information regarding cash flows presented herein includes cash flows from our discontinued operations.

Results of Operations
The following discussion, as well as the discussion found under "Liquidity and Capital Resources," compares our consolidated financial information for the three and nine months ended September 30, 2012 to the three and nine months ended September 30, 2011.
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
Consolidated Revenues. For the three months ended September 30, 2012, revenues decreased by $1.4 million, or 1.2%, to $114.3 million when compared to the same period in the prior year. This is as a result of lower activity in the third quarter of 2012 as compared to 2011.
Well Servicing-Revenues from the well servicing segment increased by $2.1 million for the period, or 4.4% to $50.6 million compared to the corresponding period in the prior year. Coiled tubing revenues were $2.3 million for the three months ended September 30, 2012 and zero in the same period in 2011. Revenues from other activities within the well servicing segment were relatively flat due to an increase in rate of 4.5% and a decrease in hours of 4.3%. We utilized 162 well service rigs as of September 30, 2012 and 2011 and two coiled tubing spreads as of September 30, 2012.
Fluid Logistics and Other-Revenues from the fluid logistics segment and other for the three months ended September 30, 2012 decreased by $3.6 million, or 5.3%, to $63.8 million compared to the same period in the prior year. The rates for this segment decreased approximately 3.4% for the three months ended September 30, 2012 when compared to the same period ending September 30, 2011. Trucking hours increased during the three months ended September 30, 2012 when compared to the three months ended September 30, 2011. Our principal fluid logistics assets at September 30, 2012 and September 30, 2011 were as follows:

                                                           %
                                     September 30      Increase
                                    2012      2011    (Decrease)
Fluid logistics and other segment:
Vacuum trucks                         475      366         29.8 %
High-pressure pump trucks              21       19         10.5 %
Other heavy trucks                     84       64         31.3 %
Frac tanks                          3,149    1,594         97.6 %
Salt water disposal wells              23       15         53.3 %

Consolidated Operating Expenses-Our operating expenses decreased to $88.6 million for the three months ended September 30, 2012, from $88.7 million for the three months ended September 30, 2011, a decrease of $0.1 million, or 0.2%. Operating expenses as a percentage of revenues were 77.5% for the three months ended September 30, 2012, compared to 76.6% for the three months ended September 30, 2011. The slight increase in operating expenses as a percentage of revenue in the three months ending September 30, 2012 compared to the three months ending September 30, 2011 was due to the increase in labor expenses due to workforce increases.
Well Servicing-Operating expenses from the well servicing segment increased by $2.5 million, or 6.4%, to $41.4 million. Well servicing operating expenses as a percentage of well servicing revenues were 81.8% for the three months ended September 30, 2012, compared to 80.3% for the three months ended September 30, 2011, an increase of 1.5%. Well servicing expenses include expenses for both well servicing and coiled tubing. Coiled tubing expenses were $2.2 million for the three months ending September 30, 2012 and zero for the three months ending September 30, 2011. Other operating expenses for activities within the well servicing segment were relatively flat comparing the three months ending September 30, 2012 and the three months ending September 30, 2011.
Fluid Logistics and Other-Operating expenses from the fluid logistics and other segment decreased by $2.6 million, or 5.3% to $47.2 million . Fluid logistics operating expenses as a percentage of fluid logistics revenues was stable at 74.0% for the three months ended September 30, 2012 and September 30, 2011. The decrease in fluid logistics and other operating expenses of $2.6 million was partially due to a decrease in contract services cost of $6.1 million, or 83.71% to $1.2 million, when compared to the same period in the prior year. Rent equipment expense decreased $3.1 million or 45.6%, to $3.6 million. Both of these expenses decreased due to the acquisition of additional equipment to satisfy customer demand and decreasing the need to utilize outside services. This decrease in contract services was partially offset by the increase in labor costs of $3.7 million, or 27.7% to $17.6 million as a direct result of workforce headcount increases. The employee count at September 30, 2012 was 1,186, as compared with 996 employees as of September 30, 2011. Supplies and parts expense increased $0.5 million or 290.4% to $0.7 million. Fuel costs increased $1.0 million, or 13.52% to $8.4 million. Insurance costs increased $0.8 million, or 69.4% to $2.0 million. The remaining $0.4 million relates to various expenses in line with management's expectations.

