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Executives

Sheila Stuewe - Senior Vice President of Investor Relations Counsel

Thomas Monroe Patterson - Chief Executive Officer, President and Director

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

Analysts

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

John Patrick Moore - Harpswell Capital Management, LLC

Michael R. Marino - Stephens Inc., Research Division

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

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

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

Marc G. Bianchi - Cowen and Company, LLC, Research Division

James Spicer - Wells Fargo Securities, LLC, Research Division

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

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

Mark Rogers

Basic Energy Services (BAS) Q3 2013 Earnings Call October 25, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Basic Energy Services Third Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded, October 25, 2013. I would now like to turn the conference over to Sheila Stuewe. Please go ahead, ma'am.

Sheila Stuewe

Thanks, Richard, and good morning, everyone. Welcome to the Basic Energy Services Third Quarter 2013 Earnings Conference Call. We appreciate you joining us today. Before we begin, I would like to remind everyone that today's comments may include forward-looking statements reflecting Basic Energy Services' views about future events and their potential impact on performance. These views include the risk factors disclosed by the company in its registration statement on Form 10-K for the year ended December 31, 2012, and subsequent 10-Qs filed with the SEC. Further, refer to these statements regarding forward-looking statements incorporated in our press release from yesterday. Please note that the contents of this conference call are covered by these statements.

In addition, the information reported on this call is only as of today, October 25, 2013. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of the replay.

With that, I'll turn the call over to Roe Patterson, President and Chief Executive Officer.

Thomas Monroe Patterson

Thanks, Sheila, and welcome to everyone dialing in for today's call. Joining me today is Alan Krenek, our Chief Financial Officer. The format for today's call will be similar to our previous calls. I'll provide an operational overview of the third quarter and update our current activity levels and pricing environment. Alan will then discuss our financial results in more detail. I'll then wrap things up with some final comments and a preliminary outlook for Q4 in 2014.

The third quarter unfolded much as we had anticipated with our customers maintaining generally flat activity levels, some heavy rains and flooding-affected activity in our Rocky Mountain market. To a lesser extent, our Gulf Coast region also experienced some wet weather that hampered operations. Typically, longer daylight hours kept utilization levels relatively flat sequentially and helped offset these weather impacts.

U.S. onshore drilling rig counts remained stagnant through the third quarter, ending the quarter almost exactly where we started the year. Most customers appear content with current activity levels even at relatively higher oil prices. We anticipate a routine fourth quarter with respect to activity, shorter daylight hours, holidays and typical winter weather will lower utilization. However, these normal seasonal impacts combined with an already crowded competitor landscape in some markets could create an environment for lower fourth quarter revenue and margin. As the quarter progresses, we'll have more visibility into this. But current conditions remain unchanged from the third quarter.

Early indications for 2014 customer spend levels are positive, with most signaling a mid-single-digit percentage increase in year-over-year spending. However, no customer have announced plans to pull funds forward into the fourth quarter of this year. Our heavy exposure to busier oil-driven markets such as the Permian Basin, gives us a great position to weather the fourth quarter and take advantage of increases in activity as they develop next year.

Now let's review our operating segments. Completion and Remedial Services experienced 4% decrease in revenue quarter-over-quarter, competitive pricing environment and stimulation services and weaker pricing in some of our selected rental tool markets push revenue down. Cement and acid pumping, along with coiled tubing revenues, rose in the third quarter, slightly offsetting these softer business lines and helping us to maintain flat sequential margins for the Completion and Remedial Services segment of 35%.

Looking forward, pricing will remain extremely competitive in this segment as excess capacity remains an issue. However, our efforts to reduce costs, combined with our field operation success and maintaining market share, put us in a favorable position to finish the year strong and to capitalize on any increases in activity

as we begin 2014.

Our Fluid Services segment saw an increase in revenue of about 1% in the third quarter, trucking hours increased about 2% as we experienced extended daylight hours and some favorable weather conditions in oily markets, like the Permian Basin. We also expanded our salt water disposal well network by 2 wells during the quarter, and we better utilized the other 5 wells that we've added since the beginning of the year

Segment margin was flat with the second quarter at 31%. Our disposal well network has allowed us to remain very competitive, which is reflected in the stable margins. Pricing in this segment remains highly competitive as fluid hauling competitors migrated to busy oil markets earlier in the year. We continue to see significant discounting of frac tanks and other similar ancillary services within the segment, which holds margins lower.

