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Forbes Energy Services (NASDAQ:FES)

Q4 2012 Earnings Call

April 01, 2013 10:00 am ET

Executives

Casey Stegman

John E. Crisp - Chairman, Chief Executive Officer, President, Chairman of Forbes Holding Company, Chief Executive Officer of Forbes Holding Company and President of Forbes Holding Company

L. Melvin Cooper - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary

Analysts

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Marco Rodriguez - Stonegate Securities Inc., Research Division

Colin Wilson-Murphy

Trey Cowan - Clarkson Capital Markets, Research Division

Evan S. Templeton - Jefferies & Company, Inc. Fixed Income Research

Lou Nardi

Tom Nowak

John Mark Bereznicki - Paradigm Capital, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Forbes Energy Services Q4 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Casey Stegman, Investor Relations. Please begin.

Casey Stegman

Thank you, and good morning. Welcome to Forbes Energy Services' call for the fourth quarter and full year for 2012. We appreciate you joining us today. With me on the call is John Crisp, CEO; and Mel Cooper, CFO. The purpose of today's call is to review the company's results for the quarter and full year, as well as provide you with some additional color on the business. Following opening remarks, the operator will provide instructions regarding Q&A.

During today's call, management will discuss net income and adjusted EBITDA, excluding nonrecurring items which are non-GAAP financial measures. Please refer to this morning's press release and the company's website for disclosures about these measures and for reconciliation of the most directly comparable GAAP financial measure. As a result of this conference call, Forbes Energy management may take comments -- excuse me, may make comments that reflect their intentions, beliefs and expectations for the future. Such forward-looking statements are qualified by the inherent risks and uncertainties surrounding future expectations generally and may materially differ from actual future results involving any one or more such statements. Forbes Energy undertakes no obligation to publicly update forward-looking statements as a result of events or developments subsequent to this conference call. For a more detailed discussion of such risks and uncertainties, please see the company's filings with the SEC.

With that, I'd like to introduce John Crisp, CEO of Forbes Energy. John?

John E. Crisp

Thank you, Casey. Good morning, and thank you for all of you that's joining us on the call today. I will start this morning's call with a general overview. Mel Cooper, our CFO, will provide selected information -- financial information just a little bit. I will follow Mel with operational highlights, and then we'll turn the call over to questions.

Generally speaking, 2012 was an improved year over 2011 in terms of utilization and revenue generation. Consolidated revenues were up 6% to 4 million -- $472 million for the year. Although the fourth quarter ended down with $107 million, which was a decrease by 6% from the third quarter, we experienced fairly robust activity levels earlier in 2012. But as Q4 came round, operators prematurely depleted their budgets. That, coupled with the typical seasonal factors, such as shorter daylight hours and holidays, made the fourth quarter somewhat challenging.

But the way that 2013 is materializing, we expect a strong finish on the annual basis. Our business segment performance during the fourth quarter was as expected, considering the industry's continued transition into oil and liquid-rich markets and the pullback from dry gas markets, such as East Texas, as well as competition and equipment capacity. However, over year-over-year, we experienced moderate growth of 14% in the Well Servicing segment and 1% in the Fluid Logistics. We have been proactive in reducing the costs and streamlining operations. Our CapEx plans have been scaled back to mirror the industry's activity. We have sharpened our focus on mapping the best positioning for our equipment and our people. With the positive trends in the price of oil and the stable drilling environments, we anticipate more opportunities to present itself for our high-grade equipment and crews as 2013 kicks off in full gear.

After Mel's comments, I will give you an update. With that, I will turn it over to Mel.

L. Melvin Cooper

Thank you, John. Good morning, everyone. I'm going to take you through the financial results for the 3 months ended December 31, 2012, as compared with the prior quarter ended September 30, 2012, and we will discuss our balance sheet and liquidity. For a year-over-year comparison, please refer to the tables in this morning's press release.

Consolidated revenues totaled $107 million in the fourth quarter, a decrease of 6% compared to consolidated revenues of $114 million in the third quarter. Our gross margins decreased to $21.6 million or 20% of revenues in the fourth quarter from $26 million or 22.5% of revenues in Q3. This was in line with the general industry slowdown John mentioned earlier.

