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8-K - FORM 8-K - BASIC ENERGY SERVICES, INC. | h69825e8vk.htm |
EX-99.1 - EX-99.1 - BASIC ENERGY SERVICES, INC. | h69825exv99w1.htm |
Exhibit 99.2
Operator
Good morning, everyone. Thank you for standing by. And welcome to the Basic Energy Services
fourth quarter earnings conference call. During todays presentation, all parties will be on a
listen-only mode. Following the presentation, the conference will be open for question and answer,
and instructions will be given at the time. This conference is being recorded today, Wednesday
February 24, 2010. And now I would like to turn the conference over to our host, Mr. Jack Lascar.
Please go ahead, sir.
Jack Lascar Basic Energy Services Investor Relations
Thank you, Barbara. And good morning, everyone. Thank you for joining us today and welcome to
the Basic Energy Services fourth quarter 2009 earnings conference call. Before I turn the call over
to management, I have a few items to go over. If you would like to be on our e-mail distribution
list to receive future news releases please call us at 713-529-6600. If youd like to listen to a
replay of todays call it will be available via webcast by going to the Investor Relations section
of the Companys web site at www.basicenergyservices.com or via recorded instant replay until March
4. The information was provided in yesterdays earnings release. The information reported on this
call speaks only as of today, February 24, 2010, and therefore you are advised that time-sensitive
information may no longer be accurate as of the time of any replay.
Before we begin, let me remind you that certain statements made by management during this
conference call include forward-looking statements and projections made in reliance to the Safe
Harbor provision of the Private Securities Litigation Reform Act of 1995. Basic Energy Services has
done every reasonable effort to ensure that information and assumptions on which statements and
projections are based are current, reasonable and complete. Important risk factors that could cause
actual results to differ materially from the expectations are disclosed in Item 1-A of Basics Form
10-Q and Form 10-K filed with the SEC. While Basic makes these statements and projections in good
faith, neither Basic nor its management can guarantee that anticipated future results will be
achieved. Basic assumes no obligation to publicly update or revise any forward-looking statements
made herein or any other forward-looking statements made by Basic whether as a result of any
information or future events or otherwise.
At this point Ill turn the call over to Ken Huseman, president and CEO.
Ken Huseman Basic Energy Services President, CEO
Thanks, Jack. Good morning and welcome to those joining us on the call. With me today to
discuss our performance for the quarter is Alan Krenek, our CFO.
As detailed in our press release, we reported a modest improvement in our financial results,
compared to the third quarter, as improving market conditions offset the seasonal factors of fewer
work days, shorter daylight hours and adverse weather across all our markets. Total revenue for the
quarter of $128 million was 3% higher than the third quarter and was a second consecutive
sequential revenue increase. Increased activity in the oil-oriented markets, particularly for
drilling and completion activity, drove sequential increases in revenue in our pressure pumping,
drilling and fluid services segments. The resumption in drilling and frac activity and a dispersion
of the industrys available fleet over several markets improved demand for our pumping services and
reduced pressure on bid rates to allow some modest margin improvement in that segment.
Demand in our fluid services segment improved over the course of the quarter, with significant
increases in activity in the Williston Basin and the Permian region. Pricing in this segment was
under pressure in our largest frac markets early in the quarter, as several larger trucking
companies discounted frac tags and auxiliary services. But that practice subsided toward year end
as the frac calendar filled.
Our well and servicing rig utilization averaged 41% in the quarter down slightly from the 42%
recorded in the third quarter. Shorter days, fewer work days due to holidays, and some adverse
weather at year end reduced what was otherwise a significantly stronger market in just about every
region. Rates continued to be stable, with a slight reduction in our reported rate per hour related
to the shift in the proportion of work generated from lower rate well servicing work as opposed to
workover activity. Our substantial presence in the Permian region is offsetting continued weakness
in the more gas-prone markets in our well servicing business. We were seeing utilization in the
Permian market well over 60% in non-holiday weeks during the quarter.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Our EBITDA margin of 7% for the quarter increased by 200 basis points from the third quarter but
remains at a relatively low at a historically low level, reflecting the erosion in utilization
and pricing weve experienced since 2008. With the cost reductions weve implemented over the past
year and the people and infrastructure in place to support much higher activity levels than weve
had recently, improving utilization will drive fairly significant increases in margins even without
improved pricing.
As reported in our December activity update, we began committing new capital in the fourth quarter
to add equipment and build our presence in selected markets. We spent approximately $20 million
during the quarter for fluid services equipment, late model well servicing rigs, and we closed the
sole acquisition of the year. The well servicing rigs and most of the fluid services assets will
augment our existing business in the Williston basin. We viewed the acquisition of Team Snubbing in
Conway, Arkansas, which closed on December 28, as a platform for adding our other services in the
Fayetteville shale market. The existing well count and ongoing drilling activity in that area
should support a stable market for the type of services we provide.
