MASTER LOAN AND SECURITY AGREEMENT

Exhibit 10.2

MASTER LOAN AND SECURITY AGREEMENT

THIS MASTER LOAN AND SECURITY AGREEMENT (the “Agreement”) between ALLIS-CHALMERS DRILLING LLC (“Borrower”), located at 5075 Westheimer, Suite 890, Houston, Texas 77056, ALLIS-CHALMERS ENERGY INC. (“Guarantor”), located at 5075 Westheimer, Suite 890, Houston, Texas 77056, and CATERPILLAR FINANCIAL SERVICES CORPORATION (“Cat Financial”), located at 2120 West End Avenue, Nashville, Tennessee, 37203, is made effective as of the 23rd day of January, 2009 .

SECTION 1. CREDIT COMMITMENT

1.1. Loan . Cat Financial agrees to make a loan or loans in Dollars only (each a “Loan”) to Borrower and any such Loan made, shall not exceed eighty percent (80%) of the invoiced purchase price of the Equipment listed in the Schedule(s) under this Agreement, in the aggregate principal amount not to exceed Twenty-Nine Million Dollars ($29,000,000) at any time during the term of this Agreement.

1.2. Notice and Manner of Borrowing . Provided Borrower is not in default under this Agreement and the conditions precedent of Section 2 have been satisfied and Cat Financial has received a properly completed and executed Schedule(s), by 4:00 p.m. Central Time on a Business Day, Cat Financial shall make the amount of such Loan available to Borrower in immediately available funds in accordance with the written instructions of Borrower referred to in Section 2(g) hereof (“Loan Closing Date”).

1.3. The Schedule . Each Loan shall be evidenced by and repayable with interest in accordance with this Agreement and a Schedule of Indebtedness (the “Schedule”) payable to the order of Cat Financial, substantially in the form of Exhibit A-1 and Exhibit A-2 . The completion of the Schedule shall irrevocably confirm Borrower’s agreement with the terms of this Agreement, and shall constitute a restatement of all representations, warranties, covenants and all other terms and conditions of this Agreement.

1.4. Interest . Borrower shall pay interest at the rate specified in the Schedule on the outstanding amounts loaned, commencing with the date specified in the Schedule and until the entire principal balance thereof is fully repaid. Interest will be calculated on the basis of twelve 30-day months elapsed over a 360-day year. Borrower warrants through its signature on the Schedule that as of the date the Loan is made, the representations and warranties set forth in Section 3 hereof are true and correct in all material respects and that Borrower is in compliance with all material aspects of this Agreement.

1.5. Maximum Interest . If any interest is charged or received in excess of the Maximum Rate (“Excess”), Borrower acknowledges and stipulates that any such charge or receipt shall be the result of an accident and bona fide error, and such Excess received shall be applied first to reduce principal then to reduce the other Obligations, and the balance, if any, returned to Borrower.

1.6. Late Payment Damages . In the event that any principal or interest under any Transaction Document is not paid when due, Borrower, to the extent permitted by applicable law, shall pay on demand, interest on such unpaid amount from the date such amount was due to the date such amount is paid in full at the per annum rate equal to the interest rate in the effect under the Schedule as adjusted from time to time during the delinquent period, plus two percent (2%) per annum.

1.7. Fees . At the time of execution of this Agreement, Borrower shall have paid to Cat Financial the upfront fees which total Seventy Two Thousand Five Hundred Dollars ($72,500) and all invoiced and reasonable legal fees and out-of-pocket expenses of its outside counsel, if any. In addition, Borrower shall pay to Cat Financial (i) an administration fee of Fifteen Thousand Dollars ($15,000), which shall be due and payable upon the first Loan closing and then on the same date of each subsequent year throughout the term of the Loan and (ii) a commitment fee equal to fifty basis points per annum charged on any amount of funds available but undisbursed under this Agreement, such fee to be determined and paid on the date of any advance made hereunder and on May 30, 2009.

1.8. Payment . Borrower agrees to make all payments by wire transfer (net of any wire transfer expenses) to Bank Account. If a payment is due on a non-Business Day, payment shall be made on the next Business Day, and such extension of time shall be included in the computation of interest.

1.9. Application of Payments and Collections .

(A) Before an Event of Default, all payments and collections received for application to the Loan shall be applied first to past due interest, then to accrued but not past due interest, then to the principal amount outstanding, and then finally to the amount of any other Obligations then outstanding.

(B) Upon an Event of Default, all payments and collections received for application to the Loan shall be applied first to outstanding Collection Expenses, then to the amount of any loss, costs, expenses or damages suffered or incurred by Cat Financial for which Borrower has agreed in the Transaction Documents to indemnify Cat Financial, and then to the order set forth in Section 1.9(A).