Well Servicing segment revenues decreased 4% to $48.6 million in the fourth quarter as compared to $50.6 million in Q3. During 2012, we expanded our Well Servicing segment in the coiled tubing operations. If you exclude the coiled tubing operations, coiled tubing revenues of $5.4 million in Q4 and $2 million in Q3, revenues from Well Servicing decreased $5.4 million to $43 million in the fourth quarter or a decrease of 11%, reflective of reduced industry activity with our customers in the areas we serve. This decrease resulted from a 10% decrease in rig hours between the quarters, which is accompanied by approximately a 1% decrease in aggregate pricing from Q3 to Q4. Our rig hours were impacted by not only the holidays and shorter days but by decrease in drilling activity as development budgets for many of our customers have been depleted toward the end of 2012.

Well Servicing expenses were $40 million or 83% of revenues in the fourth quarter as compared to $41 million or 82% of revenues in the third quarter, a decrease of approximately $1 million. Excluding coiled tubing expenses of $4 million in the fourth quarter and $2.2 million in the third quarter, Well Servicing expenses were $36 million or 84% of revenues in Q4 and $39 million or 81% of revenues in Q3.

As a result, gross margin in Well -- in the Well Servicing segment decreased to $8 million or 17 -- approximately 17% of revenues during the fourth quarter as compared to $9 million or 18% of revenues in the third quarter. This is a decrease of approximately 1 -- a little over 1% of gross margin between the 2 quarters.

Insurance costs increased an additional 1.5% of revenues due to increased charges related primarily to the self-funded portion of our policies. This caused it to fluctuate from quarter to quarter. For example, during the first 2 months of '13, we experienced a decrease in these costs relative to Q4 of approximately 1.5% of revenues, returning into third quarter levels.

Wages increased an additional 0.5% of revenues as hours and utilization fell. As any cyclical business, we incurred additional costs during slowdowns to retain employees in anticipation of increased hours. By default, in many cases, these employees are paid without the corresponding revenues. Other costs fluctuated in line with our activity.

During the fourth quarter, revenues for our Fluid Logistics segment decreased to $58 million as compared to $64 million in the third quarter, approximately an 8% decrease. This was consistent with the reduction in trucking hours from 405,000 in the third quarter to 375,000 in the fourth quarter, a decrease of approximately 31,000 or 7.6%, a modest -- and a modest decrease in aggregate pricing. As previously mentioned, our performance was impacted not only by the holidays and shorter days in the fourth quarter but decrease in drilling activity as customer development budgets were depleted toward the end of the year.

Operating expenses were $45 million or 77% of revenues in the fourth quarter as compared to $47 million or 74% of revenues in Q3. This resulted in an operating margin of $13.5 million or 23% of revenues for the fourth quarter as compared to $16.6 million or 26% of revenues in the third quarter. This 3% decrease in operating margin was driven primarily by wages, insurance and fuel. Wages increased an additional 0.7% of revenues as utilization decreased for the same reasons as our Well Service revenues increased.

Insurance costs increased an additional 1% of revenues due to increased charges related primarily to the self-funded portion of our policies, as with Well Service. Also, during the first few months of 2013, we experienced a decrease in these costs of more than 1% relative to revenues, returning them closer to the third quarter levels. Our fuel costs increased in the fourth quarter an additional 1% of revenues, driven by an increase of approximately 1.6% in our fuel cost per gallon. Other costs fluctuated in line with our activities.

General and administrative expenses were comparable at $7.4 million for the fourth quarter as compared to $7.3 million in the third quarter of 2012.

Adjusted EBITDA from U.S. Operations was $14.4 million in the fourth quarter, a 25% decrease when compared to $19 million for the third quarter. Adjusted EBITDA as a percentage of revenue decreased from 16.8% in Q3 to 13.4% in Q4. Please note that the EBITDA reconciliation table attached to the news release has an error on the depreciation number. $14.4 million is the correct EBITDA for the quarter.

