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Basic Energy Services Inc. (NYSE:BAS)

Q4 2008 Earnings Call

February 27, 2009; 10:00 am ET

Executives

Ken Huseman - President & Chief Executive Officer

Alan Krenek - Chief Financial Officer

Sheila Stuewe - Investor Relations, DRG&E

Analysts

Marshall Adkins - Raymond James

Kevin Pollard - J.P. Morgan

Dan Pickering - Tudor, Pickering, Holt & company

Pierre Conner - Capital One

Victor Marchon - RBC Capital Markets

Mike Drickamer - Morgan Keegan

Jack Wagner - MJX Asset Management

Operator

Ladies and Gentlemen, thank you for standing by and welcome to the Basic Energy Services Fourth Quarter 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) This conference is being recorded today, February 27, 2009.

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

Sheila Stuewe

Thanks, Nicole, and good morning to everyone and welcome to the Basic Energy Services fourth quarter 2008 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’d like to be on our e-mail distribution list to receive future news releases or if you experienced a technical problem and did not get one last night, please call us at 713-529-6600. If you’d like to listen to a replay of today’s call, it will be available via webcast by going to the Investor Relations section of the company’s website at www.basicenergyservices.com or via recorded instant replay until March 13, 2009.

This information was provided in yesterday’s earnings release. The information reported on this call speaks only as of today, February 27, 2009, 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 Provisions of the Private Securities Litigation Reform Act of 1995.

Basic Energy Services has made every reasonable effort to insure that the information and assumptions on which the statements and projections are based are current, reasonable and complete. Important Risk Factors that could cause actual results to differ materially from the expectations are disclosed in item 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 will turn the call over to Ken Huseman, President and CEO of Basic Energy Services

.

Ken Huseman

Thanks Sheila, and welcome to those joining us this morning. With me on the call today is our Chief Financial Officer, Alan Krenek. As reported in the Press Release, our fourth quarter capped off a very strong 2008, a year in which we set new records for financial and operational performance.

Those results are a testament to the hard work and abilities of our employees throughout the organization. Net positive overall performance for 2008 is almost irrelevant now, however, given the rapid change in the market for our services and our relatively negative outlook for 2009.

Rather than review our financial results which we’ve laid out in detail in our Press Release, Alan will comment on some of the specifics for the quarter and then I’ll come back on to review what we’re seeing today in each of our business segments and then get directly to your questions. Alan?

Alan Krenek

Thanks, Ken. And good morning to everyone, I’ll give you a brief overview of the fourth quarter and then discuss our balance sheet, liquidity and capital requirements. Revenue for the fourth quarter of 2008 was $246 million, an increase of 9% from the same period in 2007.

Adjusted EBITDA was $61.5 million or 25% of revenue in the fourth quarter compared to EBITDA of $64.4 million or 29% of revenue in the fourth quarter of 2007. We had several one-time items in the fourth quarter of 2008. First, we recorded $12.2 million of after-tax income related to the Great Wolf breakup fee we received in December. Second, we recorded a $22.5 million non-tax deductible goodwill charge, which I will discuss in more detail later.

Net income for the fourth quarter of 2008 excluding the one-time items I just discussed was $14.2 million or $0.35 per diluted share compared to $19.5 million or $0.47 per diluted share in the fourth quarter 2007. Net income as reported for the fourth quarter of 2008 was $3.9 million or $0.10 per diluted share, which included the one-time items.

Our G&A expense for the fourth quarter of 2008 was $32.1 million, or 13% of revenue compared to $25.3 million or 11% of revenue during the fourth quarter 2007. Sequentially, G&A was up by $1.6 million mainly due to approximately $900,000 of uninsured losses as well as a full quarter effect of the G&A from the acquisition of the Ajurit companies that closed in late September 2008.

We expect to see a reduction in G&A expense in 2009, as we adapt our administrative infrastructure to lower business activity levels. We currently project that G&A expense for 2009 will be slightly lower than the amount for 2008 despite the full year effect of the G&A from the Ajurit acquisition.

Depreciation and amortization expense in the fourth quarter 2008 was $32.6 million compared to $26.2 million in the same period of 2007. This increase reflects the capital expenditure program we completed in 2008, as well as the five acquisitions that we closed in 2008.

Depreciation expense in 2009 will increase as we see the full year effect of the Ajurit acquisition, as well as the additional depreciation from our 2009 capital expenditure program. Net interest expense in the fourth quarter 2008 was $6.3 million, down from $6.7 million in the fourth quarter 2007. It was up from $5.7 million in the third quarter 2008 due to the higher LIBOR rates on our outstanding revolver balanced in the fourth quarter and the additional interest on the $30 million draw down on our revolver in late September for the Ajurit acquisition.