1.10. Prepayment . Borrower may prepay the balance due under a Schedule as provided in the applicable Schedule.

1.11. Payment “Net Taxes” . Borrower agrees to pay all amounts owing under the Transaction Documents free and clear of and without deduction for any present or future Taxes and if Borrower is prevented by operation of law or otherwise from paying any amounts owing under the Transaction Documents without deduction, then the amount to be paid under the Transaction Documents shall be increased to the amount Cat Financial would have received had such payments been made without such deduction. Upon Cat Financial’s request, Borrower shall provide the original or a certified copy of evidence of the payment of Taxes by it (including but not limited to the payment of withholding tax) or, if no Taxes have been paid, a certificate from the appropriate taxing authority or an opinion of counsel acceptable to Cat Financial stating that no Taxes are payable.

1.12. Dollar Payments . All payments under the Transaction Documents shall be solely and exclusively in Dollars to Bank Account.

1.13. Obligations Unconditional . The Obligations under the Transaction Documents are absolute and unconditional under all circumstances irrespective of any setoff, counterclaim or defense to payment which Borrower may have against Cat Financial or any other Person, including without limitation, any claims related to any underlying export transaction, product quantity or quality.

1.14. Term . Cat Financial’s commitment to make Loan(s) under this Agreement shall terminate upon the earlier of (i) May 30, 2009 or (ii) the date upon which Cat Financial or Borrower terminates this Agreement pursuant to any term of this Agreement. No termination (whether by default or the passage of time) shall affect or impair the rights, powers or privileges of Cat Financial or the Obligations, duties or liabilities of Borrower relating to (i) any transaction or event occurring prior to the effective date of such termination or (ii) any of the undertakings, agreements, covenants, indemnifications, warranties or representations of Borrower contained in the Transaction Documents. All such undertakings, agreements, covenants, indemnities, warranties, and representations of Borrower shall survive such termination and Cat Financial shall retain all of its rights and remedies under the Transaction Documents.

1.15. Grant of Security Interest . Borrower hereby grants Cat Financial a first priority continuing security interest in each item of Equipment listed under the Schedule(s) to this Agreement, or upon which Borrower has received an advance pursuant to this Agreement, and all present and future attachments and accessories thereto and replacements and proceeds, including amounts payable under any insurance policy, subject only to Permitted Liens. Such security interest shall secure (a) the payment when due of any and all Obligations owing by Borrower and (b) the performance of all Obligations of Borrower. Borrower agrees that the security interest granted to Cat Financial shall extend to all Equipment so long as any portion of the Obligations secured hereby remains unpaid or any duties or obligations of Borrower remain undischarged.

1.16. Substitute Performance . In the event Borrower shall fail to maintain the insurance, pay Taxes or perform any other obligation required hereunder, Cat Financial may make expenditures in order to maintain and preserve the Equipment. The amount expended plus interest thereon from the date of expenditure at the lesser of the Base Rate plus five percent (5%) per annum or the Maximum Rate, shall be due immediately upon notice by Cat Financial.

SECTION 2. CONDITIONS PRECEDENT

Notwithstanding any provision of any Transaction Document, Cat Financial shall not be obligated to make any Loan until each of the following conditions has been received or satisfied, all in form and substance satisfactory to Cat Financial:

(A) Evidence of Borrower’s insurance policies;

(B) Evidence of any filing or recordation necessary to perfect the Liens of Cat Financial, including but not limited to subordinations and intercreditor agreements from or with any intervening lien holders, and evidence that such Liens have first priority in favor of Cat Financial;

(C) Certified copies of the resolutions of Borrower’s and Guarantor’s Board of Directors or other equivalent corporate proceedings evidencing approval of the Transaction Documents and all matters contemplated therein which shall designate the names of Borrower’s and Guarantor’s officers authorized to execute and deliver the Transaction Documents;

(D) Certified copies of Borrower’s and Guarantor’s articles of organization and operating agreement or their equivalent;

(E) The favorable, written opinions of counsel to Borrower as to the transactions contemplated by the Transaction Documents, substantially in the form of Exhibit B ;

(F) Written instructions from Borrower directing the application of the proceeds of Loans made pursuant to this Agreement, substantially in the form of Exhibit C ;

(G) Certified copies of all necessary governmental authorizations and approvals, if any, with respect to the Transaction Documents;

(H) The Transaction Documents duly executed and delivered by Borrower;

(I) A guaranty agreement duly executed and delivered by the Guarantor, in the form attached hereto as Exhibit D .

