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Basic Energy Services (NYSE:BAS)

Q4 2012 Earnings Call

February 20, 2013 9:00 am ET

Executives

Jack Lascar - Partner

Kenneth V. Huseman - Chief Executive Officer, President and Director

Alan Krenek - Chief Financial Officer, Senior Vice President of Finance, Treasurer and Secretary

Analysts

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Trey Cowan - Clarkson Capital Markets, Research Division

John M. Daniel - Simmons & Company International, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Jason A. Wangler - Wunderlich Securities Inc., Research Division

William Cornelius Conroy - MLV & Co LLC, Research Division

Patrick Lee - Wells Fargo Securities, LLC, Research Division

Walter Chancellor - Stephens Inc., Research Division

Brad Handler - Jefferies & Company, Inc., Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Basic Energy's Fourth Quarter Earnings Call [Operator Instructions] This conference is being recorded today, February 20, 2013. I would now like to turn the conference over to Jack Lascar. Please go ahead.

Jack Lascar

Thank you, Ian, and good morning, everyone. Welcome to the Basic Energy Services Fourth Quarter and Year-End 2012 Earnings 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 listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the company's website at www.basicenergyservices or by telephonic replay until March 6. The information was provided in yesterday's earnings release.

The information reported on this call speaks only as of today, February 20, 2013, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of the replay.

Before we begin, let me remind you that certain statements made by management during the call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's current expectations and include known and unknown risks and uncertainties and other factors, many of which the company is not able to predict or control, that may cause the company's actual results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include risk factors disclosed by the company in its registration statement on Form 10-K for the year ended December 31, 2011, and subsequent Form 10-Qs filed with the SEC.

Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday. Please note that the contents of this conference call are covered by these statements.

And at this point, I'll turn the call over to Ken Huseman, President and Chief Executive Officer.

Kenneth V. Huseman

Thanks for the introduction, Jack, and welcome to those dialing in for the call today. Alan Krenek, our Senior Vice President and Chief Financial Officer, is on the call with me.

As described in our earnings release issued last evening, 2012 ended with a very competitive market and several special charges, which widened the operating loss for the quarter. Alan will discuss those special items in his commentary, so I'll focus on the business environment in the quarter.

The double-digit decline in the active drilling rig count over the course of 2012 really impacted us in the fourth quarter with reduced completion activity in most markets.

Total revenue declined 11% sequentially due to that lower activity and the more competitive pricing which ensued in each of our markets.

As in the third quarter, our Completions and Remedial segment showed the largest sequential decline with a 15% drop compared to the third quarter. The steady decline in drilling activity, particularly since mid-year, was most severely felt in our pumping services subsegment. Although we've been able to keep our equipment and people working, margins dropped by 570 basis points as we matched pricing and moved assets around to the available work.

Other services within the Completion and Remedial segment, particularly coil and rental tools, suffered from the holiday interruption but did not feel the same level of pricing pressure. We think pricing generally bottomed as the year ended.

Our Well Servicing segment showed a 14% sequential decline in revenue due to a larger-than-expected holiday impact. Utilization for the quarter dropped to 66% as many customers granted their employees extended time off in late December.

Our average rate per hour dropped 2.3% sequentially, but that decline reflected a change in mix to a higher proportion of low-rate well servicing work in the Permian market rather than further rate schedule deterioration. Margins in this segment declined by 300 basis points due to the underutilized personnel and the substantial overhead associated with this segment.

Activity in our Fluid Services segment held up pretty well with only a 3% sequential drop in revenue despite lower completion activity. Increased frac heating, hot oiling and other cold weather impacts offset reduced frac tank rentals. Even with that revenue decline and the loss of the higher-margin tank rental revenue, margins in this segment declined by only 300 basis points.

Virtually all of that margin drop can be attributed to the $2.5 million spent to clean up the location of a disposal well in our Permian operation we had removed from service and were abandoning. That well had been in service for over 40 years, and the installation of that well predated current environmental standards so the cleanup included a significant amount of soil remediation, which drove the cost higher than we typically expect. That Fluid Services margin reflects the solid position we have established in that segment.

Our comprehensive range of services has enabled us to fend off the substantial increase in competition we're seeing in each of our fluid services markets. We expanded and upgraded our disposal well network in 2012 with the drilling of 3 new high-volume wells, as well as the acquisition of the 5 new or nearly new wells in the Bakken area. As we've stated in the past, access to adequate disposal capacity is the anchor for our Fluid Services business, so we'll devote additional capital to that portion of our business in 2013.

Our drilling segment showed a 6% sequential decline in revenue due entirely to a drop in utilization. Day rates remained flat during the quarter as the addition of a small rig-moving fleet to move our own equipment offset a slight drop in day rates. The 180 basis point decline in margin resulted from lower utilization.

Considering the deterioration in the market during the fourth quarter, I think our management team did a great job of controlling cost while maintaining our market position. We managed our business during the year-end slowdown to retain our experienced workforce at the level we expect to need as our customers resume activity in 2013.

Now I'll turn the call over to Alan for a more in-depth view -- review of the financial results for the quarter.

Alan Krenek

Thanks, Ken. I'll start out by giving additional information regarding our fourth quarter financial results, then review our 2012 year-end balance sheet and other items. When speaking about the fourth quarter, the discussion will focus on sequential changes, then I'll turn the call back over to Ken, who will give us an update on the current operating environment.