In the first quarter of 2009, we’ve been able to accept the interest rates on our revolver at much lower levels and expect to see a sizeable reduction in interest expense in the near term. As outlined in our press release, we recognized a $22.5 million non-tax deductible goodwill impairment charge in the fourth quarter 2008. We are required at least once a year to determine if the recorded value of the goodwill we are carrying on our books reflects its fair value.

At December 31, it was determined that the carrying value of our contract drilling segment exceeded its fair value. Based on this, we have to write-off the entire goodwill amount that was recorded in 2007 in connection with the Sledge Drilling Inc. acquisition. No other assets were impaired as of December 31.

The effective tax rate in the fourth quarter of 2008 excluding the impact of the goodwill impairment charge was 37% compared to 38% in the third quarter. In 2009, we expect our tax rate will be approximately 38%.

Weighted average diluted share count for the quarter was approximately $41.1 million. The weighted average diluted share count declined slightly from the third quarter mainly due to the share repurchases that were made in the fourth quarter. During the fourth quarter, we repurchased 897,558 shares at an average cost of $9.82 per share. We would expect that the weighted average diluted share count would be approximately $40.3 million for the first quarter of 2009, but it would depend on the number of shares that are repurchased during this period.

As we mentioned in our last conference call, our approach to the share repurchase program is very disciplined and we continue to evaluate the best investment opportunities and use of our capital. Our Balance Sheet remains strong and we continue to generate good cash flow.

Our cash balance at the end of 2008 was $111 million up approximately $30 million from September 30. We monitor the financial condition of our customers and collection of our receivables on a daily and weekly basis. DSO at December 31, was 65 within our target range of 60 to 65.

During 2008, we generated cash flow from operations of approximately $213 million or 21% of revenues. Excluding the net benefit from the terminated merger, operating cash flow was %201 million or 20% of revenue.

Total capital expenditures during 2008 were $143 million of which approximately one-third was for expansion projects and the majority of the expansion CapEx was for our completion of Remedial Services segment.

Cash, capital expenditures during 2008 were $92 million and we financed $51 million of CapEx through capital leases. Our committed capital expenditures for 2009 are approximately $25 million, which finish out our 2008 projects. In addition, we expect that our maintenance capital expenditures in 2009 will approximate 4% to 5% of revenue.

At December 31, we had approximately $29 million of availability under our credit revolver and when added to our cash balance gave us total liquidity of $140 million. In addition, we have the ability to enter into $85 million of additional capital leases.

Our debt at December 31, 2008, was comprised of the $225 million 71/8 senior notes, $180 million outstanding under our revolver and $75 million of capital leases making total debt $480 million and net debt $369 million.

The revolver has a maturity date of December 2010 and the senior notes mature in April of 2016. Our debt to adjusted EBITDA ratio was 1.7 times and total debt to capitalization was 45% at December 31.

In these uncertain times, our main priority for 2009 is to preserve our cash, so we can maintain our financial flexibility. We clearly have the liquidity necessary to navigate through these challenging times and at the same time, take advantage to grow our asset base when the right opportunity arises.

We have built Basic in a prudent manner and that is the way we manage, regardless of where we are in the cycle. At this point, I’ll turn the call back to Ken who will give you an indication of the current operating environment.

Ken Huseman

Thanks Alan. In our well servicing business, utilization has not rebounded from the typical year-end slowdown and as reported in our monthly operating summary, full fleet utilization averaged 49% in January.

Utilization has stabilized in the mid to upper 40% range through the month of February. We expect longer days and firming oil prices will help utilization move a little higher through the end of the quarter. Demand has been declining since mid October in most Markets, so we have been systematically stacking our older equipment and releasing crews as lower activity in each local market dictates.

Rates per hour have declined thus far by about 20% from the peak in the Permian Basin, but less than 10% in the more work-over related markets. The company-wide rate per hour for the first quarter will likely average about 15% lower than the $418 fourth quarter rate, as the drop in utilization and higher gas rate in the higher gas and work-over markets, will aggravate the real drop in rates across our markets.

We think most of the rate competition has come in, but we could certainly see some additional rate pressure until competitors large and small realize there’s not much market share to be gained with rate competition.

Margins will move lower by 500 basis points in the quarter despite headcount reductions, lower proved wages and other cost reductions, which cannot fully offset the combination of lower rates and utilization. Our Fluid Services business continues to holdup through this point in the quarter, as the completion backlog is supporting activity in several markets.

Bidding has become more aggressive for production water hauling work reflecting the general slowdown in oil field activity. As those lower rates are booked and the completion backlog is worked off, margins will move a couple hundred basis points lower, probably not until the second quarter though. We have been repositioning trucks to higher activity levels while downsizing in others.