(J) Certified copies of all permits and licenses, if any, necessary for the ownership and operation of the Equipment with respect to the Transaction Documents;

(K) Copies of Borrower’s invoices or bills of sale for the Equipment, together with any supporting documents;

(L) Written confirmation from the Equipment manufacturer that the Equipment contains Caterpillar Inc. engines and transmissions;

(M) Payment of applicable fees due from Borrower;

(N) A warranty by Borrower evidenced by its execution hereof, which shall be reaffirmed through signature on each Schedule, that as of the date each Loan is made the representations and warranties set forth in Section 3 hereof are true and correct in all material respects and that Borrower is in compliance with all material aspects of this Agreement;

(O) Such other documents, instruments and agreements as Cat Financial shall reasonably request in connection with the foregoing matters; and

(P) Each condition precedent in the other Transaction Documents has been satisfied or waived. Cat Financial’s election to make the Loan prior to the fulfillment of any condition precedent shall not constitute a waiver thereof, and Borrower shall use its best efforts to fulfill each condition promptly.

SECTION 3. REPRESENTATIONS AND WARRANTIES

Borrower and Guarantor represent and warrant the following to Cat Financial as of the date hereof and for the entire term of this Agreement:

3.1. Corporate Existence . Borrower and Guarantor are duly organized, validly existing and in good standing under the laws of their respective jurisdictions of organization.

3.2. Authorization of Borrowing; No Conflict as to Applicable Law or Agreements . The execution, delivery and performance by Borrower and Guarantor of each Transaction Document and the borrowing under any Schedule, have been duly authorized by all necessary action and do not and will not (i) require any approval by any government or agency thereof, (ii) violate any Applicable Law, rule or regulation or Borrower’s or Guarantor’s articles of organization or operating agreement, and (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement.

3.3. Legal Agreements . Each Transaction Document when delivered will be a legal, valid, and binding obligation of Borrower and Guarantor enforceable against it in accordance with its terms, except as limited by general principles of equity and bankruptcy, insolvency and similar laws.

3.4. Financial Condition . Borrower’s and Guarantor’s financial statements and projections heretofore furnished to Cat Financial are complete and correct in all material respects and present fairly in all material respects the financial condition of Borrower and Guarantor, subject to the absence of footnotes and to normal year-end audit adjustments.

3.5. Material Adverse Change . There has been no change, nor is Borrower or Guarantor aware of any fact which could in the future cause a change, in the condition (financial or otherwise) of Borrower or Guarantor which would reasonably be expected to have a Material Adverse Effect.

3.6. Solvent Financial Condition . Borrower and Guarantor are Solvent and will continue to be after any Loan.

3.7. Liens . The Equipment is not and will not be subject to any Lien or the terms of any security agreement, other than any Lien granted to Cat Financial, any Permitted Lien or agreed to in writing by Cat Financial.

3.8. Taxes . No stamp, duty or documentary taxes or charges imposed by any taxing authority are payable on or in connection with any Transaction Document or any related documents. Borrower has paid or shall pay when due all applicable deductions or withholdings on account of any Taxes, levies, duties, fees, deductions or withholding, restrictions or conditions of any nature imposed by any taxing authority whatsoever on the payments by Borrower to Cat Financial of each Loan hereunder.

3.9. Litigation . There are no actions, suits, or proceedings pending or to the knowledge of Borrower and Guarantor threatened against or affecting Borrower and Guarantor before any court or governmental department or agency that would reasonably be expected to have a Material Adverse Effect.

3.10. No Defaults on Outstanding Judgments . Borrower and Guarantor have satisfied all judgments, if any, and are not in default with respect to any judgment of any court or governmental agency, if any (other than any judgment the failure to satisfy or default in respect of which would not reasonably be expected to have a Material Adverse Effect).

3.11. Other Agreements . Neither Borrower, Guarantor nor any Subsidiary of either Borrower or Guarantor are a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction which could reasonably be expected to have a Material Adverse Effect.

3.12. Civil Acts; No Immunity . Borrower and Guarantor are subject to civil and commercial law with respect to their respective Obligations under the Transaction Documents. The execution, delivery, and performance of this Agreement by Borrower and Guarantor constitute a commercial act as opposed to a governmental act. Borrower, Guarantor (and their respective Property) do not enjoy, in the courts any right of immunity from suit, setoff or attachment or execution on a judgment in respect of the obligations of Borrower or Guarantor under the Transaction Documents.

3.13. Taxes and Assessment . Borrower shall be responsible for, and shall promptly pay and discharge, all Taxes that may be payable by or imposed upon Cat Financial arising out of any payment made hereunder, the Schedule or under any of the other Transaction Documents or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Schedule or under any of the other Transaction Documents.

3.14. Subordinate Debt . Borrower warrants that all intercompany debt of Borrower to other related companies shall be subordinate to the debt due to Cat Financial under this Agreement.

3.15. No Default or Event of Default . Borrower warrants that no Default or Event of Default has occurred and is continuing.

SECTION 4. COVENANTS AND CONTINUING AGREEMENTS

4.1. Affirmative Covenants . Borrower and Guarantor covenant that so long as this Agreement is in effect or any amounts owed by Borrower to Cat Financial under any Transaction Document shall remain unpaid:

(A)  Financial Statements; Other Information . Borrower and Guarantor will deliver in writing to Cat Financial:

(i)  Annual Statements . Financial statements of Borrower and Guarantor as of the end of each Fiscal Year prepared in accordance with GAAP, certified by a firm of independent certified public accountants within one hundred twenty (120) days of the end of each Fiscal Year.