At this point Ill turn the call over to Alan to lead you through the details of our results.
Alan Krenek Basic Energy Services CFO
Thank you, Ken, and good morning. Id like to take a few minutes to give a brief overview of
our other income statement items and then discuss our balance sheet, liquidity and capital
acquirements.
Our G&A expense for the fourth quarter of 2009 was $22.6 million, down 2.5 million, 10%
sequentially. G&A expense was favorably impacted by lower bad debt expense and insurance settlement
in the current quarter. G&A expense in 2009 was $104 million compared to $115 million in 2008, a
decrease of 10%. We expect quarterly G&A to be in the $24 million to $25 million range for the
near-term. Depreciation and amortization expense in the fourth quarter was $33.9 million compared
to $33.5 million in the prior quarter. Depreciation and amortization expense for 2009 was $132.5
million compared to $118.6 million in 2008, an increase of 12%. Based on our current capital
expenditure budget for 2010, we expect quarterly depreciation and amortization to be approximately
$33 million to 34 million for 2010.
Net interest expense in the fourth quarter rose to $11.4 million from $9.6 million in the third
quarter, which reflects a full quarter of interest for the senior secured notes that were issued in
late July. We expect quarterly net interest expense to be approximately $11.5 million in 2010. The
effective tax rate was a benefit of 26% for the full year in 2009. When you exclude the goodwill
impairment in the first quarter and a loss on early extinguishment of debt in the third quarter the
effective tax rate would be 37%. We expect our tax benefit rate to be 36.5% for 2010.
Our unrestricted cash balance at December 31 was $125 million, down from $137 million at September
30. Restricted cash was $14 million, no change from September 30. Restricted cash represents cash
used to secure letters of credits related to insurance collateral. During 2009 we generated cash
flow from operations of approximately $89 million with $11 million of that being produced in the
fourth quarter. The majority of the cash flow was from reduction of Accounts Receivable.
Our DSO at December 31 was 62 compared to 72 at September 30 and 65 at December 31, 2008. The
reductions in DSO from September 30 is a result of company-wide focus on invoicing efficiency and
collection efforts. We expect our DSO to be in the low 60-day range to be in the near-term. Total
capital expenditures for the fourth quarter were $11 million of which approximately $4 million was
related to expansion projects, $4 million for replacement, refurbishment and maintenance capital
expenditures, and $3 million for facilities and IT infrastructure. For 2010 capital spending we
plan to spend approximately $35 million, which represents the minimal level to sustain our existing
asset base. Based on the operating environment and geographical area, we may spend additional
capital for expansion in further equipment replacements in 2010.
In December 31 we had total debt of $502 million which consisted of $225 million of senior notes
due 2016, $214 million net of discount of senior secured notes due 2014, and $63 million of capital
leases. Net debt was $377 million at December 31. 2009 was a difficult year to manage through.
However, with the senior notes offering we completed in July we secured the financial position of
Basic and thus have the liquidity to take advantage of growth opportunities in 2010 and beyond.
At this point Ill turn the call back over to Ken.
Ken Huseman Basic Energy Services President, CEO
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Thanks, Alan. Well essentially reiterate most of the outlook provided in our third quarter
call. Oil prices remain well above the level necessary to support aggressive capital spending
programs, to workover and drilling projects, and routine maintenance is being performed without
delay. We expect oil-related activity to continue to increase as we get beyond the first quarter
weather concerns and 2010 budgets are released to E&P company field organizations.
The outlook for natural gas prices continues to be uncertain and customers will remain cautious in
their spending until gas prices exhibit strength and stability. While we expect our activity to
creep up over the next several months, we are not projecting improvements in our rate structure at
least through the first half of 2010. Price increases will come in the form of recovery of wage
increases when the current industry workforce is more fully utilized and we begin competing for
qualified field personnel, which by the way is occurring in certain markets. We expect wage
inflation will be a factor in the second quarter.
We continue to see attrition of the available fleet in each of our segments, although not to the
extent we presumed in our third quarter call. The perception of improving business prospects is
probably moderating the pressure on some of the financial players to liquidate the business and
encouraging attempts to wait out the cycle. On the other hand, a lot of older, less efficient
equipment is stacked and will likely stay that way until demand and rates return to the level we
were seeing in 2008. Most importantly, we are seeing a shift in customers in placing a premium on
service quality and focusing less on the lowest bid rate. Over the course of 2010, we expect the
supply of available equipment, combined with higher demand from our customers, to cause utilization
to increase throughout the year. Higher utilization will drive much-improved margins and absolute
results.
So along with everyone else in the industry, were glad to have 2009 behind us and look forward to
reporting year-over-year increases in the coming quarters. Operator, lets open the call for
questions.
QUESTION AND ANSWER
Operator
Thank you. (Operation Instructions). Our first question comes from the line of James West from
Barclays Capital. Please go ahead, sir.