Some higher cost competitors have founded difficult to compete without their own salt water disposal well capacity. We expect to see more attrition from these companies over the next 6 months, as, current rates tend to generate cash losses at lower utilization levels. Over time, we expect this displacement to shrink the capacity overhang and provide opportunities for rate improvement as 2014 activity ramps up.

Our Well Servicing segment showed a 4% sequential increase in revenue. Excluding Taylor industries, our manufacturing division, segment revenues were flat quarter-over-quarter. Average utilization rose to 75% from 74% last quarter on improved hours. Pricing, overall, remained flat, but the seasonal slowdown in our inland water barge fleet in response to hurricane season drove a decrease in average rig rates of around 1%. These rigs typically have a higher rate component compared to general well servicing activity.

Margins in the segment remained flat with the second quarter at 28%, excluding Taylor industries. Near-term, we expect revenue and margins to be flat to lower as industry utilization decreases with normal seasonal impact in the fourth quarter.

Our drilling segment revenue was down about 1% from the second quarter at $13.8 million. Rates in this segment were basically flat at 16,500 per drilling day. Utilization was down slightly from the prior quarter from 77% to 76%. This decrease was due to some of our customers continuing to transition their drilling dollars to deeper horizontal drilling programs in the Permian Basin. Our 3,000-horsepower drilling rig experienced the bulk of this weakness, as demand decreased from mid-depth vertical drilling rigs. However, our shallower mechanical rigs and our larger horsepower electric rigs have maintained stable rates and utilization. We don't expect these conditions to change going forward this quarter or next year.

Margins in this segment were up from 30% to 34% on lower repair and maintenance costs and lower workers' compensation insurance rates.

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

Alan Krenek

Thanks, Roe. This morning, I'll provide additional details on our third quarter income statement, as well as discuss balance sheet and cash flow items, including capital expenditures. Then I'll turn the call back over to Roe, who will give us closing comments.

As usual, when we make comparisons, comments will focus on sequential changes unless otherwise noted. Taylor Rig manufacturing revenue was $5.9 million in the third quarter, up from $2.6 million last quarter. That business line segment profit rose to $780,000 compared to $502,000 in the second quarter.

For Completion and Remedial Services in the third quarter, 57% of revenue was generated from our pumping services, 23% from rental tools, 12% from coil tubing, 6% from snubbing services and the remainder from other services.

Year-to-date, our top 10 customers represent a 35% of total revenue, but no one customer over 9%. We continue to generate the largest portion of our revenue from the Permian Basin. During the 9 months ended September 30, we generated approximately 44% of our revenue in the Permian Basin.

Our G&A in the third quarter, excluding the $3.2 million pretax impact of the special items, was $40 million, 12% of revenue as we had anticipated. In the second quarter, G&A was $41 million or 13% of revenue, excluding the $8 million accrual for our legal settlement. Due to our cost-saving initiatives, we were able to reduce our third quarter G&A. We project the G&A in the fourth quarter will drop to approximately $39 million as we realize additional cost savings.

Depreciation and amortization expense increased to $54 million in the third quarter, up from $52 million, due to our recent capital expenditures and acquisitions. We expect that depreciation and amortization for the fourth quarter will remain at about $54 million.

Net interest expense was $17 million in both the second and third quarter. As we have mentioned on our second quarter call, we expect that the quarterly net interest expense will be $17 million going forward.

Our third quarter effective tax benefit rate was 41%. In the second quarter, we projected a full year rate of 32% for 2013. We have revised our 2013 full year effective tax benefit rate in the third quarter to 35%, which costs us a quarter rate of 41% for the stand-alone third quarter in order for us to get to a 35% rate for the 9-month period ended September 30. We expect that our tax rate will be 35% for the fourth quarter.

Our net loss for the third quarter was $4.8 million or $0.12 a share for both basic and diluted shares, excluding the $329,000 after-tax severance expense and the $1.7 million after-tax settlement for state and use tax associated with an audit.