(ii)  Interim Statements . Unaudited interim financial statements as of the end of each quarter prepared in accordance with GAAP, within ninety (90) days of each quarter end.

(iii)  Default under Other Agreements . Notice of any default by Borrower or Guarantor under any agreement relating to any Indebtedness with an outstanding principal balance in excess of $1,000,000.

(iv)  Regulatory Action . Notice of any action or proceeding instituted by any federal, state, or other regulatory agency that would reasonably be expected to have a Material Adverse Effect.

(vi)  Material Adverse Effect . Notice of the occurrence of any event that would reasonably be expected to have a Material Adverse Effect.

(vii)  Requested Information . Such data, documents or further information related to this Agreement, or the business, financial condition, or business prospects of Borrower or Guarantor as Cat Financial may reasonably request, within a commercially reasonable time.

(B)  Loan-to-Value . The outstanding amount of any Loan shall not be greater than eighty percent (80%) of the invoiced purchase price for the Equipment described in the Schedule evidencing such Loan.

(C)  Compliance with Applicable Laws . Borrower and Guarantor shall comply in all material aspects with all Applicable Laws where failure to comply would reasonably be expected to have a Material Adverse Effect, and shall also comply with all material covenants, provisions and conditions in connection with all other loan or credit agreements to which it is a party where failure to comply would reasonably be expected to have a Material Adverse Effect.

(D)  Financial Covenants . For so long as any Indebtedness is owed to Cat Financial hereunder, Guarantor shall comply with all of those financial covenants contained in Section 7.19 of the Credit Agreement as the same may be amended, modified, supplemented or waived from time to time; provided that upon termination of the Credit Agreement, whether by reason of payment and satisfaction in full of Guarantor’s obligations thereunder or otherwise, the financial covenants incorporated herein as of and subsequent to the date of such termination shall be those financial covenants contained in Section 7.19 of the Credit Agreement as of the date of such termination.

(E)  Equipment Insurance Requirements . Throughout the term of this Agreement and so long as any Schedule remains outstanding, Borrower shall keep the Equipment insured against all risks, including: (i) special form replacement cost insurance for damage to the Equipment including any and all attachments, which insurance shall be for its full replacement value, but not less than the balance due under the Schedule, including principal, interest, fees and charges and (ii) general commercial liability insurance insuring against liability for property damage, death, and bodily injury resulting from the transportation, construction, ownership, possession, use, operation, performance, maintenance, storage, repair or reconstruction of the Equipment including any and all attachments which insurance shall not be less than Ten Million Dollars ($10,000,000) per occurrence. All such insurance shall be with insurance companies that must be of a financial strength and size having an A.M. Best rating of at least B+10; shall be primary, without right of contribution from any other insurance carried by Cat Financial, and shall provide that such insurance may not be canceled or altered so as to affect the interest of Cat Financial without at least thirty (30) days prior written notice to Cat Financial. For the duration of the Agreement and so long as the Schedule remains outstanding, all insurance covering loss or damage to the Equipment shall name Cat Financial (or its designee) as a loss payee and be payable solely to Cat Financial. Borrower agrees (a) to notify Cat Financial of any occurrence which may reasonably become the basis of an insurance claim hereunder, and (b) not to make any adjustments with insurers without Cat Financial’s prior written consent. Borrower hereby irrevocably appoints Cat Financial its attorney in fact to receive payment of and endorse all checks and other documents and to take any other actions necessary to pursue insurance claims, and upon taking such action, Cat Financial will promptly notify Borrower.

(F)  Preservation of Existence . Borrower and Guarantor shall preserve and maintain their respective existence and obtain and keep in force any and all privileges, licenses, permits, or other governmental authorizations necessary to the ownership of their respective Property or to the conduct of their business, except to the extent that the failure to do so would not reasonably be expected to have a Material Adverse Effect.

(G)  Inspection . At any reasonable time upon prior notice to Borrower, Cat Financial or any agents or representatives thereof (at Borrower’s expense) shall be allowed to examine and make copies of the records and books of account of, and inspect the Equipment, and to discuss the affairs, finances and accounts of Borrower with any officer of Borrower.

(H)  Maintenance of Property, Etc . Borrower and Guarantor shall maintain and preserve all of its material Property necessary in the proper conduct of its current business and in particular, Borrower shall keep the Equipment in good working order and condition, reasonable wear and tear excepted.

(I)  Maintenance of Records and Books of Account . Borrower and Guarantor shall keep, in all material respects, accurate records and books of account, in accordance with GAAP consistently applied reflecting all of their respective financial transactions.