James West Barclays Capital Analyst
Good morning, Ken, good morning, Alan.
Ken Huseman Basic Energy Services President, CEO
Hello, James.
James West Barclays Capital Analyst
Guys, we had a conversation back in early December that I distinctly remember because we were
talking about the Permian basin. At that point you had talked to a lot of your customers about
their plans for early 2010. And I believe we were talking about numbers that the oil rig count in
the Permian basin could be up 50% by perhaps as early as middle of 2010. Do you think thats still
the case? And if so, where do you think we are in that process?
Ken Huseman Basic Energy Services President, CEO
Well, I think the rig count is the drilling rig count has progressed quite a bit already. I
think the last count was about 210 or 215, 215 rigs running. Projections are for another 30 or 40
over the next several quarters. Here we are toward the end of the first quarter. Some of thats
been hampered, I think, by just plans being not implemented quite as quickly as people intended. We
are seeing and hearing of labor issues on activating some drilling rigs. So were seeing some
kind of some pinch points already develop in getting that activity ramped up; like everybody says
individually when you add it all up its a pretty significant increase. So I think its on its way
but its not there yet.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
James West Barclays Capital Analyst
Okay. And that 210 compares to probably 160 or so?
Ken Huseman Basic Energy Services President, CEO
Yes.
James West Barclays Capital Analyst
Back in December? Okay. So we are seeing a pretty good move.
Ken Huseman Basic Energy Services President, CEO
Yes. It was probably 160 in the fall of last year. I cant remember exactly the time. But its
about doubled since the bottom in early 08.
James West Barclays Capital Analyst
Okay. And then what level of utilization do you think you need now given the labor shortages
that are developing to start to actually see pricing improvements on top of wage improvements or
wage cost increases?
Ken Huseman Basic Energy Services President, CEO
James, I think its pretty premature to project that. Were kind of far away from that from an
industry utilization standpoint. I think our utilization of available equipment is similar to what
the industry in total is seeing. Were seeing quite a bit more utilization in certain markets, but
as you know everything has wheels on it. So I think were a ways away. And thats why were kind of
saying that we dont expect real pricing improvement for most of this year if at all this year,
just because of the utilization of the industry throughout the country.
James West Barclays Capital Analyst
Okay. And then just last question for me on the CapEx side you gave out a number for
maintenance CapEx. I know you guys have talked about additional CapEx if opportunities arise. At
this point given what you see in late February here, how much additional CapEx would you anticipate
spending?
Ken Huseman Basic Energy Services President, CEO
Well, were reserving that number until we get board authorization. Well discuss that next
week at a board meeting. So we dont want to get ahead of that process.
James West Barclays Capital Analyst
Okay. But we should anticipate there will be additional CapEx on top of maintenance CapEx?
Ken Huseman Basic Energy Services President, CEO
Oh, sure.
James West Barclays Capital Analyst
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Okay.
Ken Huseman Basic Energy Services President, CEO
And its purely a function of what we see develop in the business; if utilization exceeds what
our projections are and we see opportunities out there well certain take advantage of them. We
have the liquidity to do so.
James West Barclays Capital Analyst
Okay. Thanks, Ken .
Operator
Thank you. And our next question comes from the line of Dan Boyd with Goldman Sachs. Please go
ahead, sir.
Dan Boyd Goldman Sachs Analyst
Good morning, guys.
Ken Huseman Basic Energy Services President, CEO
Hello, Dan.
Dan Boyd Goldman Sachs Analyst
Hey, Ken, can you give us a refresher on what your business mix might be oil versus gas today
versus where it was at the peak? Im assuming youre a little more oily today given the decline in
gas activity?
Ken Huseman Basic Energy Services President, CEO
Yes. And thats not a scientific number, but its about 60/40 oil to gas. We think we were
about evenly split in 2008. And as you suggest, the decrease in gas activity has been the primary
driver of that, although if you compare it to where we were in mid 2009, certainly oil activity has
seen the most improvement.
Dan Boyd Goldman Sachs Analyst
Weve also seen if you look at the oil rig count were back to were above or making new
highs. Whats the disconnect between why the well servicing rig count isnt having the same strong
reaction to the commodity prices in your view?
Ken Huseman Basic Energy Services President, CEO
Well, it has. We just dont segregate regional utilization to match exactly with oil rig count
versus gas rig count. As I said in our comments in the Permian basin, non-holiday weeks we were
well above 60% in well servicing utilization, which is predominantly obviously an oil market. That
means that we had some
gas-oriented areas where were seeing a lot lower utilization to get to the company-wide level of
low 40s. So if we were to break it out purely on oil versus gas, I think youd see that.
But as I said in James question also, everything we own has wheels on it. So well move that
equipment around to take advantage of those improvements. And we have. And weve activated more
equipment in the Permian and in the oil markets than we have in the gas markets.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Dan Boyd Goldman Sachs Analyst
Okay. And then thats maybe one reason why its going to take awhile before you see the price
increases as everyone starts to just reallocate equipment to areas where youre seeing the
strength.