General and Administrative Expenses. General and administrative expenses from the consolidated operations increased by approximately $1.1 million, or 17.6%, to $7.3 million for the three months ended September 30, 2012. General and administrative expense as a percentage of revenues was 6.4% and 5.3% for the three months ended September 30, 2012 and September 30, 2011, respectively. The increase was due to an increase in compensation expense of approximately $1.1 million due to a workforce increase of 45 employees. Compensation expense for the current quarter included an accrual of approximately $0.3 million to reflect an estimate of the quarterly expense related to a newly implemented, performance based, management bonus plan.
Depreciation and Amortization. Depreciation and amortization expenses increased by $3.3 million, or 33.7% , to $13.2 million. The additional depreciation expense resulted from capital expenditures, including those incurred for the three months ended September 30, 2012 which were $11.9 million compared to $17.8 million for the three months ended September 30, 2011.
Interest and Other Expenses. Interest and other expenses increased by approximately $0.4 million from the three months ended September 30, 2011 to the current quarter due to the financing of additional equipment purchased during the quarter ended September 30, 2012 compared to the same period in the prior year.

Income Taxes. We recognized an income tax benefit of $0.6 million and expense of $1.7 million for the three months ended September 30, 2012 and September 30, 2011, respectively. Our effective tax rate for the three months ended September 30, 2012 is 31.04% compared with an 40.6% for the same period in the prior year due to higher earnings in the quarter, non-deductible expenses, and related Texas margins tax.
Discontinued Operations-We recorded a net loss from discontinued operations of $1.1 million for the three months ended September 30, 2012, compared to net income from discontinued operations of $1.8 million for the three months ended September 30, 2011. The decrease in net income relates mainly to the winding down of operations in Mexico including an adjustment for the foreign currency translation that had been recorded as a component of equity for the Mexico operations.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Consolidated Revenues. For the nine months ended September 30, 2012, revenues increased by $44.3 million, or 13.8%, to $365.6 million when compared to the same period in the prior year. This is a result of increased utilization in our well servicing segment for the first half of 2012 and an increase in our trucking fleet in the fluid logistics segment in 2012 as compared to 2011. Well Servicing-Revenues from the well servicing segment increased by $27.2 million for the nine month period, or 21.5% to $154.1 million compared to the corresponding period in the prior year. We utilized 162 well service rigs as of September 30, 2012 and 159 well service rigs as of September 30, 2011. The average rate charged per hour during the nine months ended September 30, 2012 as compared to the same period in 2011 increased approximately 6.1%. Average utilization of our well service rigs during the nine months ended September 30, 2012 and September 30, 2011 was 91.5% and 81.6% , respectively, based on a twelve hour day, working five days a week, except holidays in the U.S. The new coiled tubing component of our well servicing segment comprised $3.4 million of the increase in revenue for the nine month period ending September 30, 2012 Fluid Logistics and Other-Revenues from the fluid logistics segment and other for the nine months ended September 30, 2012 increased by $17.1 million, or 8.8%, to $211.5 million compared to the prior year, as a result of the general industry increase in activity. Our revenue increased $17.1 million due to an increase in trucking hours in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 offset by a decrease in aggregate pricing of approximately 6.7% and by the cessation of the other contract services performed in the first half of 2011, but not in the first half of 2012. Consolidated Operating Expenses-Our operating expenses increased to $269.3 million for the nine months ended September 30, 2012, from $245.8 million for the nine months ended September 30, 2011, an increase of $23.5 million, or 9.6%, Operating expenses as a percentage of revenues decreased to 73.7% for the nine months ended September 30, 2012, compared to 76.5% for the nine months ended September 30, 2011. The increase in operating expense as a percentage of our revenues is mainly due to the decreases in rental equipment due to the purchase of new equipment to satisfy customer demand offset by the increase in labor expenses.
Well Servicing-Operating expenses from the well servicing segment increased by $14.9 million, or 14.4%, to $117.9 million. Well servicing operating expenses as a percentage of well servicing revenues were 76.5% for the nine months ended September 30, 2012, compared to 81.2% for the nine months ended September 30, 2011, a decrease of 4.7%. The increase in operating expenses was partially due to an increase in labor costs of $8.4 million, or 17.6% to $56.4 million as a result of workforce headcount increase, combined with rate and bonus increases. The employee count for well servicing at September 30, 2012 was 1,074 compared to 1,041 employees as of September 30, 2011. Insurance expense and safety expense increased $1.6 million and $0.5 million, respectively, as a result of the increased employee count. Fuel expense increased by $2.5 million or 33.5% due to an increase in rig hours in conformity with increased activity levels for the industry. These increases were partially offset by a decrease in the rental of equipment of $1.1 million or 33.9% due to the rigs purchased from AES, a related party, that were previously leased and a decrease in the equipment repairs and maintenance expense of $6.6 million or 36.3% due to the purchase of new equipment. The contract labor expense increased $2.2 million due to increase in rig hours and labor hours for the plugging and abandonment division. Coiled tubing, a new component of our well servicing segment had expenses of $3.5 million for the nine months ending September 30, 2012 and zero for the same period ending September 30, 2011. The remaining increase was in line with management expectations.
Fluid Logistics and Other-Operating expenses from the fluid logistics and other segment increased by $8.7 million, or 6.1%, to $151.4 million. Fluid logistics operating expenses as a percentage of fluid logistics revenues were 71.6% for the nine months ended September 30, 2012, compared to 73.4% for the nine months ended September 30, 2011. The increase in fluid logistics and other operating expenses was partially due to an increase in labor costs of $13.1 million, or 32.9% to $53.1 million as a direct result of workforce headcount increases. The employee count at September 30, 2012 was 1,186, as compared with 996 employees as of September 30, 2011. Contract services cost decreased $14.2 million, or 62.4% to $8.6 million, when