I wanted to give some additional revenue and segment margin commentary from what we supplied in our earnings release.

Our Completion and Remedial Services revenue in the fourth quarter was broken out as follows: Pumping services represented 56%; rental tools was 25%; coil tubing, 14%; snubbing, 4%; and the remainder other. Of the pumping services revenue, 62% was stimulation and the remainder of 38% was cementing and acidizing.

In the Well Servicing segment, our Taylor Rig manufacturing operation produced $4.3 million of revenue in the fourth quarter, down from $6.4 million in the previous quarter. Segment margin for Taylor was $830,000 or 19% of revenue in the fourth quarter compared to $1.4 million or 22% of revenue in the prior quarter.

Our as-reported fourth quarter earnings, including the following pretax special charges: $7.9 million for early extinguishment of debt costs associated with the refinancing of our 2016 senior notes, $3.9 million for the final corporate office relocation cost, $3.7 million for an additional liability for prior year State of Texas sales and use tax assessment, and a $910,000 bargain purchase gain on the acquisition of SPA Victoria earlier in 2012. The after-tax effect of these special items in the fourth quarter was $9 million or $0.22 per share.

The following commentary excludes the impact of these special items in the third and fourth quarter of 2012. G&A expense was $43 million or 14% of revenue compared to $41 million or 12% of revenue for the third quarter. We expect the G&A expense in the first quarter of 2013 will be similar to what we experienced in the fourth quarter and then decline slightly each quarter as we progress through 2013.

Depreciation and amortization increased to $49 million in the fourth quarter, up from $48 million in the prior quarter, mainly due to capital expenditure additions in the fourth quarter.

We expect that depreciation and amortization for the first quarter of 2013 will be approximately $52 million, reflecting additional capital expenditures, plus a full quarter effect of the SWD of North Dakota acquisition that closed in mid-December.

Net interest expense was $17 million in the fourth quarter, slightly higher than the third quarter due to the impact of the bond refinancing that we completed in early October. On a perspective basis, we expect quarterly net interest expense to be $17 million.

On an operating basis, our fourth quarter operating effective tax benefit rate was 37% while the effective tax rate for 2012 was 38%. We believe that our effective tax rate for the full year of 2013 will also be 38%. Our net loss on an operating basis for the fourth quarter was $11 million or $0.27 per share with weighted average shares outstanding of 40 million.

In the fourth quarter, we repurchased 361,000 of our shares at an average price of $9.63 per share. For 2012, we repurchased a total of 1.6 million shares at an average cost of $9.54 per share. At the end of the year, we had $20 million remaining under our authorized share repurchase program.

Moving on to the balance sheet. We had a cash balance at year end of $135 million, up from $104 million at the end of the third quarter. Total liquidity including availability under our revolver was $360 million. There were no amounts drawn on our revolver.

During 2012, we generated $318 million of cash from operating activities when you exclude the special items in 2012. We used $251 million in investing activities, including $85 million for acquisitions and $171 million for cash capital expenditures.

We generated $3 million from financing activities, which included approximately $75 million in gross proceeds from the bond refinancing that we completed in early October, offset by $42 million used for capital lease principal payments, $18 million for share repurchases, $6 million used for premium on retirement of the 2016 bonds and $6 million used for debt issuance costs on the 2022 bond offering.

Our DSO at the end of the fourth quarter was 66 days, the same as at September 30. We continue to closely monitor the financial condition of our customers and pursue extensive collection efforts in all levels of our organization to minimize our bad debt exposure.

During the fourth quarter, total capital expenditures, including capital leases, were $64 million comprised of $18 million for expansion projects, $36 million for sustaining and replacement projects, and $10 million for other.

Expansion capital spending included $13 million for the Completion and Remedial segment, $3 million for the Fluid Services segment, $1 million for Well Servicing and $1 million for Contract Drilling.

At year end, we had $883 million of total debt consisting of the newly issued $300 million senior notes that are due in 2022, $477 million of senior notes that are due in 2019, plus $106 million of capital leases.

Our total debt to adjusted EBITDA at December 31 was 2.9x. The interest coverage ratio was 4.7x when adjusted for the additional annual interest expense on a pro forma basis from the bond refinancing.

2012 was a challenging year with the declining market conditions as we went through the year. However, we did take advantage of the bond market to improve the financial position of the company, and we successfully relocated the company's corporate headquarters to Fort Worth. It was a very busy year to say the least, and we are looking forward to the opportunities ahead of us in 2013.

Thank you, and I'll turn the call back over to Ken.

Kenneth V. Huseman

Okay. Thanks, Alan. Our earnings release provided guidance regarding our capital spending plans for 2013. Those plans are predicated on our expectations for a pretty modest level of demand for the first part of the year. As we stated on our last conference call, we think oilfield spending in 2013 will increase gradually as the year progresses and not reach a real healthy level until the end of the second quarter.

This year may be the reverse of 2012 with the active rig count building throughout the year. We're not, however, predicting that the industry will get back to the 2,000 drilling rigs it had running in early 2012 until we see some return of gas-directed drilling. We think gas fundamentals are currently too weak to support significant dry gas drilling outside of the Marcellus area in 2013.

Despite those relatively weak gas prices, we do expect gas workover activity to increase modestly over the course of the year as customers have gotten their cost structures and expectations in line with those fundamentals. In fact, we've seen early signs of that workover activity being planned and executed in several markets.