Ken Huseman Basic Energy Services President, CEO
Right. And keep in mind that most well servicing demand comes from existing well count, not
new well drilling. You know, it takes a couple of dozen drilling rigs running to support one well
servicing rig in terms of completion activity. So we use the drilling rig count as sort of an
indicator of capital spending. And there has been less workover oriented spending to the end of the
year than the oil rig oil drilling activity would imply. Were expecting that to kick in as new
budgets are released to the field.
Dan Boyd Goldman Sachs Analyst
And then the last question. Are you seeing any increased competition from maybe a lower-end
drilling rigs which are there are a lot of them out there that are currently idle, Id assume at
least from the new drilling side of the business, the oil companies might be keeping the drilling
rigs there as opposed to using a well servicing rig for any type of completion services? Are you
seeing that or is that not happening?
Ken Huseman Basic Energy Services President, CEO
Well, we always hear that. But its really hard to actually see it in practice. Because a well
servicing rig at $250, $300 a hour is still a lot cheaper than a drilling rig at $11,000, $12,000 a
day. And particularly when you factor in the cost of rental equipment that a drilling rig doesnt
have to run production equipment, et cetera. So you hear that all the time. And we just dont think
that makes sense in practice.
Dan Boyd Goldman Sachs Analyst
Okay. Thanks. Ill turn it back over.
Operator
Thank you. Our next question comes from the line of Joe Hill with Tudor Pickering. Please go
ahead, sir.
Joe Hill Tudor Pickering Analyst
Good morning.
Ken Huseman Basic Energy Services President, CEO
Hello, Joe.
Joe Hill Tudor Pickering Analyst
Guys, how many monthly rig hours can you provision with the current crew count?
Ken Huseman Basic Energy Services President, CEO
I think we could increase our overall utilization another 10 percentage we could increase
hours by another 10 percentage points.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Joe Hill Tudor Pickering Analyst
Okay.
Ken Huseman Basic Energy Services President, CEO
And thats overall by working longer days, longer weeks than we have been. Some of our
customers are now starting to make sure we get to work first thing Monday morning and work through
Friday. Thats something thats been developing over the course of the last couple of months. So we
have that crew available. We just need to work them a few more hours each week. And thats
dependent on each market. The oil markets obviously are closer to that point where were going to
have to hire more people. We have been hiring people in some local markets already. The gas areas,
were probably a ways away from being strapped for people in that fashion.
Joe Hill Tudor Pickering Analyst
Okay. And then Ken, you said the competitive pressure in fluid handling had let up a bit late
in the quarter. And I understand guys were essentially discounting or giving away the frac tanks.
Whats your outlook for that business going forward? And should we expect utilization to continue
to tick up? Anecdotes of frac activity have been very strong recently. I know this has been the
weak sister of the portfolio. So should we expect to see that business pick up materially going
forward?
Ken Huseman Basic Energy Services President, CEO
Yeah, for several reasons. We start deploying assets on a little bit higher rate work as more
work comes available. We kind of move from production water hauling to frac activity as we have the
opportunity. We run more hours per day. So our average revenue per truck, as we measure it,
increases. As you suggested, people are not discontinued discounting or throwing in the frak tanks
for free and some other charges. We saw that dissipate. So a combination of moving to higher rate
work within our own spread of opportunities as well as price level improvement is going to move
that margin up.
Weve also expanded and added more of the frac-related equipment. We took delivery of a lot of
tanks in the Williston Basin in the fourth quarter. Were sending another couple of tank spreads
into that market along with a lot of other equipment. So youll see that number be pulled forward
in the first quarter. I
think most frac companies suggest that they are booked up through the first quarter at least and
further for most of them. And weve seen that in our pumping services business as well.
Joe Hill Tudor Pickering Analyst
Okay. And then finally, I know you guys mentioned February weather having an effect in your
last ops report. Whats your sense as to how February shakes out relative to January net of weather
effects?
Ken Huseman Basic Energy Services President, CEO
Net of weather effects would be up. I think underlying demand is certainly there. We had the
largest week last week that weve had in a year overall. But then we had four inches of snow in
west Texas yesterday and essentially had zero rig hours in a market that represents about half of
our activity. So the underlying demand is there, but I hate to use weather as an excuse because it
happens every year. But it is a factor in this point in the cycle.
Joe Hill Tudor Pickering Analyst
Well, I guess what I was asking you is that after you take into account the effect of all
that, do you think February shakes out a bit better, then?
Ken Huseman Basic Energy Services President, CEO
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Yes, I think so.
Joe Hill Tudor Pickering Analyst
Okay.
Ken Huseman Basic Energy Services President, CEO
Its a bit shorter month, but no holiday.
Alan Krenek Basic Energy Services CFO
Yes. It wouldnt be worse for sure.