During the third quarter, we identified and corrected immaterial errors that originated in prior periods. These errors consisted mainly of individual deferred compensation plan and compensation expense related to share-based payments that should have been recorded for retirement of eligible employees. At September 30, an adjustment to retained earnings as of December 31, 2012 for $5.3 million net of deferred tax effect was recognized.

Weighted average shares outstanding were $40.4 million during the third quarter. We did not repurchase any shares this quarter and $20 million remains under our approved share repurchase plan.

Moving to the balance sheet. On September 30, we had a cash balance of $100 million, up from $96 million on June 30, and down from $135 million at year-end 2012. During the first 9 months of 2013, we generated $109 million of cash from operating activities, used $106 million in investing activities and $16 million -- excuse me, and we used $38 million for financing activities.

Total liquidity, including availability under our revolver, was $312 million. Nothing was drawn on our revolver at September 30. Our DSO at the end of third quarter was $61 million, down from $64 million at June 30. The decrease in DSO was attributable to our continued focus on credit and collections.

We ended the third quarter with $885 million of debt, consisting of $300 million of recently issued senior notes that are due in 2022, $477 million of senior notes that are due in 2019 and $108 million of capital leases. During last quarter's call, I mentioned that we were in discussions with our bank group to gain relief for our maximum total debt-to-EBITDA covenant for our revolver. At the end of August, this amendment to our revolver was completed. For the third and fourth quarter of this year, the maximum total to debt-to-EBITDA ratio was changed to 4.5x. We were well within that covenant this quarter with a total debt-to-EBITDA ratio of 3.9x. For the first 2 quarters of 2014, that maximum leverage ratio decreases to 4.25x and then returns to 4x for the third quarter next year.

During the third quarter, total capital expenditures were $35 million, including $11 million for expansion projects, $19 million for sustaining and replacement and $5 million for other. Expansion CapEx spending included $5 million for the Fluid Services segment, $5 million for the Completion and Remedial segment and $1 million for Well Servicing.

At this point, I'll turn the call back over to Roe.

Thomas Monroe Patterson

All right. Thanks, Alan. As we stated on our last call, we expected sequentially flat results for the third quarter. We also projected that the drilling rig count will not move up and the gas-driven activity wouldn't improve with gas prices below $4. Heading into the fourth quarter, we anticipate revenues to be down 6% to 7% sequentially, as shorter days, holidays and winter weather will intensify competition, as we stated earlier.

Even in periods of competitive market conditions, opportunities arise. Our management team has done a great job in the past of capitalizing on these opportunities as they present themselves and activity improves. We've been able to hold on to, and in some markets, increase our market position while protecting our pricing and margins. We have reduced our capital spending program by $20 million and expect to spend less than $165 million in 2013 compared to our approved capital budget of $185 million. Spending can, however, be ramped up quickly as market conditions warrant, and we can make cash available for acquisitions that we find compelling. Our customers who stayed within cash flow in 2013 now have access to healthy levels of capital, eliminating a significant barrier to increase activity levels in 2014.

So we're optimistic about '14. Our objective will continue to be improving our market position, enabling us to grow our business in every part of the industry cycle.

And with that, operator, we'll turn the call over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Michael Cerasoli from Goldman Sachs.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

It's no surprise at this point that the major trend is away from vertical drilling and towards horizontal. So I guess there's 2 questions here. First, how is Basic's set up the benefit in this environment? And then secondarily, more specific, do you think that the E&P's focus on horizontal drilling will take away from spending on well maintenance, particularly on the vertical side, or is that -- will that hold up?

Thomas Monroe Patterson

Well, first of all, I think we're positioned well to take advantage of any changes in the market. Our equipment operates pretty much the same on the surface, on a vertical wells as it does the horizontal well. We may see an increase in some flowback in our Fluid Services business as the stage count increases for horizontal wells. But I think our equipment is positioned well to take advantage of any change in -- specifically, that change from vertical to horizontal doesn't do anything but help our business. The more footage drilled and the more stages there are, the more work we should have out there. With respect to vertical maintenance work, that probably doesn't change. We'll probably see the same amount of maintenance work returns for that kind of work in these oily markets are still good, and those customers who have existing production are going to spend that capital to keep that run rate on their existing wells as high as possible.