Our Completion and Remedial Services segment, which includes our pressure pumping, wireline, rental, and under-balanced drilling services is suffering significantly lower utilization as drilling and work-over budgets are reduced. While pricing in our rental tools segment remains fairly firm, pressure pumping leading edge discounts are approaching 40% for the base charges in some markets.

We expect margins to drop by 500 basis points even after substantially reducing our workforce in this segment. Our Nine Rig Drilling segment is working two or three rigs steadily, but effective day rates have declined 14,500 per day. Leading edge bid rates most in the form of footage bids approximate 13,000 a day for a thousand horsepower rigs.

Wages have been rolled back to reflect the day rate reduction, we have stacked five rigs downsized the workforce and reconstituted crews with the most experienced people. We have always operated in a frugal manner even in the better times, but we continue to identify opportunities for cost reduction and everything is on the table.

We began manpower reductions, overtime control, wage roll backs, vender pricing negotiations, and other cost reduction efforts in the fourth quarter. Those efforts continue to be driven by the activity and outlook for each of our individual markets. We have consolidated the regional operations in the Rocky Mountain markets into one to reduce costs in that permanently impaired market and we have just announced a realignment of the two regional organizations in South and East Texas, to take advantage of opportunities developing in those markets.

Overall, we’ve reduced our employment base by about 15% from the fourth quarter and believe we have generally right-sized our organization for the current outlook. But as I said, everything is on the table. We have and will continue to protect market share and preserve the maximum coverage of our markets.

Attrition and the competitive fleet is picking up as some of the late covers with higher operating costs or insufficient economies of scale are reducing their presence in local markets or pulling out all together. We believe the more highly levered companies are at or close to cash break-even and will begin exiting certain markets if not the industry in the second quarter.

While we do have a pretty dismal near term outlook, we expect the customers will have to resume higher levels of maintenance activity to protect their production as the year progresses, so we are retaining our viability in as broad a part of the market as feasible.

Given that review and outlook, preserving cash is the name of the game, as Alan mentioned, our year-end cash balance of $111 million is growing daily despite lower activity in margins. In addition, we have $29 million available on our revolver and no principal payments due until December 2010.

So, we’re starting the year with great liquidity. Even with a substantial reduction in revenue and margins, beyond what we expect to see over the next year, we’re very comfortable we can remain in compliance with our loan covenants, build our cash reserves while supporting, if not growing our existing capacity.

Now, I’ll comment on how the company is positioned to compete in the 2009 market. In fact, we’ve been positioning the company for this environment for the last 10 years. As most of you have heard us say, we depend more on well count than rig count. We have substantial operations in the most established oil and gas provinces in the nation with exposure to more than 600,000 existing well bores.

Most of our services are required as a routine operating expense for our customers as they work to keep those wells producing oil and gas. Our customer base is broad and diversified as well. We provided services for more than 2000 customers last year and no single customer accounted for more than 5% of our business.

While the majors and large independence drive the bulk of the drilling activity in many markets, a large group of smaller independent companies own most of the well count in the older oil fields. Our local management teams really work to keep that diversified customer base.

The quality of our fleet is more than adequate to compete effectively in the current environment. In our work-over fleet, 142 of our 414 rigs are of the same make and model and have been purchased new since 2004. That standardization has really helped in streamlining maintenance and operations processes.

Our ongoing refurbishment program has rebuilt many of our best older rigs over the last five years, so we have about half of our fleet in fairly new condition. Those new and rebuilt rigs are the rigs we’re keeping in the field as demand has declined. We have been stacking our older less efficient rigs for now, but can certainly put them back in service to respond to the eventual rebound in activity at a very low capital cost and by the way, there’s very little cost associated with stacking that equipment.

The equipment in our other segments has also been upgraded over the last several years allowing us to minimize our capital budget requirements for 2009. We have almost entirely eliminated new projects and discretionary spending from our capital budget for the first six months of the year.

If the current market continues past mid year, we could hold capital spending to less than $40 million in 2009 compared to the $143 million we spent in 2008. The significant portion of the capital spending we are planning provides for selected capital expansions, which provide a competitive advantage. As an example, we can drill and complete a fluid disposal well this year, at a much lower total cost than last year, and in the Permian Basin, for sure we know where we can get a drilling rig.

And finally, our organization is experienced, knowledgeable of their local markets and well incentivized. This is a cyclical business, but it’s even more of a people business so we strive to attract and retain the best people available. We pay for performance and expect our management team to earn a substantial part of their compensation in the form of quarterly incentive bonus, which considers their area of responsibilities return on capital, safety performance and revenue growth.

