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Basic Energy Services, Inc. (NYSE:BAS)

Q3 2008 Earnings Call Transcript

November 4, 2008, 10:00 am ET

Executives

Sheila Stuewe – IR, DRG&E

Ken Huseman – Vice Chairman, President and CEO

Alan Krenek – CFO, Principal Accounting Officer, SVP of Finance, Treasurer and Secretary

Analysts

Doug Becker – Banc of America Securities

James West – Barclays Capital

Jeff Tillery – Tudor, Pickering, Holt & Co.

Pierre Conner – Capital One Southcoast

Mike Drickamer – Morgan Keegan

Mike Urban – Deutsche Bank

Jim Rollyson – Raymond James

John Daniel [ph] – Simmons and Company

Jack Wagner – MJX Asset Management

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Basic Energy Services third quarter 2008 earnings conference call.

During today’s presentation, all parties will be in a listen only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) As a reminder, this conference is being recorded today, Tuesday, November 4th, 2008.

I would now like to turn the conference over to Ms. Sheila Stuewe. Please go ahead, ma’am.

Sheila Stuewe

Thank you. Good morning to everyone, and welcome to the Basic Energy Services third quarter 2008 earning conference call. We appreciate you joining us today.

Before I turn the call over to management, I have a few items to go over. If you would like to be on our email distribution list to receive future news releases or if you experience a technical problem and didn’t get one last night, please call us at 713-529-6600.

If you like to listen to a replay of today’s call, it will be available via web cast by going to the investor relations section of the company’s website at www.basicenergyservices.com or via recorded instant replay until November 18, 2008. This information was also provided in yesterday’s earning release. The information reported on this call speaks only as of today, November 4th, 2008, 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 call and on the transcript of this conference call include forward-looking statements and projections made in reliance on the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Basic Energy Services has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. The important risk factors that could cause actual results to differ materially from expectations are disclosed in item 1A of Basic’s Form 10-K and Form 10-Q filed with the SEC.

While Basic makes these statements and projections in good faith, neither Basic nor its management can guarantee that the 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 new information, future events or otherwise.

At this point, I’ll turn the call over to Ken Huseman, President and CEO of Basic Energy Services.

Ken Huseman

Thanks, Sheila, and welcome to those joining us on the call on this important national election day. With me on the call today is our Chief Financial Officer, Alan Krenek.

As reported in the press release, we had what we believe to be a very strong quarter and will review those results shortly but given the recent dramatic reduction in volatility and commodity prices I would like to turn the format of the call around this quarter and first address our outlook, the company’s financial position, and how we are planning to manage the anticipated changes in our markets over the next year or so.

As reflected in our third quarter financial statements, basic has a solid balance sheet and strong cash flow. After funding the $60 million Azurite acquisition in late September, we have in excess of $110 million of liquidity with a debt-to-cap ratio of 44%. Year-to-date we have generated $143 million in operating cash flow with $56 million of that in the third quarter. In addition to those operating cash flows we funded a $40 million increase in working capital to support the 60% increase in our year-to-date revenue base over the course of the year. We now have $180 million in high quality accounts receivable.

We expect the funding of working capital to be less of a drain if not a significant source of cash if revenue should stagnate or shrink over the next year. Our debt position is very stable with no near term need to access the debt market. Our 7.125 senior notes do not mature until 2016. Our revolver with $29 million undrawn is in place through 2010. We believe the combination of our cash, working capital, and undrawn revolver is more than adequate capital to weather a protracted downturn in the industry.

We certainly expect capital spending by our customers to decline due to the falloff in oil and gas prices. Existing oil and gas wells, however, will continue to generate solid cash flow for our customers at today’s – and in most cases even much more lower commodity pricing. The majority of our revenue is generated in support of those existing wells. That as the past has shown with the decline in drilling activity, we expect there to be too much equipment chasing the available work. We have taken steps to reduce costs and conserve cash and will continue to do so as necessary to remain competitive in a lower demand environment.

The quality of our fleet provides a great opportunity to conserve cash in a market we expect to see over the next year. Since 2004 we have been upgrading as well as expanding our fleet. We now have one of the newest and freshest fleets in the industry and can scale back our capital spending plans without loosing efficiency or market share. We have already shelved our previously announced new build programs in both our well servicing and drilling segments and have placed limited orders for new equipment in 2009. As we always do we will monitor each of our segments and markets and respond accordingly as we see opportunities develop.