While we plan to maintain our exposure in the gas market, our established presence in the oil market, particularly the Permian Basin, has always been the backbone of the company. With over 40% of our revenue generated from the broad range of services we provide throughout the Permian Basin, we have one of the leading positions in each of our main service lines. We've been protective of that market position as new competitors moved from the slowing gas market and remain positioned to build on that strength as activity recovers during 2013.

We think oil-directed activity will increase significantly in 2013, both in terms of new well drilling and maintenance of existing wells and production. Oil prices are certainly in the range to support continued expansion of oil-related activity, and it's a bit of a puzzle why we haven't seen a greater response thus far. E&Ps seem to be cautious regarding current oil prices and waiting to get past winter weather and into more favorable operating conditions before charging ahead.

Our field organization reports that they are seeing significant planning and sourcing under way, which is consistent with our projection of a ramp in activity over the next several months.

Activity thus far in the year supports that outlook. We reported well servicing utilization for January of 71%, supported by activity in the Permian that has already recovered to the preholiday level. We expect activity in all of our markets to move higher as daylight extends and the threat of winter weather subsides.

Given those assumptions regarding activity, we think pricing will remain about where it is, costs should not see much pressure to the upside and meaningful new capacity won't enter the industry. We expect our revenue to tick up in the first quarter on the order of 2% to 3% in each segment, while margins will stay flat. Those first quarter margins will be weighed down by the impact of federal and state unemployment taxes, which will offset the benefit of higher utilization.

Our capital spending plans will be adjusted based on market conditions as the year progresses. As Alan discussed in his commentary, we have the liquidity to ramp up capacity if we find opportunities to work more equipment, and we will scale CapEx back if we're currently too optimistic.

Regardless of the level of activity, we expect to be busy evaluating acquisition opportunities. The deal flow continues with several candidates for consideration in each segment.

We have 2 small deals signed and ready to close. In fact, both should close in the next few days. Those 2 companies will broaden our capabilities in the growing water processing or recycling market.

We will have the technology and expertise to process a wide range of waste fluid streams to help our customers reduce the amount of fresh water and disposal required in their oil and gas drilling, completion and production operations.

We are excited about those capabilities, and we'll provide a more extensive description of the opportunities available over the next several weeks.

At this point, operator, let's open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Jeff Spittel with Global Hunter Securities.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Appreciate the comments. Maybe if you could provide a little bit more detail as we walk through different service lines in terms of the -- what are the areas you think exhibit the most promise for you to recapture a little bit of margin as we work through the year.

Kenneth V. Huseman

I think each of our segments is currently -- or in the fourth quarter was plagued with low utilization. As that utilization recovers, margins will recover as well. We're not projecting or expecting much relief of any -- in the form of price improvement this year. I think our Well Servicing business will certainly follow the expansion of available daylight. So you can, I think, plan on that. And then as the drilling rig count starts to recover, we've seen it actually flat, about flat so far this year, we'll see increased demand for completion-related activity both in our stimulation business, as well as our Fluid Services business. So those are the drivers for each of those segments.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

That's helpful. And if we could talk a little bit about the pumping fleet, how the calendar is shaping up in terms of work and does the split look pretty similar between hydraulic fracturing and acidizing and cementing as we saw in the fourth quarter? Is there anything that's kind of moving parts that we need to be aware of?

Kenneth V. Huseman

I think the stimulation services will pick up. I think the other segments -- the other service lines in that segment are pretty stable. The growth is -- or the recovery is going to come in the stimulation side as the rig count increases.

Operator

Our next question is from the line of Michael Cerasoli with Goldman Sachs.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

I'm curious about your view on the second half of the year, just how much of this is coming from, say, operator discussions versus your internal views on perhaps oil and gas price expectations. You talked about gas prices needing to work for true normalization of the rig count, et cetera. Is this something you're assuming in 2013 revenue guidance or is there kind of more -- is it primarily oil prices?

Kenneth V. Huseman

I think most of the recovery in the drilling rig count will come on the oil-related side, not much on the gas side. And our projection for a second half increase is based on the customer-stated plans for spending and the fact that typically in this business, at least, most of the time in my career, we see a gradual ramping up of activity into the year with full activity levels in late second quarter and through the third quarter. We kind of see that activity level peak in September, October before we see a normal decline, a gradual decline, not as much we saw this year in -- through the holiday period. So we don't have any perfect crystal ball, but it's based on our experience and what customers have said about their spending. I think it will be necessarily back-end loaded from where we're starting right now.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Okay. And then just on potential acquisitions. You closed some saltwater disposal assets at the end of the year. It seems like you're growing the segment organically as well. What's your comfort level on fluids in terms of its contribution to the company? Right now, I think, it generates about a quarter of segment profit. Do you have a certain target you're looking at? Or is it just kind of like if the -- if you guys can -- if it's economic, you're going to continue to invest in it?

Kenneth V. Huseman

Yes, and we take that approach with each of our segments. We look at each deal and each opportunity as it appears and either act on it or not based on the merits of that opportunity. So we don't have a targeted profile, a revenue profile as much as we just pursue each opportunity. We like the Fluids business. We think the margins are pretty good, returns are as good as we have in our portfolio and probably more stable over the long term because of the quick response that segment has to supply and demand. So we like that business. We have a great market position, and we'll continue to build upon that, and I think there's consolidation opportunities in that segment for us as well.