We generated a net loss from U.S. Operations attributable to common shares of $4.4 million or $0.22 per share in the fourth quarter. We had $17.6 million in unrestricted cash at December 31. As of March 29, last week, our unrestricted cash totaled approximately $32 million. We had no cash borrowings on our revolver, and we had $2.9 million in letters of credit outstanding against the revolver, resulting in approximately $104 million in cash and credit line availability.

As of December 31, we had $280 million of 9% senior notes due 2019 and approximately $26.3 million of other notes. The other notes payable were comprised of equipment notes of approximately $18 million and approximately $8 million outstanding for insurance notes. We maintain a $75 million revolving credit facility with Regions Bank. While this credit facility remains available for general and corporate purposes, including financing capital expenditures if necessary, we currently intend to use the credit facility primarily for financial stability as cyclical industry.

Our 2012 capital expenditures were $112 million as we expanded our asset base in response to increased business activity in the last half of 2011 and the first few months of 2012, plus an expansion into our coiled tubing business. Capital expenditure during the fourth quarter slowed to $8.7 million, primarily for the purchase of specialty fluid tanks, saltwater disposal well build-outs and the fourth coiled tubing spread. We've currently anticipated 2013 capital budget of approximately $20 million, plus an additional $3 million in capital expenditures related to our coiled tubing equipment that are carried over from 2012. A substantial amount of these planned capital expenditures are for saltwater disposal wells and the coiled tubing equipment I just mentioned. The balances for facilities, specialty fluid services equipment and well service equipment enhancements. Of course, our expenditures for '13 are predicated and highly dependent on industry activity, which we anticipate increasing from now through the end of 2013.

If our assumptions are not correct, we have the ability to substantially reduce our CapEx if needed, as our required maintenance capital expenditures are less than $5 million for the year.

I'll now turn the call over to John before we get to your questions.

John E. Crisp

Thank you, Mel. As we mentioned earlier, pricing, supply, budget and seasonal factors all played roles in our overall performance in the past quarter. There was some surprising pressure in certain markets and for certain services, but generally, we expect pricing to be stable throughout 2013.

We're at an unusual time in the Fluid Logistics. Hydraulic fracturing really changed the dynamics of this business. Second half of last year, equipment capacity has finally caught up with the activity levels with new players, additional equipment coming into our markets. This is leveling out as the smaller companies are falling out of the oversupplied markets. Well Servicing showed solid performance with a high of 88% utilization overall. 80% of our total rig hours were shared between our South Texas market and West Texas.

Two of our most promising positions were long life potential. Utilization on the well abandoned side of the business averaged about 90%. This has been a good stable business for the company. Coiled tubing is the newest position we've taken. First 3 spreads were fairly consistent in activity levels, with total utilization of about 60% in Q4. As we've mentioned, we have a total of 5 spreads with multiple pipe diameters to field for different customers. Demand is strong in the coiled tubing services, most of which we believe have to do with our management and crews, along with our new equipment. Our fifth spread should arrive at our yard sometime this week, and we'll be rigging it up for immediate deployment.

As for our water recycling, last week, the Texas Railroad Commission adopted new and amended rules for commercial recycling in the oil and gas waste fluids. We're clarifying the new language and its impact. Our initial understanding is that we'll be able to commence operations shortly after effective date of the rule. Our testing of this technology has been very successful, and customer interest is strong. This supplement to our Fluid Logistics management segment will give us the opportunity to fully participate in the fluids life cycle.

Summarizing everything, this year had a sluggish start coming off the holidays. But now that budgets have been reset and some of the competition has left the market, the landscape is much greener. As of the end of last month, there were nearly 400 drilling rigs in the Texas Permian Basin and just shy of 240 drilling rigs in the Eagle Ford. While these numbers may be less than they were at the same time last year, but keep in mind, drilling completions are smarter today. Techniques like pad drilling, zipper fracs, it means operators can drill the same number of wells with fewer rigs. There's plenty of inventory from existing and new shale plays to service, not to mention some of these wells is drilled in the past years are entering the maintenance cycle, which our Well Servicing segment should prosper.

We have the right people in queue for the anticipated demand, and we can generate immediate revenue by deploying these assets in our existing inventory. Our CapEx plan for 2013 will be modest, around $23 million, which should cover the operational expansion and disposal infrastructure, including the $3 million carryovers from coiled tubing.