While those incentive payments will decrease in line with our profitability, as industry conditions get tougher, we intend to reward those people who can make it happen at all levels of the company.

Operator, at this point let’s turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Marshall Adkins - Raymond James.

Marshall Adkins - Raymond James

Good overview, but you’re talking too fast.

Ken Huseman

Well I’m sorry about that. But want to get to those questions Marshall.

Marshall Adkins - Raymond James

It was very good, very helpful, but let’s go back to kind of pretty significant revenue guidance down for Q1 and you went through each of the subgroups in detail, but could you give us a little more color?

It sounds like and I don’t want to put words in your mouth, but it sounds like the work-over business, obviously down pretty substantially, but it seems to be stabilizing, completions of particularly the pressure pumping, that’s where you’ve seen the biggest fall in pricing obviously a pretty big drop in margins associated with that.

Fluids margins holding up but business still falling, that’s what I heard. Correct me where I was wrong and give us a little more color there?

Ken Huseman

No, that’s exactly right. We’re spread out over a broad geographic area, so that’s sort of a 20,000 ft. level observation. Each market is different, there’s a lot of completion backlog in some markets yet. For instance the Barnett Shale, where some numbers are as high as 500 and 600 wells yet to be completed depending on who you talk to, so we’re still seeing quite a bit of that activity going on which we’re involved with in our Fluid Services business.

The architects, Eastern Texas continues to have strong frac related activity. Some of the other markets less though, the Rockies has certainly slowed down in that respect. So, and then of course as activity in general is wound down, we see more competition for people trying to get into the production water hauling business, which is one of the anchors of that business, not the most profitable part, but certainly a significant element to it.

Marshall Adkins - Raymond James

Should we think of the fluids business falling in line with rig activity? Obviously, the work-over business tends to hold-up better, but I would think that the completion and fluids business in terms of just modeling a decline going forward more or less in line with the rig count or is that not right?

Ken Huseman

Yes, it’s actually been a delayed response thus far. The Fluid Services business has held up remarkably well even though the rig count in most markets has dropped substantially and it’s those uncompleted wells.

Now, whatever you think, how that trends off and then you can model your reduction in Fluid Services. We’ve been pleasantly surprised thus far, we know there’s an end coming and we suspect that if gas prices don’t improve, people may not complete all of the wells that are yet to be hooked up out there so it’s really something we don’t want to speculate too far ahead on and maybe best case, we continue on and drilling activity picks up before we get all of the wells completed, but that’s not the way we’re betting.

Marshall Adkins - Raymond James

Last question and really more a clarification on the CapEx plans, back of the envelope, I was coming up for ‘09 at $60 million, $70 million kind of in the plans right now. Am I doing my math right there?

Alan Krenek

That’s correct. Now, that assumes that we see some pick up in the last half of the year, which we certainly expect. If we saw a continuation of first quarter level activity, it would be cut significantly back closer to that $40 million that I mentioned and considering that $25 million of that I think is the completion of ‘08 projects.

Operator

Thank you. Our next question comes from Kevin Pollard – J.P. Morgan.

Kevin Pollard - J.P. Morgan

I wanted to touch on your pricing comments on the well servicing side. First of all, I was wondering with utilization really less than half the fleet and it seems to be the case for most of your competitors as well. What gives you the confidence that pricing is; we’ve seen the worst of the pricing as opposed to a continued deterioration throughout the year?

Ken Huseman

Well, I think the pricing goes to the cash break-even point of your highest cost competitor and pricing is not the big thing. It’s utilization and so we think that we’ve seen prices stabilize, rate pressure was pretty intense the first several weeks of the quarter and it just subsided.

So, it’s kind of a gut feel from what we see, in the work-over markets, you can give a work-over rig away, if there’s no capital budget, there is just no work. It’s a little bit more competitive in the maintenance areas where maintenance work is ongoing to some level and so you see a bit more price competition in those markets, but I think one of the reasons that pricing has not declined in some of the more work-over completion oriented markets is the work, the opportunities to bid just aren’t there.

So, it doesn’t move quite as far and again, utilization, in every market it’s a combination of utilization and price and higher utilization tends to actually cause more competition in those markets and when other markets get weaker. So, we’re seeing people try to move in and now we’re seeing people starting to move out as they can’t get the rate they need and the utilization they need to keep the doors open.

Kevin Pollard - J.P. Morgan

Okay and you had indicated pricing was down about 10%, I guess in some of the more completion oriented markets you know, compared to the Permian. If you start to see some of these wells that have been drilled but operators just choose not to complete them which we’re hearing a lot of guys start to talk about, would you expect that pricing in those markets to kind of GAAP down to where it is out in the Permian?