Operator

Our next question is from the line of Jeff Tillery with Tudor, Pickering, Holt.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

In the -- the Fluid Services segment just anecdotally felt like it had the most -- it had amongst the most headwind just from competitor dynamics, and you guys were able to keep that business close to flat in the fourth quarter. Is -- does it feel like the -- kind of the worst is behind you from a pricing and competitive landscape standpoint? Or just how are you thinking about that business through the first half of this year?

Kenneth V. Huseman

Yes, I think the worst is over in terms of the influx of competition into the busier markets. People that can move probably have. We've seen some of the very small mom-and-pop, single and a few truck operator guys go by the wayside as activity slowed down. And it's important in that segment to have a full range of capability as activity slacks off. Customers start hydrating their vendor list, simplifying their life by using fewer vendors. And those companies that can provide a full range of services essentially are able to keep the business, keep a bigger share of a shrinking pool of business from those customers. So we think we have a very defensible position. We'll continue to improve that position with additional disposal wells. We'll move frac tanks in or specialized equipment in as needed to further improve our competitive position. And that, in effect, squeezes out some of the more specialized participants in that business, and there are companies that just rent frac tanks or just operate disposal wells or just offer fluid transportation, and those companies get squeezed pretty quickly as the market shrinks.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Is that creating acquisition opportunity at this point or not yet?

Kenneth V. Huseman

Yes, it has. And there aren't fire-sale deals out there yet, but we have a number of those opportunities that have come to us. But valuations just haven't come to our expectations yet, or what we think they will be. We have been growing organically particularly in the disposal well business. The wells that we're installing now are high-volume wells that can accommodate a lot of water in a short period of time. And a lot of times those deals that are available in acquisitions are converted -- old, converted producing wells, which have an uncertain pedigree. And so in some cases, we avoid acquisition of those sorts of assets.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And just as you look across the product portfolio you guys have, what business feels the most oversupplied, what feels the closest to balanced?

Kenneth V. Huseman

Well, I'd say that pumping is kind of hands down oversupplied. I don't think anybody in the industry would disagree with that. Probably the tightest, and that's an improper use of that word, it's not tight, but the least amount of slack is probably in the Well Servicing business, and that's because it's not completion dependent, it's more well-count dependent. And even in the gas markets where new well drilling is not economic, we are seeing ongoing maintenance of existing wells to keep that gas production going. So it's just a difference in the drivers for that segment of the business.

Operator

Our next question is from the line of Neal Dingmann with SunTrust.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Just 2 quick ones. First on cost. What are you seeing on the well service side particularly in personnel and then maybe over on completions on guar?

Kenneth V. Huseman

Okay. Well, I think labor, generally -- that answer will apply to all of our segments. Labor, to some extent, in the oilfield is pretty fungible and is driven by incremental demand in -- like drilling drives wages up throughout the different segments. But right now -- so right now, with a pretty slack rig count and overcapacity, labor is not coming under any kind of a general price level pressure. Now we're still very wary of having our best, most capable people poached, so we pay attention to those offers of higher wages and respond accordingly on kind of a rifle-shot approach as opposed to any kind of a broad wage level increase. As far as guar, I think that's a last year story as far as being a problem. I think that, as far as we've seen and have heard from our guys, it's adequate and nothing scary on the horizon there at all.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then just, Ken, looking at 2 -- in 2 areas, Well Servicing and then in Fluids, your thoughts about expansion into newer areas, particularly like the Utica or something else that's really developing. Your thoughts -- I know you've been adding some disposal wells on the Fluid side. Then obviously, you've got a pretty good reach on the Well Services. So particularly those 2 areas your thoughts about maybe getting in some new areas.

Kenneth V. Huseman

Well, the Utica is within service distance of our Appalachian market service points, and we're doing some of that work over there on the tools, on the rental side. We haven't seen or seeing the opportunity -- or really the motivation to move well servicing rigs into that market yet, or fluid services for that matter. As I've said in the past, we're more well-count driven. If you're chasing drilling rigs, it can be pretty competitive with the local competitors in those markets. And so we have to see where there's a bit more of a substantial revenue base than we currently see in the Utica. Not to say there's not a good market for the people that are there, but I don't think it's a good market for our business model at this point.

Operator

Our next question is from the line of Jim Rollyson with Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Ken, just circling back -- you haven't been asked enough about the Fluids business yet. When you...

Kenneth V. Huseman

I've got more answers.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Perfect. Since that's the targeted area of growth capital this year, when you look at kind of the trucking side of the business versus the SWDs, which -- kind of break out maybe a little bit of color on margins between the 2 parts of that segment and returns on investment? Just trying to think about how this proceeds going forward given that you're kind of starting to emphasize a little bit more on the SWD side, but just love to understand the margin differential between the 2 and frankly the returns.

Kenneth V. Huseman

Okay. Well, a disposal well, as I commented in some of my opening remarks, have a very long life. We plugged a well recently that our records go back to 1968, and it was a producing saltwater disposal well at that point. So those are very long-lived assets if they're well complete -- well located and well designed and engineered, et cetera. So the returns that you would expect on those might not be quite as good as you would expect on a frac tank that doesn't last 5 or 6 years. So we look at those not necessarily individually because we have -- this is a kind of a comprehensive suite of assets that go together to provide this overall opportunity. But you can expect, I think, a disposal well to pay out on a cash basis in 5 or 6 years, and that just depends on the market at the time. Sometimes it's even quicker than that if rates are really high and skim oil sales are good, et cetera. But I think generally, we look at that as a package of assets, one complements the other. And as I said earlier, we wouldn't -- we could really outcompete those companies that are just putting in disposal wells or just putting in -- just offering frac tanks, for instance. So I guess, I'm not sure I want to answer your question with much more detail than that.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

That's helpful. And just as we think about margins going through from '12 into '13, it sounds like you're not adding a lot of trucks per se, but you have, with the recent acquisition and kind of targeting some things, looking at stepping up your saltwater disposal well kind of base -- when we think about how that moves margins from year-to-year, how do you think about that?