With that, operator, we'll turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Brian Uhlmer of Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I just want to follow up a little bit on the discussion on the Railroad Commission and recycling unit, and maybe you can go into that a little bit more detail in terms of -- does that mean that you were delaying the startup of the unit, or you're going to have to modify the units, or can you just explain that a little bit more?

John E. Crisp

Well, Brian, it's not delaying our unit. We're in the testing mode on our unit. These recycling units are going to be regulated through a permit under the authority of the Railroad Commission, and that language hadn't been real clear. One time, we were told that if we had the unit at one of our disposals, it didn't need a permit. And then next time, they claimed it did. If you're recycling on the operator's location, it's questionable whether you needed the permit or not. They had a meeting last week. We're trying to get the official ruling now. But we feel like by the time we're ready to go with our recycling technology, the permit won't hold us up.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay, perfect. A second question for you on your cash build, I think you said you have $32 million by the end of March. I didn't quite catch that exact number and date. So what do you attribute a lot of that to, and have you started ramping activity up, Mel? Are you going to need to start pulling some of that back in for working capital? Or is that a pretty good cash balance, and you're not going to need to pull back from it?

L. Melvin Cooper

Certainly, as activity ramps up, some of that cash gets used up in accounts receivable, without a doubt. And then we have our interest payment coming up in June on our bonds. But that's a pretty normal cash level for this time, and we're positive cash flow, so...

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Right, and continue to be so?

L. Melvin Cooper

Yes.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Good stuff. So what -- I mean, we're going to have positive cash flow. You're going to have no problem with your interest payments. You're going to have -- reduced EBITDA throughout the year and pretty minimal CapEx is -- are we -- what are we thinking here, just keeping our reserve account for the debt or spending more as the year progresses, if things start to shape out as you envisioned?

John E. Crisp

Brian, well, for cash, we're definitely simply building cash. We don't anticipate busting our CapEx budget. We have plenty of supply in the company to meet the customers' requirements. Sure, there might be some specialized equipment here or there, but for the time being, we're just going to build cash, strengthen our balance sheet. And then year-end, we'll see what happens.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay, so no little tuck-in acquisitions or anything like that, that you're looking at right now?

John E. Crisp

None anticipated at this time.

Operator

The next question is from Marco Rodriguez of Stonegate Securities.

Marco Rodriguez - Stonegate Securities Inc., Research Division

I was wondering if you could, perhaps, dive a little bit deeper into some of the major assumptions for 2013 as it relates to the drivers of your revenue.

John E. Crisp

Well, yes. I don't quite understand the question, Marco. We -- I can give you an overview, and then you can question that. 2013, with what we're hearing from the operators on the CapEx plans they have and the plans on activity in the Eagle Ford and then the Permian Basin, is they have all been great news to service companies. Q1 started off slow. We're just like everybody else. We've seen an uptick in March of Q1. We feel like each month, each quarter this year, as these operators continue to push their CapEx on out to the field and start their programs, it will get stronger. We feel like last year, in 2012, the market started off strong first Q1 then Q2, and then it tapered off. We believe it's going to be the opposite this year. Just listening to our customers on the way they're looking at everything unfolding, we feel like the weakest quarter is the first quarter, the strongest quarter will be the end of the year. That's why we feel like our revenues are going to continue to grow.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Okay, perfect. And so I'm assuming with that assumption, and I believe I heard you guys say in your prepared remarks, that pricing, you're expecting pricing to be flat for the year.

John E. Crisp

We feel like pricing will be stable. We've experienced a couple quarters of somewhat downward pressure on pricing. It feels like it's stable. It's more of at a bottom. We don't anticipate any additional pricing pressure. Whether or not we'll be able to, toward the end of the year, increase pricing, that's to be said.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Okay, perfect. And then in terms of just the overall utilization for your 2 segments there, obviously, you're saying that revenues should be improving throughout the year. What sort of level of utilization are you expecting to exit the fiscal year?