Joe Hill Tudor Pickering Analyst
Okay. Good.
Ken Huseman Basic Energy Services President, CEO
Just so you know, we still have a week left in the month, so
Joe Hill Tudor Pickering Analyst
Ill keep my fingers crossed.
Ken Huseman Basic Energy Services President, CEO
Yes. Me, too .
Operator
Thank you. And our next question comes from the line of Pierre Conner with Capital One
Southcoast. Please go ahead, sir.
Pierre Conner Capital One Southcoast Analyst
Good morning, gentlemen.
Ken Huseman Basic Energy Services President, CEO
Hello, Pierre.
Alan Krenek Basic Energy Services CFO
Hey, Pierre.
Pierre Conner Capital One Southcoast Analyst
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Hey. Listen, on the well service first, Ken, you mentioned that the hourly rate was purely a
mix issue, which youre working on, and not anything in pricing. And so was that affected by the
daylight hours and such as well? And what would that trend be for as you saw the hours improve in
January we talked about February, you know, 1Q, can the hourly rate improve just on mix?
Ken Huseman Basic Energy Services President, CEO
It will as the year progresses. The first quarter I would suspect would be flat. And what goes
on there or what produces that, of course, is as activity in these oil areas which is primarily
well servicing picks up, those hours generate less per hour than workovers in the Rockies. So as
that proportion shifts to maintenance, even if your rate doesnt change, the average will drop a
little bit. So thats were seeing.
Pierre Conner Capital One Southcoast Analyst
Okay.
Ken Huseman Basic Energy Services President, CEO
Profitability theres no difference in profitability. We make the same margin and a lot of
times more margin on those well servicing in terms of percentage on those well servicing hours
than we do on the workover hours.
Pierre Conner Capital One Southcoast Analyst
Thats helpful. On the CapEx side in well servicing particular where you might look at
opportunities where the markets telling you, what is your leaning towards any additional
acquisitions if theyre out there? Or do you have and how many do you have equipment? They
didnt retire all the rigs, but you still have equipment that you could upgrade if utilization were
to warrant?
Ken Huseman Basic Energy Services President, CEO
Sure. We still have the fleet essentially that we had that generated over $1 billion in
revenue in 2008. Essentially all those assets are still in place, workable, and will be deployed at
the right time, without substantial capital. Weve been working our newest, most efficient
equipment over the course of the last year, obviously. The rigs that we replaced that we purchased
for the Williston Basin, for instance, were new equipment suited for that market and allowed us to
not rebuild some other equipment for that market. So thats the reason we opted to purchase those
rigs. They were kind of market-ready and kept us from having to rebuild equipment to match those
restrictive road requirements that we find in North Dakota.
Pierre Conner Capital One Southcoast Analyst
Is it safe to say that generally the returns on rebuilt equipment is similar to the purchase
markets now? Or it just depends?
Ken Huseman Basic Energy Services President, CEO
Well, its still a little bit better to refurbish older equipment. I think its going to be
difficult to find the same deal on some of those late model rigs that we had that we found over the
last six months. So a lot of our older equipment will be in better shape to rebuild it than just
purchase new.
Pierre Conner Capital One Southcoast Analyst
Okay. I understand.
Ken Huseman Basic Energy Services President, CEO
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Let me answer your question on acquisition. We have seen a significant increase in deal flow
lately across the breadth of size, so to speak, and well continue to pursue those. We think well
do the normal amount as we go down the path.
Pierre Conner Capital One Southcoast Analyst
Okay. That leads in I was going to ask you about one of you mentioned it was a $20
million spend in the quarter for total acquisitions including the frac equipment, et cetera that
you disclosed as well as Team. Can you give us some perspective on that, what revenue you would
expect that to generate, maybe on a run rate basis or during the first quarter, something of that
nature?
Ken Huseman Basic Energy Services President, CEO
Well, its kind of go ahead, Alan.
Alan Krenek Basic Energy Services CFO
I was just going to say two of those rigs that were being sent, deployed up to the Bakken went
up in late December. And the other four are going to be staged throughout the quarter. So I
wouldnt expect too much out of that in the quarter, maybe two rigs worth. Two or three rigs worth.
Team Snubbing deals probably an additional $1 million or so in the quarter.
Pierre Conner Capital One Southcoast Analyst
Okay.
Ken Huseman Basic Energy Services President, CEO
One thing were seeing in the Bakken with the reality of those winters have set in. So we are
moving equipment in there ahead of the time it will actually see full utilization because of just
the severe weather impact that they see occasionally up there. They have to heat, for instance on
the frac side they have to heat that frac water. And some of the operators are figuring out that it
costs a lot of money to heat water to 80 degrees when its 40 below. So seeing some impact on frac
activity probably going to be a bit moderated between now and when warmer weather comes in.