Basic has grown substantially over the years by acquiring successful companies at attractive prices. Those opportunities have diminished over the last several years as the asking prices for well established companies with good assets grew to unattractive levels. We expect that to reverse course over the next six months as the effects of lower industry utilization and a more difficult financing environment set in. The deal flow has already increased as prospective sellers try to beat the impact of the expected slowdown but we believe it is a little too early to act on the deals we have seen thus far. We will position the company to take advantage of the most attractive of those opportunities.

Prior to the meltdown of the equity markets and our share price along with it, we did not consider repurchasing our shares to be in the best interest of shareholders. Up to this point, acquisitions and internal growth opportunities provided more clearly attractive alternatives for building shareholder value. The current environment has caused us to at least temporarily reevaluate that position. Our limited share repurchase is for the time being one of the investment alternatives we will consider in determining how we deploy our adequate but limited capital. Alan will provide additional details on each of those topics in his comments.

Now turning to the performance for the quarter, we did set a new record for revenue and EBITDA. Revenue this year was 21% higher than the third quarter of 2007 primarily reflecting the improved market conditions and fleet expansion across all our markets and services. Adjusted EBITDA for the quarter rose $78.1 million or 28% of revenue compared to $68.8 million and 30% of revenue in the prior year quarter. Higher labor and fuel costs and stagnant pricing resulted in lower margins in most of our service lines compared to last year.

Those higher margins – revenues and margins flowed through to produce fully diluted earnings per share of $0.64 in this quarter compared to $0.59 reported in the prior year. On a sequential basis, revenue grew by 10% over the second quarter driven by stronger utilization and pricing in each of our segments. Adjusted EBITDA increased by 9% from the second quarter while EBITDA margin dropped by 35 basis points due to slightly higher G&A costs. Fully diluted earnings per share increased by $0.09 per share reflecting the earnings leverage which higher equipment utilization provides.

We did experience some hurricane impact early in the quarter and closed one acquisition late in September but overall the quarter represented a good strong showing by all of our operations.

Our well servicing segment generated 9% more revenue on a 2% increase in available rigs, two percentage points higher utilization and 4% higher pricing. As fleet-wide utilization approached 80% we were able to implement price increases in several regions but overall our operating margin declined 60 basis points reflecting the continued wage pressure we have been facing in this segment.

Revenue grew by almost 14% in our fluid services segment. Our average number of trucks grew by 3% due to the full impact of the 17-truck acquisition completed in the second quarter and a slight contribution from the Azurite acquisition closed very late in the quarter. The bulk of the revenue growth came in the form of fuel surcharges, a broader range of services included in this service line and general rate increases throughout our operations. The segment profit improved to 35.8% reflecting the higher pricing, mix of equipment, and improved utilization.

Our completion and remedial services segment grew by 7% from the second quarter on the strength of a full quarter of Triple N acquisition closed in the second quarter, higher utilization of cross all services, and increased revenue in our rental and fishing tool service line. This segment’s operating margin declined to 45.3% from 46.4% in the second quarter due to some rate erosion and cost increases in our pressure pumping service.

Our contract drilling segment increased its revenue in the quarter by 16% with a 10% increase in drilling days and a 5% increase in average day rate. About one-third of the day rate increase reflected higher wages passed on midway through the quarter but the higher utilization drove the effective day rate and operating margin higher. The drilling days equated to an approximate 92% utilization for the nine rig fleet.

At this point, I’ll turn the call over to Alan for his comments on the reminder of the income statement and balance sheet.

Alan Krenek

Thanks, Ken, and good morning to everyone. Today, I'd like to review our G&A and nonoperating items in more detail and then discuss our balance sheet and capital requirements and resources.

Our G&A expense for the third quarter of 2008 was $30.6 million or 11% of revenue compared to $25.5 million or 11% of revenue during the third quarter of 2007 and was up approximately 14% sequentially on a revenue increase of 10%. The sequential increase is mainly due to the items linked to increased revenues and profitability such as incentive compensation, facility expenses et cetera, as well as increases in salary and wages and bad debt expense. For the full year in 2008 we expect that G&A expense as a percent of revenue will average 11%, which is no change from prior guidance.