Kenneth V. Huseman

Well, we've always had a lot of disposal wells or a good proportion of disposal wells in our more established areas like in East Texas and the Permian, where we've had a significant well count for quite a while. We're adding more wells. As we grew our South Texas operation, we needed more wells to kind of balance out that ratio. And then in the Williston Basin, that was actually not having our own disposal we felt was an impediment to having long-term competitive, defensive competitive position. So we added those wells up there. So it's not a change in focus, it's more of rounding out our capabilities in each market to match what we've had in West Texas and East Texas for a number of years, and which is really, I think, essential to success in that business. Margins, I think, will be similar to what we've generated over the last, well, 10 or 15 years in that segment. Again, recognizing that we've always had disposal wells and a well-rounded capability in those markets where we have been a long time. So we think that those margins will gravitate to the mid- to upper 30% range over the -- throughout the cycle.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. And then just as one follow-up, kind of switching gears a little bit on the pressure pumping fleet. We talked about the revenue mix and kind of that being the toughest market. Can you give us where your capacity stands today? I don't think it's changed, but just to double-check that and kind of how your utilization on that, particularly on the stimulation side of that business, is today versus where it was mid-last year or so?

Kenneth V. Huseman

I think right now, we reported that we have about 291,000 horsepower, which is up a little bit from the third quarter numbers with some equipment added in the Rocky Mountains. Utilization right now, it's -- we don't track it like we do well servicing. It's not quite as finite as that. But we're probably in the 70% range in terms of the available days working and -- out of what's available. So we can squeeze quite a bit of activity out of that fleet and again, we haven't -- we don't do much 24-hour work. So to the extent we have customers who want to go that way, it's even more upside. So as I said earlier, that will track the drilling rig count increase as we see that develop through the year. So that's it.

Operator

Our next question is from line of Blake Hutchinson from Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Wanted to just, again, follow that line of questioning actually because in your prepared comments, Ken, I guess, you characterized most of the decline in completion or remedial services as price-based within the pumping business and that actually utilization levels were fairly stable. Is that -- was that just more to say that you hadn't put any equipment or -- to the side or put people down than coming around that kind of 70% utilization level? And is that pure -- kind of pure pricing commentary, is that correct?

Kenneth V. Huseman

Yes, I think, the pricing, we really saw a big drop in pricing through the last half of the year, and it seemed to build to the low point, so to speak, or bottomed out by the end of the year. That's always subject to change by competitive activity, but that's our sense right now. Utilization has been drifting down over the last several -- well, throughout the last half of the year as well, and -- but we did add a few pumps in the fourth quarter as well. So the main driver for that revenue drop, though, in the fourth quarter was frac-based pricing.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. And then is there any element of it as a smaller pumper that was kind of single customer driven where you also get -- have better visibility because that single customer has plans to pick up here in the near term?

Kenneth V. Huseman

We've seen a few frac dates delayed, which certainly affects utilization, but nobody abandoned the program per se that we think is going to resume it. It's, I think, more of just picking up additional drilling rigs and that sort of thing. We think that that's going to continue to pick up as we go through the year. Does that answer your question? There was no [indiscernible]

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Yes, it does. I'm sorry. That was exactly it. I apologize. And then just finally, maybe some thoughts around -- you mentioned maybe some mid- to later year pickup in the gas completion well service markets. I know -- and through the course of 2012, you had some issues with getting costs in line in places like the Marcellus's activity -- with activity fits and starts. Would it be your feeling that how you're positioned in the gas markets today is not necessarily dilutive to margins and therefore, if we picked up even in a small way in the gas completion market, it might have a fairly powerful impact on the income statement?

Kenneth V. Huseman

Sure. The margins in those gas markets have been dilutive, well, for the last several years. We generate a lot of higher margins in the busier markets. Margins track utilization. So those gas markets have, in fact, hurt our margins on a combined basis for the last several years. So to the extent we see a pickup in those gas markets, a lot of the overhead is already there, and we will see high incremental margins coming from those particular markets. So there is going to be a pop if we can build utilization up in those areas even without any recovery in pricing.

Operator

And our next question is from the line of Trey Cowan with Clarkson Capital.

Trey Cowan - Clarkson Capital Markets, Research Division

So just a housekeeping question first. Shares outstanding, where did you all end the quarter at?

Alan Krenek

The average weighted for the quarter was 40 million.

Trey Cowan - Clarkson Capital Markets, Research Division

Okay. And then I hate to beat a dead horse, but on the disposal well side of things, where did you end the year as far as how many saltwater disposal wells?

Alan Krenek

71.

Trey Cowan - Clarkson Capital Markets, Research Division

Okay. And looking from where you're talking about in your prepared commentary of spending your capital budgets, just from eyeballing it, it sounds like it's between 10 and 20 saltwater wells. Which side is it closer to?