John Patrick Moore - Harpswell Capital Management, LLC

Okay, very helpful. And then just my follow-up question is just sort of a little obscure. The Taylor manufacturing did have a very solid quarter. I'm curious to know if there's any read across to market conditions? Was that a one-off? Was it new rail work? Maintenance activity? Just maybe a little bit more color because they seem to be a pretty substantial pickup in that subsidiary for you?

Thomas Monroe Patterson

Yes. In the second quarter, we only had one external rig sale. In the third quarter, we had 4. I don't know if I would consider that to correspond to a pickup in the market. I think it's probably more of a one-off than anything else.

Operator

And our next question comes from the line of Michael Marino from Stephens.

Michael R. Marino - Stephens Inc., Research Division

Question on the comment around, I guess, the fourth quarter guidance were down 6% to 7% top line. How much of that is typical kind of seasonal decline, and how much are you expecting to come from maybe pricing or...

Thomas Monroe Patterson

Well, I think typical seasonal decline is probably somewhere in that 5% range, 5% to 6%, with the additional guidance there of another 1% or 2% coming from kind of conservative approach for rates in the fourth quarter.

Michael R. Marino - Stephens Inc., Research Division

What product line do you think is most susceptible for that?

Thomas Monroe Patterson

The same ones that are competitive now. In our Completion and Remedial Services segment, it's going to be our pumping group on the frac side, and our Fluid Services segment are going to -- those 2 segments are going to see probably the bulk of the competition and potential for rate decrease in the fourth quarter. Well Servicing ought to stay really flat.

Michael R. Marino - Stephens Inc., Research Division

Have you seen any of that pricing kind of deterioration and just 25 days into the quarter? But I mean, have you seen it yet, or is it something maybe something you're worried about as you kind of get into November, December?

Thomas Monroe Patterson

Well, we've seen very little. But I mean, it's definitely out there. It's something we're talking about. It's something that our customers are talking about. It's some competitors are throwing around some cheaper pricing. So far into the third quarter, we haven't seen a big impact yet, but it's something that we definitely are keeping our eyes on and we expect.

Michael R. Marino - Stephens Inc., Research Division

And if I could follow up with, one, on the Completion segment. You mentioned coil tubing was up sequentially. I guess it's some -- a product line that's been bouncing around for a lot of people and results are very pretty widely. Is there anything specific about your business, or was it something basin-specific? And how do you see that coil business kind of over the next 12 months, given, I guess, it seems like some people are having some difficulties there?

Thomas Monroe Patterson

Well, I think where our assets are located, we just had a good inventory of work to do for our customers that we provide that service for. Our -- really, our larger coil has stayed pretty consistent this quarter and last quarter. Where we saw kind of an increase and an uptick in that was in the smaller coil and the maintenance and the remedial work with some of that smaller coil does, and that work jumped up a little bit and allowed us to see some sequential improvement in the business. So I don't think there's anything profoundly different in our coil, how it's set up in the customers we work for, we've just had a consistent inventory to work out there.

Michael R. Marino - Stephens Inc., Research Division

And you see that kind of through the fourth quarter and...

Thomas Monroe Patterson

Yes.

Operator

And our next question comes from the line of Neal Dingmann from SunTrust.

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

Roe, on your comment about the single-digit increase, I'm just wondering kind of if you could comment a little bit on sort of segment-wise or region-wise anything specific, maybe a bit more you can say about that now? Or is that just sort of a more general statement based on just overall customer conversation so far?

Thomas Monroe Patterson

Well, it's definitely -- those conversations are definitely surrounding these oilier markets. Where we've seen some talk about increasing capital spending year-over-year, the Permian is the first place that comes up. The Eagle Ford and the Bakken has been the 3 places and somewhat in the Niobrara, but those are the markets that we've kind of seen the positive guidance and a little more bullish attitude toward capital spending next year.

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

Got it. And what would you think -- it's still a surprise to me with all the existing wells that we haven't seen. The Well Servicing now only was sort of flat, but maybe expectations aren't a bit higher for that. What do you think we'll have to see to maybe increase your confidence that at least either the top line or bottom line of that business would start to expand, given all the existing -- just despite the rig count, given the existing well count continues to tick up nicely?