John E. Crisp

That's hard to judge right now. We do have plenty of supply to meet our customers' requirements. But where we're ending year-end in that, I don't know right now.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Okay, that's fair enough. And then just another quick follow-up in regard to the CapEx, you mentioned that you don't anticipate breaking that number higher. Can you maybe discuss what might drive a relook, if you will, CapEx for fiscal '13?

John E. Crisp

Well, the only thing that we could -- there could be a couple things, but we don't anticipate that. The market's just red hot toward the end of the year, and we run out of equipment. But we don't think that's going to -- we feel like we've got plenty of equipment on the ground to have our building growth this year without spending much CapEx. Or as opportunity came, as Brian mentioned earlier, the tuck-in acquisition, that would be accretive to our business. Other than that, I can't think of anything. Can you, Mel?

L. Melvin Cooper

No. I mean that we -- like John mentioned, we have quite a bit of equipment. We can generate a substantial amount of revenues and service a lot more activity than we have today with the equipment position we have. So it'd have to really, really pick up.

Operator

The next question is from Colin Wilson Murphy of Lowery (sic) [Bowery] .

Colin Wilson-Murphy

Could you -- Melvin, could you potentially just shed a little bit of light on the -- this -- the $2.2 million D&A difference? It looks like you're showing in the income statement $13.9 million of D&A, and then when you're adding back your D&A to your adjusted net income number to get to adjusted EBITDA, it looks like you're using $16.1 million.

L. Melvin Cooper

That's correct, Colin. That is what we did. It's an error. And as I've mentioned on my scripted portion of the call, the correct EBITDA is $14.4 million, and we'll correct that after the call. This characterization is this -- right at $13 million.

Colin Wilson-Murphy

Okay, good, good. And was the cash generated from January through March the result of sort of an uptick in earnings and revenue? Or was it largely the result of a drawdown in working cap?

L. Melvin Cooper

Well, part of it is, Colin, the cash at any of our year-ends is going to be impacted by our interest payment on our bonds, which occurs in December. So we build up cash throughout the year, and then every December and June, we make our interest payment. So as a result, when we have our 10-K, our cash is going to be down by $12 million or so because we just made an interest payment 2 weeks earlier. So cash is now building back up. And so there's nothing unusual about it. It's just the ebb and flow of the cash balances.

Colin Wilson-Murphy

Okay. And John, as of today, are you comfortable reiterating your 2013 total CapEx max budget of $20 million?

John E. Crisp

As I mentioned, the $20 million -- with the $3 million from the coiled tube will be $23 million. Yes, we feel very comfortable with that going.

Operator

The next question is from Trey Cowan of Clarkson Capital Markets.

Trey Cowan - Clarkson Capital Markets, Research Division

Looking at the first quarter's activity levels in the Permian and Eagle Ford, has there anything -- since we've already got those numbers pretty much in the books as far as rig count goes, has there been anything that's surprised you guys on activity levels on the servicing side in either one of those regions, either positively or negatively for the first quarter?

John E. Crisp

Well, we were surprised that we didn't come out the gates January 1 wide open. I guess that was the biggest surprise. It's just trending up. We really felt like coming out of the fourth quarter that Q1 would take off like it did in 2012. It took off at a slower pace, but we see an increase in activity through March, and we feel like that would continue to go on.

Trey Cowan - Clarkson Capital Markets, Research Division

So was that March uptick, was that somewhere to what you would have expected to happen at the beginning of the year? Or was it a little bit more, a little bit less? Or how do you gauge that?

John E. Crisp

I would have been very happy to have March start off in January.

Trey Cowan - Clarkson Capital Markets, Research Division

Got you. And let's see. Apologize, just a second. I'll catch up with you guys later. I apologize. I just lost my train of thought.

Operator

The next question is from Evan Templeton of Jefferies.

Evan S. Templeton - Jefferies & Company, Inc. Fixed Income Research

Mel, I think, just looking at the liquidity and capital resources, a portion of your press release, you mentioned there was $1.4 million of restricted cash at the end of the year. Is that still there currently? Or is that kind of unwound, is that related to Mexico?