Kenneth V. Huseman

It's probably closer to the 10, 10 or 12. It's going to -- that depends on how fast those wells get permitted, and then that drives when we can get them completed and in service. So we think one a month would be a good pace. And it will probably lumpier than that, but that would be the objective.

Operator

And our next question is from the line of John Daniel with Simmons & Company.

John M. Daniel - Simmons & Company International, Research Division

First one for me is you mentioned the acquisition opportunities to help bolster water treatment and water recycling, and it seems like several other companies are seeking to do the same thing. If you look out a couple of years -- this is more of a longer-term question, if the water recycling business is successful, do you see that potentially reducing the demand for SWDs?

Kenneth V. Huseman

No, because the -- a lot of the -- you're still going to have a lot of the fluid -- the un-reprocessable water, so to speak, that's going to be disposed, along with continued growth in drilling activity, flowback work, produced water, that sort of thing. Now we don't need to be building disposal wells at the rate we are forever into the future because it's a function of -- I'm sorry, drilling activity and flowback work. I think that successful efforts at reprocessing will allow the industry to continue expanding drilling and frac work that is going to hit a wall one of these days when availability of water becomes an issue. And we've seen it in some markets already. We've had fracs stalled in central Oklahoma the last couple of years during the summer because of lack of surface water. South Texas is certainly under that gun. West Texas -- as that activity continues to branch out West and even to the East, surface water and well water becomes more difficult in some of those markets. So the industry really needs to unlock that code to reprocess some of that water and reuse some of that water, or we're going to hit a wall in terms of activity. We don't think it -- and along those lines, we don't think it will hurt the trucking side of our business because we tend to move that water around from location to processing location and back to the next location. So it could actually, at least, in the short term, increase demand for trucking.

John M. Daniel - Simmons & Company International, Research Division

Alan, I missed the G&A guidance for Q1. It sounded like you said it was going to be similar to Q4? Is that correct?

Alan Krenek

Yes, it will be similar in dollar amounts. Of course, as the year goes on, as a percent of revenue, it will come down. But from a dollar amount perspective, very similar in the first quarter as it was in the fourth quarter.

John M. Daniel - Simmons & Company International, Research Division

But did the sales tax, the audit fees and the relocation all fall within G&A?

Alan Krenek

They did.

John M. Daniel - Simmons & Company International, Research Division

Okay, so there's not...

Alan Krenek

On the as-reported numbers.

John M. Daniel - Simmons & Company International, Research Division

All right. So basically $50-ish million for Q1 is right, not the adjusted number down for those 2 items? Do you follow me?

Alan Krenek

The $50 million number includes about $15 million -- excuse me, includes the sales tax amount that we booked, which was $3.7 million and the other amount [indiscernible].

John M. Daniel - Simmons & Company International, Research Division

I wasn't sure if...

Kenneth V. Huseman

On a run-rate basis, that's about $42 million or something.

Alan Krenek

$42 million, $43 million, yes.

Kenneth V. Huseman

For G&A.

John M. Daniel - Simmons & Company International, Research Division

Correct. So $42 million is the guidance, not $50 million. Just making sure.

Alan Krenek

Yes.

John M. Daniel - Simmons & Company International, Research Division

Okay. All right. It came across the other way, that's why I just want to confirm that. And then -- and the last one for me is just on pressure pumping real quickly. We had heard from one of the guys out in the Permian that they saw an increase of 20% of -- in frac jobs January versus December, seems like a pretty healthy jump. And I don't know if you have handy the number of jobs you did in January versus December. But can you just share with us what the rate of change was?

Kenneth V. Huseman

Well, it depends on the size of the fleet, I guess, would be -- whether that would be consequential or not. We actually showed an uptick in the number of jobs in January versus December as well. I'm trying to see if it's 20%. I don't think it's quite 20%.

John M. Daniel - Simmons & Company International, Research Division

Yes, they're smaller than you guys. But I'm just curious...

Alan Krenek

That was Permian-specific though.

Kenneth V. Huseman

Yes, this is our total fleet. So Permian-specific sure could have been. For one thing, January is a longer month.

John M. Daniel - Simmons & Company International, Research Division

Yes. I mean, I understand the holidays and all that stuff. I just -- it seemed higher than what I would have normally expected, that's all. Okay. Last one, and then I'll jump off for others. How many rigs are running 24 hours right now for you on the workover side, and how do you see that trend evolving in '13? And that's it for me.

Kenneth V. Huseman

We don't track it daily, but virtually, we probably have a dozen, I'd say, throughout the country. More of our rigs in the Appalachian market operate 24 hours on a routine basis. We have 2 or 3 a day in the Permian. Of course, the 4 barge rigs are all 24 hours. And then in South Texas, we fluctuate up and down there, and in East Texas as well. So it would probably be at least a dozen on any given day and it would go up from there. We see that probably gradually ticking up as these more difficult workovers and in some cases, completions grow, where they don't want to start and stop activity each day, so it's probably going to increase, but I don't think it's going to double or triple.

Operator

Our next question is from the line of Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

So it's clearly good to see a pickup in activity across your businesses, and wanted to focus a little bit on the pumping side and, again, always good to see activity moving higher. Wondering, though, if it's a bit of a mixed blessing in the sense that we had been hearing about a lot of distress out there especially amongst some of the smaller operators of equipment. Does this just give them another lease on life and live to fight the next battle? Is there still an appetite to potentially do deals there and is there -- and would those deals be at a discount to market value or replacement value? Or again, are we just kind of extending the lives of a lot of these little guys?