Pierre Conner Capital One Southcoast Analyst
Okay. All right. Moving to the fluid services, fluid handling business, and I think Joe
started in at about where the margins will go. You indicated they should increase. Could I get you
to give me some perspective? Can we get them back to obviously youd like to see them back about
3Q levels? The first and second quarters of last year were pretty impressive. Whats it going to
take to get back to those kind of levels? Was it mix that got you?
Ken Huseman Basic Energy Services President, CEO
Some of thats certainly mix. Frac activity is kind of surging back. We did more production
water hauling as proportion to the total in the fourth quarter than we did in the previous portion
of the year. And so I think youll see sort of a mirror image as we go through the year.
Pierre Conner Capital One Southcoast Analyst
Okay.
Alan Krenek Basic Energy Services CFO
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
But on a historical basis, those margins have been traditionally around 30%. And its been
very unusual to see them dip as low as they have. But its just a very competitive market right
now.
Pierre Conner Capital One Southcoast Analyst
Thats a question. Is there enough new interest in discounting to hold them below 30?
Ken Huseman Basic Energy Services President, CEO
No. No. I think, in fact some of the issues that caused that competitiveness have moderated.
Some of those companies have liquidated some assets, gone through restructuring. So were seeing
less competitive pressure as opposed to more, and expect that to continue to benefit us in the next
couple of quarters. Ill keep in mind that it is wintertime and you just dont get as much done
this time of the year as you do in the second and third quarters.
Pierre Conner Capital One Southcoast Analyst
Okay. Appreciate it. Thats good. All right. Thanks, gentlemen.
Operator
Thank you. And our next question comes from the line of William Conroy with Pritchard Capital.
Please go ahead, sir. Mr. Conroy?
William Conroy Pritchard Capital Analyst
Ken, Alan, good morning.
Ken Huseman Basic Energy Services President, CEO
Hey, Bill.
William Conroy Pritchard Capital Analyst
A couple of questions. One, Alan, maybe for you. Can you detail the amount of the income tax
receivable at your end?
Alan Krenek Basic Energy Services CFO
Well, at December 31 we had a receivable of almost $62 million on the books. So the maximum
that we could qualify for a refund going back would be about $62.5 million. So we plan on filing
the tax return on time this year and then immediately following up with a request for a refund. We
think we should maximize the amount of that receivable this year, and then next year have for
2010 have it wont be as big but there will be some additional refunds that will be available to
us. But were not counting it yet until we get it. But we plan on filing very shortly.
William Conroy Pritchard Capital Analyst
Great. And can you also tell us head count at the end of the year and how that compared to
maybe a year ago?
Ken Huseman Basic Energy Services President, CEO
The head count is still about 3800.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
William Conroy Pritchard Capital Analyst
3800.
Ken Huseman Basic Energy Services President, CEO
Which was down about 1700, I think, from the peak in October of 2008. Year-over-year its not
quite that dramatic, but still pretty significant.
William Conroy Pritchard Capital Analyst
And last one, Ken. It sound like from the tone of your comments there may be more margin
leverage in the near-term out of the fluid handling business than the well servicing business.
Would you agree with that?
Ken Huseman Basic Energy Services President, CEO
Yes. I think that we got whacked a little bit more in the fluid services business lately. That
business tends to be pretty resilient. Trucks come and leave the market a little more quickly than
the well servicing segment because those trucks have an use outside the energy business, outside
the oil field. So I think a lot of that equipments been pulled out or moved to busier markets. So
well see those margins overall kind of revert to a historical trend. Well servicing, theres still
a lot of rigs out there. We dont know how many are still marketed and competitive. We think thats
that available fleet has shrunk some. Well have to wait to see how it develops.
William Conroy Pritchard Capital Analyst
Great. Thank you very much .
Operator
Thank you. And our next question comes from the line of Neil Dingmann with Wunderlich
Securities. Please go ahead, sir.
Neil Dingmann Wunderlich Securities Analyst
Good morning, guys.
Ken Huseman Basic Energy Services President, CEO
Morning, Neil.
Neil Dingmann Wunderlich Securities Analyst
Say, Ken, Alan, was wondering bid activity how that looks today versus the beginning of the
year. Just as you see compared for the next month or two?
Ken Huseman Basic Energy Services President, CEO
In which segment? Just across the board or
Neil Dingmann Wunderlich Securities Analyst
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
More just on the well servicing, what youre seeing there. And then as youre talking about
that because you did mention I think in the very last part of your prepared comments about some
customers werent necessarily just looking at pricing. So Im wondering are you just seeing just
general customers coming in in a much larger way? Or just if you can maybe expand on that a bit.
Ken Huseman Basic Energy Services President, CEO
Yes. I think customers are have projects to do, the larger independents and the majors have
budgets to spend now.. So theyre keeping equipment in the field working well to well as opposed to
just performing maintenance as they were late last year. We actually have a couple of areas in oily
markets where we have a board that were working off of where we know where the rigs are going to
be for the next week or so. And the customers dont check every day before we move our location and
talk about rate. Theyre keeping the rig and the crew busy, because they want to keep that rig and
that particular crew. Thats changed completely in the last probably the last 90 days for sure. We
dont have a long-term contract per se for work. Its still call out. But these customers are
keeping their preferred rig and crew busy as opposed to checking on the rate every time.