Depreciation and amortization expense in the third quarter of 2008 was $29.3 million compared to $23.6 million in the same period of 2007. This increase reflects the continuation of our capital expenditure program as well as the acquisitions that we have closed in the past year. For 2008, based on our current capital expenditure program, we estimate that depreciation and amortization expense will be between $118 million to $120 million, no change from prior guidance.

Net interest expense in the third quarter of 2008 was $5.7 million down from $6.5 million in the third quarter of 2007 and $6 million in the second quarter of 2008. This reduction in interest was mainly due to lower effective interest rates on the outstanding balance on our revolver.

The effective tax rate in the third quarter of 2008 was 38% and 37.9% year-to-date and we expect our tax rate will be 38% for the full year 2008. As Ken mentioned earlier, we generated net income of $26.7 million or $0.64 per diluted share for the quarter excluding the $800,000 or $0.02 per diluted share of after-tax merger related expenses.

Weighted average diluted share count for the quarter was approximately 41.8 million. The weighted average diluted share count will decline slightly in the fourth quarter mainly due to share repurchases that have been recently made. As of October 31st we have repurchased approximately 228,000 shares at an average cost of $10.37 per share. Our approach to the share repurchase program is disciplined as we continually evaluate the best investment opportunities in use of our capital.

Our balance sheet remains strong and we continue to generate good cash flow. Our cash balances at September 30th was up $3m from June 30, 2008, ending the quarter at $81 million. Please note that we used $30 million of our cash balance to help fund the acquisition of the Azurite companies in late September.

We have approximately $29 million of availability under our credit revolver as well as the ability to enter into an additional $85 million of capital leases at September 30th. Our debt at September 30th was comprised of $225 million 7.125 senior notes, $180 million outstanding under our revolver, and $67 million of capital leases making total debt $472 as of September 30th. The outstanding under our credit revolver increased from $150 million at June 30th as we used $30 million to fund the other half of the Azurite acquisition.

During the first nine months of 2008, we generated cash flow from operations of approximately $143 million or 19% of revenues. Total capital expenditures during the first nine months of 2008 were $105 million of which approximately one-third was for expansion, most of which was in our well servicing and completion and remedial segments. Cash capital expenditures during the first nine months of 2008 were $69 million and we have $36 million of capital expenditures financed through capital leases.

For 2008, we expect cash capital expenditures to be approximately $95 million and capital leases of $40 million for a total CapEx spend in 2008 of $135 million.

We had total liquidity of approximately $110 million at September 30th while our debt-to-EBITDA ratio was 1.7 times and total debt-to-capitalization was 44% giving us liquidity and the financial strength to act quickly on acquisition and other growth opportunities if they may arise. We’re focused on protecting our balance sheet while growing the company and ensuring that we have one of the most well maintained fleets in our industry. In these uncertain times our first priority for 2009 is to preserve cash and maintain our financial flexibility. We believe that we are well positioned to enter 2009 to continue with this strategy.

At this point, I will turn the call back to Ken who will wind up our prepared remarks.

Ken Huseman

Well as you have heard in our opening – in our comments thus far we have a fairly negative near term outlook for oil field services due to expected reductions in many of our customers’ capital budgets. We’re however just as optimistic of the prospects for Basic Energy Services. This is the type of environment in which we thrive. We have a seasoned management team in each of our segments and operating regions who have been through these cycles. We provide a range of services which are essential to the life of the well. We have a substantial presence in the most prolific oil and gas basins and we have a broad customer base of over 2000 active customers, none of which comprises more than 5% of our business.

So while the market conditions may be tough we are confident that we have the foundation upon which to continue building shareholder value.

With that we will turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from the line of Doug Becker with Banc of America Securities. Please go ahead.

Doug Becker – Banc of America Securities

Ken how much of the expected 4% to 6% sequential decline in revenues is seasonal versus some type of actual demand disruption because I think last year you were talking about a similar sequential decline at this time?

Ken Huseman

Well the 4% to 6% is net of the addition of the full quarter of the Azurite acquisition. So it is a combination of, you know, adding the Azurite business and in seeing some seasonal decline as well as some pullback in capital spending but you know, we’re almost halfway through the quarter already and we’re seeing minimal impact at this point but we think that in the holiday period we will see pretty maybe more (inaudible) than normal demand just because customers are kind of pulling back, reevaluating their spend, take the opportunity to give some people time off et cetera. More like ‘06, 2006, where we got into a period at the end of the year where most – many of our customers just took an inordinate amount of time off during the holidays.