Thomas Monroe Patterson

Well, there's plenty of rigs out there, and I think that's what's got his finger on, on any kind of rate traction or -- and margin expansion. I think that we'll probably see that business improve as the rig count improves next year or which we're hoping for. I think that, obviously, gas is the piece that's missing the most from the discussion and the equation. We need gas prices to improve to really see a big jump in that segment.

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

And Roe, would you more in the liquids market, such as, I don't know, like the Utica or TMS or some of these that we hear maybe improving? Or would you have to have a customer sort of bring you there?

Thomas Monroe Patterson

Well, well count drives that business, and this plays like the princes of the Utica and the TMS are just starting to develop, so you're chasing completion work only. And really, Well Servicing rigs -- it doesn't take very many Well Servicing rigs due to -- to keep up with a lot of drilling rigs. And that's probably a poor way to plan your business in the Well Servicing segment. So we'll go when the well count is higher and there's plenty of maintenance work to do as well.

Operator

And our next question comes from the line of Klayton Kovac from Tudor, Pickering.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So given the shift to more horizontal drilling in the Permian, what's your willingness to expand your Contract Drilling line?

Thomas Monroe Patterson

Boy, pretty low, pretty low.

The price of poker is pretty high. A high-spec rig to do a longer lateral -- deeper, longer lateral probably got a sticker price for around $20 million. That's a big bet. And I don't think that the contract situation out there is good enough to justify a company our size making that bet. I don't think we're seeing 4-year firm contracts on rigs like that. They're probably at best getting a 2-year deal, and so it's just too big a bet.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then also, are you seeing -- so you mentioned more capital spend in the Permian. Are you kind of seeing the spend take place in a certain area of the Permian? And then also, are you kind of seeing any sort of repositioning of assets there on the surface side?

Thomas Monroe Patterson

Our assets, I think, are positioned well. I don't think we need to do anything to take advantage of any increases in activity. We definitely have seen a lot of the spin talks around the fringes of the Permian Basin, where the Delaware Basin is growing and then also Bone Spring play and the Wolfcamp in that area as well, and then also on the Eastern side of the basin in the Wolfcamp horizontal play. So those are probably the areas that are going to see the biggest increase in capital spend over the next year, and we're positioned well to take advantage of any increases that we see.

Operator

And our next question comes from the line of Mike Urban from Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

So you talked about some of the cost cutting that you've done and we saw a little bit of impacts on that. Just beyond pure cost, we have seen a little bit more stable environment, I guess, to the upside of slower growth and at least stable. And then as a result of that, have you been able to drive meaningful efficiency improvements in your business? And if so, have we seen that? Or should we expect to see that going forward?

Alan Krenek

Mike, is that -- you're talking about G&A or you're talking about from the operating side?

Michael W. Urban - Deutsche Bank AG, Research Division

More on the operating side. So we've seen the pure G&A cost cuts, so I'm talking about less pure cost coming out and just running the business more efficiently, which presumably, you could do if you have this more kind of stable activity outlook rather than this roller coaster we've had from a cyclical standpoint over the last -- really, forever, it's been several years?

Alan Krenek

Right. But I think if you look at Well Servicing, 2/3 of the cost structure is labor. So when you look at cost savings from an operational nature, you look to the Completion and Remedial segment. The revenue dropped about 4% sequentially, but we maintained those 35% margins. We did that by going back and tweaking our organizational structure, making some cuts and then going back to our vendors and suppliers and asking for pricing concessions. So the biggest bang for the buck was derived from that segment during the quarter.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. So sounds like you're able to drive some efficiencies there. So with the spending outlook and growth that you've -- that you're seeing next year that you've detailed earlier, is that sufficient given there's efficiency gains to drive margins higher in any of your businesses or not quite enough? Because it doesn't feel like we're at the point where we get pricing any time soon.

Alan Krenek

We don't expect pricing to be a benefit to us in the near future. We will, hopefully, realize some margin improvement just from increased utilization as we go through next year, which will, like I said, improve our margins as we absorb some of the fixed costs that we have built into our structure.