L. Melvin Cooper

No, it is. That's some restricted cash, Evan, that we use. We have some letters of credit that we issued to our insurance company, and it's just less expensive if we do that.

Evan S. Templeton - Jefferies & Company, Inc. Fixed Income Research

Okay, great. And then, I guess, second question, just wondering, Steel Partners, taking a sizable stake, have you had any dialogue with them? And maybe you can share with us, if you have, kind of what their thoughts are.

John E. Crisp

We've had same dialogue with Steel Partners as we do with any other investor. At this point, we just -- we understand through their filings that they've taken a position, and we welcome them as new shareholders.

Evan S. Templeton - Jefferies & Company, Inc. Fixed Income Research

Great. And then, I guess, just the final question, just natural gas prices, obviously they've upticked pretty nicely. Are you seeing any real any -- is that trade translating to increased activity? In the Permian, are you seeing more work on the natural gas side? Or is it really just oil still?

John E. Crisp

At this time, Evan, it's -- everybody's focused on the liquid side of the business. Yes, natural gas has had a uptick. We think -- it's our belief that the operators are going to be a little more cautious before they deploy any CapEx. If everybody had the comfort level that gas would stay where it's at, we would see some kind of uptick, but right now, it's so cautious that we're just basically doing routine maintenance as we've done during 2012.

Evan S. Templeton - Jefferies & Company, Inc. Fixed Income Research

Got you. So not yet. And then just last question, maybe just the coiled tubing rigs that you've deployed, what sort of activity are those rigs doing right now?

John E. Crisp

Well, we've been slow on getting our units in. We were promised to have all those units up ready to go during the fourth quarter, and they trickled in. As of this last week, we stayed very focused since this is a new business line for us. The coiled tubing units that we have operating seem like the utilization's going to be good for them. This unit that we'll take delivery of sometime this week, by the time we get rigged up and deployed -- be late this month. We believe that it'll stay busy. And the reason we've seen this opportunity here, last year, when we were receiving our units, a lot of our customers were under contract on these coiled tubing units, and they weren't really happy, but they were bound that contract. Well, late fourth quarter and beginning in January, we notice much of these contracts were either being bought out or rolled out, and that gave us opportunity to come in with the new equipment and these very experienced folks that we have working with us and get our piece of the market. And we feel like that's going to continue.

Evan S. Templeton - Jefferies & Company, Inc. Fixed Income Research

And are those units, are they focused on -- are they doing maintenance work? Or is it completion activity? Or is it a mix?

John E. Crisp

Right now, majority of our revenue is coming from completion work. We feel like the remedial or repair work is a thing of the future. That's one of the reasons we're offering multiple sizes of coal to go in some of these existing wells. If you think about the Eagle Ford, it's now becoming about 3 years old, and there's going to be some repairs and maintenance coming along, and we feel like having this mixture of coal sizes will give us opportunity to do maintenance work and completion work.

Operator

The next question is from Lou Nardi from Global Hunter Securities.

Lou Nardi

I just wanted to follow up little bit more on the coiled tubing. I think you said that utilization rates were about 50% in the fourth quarter. I was just wondering when the deliveries took place. And was it 50% while you owned them or 50% versus 4 rigs?

John E. Crisp

As we deploy them, it's not aggregate of 50%, but the units, as they were deployed, we felt like we had about that much utilization. So if we put one to work in late December, we looked at utilization from the time it went to work then.

Lou Nardi

And you had 2 I think, at the end of the third quarter, so there were 2 more delivered in the fourth. Did I get that right there?

John E. Crisp

Yes, yes. And the fourth one came late in December, so we didn't get a whole lot of benefit out of that.

Lou Nardi

Okay. And then the only other thing I had was just trying to back out the fourth quarter change in working capital, I assume was around $10 million, $11 million usage. Is that right?

L. Melvin Cooper

Tell me again, Lou? This is Mel.

Lou Nardi

The fourth quarter, I'm guessing the working capital usage was about $10 million or $11 million. Is that correct?

L. Melvin Cooper

I'd have -- probably you've got the interest payment that hit. I'd have to -- I don't really happen to have an answer to that.

Lou Nardi

Okay. I'm just trying to -- I've got the change in debt from the third quarter.