Doug Becker – Banc of America Securities

Okay and then a quick one for Alan. You mentioned you are reducing capital spending down to $95 million. How much capacity do you still have scheduled to enter debts you’ve already ordered and just an update on maintenance CapEx, I think it has been running something around $20 million a quarter it seems.

Alan Krenek

Yes, as far as new builds coming in we have 7 scheduled for the remainder of the year. It is coming in the fourth quarter. We have not placed an order for deliveries in 2009. So once we get the 7 that completes our 134 new build program that we started back in 2004. We are currently going under our capital budgeting process and will determine what our requirement is going to be for next year as far as rig deliveries. As far as sustaining and maintenance CapEx, just purely maintenance CapEx usually runs about 4% to 5% of revenue and then the difference would be sustaining, which would be basically replacement.

Doug Becker – Banc of America Securities

Got you. Thank you.

Operator

Thank you sir. Our next question comes from the line of James West with Barclays Capital. Please go ahead.

James West – Barclays Capital

Yes.

Ken Huseman

Hello James.

James West – Barclays Capital

Ken as you look into end of this year particularly into early next year how do you balance, in the well servicing piece of your business, how do the balance the recent pricing gains that you were able to achieve versus, I guess, probably a desire to maintain or potentially even grow your market share during a period of weakness?

Ken Huseman

Well, it is really, really a tough sell to raise rates in a soft utilization market. But we – when utilization builds up to the 80% range as we saw it develop in the third quarter before this price decline we took advantage of those opportunities to raise rates partially driven by wage increases. So as we look down the road, we expect customers to utilize the soft utilization softer demand to start asking for price concessions or at least be adamant in refusing any sort of price increases. We intend to keep our cost structure as low as possible so that we can be competitive as possible and continue to build that – to protect if not build our market share. But, you know, we may – we have not seen what we are projecting in our outlook to this point. In fact, we were talking earlier that with all the earnings beats that are going on our outlook almost seems out of sync with what people are reporting. But we have been in this – we have seen this movie before and we expect to play out similarly as it has in the past, price declines, rapid price declines, commodity price declines result in decline in activity particularly in drilling and capital investment spends on the part of our customers. So we’re getting ready for that. And we intend to be competitive and hold if not build our market share.

James West – Barclays Capital

Okay. So you would give up some pricing just to maintain and perhaps grow market share. Is that a fair statement?

Ken Huseman

I don’t think we will have any choice.

James West – Barclays Capital

Okay.

Ken Huseman

Nobody else will either.

James West – Barclays Capital

Right, okay understood. And then second question, if we look at capital allocations for next year you obviously mentioned deal flow is increasing although the timing may not be right currently but perhaps it gets better as we go into next year. How do you balance the opportunity to buyback your stock in here at based on our numbers at about 3 times ’09 EBIT, EBITDA versus acquisitions that maybe at 4 times.

Ken Huseman

Well I think the acquisitions need to come down to be competitive with the share buyback and we think they will. And we look at that into the future as well not at the absolute point in time that that decision is being made. But the reason we initiated a modest stock buyback under the authority we were granted by the board is that at $10.00, it was just pretty compelling and there weren’t event any deals out there yet that could compete. We expect that to change whether it is next week or three months remains to be seen. It depends on how quickly utilization or how competitive it gets in the market.

James West – Barclays Capital

Okay, then just one last question for me the break up fee associated with the Grey Wolf transaction, the failure of the Grey Wolf transaction, has that been paid or is that payable upon their consummation of the deal with Precision.

Ken Huseman

Yes, it is based on the consummation, which based on what we have heard from the Grey Wolf people if the deal closes – if it is approved on December 9 at their meeting then the transaction is affected the next day so.

Alan Krenek

And that pickup fee is not in the numbers we spoke of.

Ken Huseman

That is correct.

James West – Barclays Capital

Okay. Great, thanks guys.

Operator

Thank you sir. Our next question comes from the line of Jeff Tillery with Tudor, Pickering, Holt & Co. Please go ahead.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Hi good morning.

Ken Huseman

Good morning Jeff.

Alan Krenek

Hello Jeff.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Just wanted to explore kind of how you guys are thinking about your liquidity a little bit more and you’ve got kind of $110 million as we sit here today and then $20 million or so potentially coming in the next three months from the breakup free. Are you generating free cash, I mean, how do you view your firepower or asking another way what is the kind of the minimum liquidity threshold you guys are willing to go into ‘09 with?