Ken Huseman

No, because it’s a different suite of services provided. The layout of equipment provided is completely different. Permian is what we would call a pulling unit market where you get rig and four people, some hand tools and these other markets, work-over markets you get a rig and several hundred thousand dollars of related equipment, more people, etc. So, the pricing model is completely different in those other markets and as I said if a capital budget doesn’t exist, there’s nothing to bid into, so I don’t expect that to occur.

Kevin Pollard - J.P. Morgan

Okay, and last question, on the Fluid Services, did I hear you correct when you said you expected margins to come down a couple hundred basis points over the next couple quarters?

Ken Huseman

I think I probably misspoke a little bit. Actually, in this quarter probably a couple hundred basis points and then it just depends then on what happens with these uncompleted wells, whether we’re close to the end or not close to the end. That would be more activity driven than pricing driven I think people tend to stack trucks pretty quickly.

Kevin Pollard - J.P. Morgan

Well, I guess that’s where I was going with the question, because you just had gross margins at 38% so even if it was down a couple hundred basis points in each of the next two quarters that still kind of puts you in the kind of 33%, 34% range which is not really down year-on-year all that much.

It seems pretty solid given the broader market. I’m wondering what’s leading that sustainability? It seems like you would be getting more price pressure there. Is there some offset from the high fuel costs and stuff early in ‘08 that’s helping you out there?

Ken Huseman

That’s part of it. It’s just, it’s really utilization driven as much as anything. We have some really large economies of scale in that business. We have some really large yards and that’s driving that particularly with this one acquisition we did late in the year, and of course the bergening activity in the Arklatex.

The margins in that business tend to year-in and year-out, throughout the cycle, move around in the mid 30% range, and that’s because those trucks have an application outside the oil field in the general economy. You can sell trucks and the fleet will shrink. It will expand, but it will shrink more in line with demand or more quickly, and we’ve done some of that ourselves.

We can reposition those trucks from one market to the other. Companies like us with more than one regional operation have the benefit of being able to relocate trucks rather than stay in place and battle it out.

Operator

Thank you. Our next question comes from Dan Pickering - Tudor, Pickering, Holt & company.

Dan Pickering - Tudor, Pickering, Holt & company

Alan, I want to make sure that I understand the baseline numbers around the SG&A commentary that you had. I think you said that you expected 2009 to be slightly down from 2008 and I just want to make sure the 2008 benchmark that you’re using would be $115 million-ish, is that correct?

Alan Krenek

That’s correct.

Dan Pickering - Tudor, Pickering, Holt & company

Okay and roughly kind of ballpark for us Q1 then? I mean is it going to be at that $110 million-ish run rate or are we going to be pretty steady there or are there going to be continued cost reductions that get you to the down year-over-year?

Alan Krenek

Yes. It should be somewhere slightly below $30 million for the first quarter.

Dan Pickering - Tudor, Pickering, Holt & company

And then Ken, when we think about cash flow for the business through ‘09, I heard you say $40 million to $70 million as kind of the range right now for capital spending. Alan, remind us what depreciation should be for 2009?

Alan Krenek

Well I didn’t give a number specific for the year, but you can take the run rate and the fourth quarter, because that includes the Ajurit acquisition of $32.6 million and then gradually layer-in the $50 million to $60 million of CapEx evenly throughout the year. So, whatever that number comes up to be is going to be pretty close.

Dan Pickering - Tudor, Pickering, Holt & company

I guess where I’m going with this is; in a break-even earnings environment you’re still nicely cash flow positive, unless there’s something going on with working capital. Would working capital be coming out of the business or going in, in this environment?

Alan Krenek

It would be coming out.

Ken Huseman

In a shrinking revenue environment, we’d certainly be reducing working capital.

Dan Pickering - Tudor, Pickering, Holt & company

Right, and do you have any benchmarks for that? Do we get $0.20 on the dollar for each revenue dollar drop or I mean or should I just use those?

Alan Krenek

Well we should be able to get about $30 million out of working capital.

Ken Huseman

Our DSO is 65 days and that is increased slightly from where we’ve been, so then you got a half a month of payables in there. So, 50 days revenue or something like that is what working capital is.

Dan Pickering - Tudor, Pickering, Holt & company

So, it sounds like as long as you’re kind of disciplined on the CapEx side and paying attention to the operating cost structure, I mean Basic is going to throw off cash in 2009 even in a rough environment.

Ken Huseman

Exactly.

Dan Pickering - Tudor, Pickering, Holt & company

Okay and you said capital conservation is sort of a key goal. Anything appetizing on the acquisition side you just can’t pass up or is that sort of in a no-buy period?