Neil Dingmann Wunderlich Securities Analyst
You mentioned about the CapEx. I know youll be revisiting that soon. But just wondered
obviously the huge growth we see in the Bakken and the Marcellus and such. Do you foresee maybe
larger facilities in some of those areas, or shipping some capital more towards those areas?
Ken Huseman Basic Energy Services President, CEO
The Marcellus is a little bit farther down the road. We constantly monitor that. The Williston
basin since we have a fairly large presence there weve been moving assets up there. I think we
purchased 150 frac tanks, with probably two-thirds of those on the ground up there. The rest will
be there before the thaw. We have purchased a total of six rigs suited for those weight
restrictions. Those will all be there before the thaw. So yes, we are watching those markets and
well move assets in there as we can, as we see the opportunity.
Neil Dingmann Wunderlich Securities Analyst
Okay. And then last question if I could just the contact drilling services, it seems to
just continue to be pretty steady for you all. Do you see those continuing to work for the same
customers and kind of keep up that steady pace? Or what do you foresee in that area?
Ken Huseman Basic Energy Services President, CEO
Yes, we have five out today. Well have all six of the marketed rigs busy here shortly, we
think, on projects for the most part. I think four of the six will be on multi-well projects that
should carry us into the summer. The other two are working for kind of a handful of customers well
to well, but they always seem to keep us busy. So not anything dramatic along those lines. Those
are shallow rigs, not particularly suited for the Wolfberry which is where the big ramp up in
activity is going. So we think its going to be steady and kind of what you see right now.
Neil Dingmann Wunderlich Securities Analyst
Good to hear. Thanks, guys.
Ken Huseman Basic Energy Services President, CEO
Okay .
Operator
thank you. And our next question comes from the line of Mike Urban with Deutsche Bank. Please
go ahead, sir.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Mike Urban Deutsche Bank Analyst
Thanks. Good morning.
Ken Huseman Basic Energy Services President, CEO
Hello, Mike.
Mike Urban Deutsche Bank Analyst
I was wondering if you could give us a sense for the level of or the flavor cost inflation
we might expect to see starting in I guess the second quarter you said.
Ken Huseman Basic Energy Services President, CEO
Well, I think it wouldnt be unexpected to see something on the order of 10% over the course
of the next quarter or so.
Mike Urban Deutsche Bank Analyst
Okay. And more broadly speaking on the cost side, you guys have done a good job of pulling
costs out of the system really across the board as activity slowed down. Once you kind of get above
that, say 10% growth in hours that you talked about, are there some other costs out there
associated with ramping up activity? Weve seen that in a couple other instances across the sector
where activity is kind of surprised to the upside and a lot of these costs that we start to pull
out start to come back. I wonder if you could comment on that a little bit.
Ken Huseman Basic Energy Services President, CEO
Yes. I think the 10% labor increase, if the industry tries to ramp back up to where it was in
2008 you can throw that factor out the window, because well be competing for a lot of people
across the industry. We dont foresee that; we think its going to be more gradual. Now, if we had
to go activate every piece of equipment we own, wed have to throw some money at activating
equipment for tires and things like that that we pulled off to hold expenses down. But as far as
infrastructure, things like that, we dont see other than labor any significant expenses.
Mike Urban Deutsche Bank Analyst
And what level of utilization would you have to get to where you might have to spend some
money on things other than labor? Like you said, on the equipment and some things that you might
have done to cut costs? I mean I guess how many rigs
Ken Huseman Basic Energy Services President, CEO
Gradually as we activate equipment its just not significant. It would be significant if we
tried to do it all at once. But well be activating equipment each month as we go forward.
Gradually.
Mike Urban Deutsche Bank Analyst
Okay.
Ken Huseman Basic Energy Services President, CEO
It shouldnt be an impact to the utilization improvement, the margin generated by the
increased utilization, should offset the incremental cost associated with activating equipment.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Mike Urban Deutsche Bank Analyst
Okay. Perfect. Thats what I was looking for. Thank you.
Operator
Thank you. And our next question comes from the line of Matt Beeby with Morgan Keegan. Please
go ahead, sir.
Matt Beeby Morgan Keegan Analyst
Thank you. Good morning, guys.
Ken Huseman Basic Energy Services President, CEO
Hey, Matt.
Matt Beeby Morgan Keegan Analyst
You mentioned that your clients are focused on the quality, not necessarily the lowest bidder.
Can you tell us how your rigs compete and maybe some specifics in what youre doing in terms of rig
upgrades?