Operator

And our next question comes from the line of Daniel Burke from Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

In terms of the revenue progression from Q3 to Q4, any segments specifically highlight that, that should over or underperform that 6% to 7% level? And I guess, specifically, what I was curious about is, how is the frac calendar look here as you get at least part way through Q4?

Thomas Monroe Patterson

Well, as we see as kind of the frac part of our business that pumping side and the Fluid Services segment are the 2 segments where we expect the most competition and the most softness in pricing going into Q4. The calendar looks good. Unfortunately, customers don't always do what's on the calendar. There's really not a lot of push to get things done in a hurry. If they have to push it off because of water, if they have to push it off because of slowdown in drilling rig or just general pace of their field, delays happen right now. It seems like more than they would and kind of a busier market. So the calendars got plenty of work on it. We just need our customers to get it done in a timely fashion without any delays, and that's just hasn't -- so far in the last quarter and going into this quarter, that hasn't happened. They're not hesitating at all to push some of those dates off if they have to.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay, that's helpful. And then just I guess my second one would be, CapEx outlook for next year, can you share any prelim thoughts in terms of how you'll think about that budget?

Alan Krenek

No, I think it will be very similar to what we have for this year. In fact, where we spend expansion CapEx will be almost the same, salt water disposal well expansion and then improving or increasing our fleet of rental tools. That's just based on what we see now. Like Roe said earlier, that can change pretty quickly depending on the operating environment. But for right now, I would suspect that our CapEx should be somewhere between $165 million we spend this year and $185 million that we budgeted for at the beginning of the year, with sustaining CapEx being a little over $100 million.

Operator

And our next question comes from the line of Blake Hutchinson from Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Just kind of looking out -- your guidance here has kind of been refreshingly realistic for the last couple of quarters, and I just wanted to -- while we have the opportunity, as we think about jumping ahead a bit -- as we think about the progression from 4Q to 1Q, I'm looking out there at expectations and they seem set a little bit closer to the third quarter result than what we're expecting here for 4Q. I mean, is there anything in your conversations to suggest that we should have a quick start to the year? And I guess, just kind of overall big picture, I know we take some margin hits from some added costs in the first quarter. Should we be thinking more first quarter next year looking like a slight improvement all for 4Q? Or is there potential for it to rebound quickly and look like the quarter just recorded?

Thomas Monroe Patterson

Well, we'll see. I'll tell you what we know. Right now, we're having some conversations with some customers about work for next year -- early next year that we really didn't have last year. So that's a positive sign and that's something that would make us feel like the first quarter was going to be definitely an improvement over what we saw in the slow ramp of 2013, very slow ramp-up in activity in the first quarter of '13. So that's a positive sign and we're very optimistic about that. However, you have to remember, the first quarter still has a lot of issues. Plenty of weather to contend with in January, February, so -- and even March to some extent, so there -- that's one thing that always kind of puts the lid on first quarter and slows that pace. So the conversations we're having right now with some of our customers who are trying to kind of line up their budgets and get pricing and understand where we are and what we can do for them next year, those are good conversations and would kind of lead us to believe that this is going to be a quicker ramp in '14 than it was in '13.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

That's good to hear. It sounds like the opportunity play a little offense early in the year. Appreciate that feedback. And then just -- there are some good and bad to being positioned in the Permian at this point, and understanding your comment earlier, Alan, about labor being such a large portion of a couple of your segments, is there anything specific to Basic in terms of a point in time, as we look out to '14, that you have to make a decision in terms of a one-time kind of wage increase across your labor base that we should be aware of?

Thomas Monroe Patterson

Not right now. No, we haven't seen anything like that. Right now, we've got plenty of available hands, and that's been a good problem to have, so...

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. And then, Roe, just to clarify kind of what's going on in your pressure pumping operations, and I think you've kind of touched on this. At present, I take it that you are more customer-attached with most of your equipment and just kind of putting -- dealing with the utilization fits and starts of specific customers rather than experiencing kind of continued turnover of all of the assets? I mean, is that the proper way to characterize it? Or is there still -- with the pricing changes, are we also having a lot of customer turnover at the same time?

Thomas Monroe Patterson

No, you hit the nail on the head. That's exactly I would look at.

Operator

And our next question comes from the line of Jason Wangler from Wunderlich Securities.