Ken Huseman

We’re going to really be careful through probably the first half now, until we see some clarity about oil prices and the economy and the credit markets and all that. The potential acquisitions are lining up as I’ve told our guys. We’ll wait a couple months and maybe have a beauty contest in the second quarter, but I don’t think you could come up with one that’s so compelling that would make us jump right now.

Operator

Thank you. Our next question comes from Pierre Conner - Capital One.

Pierre Conner - Capital One

Ken a point was made of a very good review, so I appreciate your commentary. But I did want to reconcile and maybe I misunderstood, I thought at the beginning of your questions you mentioned the pricing going to the cash cost of your highest cost competitor, but then we spoke about margins sort of maintaining, maybe that was in Fluid Services, so I apologize, but if you could go back and reconcile those for me.

Ken Huseman

Cash cost at the operating cash flow level which is not our direct margin, we’ve been talking about direct margins, not operating cash flow post overhead and interest.

Pierre Conner - Capital One

Okay and when you were speaking of that pricing, that was in the fluid handling business?

Ken Huseman

When I talked about pricing going to the break-even of our highest cost competitor that was referring to the rig business specifically.

Pierre Conner - Capital One

Going back to fluid hauling and that’s a very big variable I think, in your business. So where do you think sort of a revenue per truck basis does this, can we go back to ‘07 levels? I mean we were kind of running sort of $80 or 80,000 trucks a quarter or how much or give us a range of where you think that goes to?

Ken Huseman

I think one thing that our business has changed a bit in mix since that time, we have a bit more of exposure to, for instance to Arklatex with this latest acquisition, and a higher proportion of frac tanks etc. But I think, so it’s somewhat higher than that, certainly not where we finished ‘08 at but maybe something in the mid upper 80’s or something like that.

Pierre Conner - Capital One

And I know we spent a lot of time talking about liquidity and cash flows but just so we know where the benchmarks are Alan, what are your current covenants? And there’s some fairly standard ones I think out there. But what kind of covenants do you have on a debt to EBITDA multiple?

Alan Krenek

Our revolver is at 3.25 times on a debt to EBITDA leverage ratio max and with the three times interest coverage ratio, and we, like all other companies, have stress tested what it would take to bring it down to the maximum debt to EBITDA level and it would take a pretty sizeable reduction in our EBITDA. It would have to drive it below $100 million for the year.

Pierre Conner - Capital One

So given that and I think your other comment about, you guys have been very good on the acquisition front and for now though, want to wait and see where things shake out. Would that be a similar thought about the stock repurchase program as well that while you might be there, we’re just in a bit of a flux period?

Ken Huseman

Yes. We have been evaluating that on an almost daily basis and there’s really three potential uses, obvious potential uses of our cash, as we gain some clarity in all this is one, of course is our stock, one is our bonds if they tend to trade down and then of course acquisitions.

And I didn’t say that in any particular order but those are just the alternatives and we’ll revisit that again at our board meeting here in the next couple of weeks, but right now we’re kind of just hung up waiting to see what’s going to happen.

Operator

Thank you. Our next question comes from Victor Marchon - RBC Capital Markets.

Victor Marchon - RBC Capital Markets

First question I had was just on the margin guidance. Specifically, for well servicing and pressure pumping, I just wanted to gauge if that as the full run rate of the cost savings initiatives that you guys have put in place, just trying to get a sense as we move into the second quarter, if pricing is stabilizing particularly for well servicing and the cost savings initiatives start to hit, just trying to see because it would suggest that, margins could be flat to higher in the second quarter and I just wanted to see if that thought process made sense to you guys or if I’m missing something there?

Ken Huseman

I’d say flat. I wouldn’t say higher in this market. I just want to hedge our bets a little bit. We are continuing to push around costs, trying to push them down since the vast majority of the costs in this business are labor, we can push our vendors around some, but it has a negligible effect. You don’t want to turn a variable cost into a fixed cost by adding too much purchasing effort, so it really comes to what we can do with labor and still protect our ability to field the best people and attract and retain the best people.

Alan Krenek

And then utilization is a big factor that comes into play there.

Ken Huseman

A couple percentage points variation in utilization is more important than a couple percentage points in pricing.

Victor Marchon - RBC Capital Markets

And the last one I had was just on the drilling side, you gave some guidance on where the leading edge bid rates are. How do we look at just on the operating costs per day? You guys did about 9,500 in the fourth quarter. Does that trend down through ‘09 and what sort of order of magnitude?

Ken Huseman

I think down probably 10% or so on a daily basis and as I said some of that, it being bid as footage, which skews all of that a little bit but the margin ought to be as it was in ‘09, less 15, what do you have there Alan ? I’m sorry, I can’t really read Alan’s spreadsheet. Sorry, just a second.