Ken Huseman Basic Energy Services President, CEO
Well, since 2004 weve purchased a total of 140 new rigs out of the 400 that we operate.
Another 80 of those have been rebuilt over the last four or five-years. So we have well over 200 or
half of our fleet is new or rebuilt. The other half are in relatively good operating condition.
Well watch that, we are evaluating rebuilding, resuming on a more aggressive level our rebuilding
program. We havent needed to do that yet. But were going to watch that.
The turn around on rebuilding equipment is three to six months depending on how extensive the
rebuild is. So well be watching that. We have a couple of rigs in rebuild all the time now. We did
not completely shut that down. We scaled it back significantly. Well resume we purchased some
new frak tanks that were rigged up specifically for the Williston basin, purchased some new trucks
to support that market. Well probably resume our truck replacement program a bit more aggressively
later this year if activity continues.
But my comment was primarily oriented to or related to the fact that customers arent talking
about price, theyre wanting to keep a particular rig and a particular crew that they like and has
been performing
well for them tied up, so to speak, rather than having it work a day or two and then release it and
then maybe not get it back for the next project. So theyre scheduling their work and being careful
to make sure they have the people and equipment they want.
Matt Beeby Morgan Keegan Analyst
Okay. Very good. Also you had mentioned the oil-gas split is 60/40. If you look at the kind of
current commodity environment it seems that could be increasing. What do you guys think about in
kind of the 6-month, maybe 12-month outlook as far as the split goes? How do you see that
progressing?
Ken Huseman Basic Energy Services President, CEO
Well, the oil activity can certainly continue to build while gas activity could go sideways.
So our proportion could continue to grow. If you look at the map, were exposed to almost all the
gas markets with the exception of Appalachia and almost all the oil areas with the exception of
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
California. So it will really depend on where our customers spend their money how that which
direction that pulls us.. But I could see the oil activity continuing to grow and gas holding flat
so the proportion would increase.
Matt Beeby Morgan Keegan Analyst
Okay. Thanks, guys .
Operator
Thank you. (Operator Instructions) . And our next question come from the line of Victor
Marchon with RBC Capital Markets. Please go ahead, sir. Victor Marchon: Thank you. Good morning,
Ken and
Ken Huseman Basic Energy Services President, CEO
Hey, Victor.
Victor Marchon RBC Capital Markets Analyst
First question on well service on utilization side, Ken I think you had talked about on the
last quarter call about 60% utilization, potentially hitting that at some point in the summer.
Given what youve seen year to date an sort of x-ing out whats happened on the weather side, do
you think that theres some upside to that? Do you think youd nudge your forecast a little bit
higher as to what youre seeing from customers?
Ken Huseman Basic Energy Services President, CEO
Id be reluctant to were still talking about being careful about projecting too far into
the future. I think that oil prices certainly warrant a higher level activity than even weve seen.
Well have to get out of this quarter and see how things develop. But Ill probably want to do that
next quarter.
Victor Marchon RBC Capital Markets Analyst
Okay.
Ken Huseman Basic Energy Services President, CEO
If at all.
Victor Marchon RBC Capital Markets Analyst
And the second one I just have was on the pressure pumping side, just wanted to see what you
guys were seeing there from utilization standpoint on your horsepower as well as pricing and sort
of tie that into what your outlook is on the margin side for completion and remedial services.
Ken Huseman Basic Energy Services President, CEO
I think in that segment we are kind of on a more real-time basis seeing improvements beyond
what we expected. I think most other pumping companies have said that theyre booked up through the
quarter and well into the year. Were seeing that as well. The increase in drilling activity,
particularly on the oil side which is right down our fairway, has resulted in us in boosting our
cementing activity. We cement on long strings on new wells as well as doing some of the smaller
fracs. So pretty well booked up, moving equipment around trying to catch every job that we can.
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Feb 24, 2010 / 02:00PM GMT, BAS Q4 2009 Basic Energy Services, Inc. Earnings Conference Call
Discounting has moderated some. Its still the industry never has really charged 100% price
book. But discounts have backed off probably 10 percentage points from where they were, more than
that in some services and markets. But its still pretty competitive. Youll see people pop up all
of a sudden and grab a job from you that you didnt expect to see. But generally were seeing a
much stronger performance in that segment.
I think we expect that well see year-over-year increases in that segment first, probably at least
in the second quarter if not the first. And margins will move not back to where they were but
certainly increase well see sequential improvements in margins as well.
Victor Marchon RBC Capital Markets Analyst
Thats great. I appreciate it. Thats all I had. Thank you.
Operator
Thank you. Theres no further questions in the queue so Ill turn it back to management for
any closing statements. Please go ahead.
Ken Huseman Basic Energy Services President, CEO
Okay. Well, thanks, everyone, for joining us on the call. And we look forward to talking to
you again next quarter. Thank you, operator.
Operator
Ladies and gentlemen, that does conclude our conference call for today. Thank you for your
participation. You may now disconnect.
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