John E. Crisp

So I'm trying to make your model work.

Operator

The next question is from Trey Cowan of Clarkson Capital Markets.

Trey Cowan - Clarkson Capital Markets, Research Division

I got it now, guys. So looking at -- what we're starting to hear is a trend moving from more exploration type work to more development production type work. Would you agree that, that's the way things are going?

John E. Crisp

Yes, definitely. The exploration phase, especially in the Eagle Ford, it's pretty well proven. They've got the boundaries on the Eagle Ford, so as development starts, that's where you're going to see more multi-well pads being drilled. That's the reason you're seeing a decrease in rig count, but if you look at the permits that's being issued, they're up. So we're actually -- we feel like, as an industry, we're going to see more wells being drilled this year than last year with fewer drilling rigs. The Permian, they pretty well got that declined in the Wolfberry and all that. They're going to more development stages there. There's some exploration still left in the Permian.

Trey Cowan - Clarkson Capital Markets, Research Division

And that kind of begs the question to what you're talking about with the decoupling of -- between the rig count and the service work going forward, being you could actually see more service work even in a declining or flat rig count environment. Where do you think -- if we're looking from the first quarter to the second quarter right now, is there some level of decline where you go, oh, well, that actually you said there's going to be a decline in services? Is that more tied to commodity prices? Or do you think you just need to -- I mean, how would you gauge it looking out to the next quarter as far as where would you start to be concerned?

John E. Crisp

Well, about the only -- you've hit it on being concerns as commodity prices, but most of these operators, they have their plan budget. They understand the fluctuations in commodity prices. It'd have to be a significant decrease in commodity price to derail the service side of the business. We don't see anything in the near future that will derail any of this. And as these wells age, our service work inventory's going to continue to increase. Development. There's 2 pieces to this development. One, they're going to drill a lot more wells with less drilling rigs, so completions going to be good for all service companies. And as these wells age, the maintenance cycle starts. And with any of these liquid-rich wells, it requires more maintenance. There's more wear and tear and stuff like that. So we're thrilled. We believe our -- we spoke about the annuity effect of the Well Servicing business for a couple years. We feel like we're just starting to get in that phase. When you have 30 -- 3,000, 3,500 wells drilled a year in the Eagle Ford, that's 3,000, 3,500 wells that's going to need well servicing. Whether it's your traditional rig or your smaller coiled tubing, it generates lots of work. And it seems like these operators, they are being pressured by the investment community to be efficient on their capital, live within the cash flows and everything else. So they're go to be focused on existing production trying to get that at peak levels to harvest that cash to continue their programs. So we feel like, as the service industry, everything's greener for us.

Operator

And the final question is from Tom Nowak of Advent Capital.

Tom Nowak

Sorry if I missed this, but you have the quarter, the first quarter under your belt. I mean, without asking for specific guidance, I mean, just either on a top line or EBITDA basis, are you expecting flat, weaker or a little better than what we saw in 4Q?

L. Melvin Cooper

Tom, sorry. Say again, Tom.

Tom Nowak

Was 4Q the trough? Or do you think 1Q is going to be the trough? I'm just -- do you think -- or are we going to see sequential decline in the new EBITDA levels in 1Q versus 4Q?

L. Melvin Cooper

Yes, we don't really give out forecasts. And I mean, the best we can say is that, as John mentioned, the January and February were soft and March is picking up. I mean, I know it would be ideal to...

Tom Nowak

[indiscernible] versus...

L. Melvin Cooper

if we throw out a number.

Tom Nowak

[indiscernible] softer versus November and December or flat?

L. Melvin Cooper

For January and February?

Tom Nowak

Yes.

L. Melvin Cooper

Probably similar.

Operator

And I do show we have another question from John Bereznicki.

John Mark Bereznicki - Paradigm Capital, Inc., Research Division

You mentioned you may be seeing some smaller competitors maybe fall by the wayside on the fluid side. Can you give us a sense of what you're seeing in South Texas now on the fluids and disposal business?