Alan Krenek

The margins on the Drilling?

Ken Huseman

Yes.

Alan Krenek

Yes, they’re going to come down to 20% level, 25%, somewhere in that range.

Operator

Thank you. Our next question comes from Mike Drickamer - Morgan Keegan.

Mike Drickamer - Morgan Keegan

Ken, you mentioned that you’re starting to see or you expect to see at least, some of your competitors either leave markets and/or leave the industry completely. Can you talk about what markets you’re seeing that in?

Ken Huseman

We expected to see that throughout the industry. We had a lot of new players sponsored by private equity in some cases or just start ups coming into some markets, but I think the Barnett Shale is particularly susceptible to that. That is now a fairly mature play over there and this shrinkage in activity is really whacking the industry over there, so that’s a consolidation play.

Some in the Permian but it’s a bit around the country. Just, it’s more a function of what individual companies leverage is and their relative size in that market. So, I guess I’m not going to give you a straight answer.

Mike Drickamer - Morgan Keegan

Kind of flipping the question around then, instead of asking what are the weak markets out there; are there any markets that have been surprisingly strong for you?

Ken Huseman

I guess there’s no market that’s surprisingly strong. There’s some that are stronger than others, but nothing that’s particularly surprising. We’ve been getting along pretty well in the Arklatex and some of that is because some of those gas plays over, they are still pretty viable, so we haven’t seen as much of a drop.

Now, we’ve definitely seen a drop over there as well so it’s where we’ve seen the least drop off I guess. Other markets obviously you’d expect the Western part of the Rockies to be in the dumper and it is.

Mike Drickamer - Morgan Keegan

Ken, my last question, if you kind of look at where you’d like the company to be positioned coming out of the downturn, however long it takes from now. Do you think the company will be positioned differently? Would you like to see it positioned differently?

Ken Huseman

I think that we have the business lines that we like and make sense to us, that sort of have some synergies together, even though we don’t package them per se, but really it’s going to be a function of which opportunities in each of our business segments are the most attractive at the point we’re comfortable in jumping in. But I don’t think we’re going to change the overall completion of the company.

Now, the pieces may be a little bit different. Right now we’re about roughly a third well servicing, a third Fluid Services, a third what we call Completion Remedial and then drilling is a pretty small sliver. We hope to stay in that range of services and obviously we need to expand our drilling business if we see the right opportunity.

Operator

Thank you. (Operator Instructions) Our next question is a follow-up question from Dan Pickering - Tudor, Pickering, Holt and company.

Dan Pickering - Tudor, Pickering, Holt & company

Ken, you talked about or Alan you gave guidance for 33% to 35% revenue decline sequentially. You’ve talked to this segment in detail, but again in the interest of just hearing you say it, which as we look at Q1, which of the business segments do you think are going to be above or below kind of that 33% to 35% average?

Ken Huseman

I’ll let Alan answer that. He’s got the page right in front of him.

Alan Krenek

Yes, the biggest decrease actually will come in from our fluid service business from the fourth quarter. Well, I was looking at the wrong line. The biggest decrease will come from contract drilling but it’s the smallest piece of the pie.

Dan Pickering - Tudor, Pickering, Holt & company

Right the biggest percent.

Alan Krenek

The biggest decrease will come from our Completion and Remedial segment mainly from pressure pumping. Then followed by Well Servicing and then Fluid Services will be the least affected.

Dan Pickering - Tudor, Pickering, Holt & company

And that’s on a percent revenue quarter-to-quarter?

Alan Krenek

That is correct.

Ken Huseman

And that Completion and Remedial business primarily driven by just lower overall activity in the pressure pumping business not solely rate. We’ve had some customers just back off of ongoing small frac programs and obviously we do a lot of primary cementing as the drilling Rig count drops, that continues to drop.

So, as I said, about our Well Servicing business, utilization is more important than pricing and it applies in that business as well.

Alan Krenek

And Dan one change you’ll see in our distribution of revenue in ‘09 versus ‘08 is that our Fluid Service segment will become the largest segment from a revenue standpoint.

Dan Pickering - Tudor, Pickering, Holt & company

And then I guess the pressure pumping commentary leads into my next question. Ken, you talked about 40% discounts and I want to make sure that I understand. Is that 40% off of list price or is that 40% from the peak or 40% from last year?

Ken Huseman

Yes, 40% from the peak which was close to list price I guess. Now, that’s for the baseline charges. We get a lot of other add-ons that aren’t subject to those same discounts, so if you looked at two tickets laying side-by-side it probably wouldn’t be that bad, that’s to give you kind of a sense of the overhang in that business and what’s going on. As I’ve always said, we tend to not complete directly with those big guys with those big fracs, but we are impacted when they start whacking or adding discounts like that, we can’t not be affected.