Kenneth V. Huseman

Well, I think it would probably cause -- if this thing stayed slower longer, it would certainly shorten the life span of some of those distressed assets. However, this pickup that we saw in January isn't enough to alleviate everyone's problems, particularly if you're a 1 or 2 spread company. The last question revolved around a 20% increase. That doesn't solve anybody's problem. That's any of the smaller guys' problem in -- because there's no price relief yet. So I think they're working at pretty modest margins. So I don't think it's going to change that landscape much.

Michael W. Urban - Deutsche Bank AG, Research Division

So you still see the potential to consolidate that market a little bit? There could still be some distressed sellers?

Kenneth V. Huseman

Yes, we -- yes, that's right. I think the first thing that's happened is the expansion of the fleet has come to a screeching halt over the course of the last 6 months. We've actually seen opportunity to rent equipment rather than purchase it, which is an early indication of distress. And so I think there are going to be a number of those companies now. You're probably right, some are waiting to see what's going to happen and hoping for a better day, but we'll just have to see how the rig count plays out and whether that is enough to solve everybody's problem.

Michael W. Urban - Deutsche Bank AG, Research Division

That makes sense. And then on the pickup in -- or potential pickup in gas activity that you referred to, it sounds like you certainly have maintained your infrastructure in a lot of the more gas plays, and that is -- sorry, from a margin perspective, as that activity does pick up, do you have the capacity in terms of equipment or in people to address those needs, or is that something you'd have to add or spend a little money to do?

Kenneth V. Huseman

At least on the initial uptick, we have the people and equipment that are currently underutilized. For instance, in East Texas, we have equipment and people that are working effectively 3 days a week, and we can go to 5 or 6 before we add much capacity. It never works quite that cleanly. But there's quite a bit of slack in the system with our existing capabilities in those markets.

Operator

Our next question is from the line of Jason Wangler with Wunderlich Securities.

Jason A. Wangler - Wunderlich Securities Inc., Research Division

Just curious as far as -- and I think you guys have kind of hinted at it, at least, on the pressure pumping side, you ended the quarter just with a slight increase in horsepower. Have you pretty much gotten everything delivered that you had been purchasing? And how do you see that number playing out just on the current assets as we go through '13 as far as possible retirements or putting some away?

Kenneth V. Huseman

I think that number will be essentially flat in terms of owned assets that we have the opportunity to pick up some of -- a small fleet on a rental basis and that would certainly increase our capability, but we don't have equipment on order nor do we expect to retire anything, any significant amount. We'll go through the normal evaluation when we rebuild equipment, but there's nothing slated for retirement at this point.

Jason A. Wangler - Wunderlich Securities Inc., Research Division

Okay, perfect. And then just maybe as far as the share repurchase -- Alan, I think you kind of talked about it a bit. You guys have done a pretty nice job of getting that taken care off. I think you said $20 million left. Is it just being opportunistic still and watching the stock price? Or is there anything that you would watch for, and also would you look to even increase that number going forward with only $20 million left?

Alan Krenek

Well, I think you can look back historically in the price range that we've repurchased these shares at. Under current market conditions, I don't think we would be in the market of buying shares back. But it all depends on where the market goes and where the values are.

Operator

Our next question is from the line of William Conroy with MLV.

William Cornelius Conroy - MLV & Co LLC, Research Division

Maybe start with just a quick one. Can you break down the pressure pumping horsepower between that, that you use for frac-ing and what you're using for cementing and acidizing pump down?

Alan Krenek

Yes, about 220,000 -- 215,000 of it is for stimulation and then the rest of it is for acidizing and cementing.

William Cornelius Conroy - MLV & Co LLC, Research Division

Got it. And let me pick on the Well Servicing business just for a second. Alan, do you have the average or the revenue per rig hour for Q4? I didn't think I heard it in your prepared remarks. I've got it calculated, but do you have it?

Kenneth V. Huseman

Q4 was $393 per hour.

Alan Krenek

Yes. Which was down sequentially but due to mix change.

Kenneth V. Huseman

It was down by about 3%, I think.

Alan Krenek

2%. Yes.

Kenneth V. Huseman

2-something percent, yes.

William Cornelius Conroy - MLV & Co LLC, Research Division

Right. So I guess the question is if I look back in, at least, in the previous cycle at this utilization, the rate was much lower. Probably closer to $350 just by -- without double-checking it. That said, are you surprised at all that in this environment that the pricing hasn't come down or conversely, and really this one, I think, is aimed at you, Ken. If you guys just put up the January utilization number that you did. With a, call it, a modest kind of climb out in the utilization rate, should we be thinking -- why shouldn't we be thinking that pricing comes up more than you seem to indicate over the course of 2013?

Kenneth V. Huseman

Sure, Mike, it's just hard to -- we don't get any extra points for predicting something that doesn't happen. So we're pretty careful there. One thing to remember is that the difference between now and a couple of years ago is the wage levels have moved up over -- and so that wage levels are what supports pricing, and pricing can only go down so far before -- with poor utilization before you get to a kind of a break-even cash flow. So that's the support level that we see in pricing. So when utilization moves up typically, solidly in the upper 70s on a national basis with the industry fleet, then we start seeing some pricing movement up as we compete for labor, raise wages and have to raise rates accordingly. So it's all -- it's going to be a function of that utilization number. If the industry starts reporting utilization in the mid- to upper 70s, I think you'll see rates move up because, as I said, we'll be competing for labor and throwing money at it again.