Ken Huseman

Well, Alan do you want to address that?

Alan Krenek

Yes I think we’re pretty comfortable with $30 million to $50 million, somewhere in that range.

Ken Huseman

And then you know, with the additional cash build that we’re going to have during the quarter as you talked about. And then if we get the breakup fee in the fourth quarter I think we will be well positioned to go into 2009 and if there is some investment opportunities that come about we will take advantage of them.

Jeff Tillery – Tudor, Pickering, Holt & Co.

And just from a timing standpoint it sounds like bit outspread M&A [ph] is not there right now, would you expect anything along, any acquisitions – would you expect your guys to close on any acquisitions between here and year end?

Ken Huseman

No. You know to close on an acquisition between now and year end we would have to be well into the process and we’re not.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Kind of turning back to (inaudible) a little bit, fuel surcharges were a big part of the revenue improvement in the fluid services segment. Do you see that reversing in the fourth quarter or is it going to take longer than – would it take longer than for fuel prices to be around for that one to reverse?

Ken Huseman

Well they are a little sticky. I mean, they followed – we had a little bit of a lag as fuel went up. We couldn’t quite get them in sync with fuel increases. It’ll be the same way on the way down but they’re coming down. As fuel prices drop that is passed on fairly quickly, not minute by minute but fairly quickly as we go. On the other end the fuel cost is down as well. So now from an absolute standpoint we’re staying at least even.

Jeff Tillery – Tudor, Pickering, Holt & Co.

We have seen drilling rig counts start to slow a little bit well both in West Texas and the mid-Continent. Does that fit with the areas within your operations that you are seeing kind of some declines on the margin?

Ken Huseman

You mean in terms of the –

Jeff Tillery – Tudor, Pickering, Holt & Co.

Just from (inaudible) standpoint are you guys – where are you guys saying and or expecting weakness kind of in the short term?

Ken Huseman

Well everyplace.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Okay.

Ken Huseman

Well all the stuff has wheels on it and it moves – we could move ours around. There is no at least as far as we have seen no market immune to this decline. Some have shown up a little quicker but I think that every – a broad range of customers are curtailing activity to one degree or another you and we will in virtually all markets as we go down the road.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Okay, thank you very much.

Operator

Thank you sir. A next question comes from the line of Pierre Conner with Capital One Southcoast. Please go ahead.

Pierre Conner – Capital One Southcoast

Good morning gentlemen.

Ken Huseman

Hello Pierre.

Pierre Conner – Capital One Southcoast

Ken on your slowing your potential new build deliveries for ’09, what can you say obviously when you made the call maybe you can place the order I guess, what can you say about the rest of the industry’s reaction as well as we have seen a dramatic drop off in construction or there are a couple of people still pressing their head. What is your take when you speak to the rig build?

Ken Huseman

Well, probably on the basin of oil shell [ph] took place about two weeks ago in Odessa, and there were a number of rig manufacturers, I guess, all of them were build rigs in the U.S. were in attendance and all had rigs and I think you could have bought one of the lot from just about everybody while there. So I think that I don’t know of anyone canceling orders but I don’t think anybody is placed one either lately.

Pierre Conner – Capital One Southcoast

So have you seen any – were they beginning to discount the prices there just two weeks ago even?

Ken Huseman

I was afraid to ask. But I had to buy (inaudible).

Pierre Conner – Capital One Southcoast

Understand, okay. On some of your costs you know, in terms of you watching closely I’m talking about operating costs may be in – how quickly are you going to react, or you have a plan in place and you will react appropriately when you see the slowdown, I mean consistent with your comment about we haven’t seen a big impact yet, we’re expecting it. Are you proactively reducing some costs for instance in headcount that kind of thing?

Ken Huseman

Sure, we have talked to all of our operations managers. Most of those guys have been through these cycles several times, some not as often as I have but we let attrition take its toll and have already. We – we select the higher cost rigs to sit idle, high grade or personal. Those actions are already being taken. We’re looking at all of our purchases to try to pass those savings that we expect we have to give our customers onto our vendors to the extent we can. But nothing draconian yet and we don’t expect wages to drop, you know, that is never a viable alternative but we can become more efficient by retaining the best, most experienced people operating the most efficient equipment et cetera.