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

Just curious as, obviously, the Permian being such a big focus for you guys in the kind of horizontal shifts. Can you maybe just talk about how much work you're seeing there on the horizontal versus vertical? I don't know if it's jobs or percentages or anything that you could maybe just give some color on that?

Thomas Monroe Patterson

Well, for most of our equipment, we don't -- they don't tell us on the phone how you're coming out on a horizontal well or vertical well. Most of the time, we know it pretty much. We're just going out there to do one function and one piece of the work. And like I said, our equipment operates the same on a vertical well usually, in most cases, that it does on a horizontal well. Half of approximately 40% or so of the rig fleet in the Permian is running on a horizontal or directional basis right now. So as far as completion work goes, that's probably about what -- if we're out on a drill-out or we're out on a flowback, that's probably the same portion of the work that we're doing will be vertical versus horizontal. Our frac business is typically vertical. We don't have -- we don't scale up and do the bigger horizontal fracs. We stick to the vertical, and what horizontal we do is pretty shallow. So from the frac side, we're mainly vertical well-oriented, and that's good. That's our niche. It fits us well. And as far as the rest of our segments, it would be hard to pinpoint what we were doing because our equipment operates exactly the same on both wells.

Operator

And our next question comes from the line of Marc Bianchi from Cowen and Company.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

I'm curious to get your thoughts being very experienced operator in the Permian. As we think about this activity ramp in horizontal wells and rigs that a lot of the companies are talking about, just curious, you mentioned water problems sometimes delaying some activity; we know about the problem getting hotel rooms in the basin; we've heard about electricity infrastructure problems over the years, so just kind of curious what you guys think as a reasonable horizontal rig count growth or reasonable well count growth that the basin could support as we look to '14 and '15?

Thomas Monroe Patterson

Well, the horizontal rig count this year grew by in the direct -- including directional grew by about 40 rigs. That was the shift. So the rig count stayed pretty flat, but we shifted about 40 rigs over to directional or horizontal. So we've already made a big shift. I think that in 2011, we were running close to 500 rigs in the Permian. I think that the Permian probably has the ability to do that and sustain that kind of rig activity. Some of the infrastructure issues and hotel problems, electricity, water that you mentioned earlier, some of those have worked themselves out in some areas. In other markets, water will always be an issue because it's just very arid and putting fresh water together is a tough thing. So that may never go away. That may always be something that we're dealing with. But I think that the Permian is in pretty good shape. Earlier last year, we had some takeaway issues, some capacity takeaway issues and infrastructure on the pipeline side. A lot of those have resolved themselves and increased capacity as an industry for the basin, and so takeaway capacity is pretty good right now. So that's how I see it. If we got back to 500, it wouldn't shock me. And if half of those rigs were running in a horizontal directional basis, that wouldn't shock me either.

Operator

And our next question comes from the line of James Spicer from Wells Fargo.

James Spicer - Wells Fargo Securities, LLC, Research Division

You mentioned a little bit about the attrition amongst smaller companies driven by the competitive environment. Just wondering what types of consolidation opportunities that might create, and if you have any appetite for those types of opportunities in this environment?

Thomas Monroe Patterson

Well, the expectations that we've seen from some of those potential sellers haven't been at the levels that we would consider attractive yet. So that's got to come back in the balance a little more, and we expect it to over the next couple of quarters. But definitely, we were interested and we will have our eyes out and ears open and be watching to see what comes down the pipe. But -- so we're definitely paying attention and hope to capitalize on some of those opportunities.

Operator

And our next question comes from the line of Jim Rollyson from Raymond James.

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

Roe, it seems like your continued focus on SWDs is probably maybe one of the differentiators between your ability to hold revenues and margins in your Fluid Services business relative to maybe some of the peers. Curious if -- how you think about some of the big competitors there? Are they matching or continuing the same focus on SWDs that you are? Do you see that? And do you think some of the small guys that you mentioned that might get out of the market, are they just, too, not benefiting from the capital side of things to be able to invest in those to keep in the market? Just kind of curious how you think about that market shaping up.