John E. Crisp

Yes. John, over the last year, we saw a lot of competitors come out the dry gas market, hit some hot areas, the Eagle Ford and a bunch of new trucks and stuff like that came in. And over this last couple of months, some of those guys have rolled up and moved back to their home bases. When you move in with just fluid trucks, you can create some havoc. But you can't stand the heat because you don't have the infrastructure, the mix and facilities to make specialized brines and stuff like that, the disposal facilities or the tank capacity. So they're typically first ones to leave. Good news is when they leave, that was typically the ones that drove down pricing little bit. Bad news, when you give up something, it takes you a while to get it back.

John Mark Bereznicki - Paradigm Capital, Inc., Research Division

Got you, got you. And in terms of your disposal wells, how -- can you remind us how many do you have right now in particular in South Texas?

John E. Crisp

In South Texas, we -- majority of our disposals are in South Texas are in Eagle Ford, and currently, our disposal well count is 16.

John Mark Bereznicki - Paradigm Capital, Inc., Research Division

Got you. And so give us a sense how difficult it is to put a new disposal in the service now compared to, say, a year ago, presumably that's become a little more difficult to do.

John E. Crisp

Yes. In fact, we've got some in the queue on the permitting process. It seems like nowadays, every time you go try to get a permit issued, it's being delayed, protested. We added a well out in the Permian Basin, which was the most efficient 1, and it took us about 8 months to get the permit. We have some in the Eaglebine that's running that long. We had some in other areas that's over a year. So we, as the industry, we're not having luck to adding a whole lot of supply into disposals. There's a bunch in queue that's coming around that we're seeing be put in, but it's definitely not getting any easier.

John Mark Bereznicki - Paradigm Capital, Inc., Research Division

Got you. And then just lastly, can you give us a sense of where your service rigs are sitting today?

John E. Crisp

Yes, John. Let me get my list here. In the Eagle Ford, we have about -- let me get our most current list here. In the Eagle Ford, about 38% of our fleet's in South Texas are in Eagle Ford. About close to 45% of our fleet's out in the Permian Basin, and then the 8%, still in the East Texas market that's migrating toward the Eaglebine. That's between the Eagle Ford and East Texas.

John Mark Bereznicki - Paradigm Capital, Inc., Research Division

Got you. And do you see that mix staying steady this year? Or do you see it changing a whole bunch here with activity?

John E. Crisp

What's that, John?

John Mark Bereznicki - Paradigm Capital, Inc., Research Division

In terms of where those rigs lie, do you see that changing a whole bunch this year as activity evolves? Or what's your best sense at this point?

John E. Crisp

Well, the only thing to actually change any is in the East Texas market. The -- some of those could be drug into the oilier markets to get better utilization.

Operator

There are no further questions in the queue at this time. I'll turn the call back over for closing remarks.

John E. Crisp

Well, I appreciate everybody joining us this morning. Boy, I'll tell you what, it's been an experience here over the last couple of quarters starting off 2012 as strong as we did and the industry prematurely blowing through the budgets, which put some challenges on us towards year-end and then January and February not taking off like we expected or like the industry expected. But we definitely believe that by talking to our customers that everything's going to be busier at the end of the year than it is now. And it's not going to just happen in the last quarter. I think we're going to see this uptick month after month, quarter after quarter.

The nice thing about Forbes, we've got our equipment in position. Sure, we might have to reposition it in different areas, but we have lots of upside growth as a company with assets we have on the ground. We have a great group of experienced workers and partners that work with Forbes that we're going to see benefits from. As I mentioned earlier on our coiled tubing business, we're very excited on that. We're a little slow getting out of the gates. We're getting equipment delivered. But as equipment comes out, it's new. It's what the industry wants. And also, the people we have manning those units are also requested by our customers. So we believe that growth's there. We're excited about the recycling business. We're finally getting some color on permitting issues and stuff like that. We've had lots of customer requests. We feel like that's going to be a growth item for Forbes.

I guess, just recapping everything, we believe that each month, we'll get stronger; each quarter, get stronger; and fourth quarter will be the strongest quarter. With that, thank you and appreciate your time.

Operator

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.

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Source: Forbes Energy Services Management Discusses Q4 2012 Results - Earnings Call Transcript
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