(J)  Discharge of Indebtedness . Borrower shall promptly pay and discharge all Indebtedness and lawful claims which, if unpaid, might become a Lien (other than Permitted Liens) or charge upon the Equipment.

(K)  Uninsured Loss . Borrower shall give Cat Financial written notice of any uninsured loss suffered by Borrower through fire, theft, judgment, liability, or property damage which would reasonably be expected to have a Material Adverse Effect.

(L)  Further Assurances . At Cat Financial’s request, Borrower and Guarantor shall promptly execute or cause to be executed and deliver to Cat Financial any and all documents, instruments and agreements reasonably deemed reasonably necessary by Cat Financial to give effect to or carry out the terms or intent of any Transaction Document.

4.2. Negative Covenants . Borrower and Guarantor covenant that so long as this Agreement is in effect or any amounts owed by Borrower to Cat Financial under the Transaction Documents are unpaid, Borrower and Guarantor shall not:

(A)  Sale or Disposition of Assets . Sell, lease, or otherwise dispose of any Equipment, without the express written consent of Cat Financial.

(B)  Mergers; Consolidations; Acquisitions . Merge, consolidate with or acquire all or a substantial part of the Properties of any Person without the express written consent of Cat Financial; provided , that the Borrower may merge with any Subsidiary if the Borrower is the continuing or surviving Person, the Borrower may acquire any or all of the assets of any Subsidiary, the Borrower may merge with the Guarantor if the Guarantor is the continuing or surviving Person and the Guarantor may acquire any or all of the assets of the Borrower, other than the Equipment.

(C)  Restrictions on Nature of Business . Engage in any line of business materially different from that presently engaged in by Borrower and Guarantor.

(D)  Liens and Encumbrances . Create, incur, or suffer to exist any Lien upon any of the Equipment, except Liens in favor of Cat Financial and Permitted Liens, without the prior written consent of Cat Financial.

(E)  Subsidiary and Affiliate Transactions . Be a party to any transaction with any Subsidiary, Affiliate, or member, except in the ordinary course of Borrower’s and Guarantor’s business and upon terms which are no less favorable to Borrower or Guarantor than it could obtain in a comparable arm’s length transaction with a Person not a Subsidiary, Affiliate or member of Borrower or Guarantor.

(F)  Distributions . Declare or make any Distributions other than in the ordinary course of business; provided , that the Guarantor may at any time and from time to time make Distributions to the Borrower and to any wholly-owned Subsidiary of the Borrower.

SECTION 5. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT

5.1. Events of Default . An “Event of Default” shall exist if any of the following shall occur and is continuing, regardless of the reason or whether it was within the control of Borrower:

(A) Borrower fails to pay any portion of (i) the principal owing under a Schedule when due, or (ii) within 3 Business Days after the same becomes due, any interest owing under a Schedule, the annual administration fee, or any other amount or Obligations owing under any Transaction Document;

(B) any representation, warranty or other statement by Borrower or Guarantor in any Transaction Document shall prove false or misleading in any material respect when made;

(C) Borrower or Guarantor fails to perform, keep, or observe any covenant contained in any Transaction Document and such failure or default continues for thirty (30) days after the earlier of (i) the date notice has been given to the Borrower by Cat Financial or (ii) the date the Borrower knew or reasonably should have known of such failure or default;

(D) there shall occur any default on the part of Borrower or Guarantor under any other Transaction Document, agreement, document, or instrument to which Borrower or Guarantor and Cat Financial are parties and such default continues for thirty (30) days after the earlier of (i) the date notice has been given to the Borrower by Cat Financial or (ii) the date the Borrower knew or reasonably should have known of such default;

(E) Borrower fails to make any payment due on any Indebtedness with a principal amount of $1,000,000 or more or Guarantor fails to make any payment due on any Indebtedness with a principal amount of $5,000,000 or more or any event occurs or any condition exists in respect of any such Indebtedness the effect of which is to cause such Indebtedness to become due prior to its stated maturity or prior to its regularly scheduled dates of payment;

(F) Borrower or Guarantor consents to the appointment of or a court appoints a custodian, receiver, liquidator, or trustee of Borrower or Guarantor, or of any of their respective Property; or an order for relief in respect of Borrower or Guarantor shall be entered under any bankruptcy laws; or any of their respective Property shall be sequestered by court order and such appointment (other than an appointment consented to by the Borrower) order or sequestration is not discharged, stayed or dismissed within sixty (60) days of entry thereof;

(G) Borrower or Guarantor files a petition for voluntary bankruptcy or a petition is filed against Borrower or Guarantor or either Borrower or Guarantor seeks relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction and such petition (other than a petition filed by the Borrower) is not discharged, stayed or dismissed within sixty (60) days of filing thereof.;

(H) Borrower or Guarantor makes a general assignment for the benefit of its creditors, or admits in writing its inability to pay its debts as they become due;

(I) there is a material cross-default with any other credit agreement Borrower or Guarantor may be a party to;