Operator

Our next question is from the line of James Spicer with Wells Fargo.

Patrick Lee - Wells Fargo Securities, LLC, Research Division

This is Patrick Lee calling on behalf of James Spicer. I'm just wondering with respect to the water processing and recycling business that you are right now about to close on, can you give any additional color on that as to how much maybe you're expecting in terms of incremental revenue or EBITDA from that, and what the cost was for those deals? And two, where you think you might go in terms of that business in the future in terms of growth CapEx that might be aligned with processing and recycling business?

Kenneth V. Huseman

I think it's a little early to comment on that. We will issue a press release as those deals get formally done. They're pretty modest in terms of overall cost. We'll match it up with some other technology we've been working with over the last couple of years and develop a business plan. And at the outset, it's not a big deal, it's not going to be a needle mover. We think that within the next -- probably within calendar year '13, we'll have something more substantial to talk about. It's just something that I think every company in this segment is working on and I think will be necessary if we're going to compete effectively in the Fluid Services business. But it's a little early for us to give much color on what's going on there.

Operator

Our next question is from the line of Walt Chancellor with Stephens Inc.

Walter Chancellor - Stephens Inc., Research Division

Just had a quick one on the Completion and Remedial segment. As we look out into '13 given your sort of view of activity ramping into the second half, is operating -- or a gross margin in the range of that 40% achieved, say, Q1 to Q3 2012, is that a reasonable target? Or how do you think about that with current pricing and utilization dynamics at play?

Kenneth V. Huseman

It won't happen with current utilization, and utilization is always more important than pricing. If we get to the point where we can fully utilize the people that were -- we have to retain to perform the service, margins will move up. I'm not sure they'll get back to that 40% level. But certainly, we'll move up from where they are now, and could by the end of the year even without pricing.

Walter Chancellor - Stephens Inc., Research Division

And then this one might be cutting it a bit too fine, but there's been a lot of commentary, obviously, about ongoing transformation of the Permian Basin towards the more horizontal activity. 30% to 35% of the rigs in the basin are horizontal, what percentage of your business is driven by those? Or what percent of your revenue in the Permian is driven by those horizontal rigs right now, and what opportunity for revenue growth would there be?

Kenneth V. Huseman

I wouldn't -- not much of our current business is driven by those horizontal wells other than we certainly haul water to support those fracs. And as that rig count grows, we benefit just as we do with any other increase in the rig count. So we don't really differentiate between a horizontal well and a vertical well. They're frac-ing it. They're going to need water, and we'll be hauling to it. They'll need a completion rig, and we'll probably be involved in the pumping services as well. So those wells do take about twice as long to drill as a vertical well. So if we're seeing a well -- or rig-for-rig reduction vertical to horizontal, it turns out to be -- to generate about the same amount of demand. It takes twice as long to drill, but they're probably putting twice as many stages on it in terms of frac. So we're pretty much indifferent. Now we think that over time, as those horizontal wells are completed and left to produce that those wells become a better candidate for more frequent and more extensive service work because of the nature of the completion.

Operator

And our next question is from the line of Brad Handler with Jefferies & Company.

Brad Handler - Jefferies & Company, Inc., Research Division

Maybe I'll make it an uncomfortable one or something just for fun. The -- I guess, I'm curious, I certainly understand you're not giving guidance for '13 other than on certain specified elements, and that's helpful for our modeling. But I guess, I'm curious in your own planning, do you -- it feels as though you've laid out a CapEx plan, there's a bias to the upside as acquisition opportunities layer in. Are you budgeting for to be free cash flow positive in '13?

Kenneth V. Huseman

Definitely. Yes, definitely. In fact, that's the basis from which we develop our CapEx plan. We make sure that this thing, that we'll be cash flow positive. And if we're not, if we don't hit the top line numbers and the margin numbers, then we'll scale that CapEx back to the point we are free cash positive.

Brad Handler - Jefferies & Company, Inc., Research Division

Okay. I mean, as you say, you have plenty of access to liquidity, you have healthy cash on your books, you could dip in for opportunities. But okay...

Kenneth V. Huseman

Yes, well, we will. We'll certainly consider those opportunities but to continue to sustain a fleet in a market that doesn't allow us to generate free cash flow, we probably shrink that fleet.

Brad Handler - Jefferies & Company, Inc., Research Division

Got you. Similar -- that's helpful. From a similar vein, would you expect to be -- from an EPS perspective, would you expect to be in positive EPS territory by the second quarter?

Kenneth V. Huseman

I think it's possible if we see this rig count improve fairly quickly. Now it needs to go ahead and make a move because right now, we're pretty flat with -- on a rig -- on a drilling rig count basis, kind of flat where we ended the year. So we need to see some increased level of activity -- here the first quarter is 2/3 over, and we haven't seen much movement. So not too surprising, but if March -- if we don't start seeing some movement into March and April, then it may -- it will be more difficult to get to that point.

Okay, operator, I think that's all the calls.

Operator

There are no further questions at this time. I'll turn it back to you guys for any closing remarks.

Kenneth V. Huseman

Okay. Well, thanks, everyone, for dialing in. We look forward to discussing our first quarter performance in May, and we'll be talking to you.

Operator

Ladies and gentlemen, this concludes Basic Energy's Fourth Quarter Earnings Call. You may now disconnect. Thank you for using AT&T teleconferencing.

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