Pierre Conner – Capital One Southcoast

Okay, on maybe an earlier question about where you are saying impact and I know it is obviously sort of a everywhere type of potential but specifically do you know any secondary recovery, tertiary recovery programs that have might have been involved in a number of wells service units getting canceled as a result of oil price.

Ken Huseman

No, we have not. Those – I think those projects the customers are probably looking across the valley a little bit at this point and I think certainly it’ll manifest itself first in drilling in, you know, one and two well drilling programs, bigger projects Co2, fluid, et cetera require bit longer perspectives. So we don’t expect to see a reduction in that activity although we have had already a couple of the major players talking about reductions in their costs et cetera. Fortunately they are not our big customers but that will have a ripple effect when those contractors who do work for those guys react.

Pierre Conner – Capital One Southcoast

Okay and then maybe one for Alan, to the extent that you won’t want to take a stab at the decrement, I know, we have talked, you mentioned a decline in revenue sequentially 4% to 6%, (inaudible) your comment about trying to be proactive on some costs. What kind of decrements have you – would you expect on that revenue decrease.

Ken Huseman

As far as margin.

Pierre Conner – Capital One Southcoast

Yes.

Ken Huseman

I would probably expect margin gross profit or profit margins decrease somewhere in the 1% range.

Pierre Conner – Capital One Southcoast

Okay that is helpful. All right gentlemen, thank you very much.

Ken Huseman

Again Pierre we are halfway through this quarter. So, this one is a bit in the bag to that extent.

Operator

And thank you sir. Our next question comes from the line of Mike Drickamer with Morgan Keegan. Please go ahead.

Mike Drickamer – Morgan Keegan

Hi, good morning guys.

Ken Huseman

Hi.

Mike Drickamer – Morgan Keegan

Ken looking at your revenue guidance here you expect 4% to 6% decreases in the fourth quarter. Is that pretty much across the board across all the different product offerings are do you expect some actually increase here in the fourth quarter offsetting greater weakness elsewhere?

Ken Huseman

Well the impact, the full quarter impact of the Azurite deal which was done in September, will follow through to cause the fluid services business to show more, I guess, more resilience than otherwise. Just trying to scan can some notes here real quick, but it’s pretty much let us say across the board.

Alan Krenek

Yes I would say for the fluid service which would be an up tick from the third quarter. The other three would be about the same percentage-wise decreases.

Mike Drickamer – Morgan Keegan

Okay. The fluid service is up but the other three will be down in and they will probably be down something greater than the 4% at least then to offset the fluid services?

Ken Huseman

Right.

Mike Drickamer – Morgan Keegan

Okay.

Ken Huseman

That is correct.

Mike Drickamer – Morgan Keegan

Let me see, that was my only question. Everything else has been answered. Thank you.

Operator

Thank you sir. Our next question comes from the line of Mike Urban with Deutsche Bank. Please go ahead.

Mike Urban – Deutsche Bank

Thanks good morning.

Ken Huseman

Hi, Mike.

Mike Urban – Deutsche Bank

Wanted to follow up on the M&A questions earlier, I think you guys have addressed this number of times in the past. Just wondering if your views have changed in light of the markets. What would the targets be, would you look to expand within your existing business lines and consolidating transactions or expand geographically or would you look to add new product and service lines if it becomes compelling enough?

Ken Huseman

Well I think we would all look at anything if it is compelling enough. We don’t envision any sort of additional product line add at this point. We think that it makes sense to continue to build the services that we now provide and in the geographic markets that we are already in, kind of broadly defined in both cases where there is a lot of the blank spots on our map in the footprint that we cover and we think that are probably too many bidders in the market right now for services to help consolidate features or services that we are already in.

Mike Urban -Deutsche Bank

Okay, great. That is all I had. Thank you.

Operator

Thank you sir. Our next question comes from a line of Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson – Raymond James

Good morning Ken and Al.

Ken Huseman

Hi, Jim.

Jim Rollyson – Raymond James

Ken you guys have done a lot of adding of equipment and at the same time retiring some of your older equipment, trying to keep things fairly on a net basis not growing the industry by too much. As you look at next year assuming CapEx comes down and you are not building a lot of new equipment, how do you look at the retirement side, is that slowdown or just does that actually maintain the pace depending on how the industry is playing out.