(J) there is a cessation of a substantial part of the business of Borrower or Guarantor for a period which significantly affects Borrower’s or Guarantor’s ability to continue its business on a profitable basis; or Borrower or Guarantor suffers the loss or revocation of any license or permit now held or hereafter acquired by Borrower or Guarantor which is necessary to the continued lawful operation of its business; or Borrower or Guarantor shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business; or any lease or agreement pursuant to which Borrower or Guarantor leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term and such termination shall have a Material Adverse Effect; or any material part of its Property shall be taken through condemnation or the value of such Property shall be impaired through condemnation;

(K) Borrower or Guarantor challenges or contests in any action, suit or proceeding the validity, legality or enforceability of any Transaction Document, the Obligations or the perfection or priority of any Lien granted for the benefit of Cat Financial;

(L) Guarantor shall attempt to revoke its guaranty or shall be in default under the terms of the guaranty agreement or the guaranty agreement shall for any reason cease to remain in full force and effect;

(M) any governmental authorization necessary, if any, to enable Borrower or Guarantor to comply with or perform its Obligations under any Transaction Document shall be revoked, withdrawn or withheld and such event would reasonably be expected to have a Material Adverse Effect;

(N) Guarantor defaults under the Credit Agreement; and

(O) the Equipment or any part thereof is sold, transferred, assigned or otherwise disposed of by Borrower or any material part thereof is lost, stolen, materially damaged, levied on, seized or attached.

5.2. Rights and Remedies Upon Event of Default . Upon the occurrence of an Event of Default and until such Event of Default is cured within ten (10) days to the satisfaction of Cat Financial, Cat Financial may exercise any or all of the following rights and remedies:

(A) Cat Financial may terminate its commitment to make Loan(s) and may declare the entire unpaid principal amount of all Schedule(s), all interest accrued and unpaid thereon, and all other amounts payable under the Transaction Documents to be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which Borrower hereby expressly waives;

(B) Cat Financial may: (i) proceed to enforce this Agreement, the Schedule(s) and the other Transaction Documents by suit or proceedings in equity, at law or in bankruptcy, whether for specific performance, for the recovery of Borrower’s Obligations, to enforce the Lien on the Equipment granted to Cat Financial or for the enforcement of any other legal or equitable remedy available under Applicable Law; (ii) without notice, liability, or legal process, enter upon the premises where any of the Equipment may be and take possession thereof, if valid under Applicable Law; (iii) require Borrower to assemble the Equipment or any portion thereof and make it available to Cat Financial at a place designated by Cat Financial which is reasonably convenient to Cat Financial and Borrower, if valid under Applicable Law; and/or (iv) exercise any rights and remedies available to Cat Financial as a secured party by law or agreement;

(C) As valid under Applicable Law, Cat Financial may undertake commercially reasonable efforts to sell or dispose of all or any part of the Equipment and the proceeds of any such sale or disposition shall be applied first to reimburse Cat Financial for all reasonable expenses of retaking, holding, preparing for sale or disposition, and selling or disposing of any item of the Equipment, including all taxes and reasonable attorneys’ fees and, second, to pay all Obligations and liabilities secured hereby. Any surplus shall be paid to the person entitled thereto. Borrower shall promptly pay any deficiency to Cat Financial.

5.3. Remedies Cumulative; No Waiver . All agreements and undertakings of Borrower in any Transaction Document shall be deemed cumulative to and not in derogation or substitution of any other agreement or undertaking of Borrower in any Transaction Document. The failure or delay of Cat Financial to exercise or enforce any rights, Liens, powers, or remedies hereunder (all of which are cumulative and nonexclusive) or under any other Transaction Document shall not operate as a waiver thereof but all such rights, Liens, powers, and remedies shall continue until all Obligations owing or to become owing from Borrower to Cat Financial have been paid in full.

SECTION 6. SUCCESSORS AND ASSIGNS

Borrower and Guarantor shall not assign their respective rights or obligations under this Agreement or any other Transaction Document. Cat Financial has the right to assign this Agreement and all or any part of its interest and rights herein at its sole discretion without providing notice or obtaining the consent of Borrower or Guarantor. This Agreement shall be binding upon and inure to the benefit of Borrower, Guarantor and Cat Financial and their respective successors and assigns.

SECTION 7. GENERAL

7.1. Certain Matters of Construction . Section titles appear for convenience only and shall not affect the interpretation of this Agreement. All references to any Transaction Document or other instrument or agreement shall include all modifications, amendments, extensions, or renewals thereto.

7.2. Amendments . This Agreement may not be amended or waived except by written instrument signed by the parties hereto. In the event an amendment to any Transaction Document is, in Cat Financial’s sole discretion, required due to any request, action, or inaction of Borrower, including but not limited to any voluntary or mandatory prepayment of the Obligations, Borrower shall reimburse Cat Financial for all costs and expenses associated with such amendment, including but not limited to the reasonable fees and out-of-pocket expenses of outside counsel and other advisers for Cat Financial.