Thomas Monroe Patterson

Well, I think if you're in the fluid transport business and you haven't figured out that salt water disposal well makes you more competitive, you're probably not paying very close attention. So I think all of our peers, small or large, understand that. And if they have the means and the capital to add salt water disposal well capacity, they're probably working on it. So I think our team's done a good job of kind of putting them in a manufacturing-type mode and really a process and joining them up and knocking them out. So if I have to say where we differentiate any is just that we line them up and put several in the queue. And because the permanent process is the part that holds everything up the most, it's a part of the process that we can't control for the most part. So you try to get several projects going and then it's just a race to see which one gets to the finish line first.

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

That's helpful. And then switching gears to the Well Servicing business. Where do you think we are in terms of when you think about some of the longer-dated shale place like maybe the Barnett, at what point do we start seeing a pickup in workovers there as those things start to get -- well, all productivity starts to fall off, where they need to get in there and do some workover?

Thomas Monroe Patterson

Well, I think there's some -- that maintenance is out there. It's piling up and there's definitely plenty of projects to do. Unfortunately, there's gas price to support. It just hasn't been there. When gas prices popped a little early in '13, we saw some of that workover activity pick up and that maintenance activity picked up. The Barnett, in particular, and especially those horizontal wells that are now starting to get some age on, have plenty of work to do. There's lots of maintenance work to do there. So I think it's there. I think it's on everyone's board to be done. But I just don't think there's a reluctance out there to do a lot of that with prices down around $3.60.

Operator

[Operator Instructions] Our next question comes from the line of John Daniel from Simmons & Company.

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

A follow-on question in Neal's earlier comment about the well service rig hours. It seems that the flattish hours recently, as you alluded to, a function of too much capacity which is coming in the market. And then as we sit back and speak with the rig builders, it seems more supplies are coming. You guys had a nice uptick in Q3. And then when you look at the auction sites, I mean, just right now, it looks like there's another 30 rigs to be auctioned just in the next few weeks. And so with that as a backdrop and while we share your view that industry activity is poised to rise next year, it seems that those supply chain challenges could mean that your rig hours, as well as your public peers, underperformed relative to the drilling activity in the well count wells. Is that a fair statement, or am I being too penal?

Thomas Monroe Patterson

Well, I think you're recognizing that there's potential for those rigs to come on the market. There are some out there. And I think that's why you've seen us be more conservative with our forecast for Well Servicing. We've kept things pretty flat, and we've also said that we expect it to stay relatively flat even in a high rig count growth. There's 2 reasons there. One is, the rigs that you mentioned that could potentially enter the market; and two is, just that the drilling rig count doesn't necessarily increase Well Servicing rig count proportionally, so -- because it's just -- they don't -- they're not one-for-one like that.

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

Right. I just want to make sure we don't get ahead of ourselves as we look to well count growth and just extrapolate that to the industry. That's all, given the supply framework.

Thomas Monroe Patterson

Yes. Well, I think that's why you've seen a lot of conservatism on our part.

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

Okay. If you believe that some of your peers might lower pricing this quarter and then you put that into context believing that activity levels, broadly speaking, improve next year, does it make sense to do short-term pricing cuts to maintain share? Or is it better just to stick it out and wait till activity rebounds?

Thomas Monroe Patterson

Well, the potential for those discounts is certainly out there. And when that -- when you're faced with that, I think the choice is to do those discounts, if you have to, to maintain market share. Deciding to sit on the sideline and wait for better pricing environment's a pretty poor strategy.

Operator

And our next question comes from the line of Mark Rogers from Gagnon Securities.

Mark Rogers

Could you just remind us what your percentage of 24-hour work is currently and what it was in the previous quarter?

Thomas Monroe Patterson

It's probably somewhere around -- it's under 10%, I am going to say it is about 7% to 8% and that's been pretty flat.

Operator

And there are no further questions. I would like to turn it back to management for any closing remarks.

Thomas Monroe Patterson

All right. Thanks, everybody. We'll talk to you next quarter. Thanks a lot.

Operator

Ladies and gentlemen, that does conclude Basic Energy Services Third Quarter Earnings Conference Call. If you like to listen to a replay of today's conference, please dial (303) 590-3030, and use conference ID# 4644175. ACT would like to thank you for your participation, and you may now disconnect.

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