Dan Pickering - Tudor, Pickering, Holt & company

Do you see the big guys at this point coming kind of down into your market, if you will or is it just the pricing umbrella that’s the influence?

Ken Huseman

Yes, we have seen some of those guys come after work four or five months ago, they wouldn’t have stooped to bid on and then of course the number of jobs have declined as well so it’s a bit of a double impact there.

Dan Pickering - Tudor, Pickering, Holt & company

Right and if we thought about your pressure pumping business right now, at the kind of fully costed levels where you allocate overhead in G&A and the like, is it making money right now?

Ken Huseman

Oh, sure. It’s definitely making money right now.

Dan Pickering - Tudor, Pickering, Holt & company

Okay, so you’re able to lower costs enough that this is still a double-digit margin business?

Ken Huseman

Yes, in fact, that’s the operation that we just completed a significant reduction in force in probably 20% in the last four or five weeks, as this decline started to play out and we pushed some supervisors back down on to the trucks and pushed out some of the newest less experienced guys and tried to turn as much of the fixed cost into a variable cost in that business as we could.

Dan Pickering - Tudor, Pickering, Holt & company

And I don’t know if you said it. If you did I apologize. Where would your, kind of, horsepower utilization be today? I mean is it 50%-70%?

Ken Huseman

We don’t track it like that. I wish we did, but it’s probably consistent with what we’re seeing in other parts of the business. I certainly wouldn’t think it’s on any given day, more than 50%.

Dan Pickering - Tudor, Pickering, Holt & company

Sorry for the string of questions. Last one from me. The drilling segment is smaller. You said you’d have to do a lot there to make it bigger. Is the drilling business a core business for you? It’s just small or is it something that at the right price you’d exit?

Ken Huseman

It’s a core business for us. It’s small, we had plans mid last year to build some super single rigs, which fortunately cancelled before we spent a bunch of money on, but that’s still a plan, long range. We don’t know if it will ever be enacted. Drilling may go to zero, but in the event it doesn’t, we’ll probably want to expand that business down the road.

Operator

Thank you. Our next question comes from Jack Wagner - MJX Asset Management.

Jack Wagner - MJX Asset Management

Yes, Alan, you mentioned before about right sizing the cost structure to the revenue stream and it was just mentioned about trying to convert some of the fixed cost to variable. What percentage of your cost would you consider fix and what percentage would you consider variable?

Alan Krenek

Yes. It’s probably in line of about 80% variable, 20% fixed, just as a rule of thumb.

Jack Wagner - MJX Asset Management

80 variable and 20 fixed?

Alan Krenek

On the operating side, yes.

Operator

Thank you. Our next question is a follow-up question from Pierre Conner - Capital One.

Pierre Conner - Capital One

Alan, you mentioned interest expense flowed significant, so could you give us a feel for what you think that aggregate interest expense rate would be first quarter?

Alan Krenek

Yes, I think on a net interest expense basis, it should be a little over $5 million for the month.

Pierre Conner - Capital One

For the quarter?

Alan Krenek

Excuse me, for the quarter. We kind of got caught in a little bit of a bind in the fourth quarter when there was a spike up in the LIBOR rates and we have to set our interest rates for the revolver. Now, we pretty much are setting the interest rate on the revolver at LIBOR plus 125 basis points and we’re using a one-month LIBOR rate, so basically an all in rate on the revolver of about 1.75. So, what we’ll see is considerable savings there and as our cash balance is growing with a little bit of interest income that will offset it too a little bit.

Pierre Conner - Capital One

Right and you did that adjustment at the beginning of the year. Do you get the full effect this quarter?

Alan Krenek

Pretty much. We have one adjustment that happened at the first of January for half of it and then the other half of it happened at the first of February.

Operator

Thank you. And there are no further questions at this time. I’d like to turn the conference back over to management for closing remarks.

Ken Huseman

Okay well obviously this is a challenging time in the industry. We’re very happy with our position as we’ve set the company up to be competitive in this environment; we intend to continue to be so. So, we hope you’ll join us again next quarter. Thank you all.

Operator

Thank you Ladies and Gentlemen. This conference is available for replay. If you’d like to access the replay system you may do so by dialing 303-590-3000 and entering in the access code of 11126261. Again that telephone number is 303-590-3000 and access the code is 11126261.

Ladies and Gentlemen, that does conclude the Basic Energy Services Fourth Quarter Earnings Call. Thank you so much for your participation. You may now disconnect.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Basic Energy Services Inc. Q4 2008 Earnings Call Transcript
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