7.3. Notices . All communications under this Agreement shall be in writing and shall be mailed by courier, delivered by hand or transmitted by a telecommunications device capable of transmitting or creating a written record to the address set forth on the first page of this Agreement.

7.4. Costs, Expenses, and Indemnification . Borrower agrees to pay all costs and expenses in connection with the preparation, execution, delivery, enforcement and legal advise in respect of any Transaction Document, including, without limitation, the reasonable fees and expenses of Cat Financial’s outside counsel. Borrower further agrees to indemnify and hold harmless Cat Financial from and against any and all (i) Taxes or assessments, governmental charges or levies, duties, fees, deductions or withholding, restrictions or conditions of any nature or other amounts imposed by, or behalf of, any government or taxing authority thereof ( excluding taxes imposed on net income and all income and franchise taxes of the United States or any subdivision thereof on Cat Financial), and (ii) damages, losses, liabilities, costs and expenses resulting from, related to or connected with any Transaction Document or the transactions contemplated hereby.

7.5. Power of Attorney . Borrower hereby irrevocably appoints Cat Financial (and all Persons designated by Cat Financial) as Borrower’s true and lawful attorney (and agent-in-fact) with the power and authority to sign on behalf of the Borrower all documents, schedules and notices necessary to effect and maintain a first priority continuing security interest in favor of Cat Financial over the Equipment. Cat Financial or its designee may, in Borrower’s or Cat Financial’s name and without notice to and at the expense of Borrower, do or commit to all reasonable acts necessary to fulfill Borrower’s Obligations under this Agreement.

7.6. Survival . All warranties, representations, agreements and covenants made by Borrower and Guarantor herein or in any other Transaction Document shall be considered to have been relied upon by Cat Financial and shall survive the making of the Loan regardless of any investigation made by or on behalf of Cat Financial. All statements in any other Transaction Document shall constitute warranties and representations by Borrower or Guarantor hereunder.

7.7. Submission to Jurisdiction and Service of Process . Borrower and Guarantor irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or any Transaction Document may be instituted in any Federal or State court sitting in the State of New York, U.S.A. and Borrower and Guarantor, in respect of each, their respective Properties, and revenues, irrevocably submits to the jurisdiction of these courts. Borrower and Guarantor waive personal service of process and irrevocably consent that service of process upon it may be made by the mailing of copies thereof by certified or registered mail, return receipt requested, at its address set forth in this Agreement and service so made shall be deemed completed on the tenth (10 ^th ) business day after such service is deposited in the mail. Nothing herein shall affect the right to serve process in any other manner permitted by law. Borrower and Guarantor agree that final judgment against either in any legal action or proceeding arising out of or relating to this Agreement, or any other Transaction Document shall be conclusive and may be enforced in any other jurisdiction within the United States by suit on the judgment, a certified or exemplified copy of which judgment shall be conclusive evidence thereof and of the amount of its indebtedness, or by such other means provided by law.

7.8. Governing Law . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF.

7.9. Right of Setoff . Borrower and Guarantor grant Cat Financial the right to apply, at any time and from time to time should an Event of Default exist hereunder, any and all obligations owing from Cat Financial and/or any affiliate or subsidiary of Cat Financial (or its assignees) to Borrower or Guarantor toward repayment of any sums owing from Borrower or Guarantor to Cat Financial hereunder. Borrower and Guarantor authorize Cat Financial to direct any affiliate or subsidiary of Cat Financial to pay any obligations owing to Borrower or Guarantor, as the case may be, directly to Cat Financial in satisfaction of its obligations to Borrower or Guarantor, and hereby consent to the payment of such monies to Cat Financial by any of its affiliates and/or subsidiaries. Borrower and Guarantor shall not have and hereby waive any right of setoff or reduction due to any reason whatsoever, including disputes outside this transaction.

7.11. Severability of Provisions . Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.

7.12. Consequential Damages. Borrower and Guarantor hereby fully waive any claim or right now or hereafter existing against Cat Financial for any incidental, special, or consequential damages whether based on contract, warranty, tort (including negligence and strict liability), or any other cause of action.

7.13. Jury Trial Waiver . BORROWER, GUARANTOR AND CAT FINANCIAL EACH WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY TRANSACTION DOCUMENT OR THE OBLIGATIONS. BORROWER AND GUARANTOR ACKNOWLEDGE THAT THE FOREGOING WAIVER IS A MATERIAL INDUCEMENT TO CAT FINANCIAL ENTERING INTO THIS AGREEMENT AND THAT CAT FINANCIAL IS RELYING UPON THE FOREGOING WAIVER IN ITS FUTURE DEALINGS WITH BORROWER AND GUARANTOR. BORROWER AND GUARANTOR WARRANT AND REPRESENT THAT THEY HAVE REVIEWED THE FOREGOING WAIVER WITH THEIR RESPECTIVE LEGAL COUNSEL AND HAVE KNOWINGLY AND VOLUNTARILY WAIVED THEIR RESPECTIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE COURT MAY FILE THIS AGREEMENT AS A WRITTEN CONSENT TO A TRIAL.