Ken Huseman

It will certainly depend on how the industry plays out. We are – we will still rebuild, we still have an active rebuild program with the eye to maintain the fleet size about where it is now. You know, we don’t expect a radical change in the number of rigs that we’re operating. We took most of the old – really old equipment out of the fleet and we think what we have left can be rebuilt and kept competitive. We may pull it out temporarily in response to slack demand in a particular area and have it ready to go back out as the situation improves.

Jim Rollyson – Raymond James

Okay, and then just as a follow up, the shelf filing [ph], I presume that is pretty much just setting yourselves up to have the flexibility if there is an opportunity that might arise out there. Is that a fair statement?

Ken Huseman

Yes one of these days the credit markets will open back up. We want to be able to be ready for that and also any other opportunities that come down the pack.

Jim Rollyson – Raymond James

Great. Thanks.

Operator

Thank you sir. Our next question comes from the line of John Daniel [ph] with Simmons and Company. Please go ahead.

John Daniel – Simmons and Company

Good morning guys.

Ken Huseman

Hi John.

John Daniel – Simmons and Company

A quick question. Any chance you guys could use the industry slowdown to help transition the business from our four man crews to three man crews and that is something that one of your larger competitors is never able to do successfully?

Ken Huseman

Well it has been tried in my career since 1978 probably five or six times and it has limited application. In certain market it works. I think generally customers feel like the cost savings of saving a person is lost and efficiency over the course of a long day. As contractors, we feel like the cost savings which the customer expects to see is offset by not only efficiency over the course of a long day but safety factors. So I think, anyone who expects that to happen has never been on a road crew rigging up a couple of times a day and the fatigue that could set in with one less guy being in the mix. So you know it sounds great but always proffered by the people who don’t have to do that work. So I just don’t see that happening.

John Daniel – Simmons and Company

Okay, do you guys see a difference in safety on the three men crews versus the four men crews?

Ken Huseman

In those markets where they – where the type of work lends itself to that that, it is not a factor. But when you try to push it into a different kind of work, a difficult job where you got to need those four people then you it becomes a factor.

John Daniel – Simmons and Company

Okay, thanks.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Jack Wagner from MJX Asset Management. Please go ahead.

Jack Wagner – MJX Asset Management

Yes good morning. Can you explain to me how the contracts with the customers work and what their ability is to cancel contracts and if any contracts have been canceled?

Ken Huseman

None of our main business lines with the exception of contract drilling have term contracts. So we work under master service agreements on a call out bases. So there is nothing in affect, no term contract to cancel for 99% of our business.

Jack Wagner – MJX Asset Management

Okay, and on the contract drilling how long are the contracts for?

Ken Huseman

They are multi well contracts. Some will take us well into next year but that covers about less than half of our rig fleet. So most of them are multi well, not long-term contracts in our case. This is not the case with other drillers but it is with us.

Jack Wagner – MJX Asset Management

Okay and what percentage of your business would you characterize tie to [ph] or crude oil 1% would you see this tighten natural gas?

Ken Huseman

Well we have said over the course of the last several years that we’re fairly evenly spread between oil and gas-related activity and that bounces around somewhere between 60 and 40 depending on where we are in the cycle. But generally we are pretty evenly split. We have a broad exposure to both oil and gas production in the footprint that we operate in, allow the markets that we compete in on a local basis have both oil and gas activity going on. So that is not a very easy question to answer with precision.

Jack Wagner – MJX Asset Management

Okay, maybe just say it is 60 crude oil and 40 natural gas.

Ken Huseman

Yes, right now it probably is. We have seen a little bit of a pullback in gas over the last 6 months, the gas activity. So, it is a heavy or lower [ph] right now.

Jack Wagner – MJX Asset Management

Okay, thank you.

Operator

(Operator instructions) And at this time, there are no further questions. I would like to turn it back to management for any closing remarks.

Ken Huseman

Okay, we thank all for your time today and we will conclude the call. Thank you, operator.

Operator

Ladies and gentlemen, this concludes the Basic Energy Services third quarter earnings conference call. This conference will be available for replay after 10 o’clock central service time today through Tuesday, December 2nd at midnight. You may access the replay system at any time by dialing 303-590-3000 and entering the access code of 111-21-262. Once again the phone number is 303-590-3000 and the access code is 111-21-262. Thank you for your participation. You may now disconnect. Have a pleasant day.

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Source: Basic Energy Services, Inc. Q3 2008 Earnings Call Transcript
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