compared to the same period in the prior year due to the acquisition of additional equipment to satisfy customer demand and decreasing the need to utilize outside services. The decrease in contract services also includes the Company terminating services in June of 2011 where Wolverine Construction, Inc., a related party, completed services as a sub-contractor. Fuel costs increased $3.4 million, or 15.5% to $25.6 million for the nine months ended September 30, 2012, due to fuel price increase of 3.4% and higher activity in drilling and well services when compared to the same period in the prior year. Repairs and maintenance cost increased $2.2 million, or 15.4% to $16.4 million as a result of activity increases. Insurance cost increased $2.2 million, or 70.1% to $5.2 million for the nine months ended September 30, 2012, when compared to the same period in the prior year due to headcount increases and acquisition of additional equipment. Tire cost increased $1.3 million, or 48.4% to $3.9 million and supplies and parts costs increased $1.4 million or 411.4% to $1.7 million million mainly due to acquisition of additional equipment. There was also a decrease in product and chemical expenses of $1.8 million or 24.1% to $5.7 million due to a slow down in product and chemical sales. The remaining $1.1 million change is related to various expenses that were consistent with the activity of the business.

General and Administrative Expenses. General and administrative expenses from consolidated operations increased by approximately $1.0 million, or 4.2%, to $26.0 million for the nine months ended September 30, 2012. General and administrative expense as a percentage of revenues was 7.1% and 7.8% for the nine months ended September 30, 2012 and September 30, 2011, respectively. The increase of $1.0 million was due to a decrease litigation, settlement, and legal fees of $7.6 million, which was offset by an increase in compensation expense of approximately $5.2 million in 2012 due to a workforce increase of 45 employees. There was also an increase in discretionary management bonuses of approximately . . .