SECTION 8. GENERAL DEFINITIONS

8.1. Defined Terms. When used herein, the following terms shall have the following meanings and include the plural as well as the singular:

“ Affiliate ” means any Person (i) which directly or indirectly controls, is controlled by, or is under common control with, Borrower or Guarantor; (ii) which beneficially owns or holds 10% or more of any class of Borrower’s or Guarantor’s voting stock; or (iii) which has 10% or more of its voting stock (or in the case of a Person which is not a corporation, 10% or more of the equity interest) beneficially owned or held by Borrower, Guarantor or a Subsidiary of either Borrower or Guarantor. For purposes hereof, “control” means the power, directly or indirectly, to cause the direction of the management and policies of a Person, whether through the ownership of voting stock, by contract or otherwise.

“ Agreement ” means this Loan Agreement as amended or otherwise modified from time to time.

“ Applicable Law ” means all laws, rules and regulations applicable to the Person, conduct, transaction, covenant or Transaction Documents in question, including, but not limited to, all applicable common law and equitable principles, state and federal constitutions, statutes, rules, regulations and orders of governmental bodies and all judicial orders, judgments and decrees.

“ Bank Account ” means Cat Financial’s account with JP Morgan Chase Bank, New York, New York, USA, account number 910-2-469872, ABA code 021-000021, or such other account designated by Cat Financial in writing.

“ Base Rate ” means the rate of interest specified in each Schedule.

“ Business Day ” means a day other than a Saturday, Sunday, or a day on which banks are authorized by law to be closed in New York, New York.

“ Collection Expenses ” means all reasonable costs and expenses incurred by Cat Financial after an Event of Default in connection with efforts to collect or recover any of the Obligations or the Equipment from Borrower, including, without limitation, legal fees.

“ Credit Agreement ” means that certain Second Amended and Restated Credit Agreement between Guarantor, Royal Bank Canada and the Lenders Parties thereto, dated April 26, 2007, as amended.

“ Default ” means an event or condition the occurrence of which would, with notice or lapse of time, become an Event of Default.

“ Distribution ” in respect of any corporation means: (i) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock); and (ii) the redemption or acquisition by the corporation of its capital stock unless made contemporaneously from the net proceeds of the sale of its capital stock.

“ Dollars ” and the sign “ $ ” means the currency of the United States of America.

“ Equipment ” means all Property listed in the Schedule(s) to this Agreement which is the subject of Liens granted in favor of Cat Financial.

“ Excess ” means any interest charged or received in excess of the Maximum Rate.

“ Event of Default ” shall have the meaning ascribed thereto in Section 5.1.

“ Fiscal Year ” means Borrower’s and Guarantor’s respective financial accounting year.

“ GAAP ” means generally accepted accounting principles as in effect in the United States of America from time to time.

“ Guarantor ” means Allis-Chalmers Energy Inc.

“ Indebtedness ” as applied to a Person means, without duplication all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, (i) the obligations for borrowed money; (ii) the obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of business); (iii) the obligations secured by Liens or payable out of the proceeds or production from Property now or hereafter acquired; (iv) the obligations evidenced by notes, acceptances, or other instruments; (v) obligations to purchase securities or other Property arising out of or in connection with the sale of the same or substantially similar securities or Property; (vi) capitalized lease obligations and (vii) any other obligation for borrowed money or other financial accommodation including the Obligations under this Agreement.

“ Late Payment Rate ” shall have the meaning ascribed thereto in Section 1.6 of this Agreement.

“ Lien ” means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority, or other security agreement or preferential arrangement, charge, or encumbrance of any kind or nature including, without limitation, any conditional sale or other title retention agreement or any capital lease obligation having substantially the same effect as any of the foregoing whatsoever.

“ Loan ” shall have the meaning ascribed thereto in Section 1.1 of this Agreement.

“ Loan Closing Date ” means the dates on which Loans under this Agreement will be made by Cat Financial as described in Section 1.2 of this Agreement.

“ Material Adverse Effect ” means any condition which has or may be reasonably expected to have a material adverse effect upon: (i) the business, operations, Properties or financial condition of Borrower or Guarantor; (ii) the validity or enforceability of any Transaction Document; or (iii) the ability of Borrower or Guarantor to perform its Obligations or upon any rights or remedies under any Transaction Document or of Cat Financial to enforce or collect the Obligations in accordance with the Transaction Documents and Applicable Law.

“ Maximum Rate ” means the maximum rate of interest permitted by Applicable La