Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Basic Energy Services, Inc. (NYSE:BAS)

Q1 2014 Results Earnings Conference Call

April 25, 2014 9:00 AM ET

Executives

Sheila Stuewe - Dennard-Lascar Associates, IR

Roe Patterson - President and CEO

Alan Krenek - Chief Financial Officer

Analysts

Trey Stolz - Iberia Capital Partners

Michael Marino - Stephens Inc

Jeff Tillery- Tudor, Pickering, Holt

Marc Bianchi - Cowen and Company

Agata Bielicki - Simmons & Company

Neal Dingmann -SunTrust

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Basic Energy Services First Quarter 2014 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, Friday, April 25, 2014. And I would now like to turn the conference over to Sheila Stuewe. Please go ahead.

Sheila Stuewe

Thank you, Brittany, and good morning, everyone. Welcome to the Basic Energy Services first quarter 2014 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’ view 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, 2013.

Further, refer to the statements regarding forward-looking statements incorporated in our press release from yesterday. Please note that the content of this conference call covered by -- are covered by these statements. In addition, the information reported on this call is only as of today, April 25, 2014. 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 CEO.

Roe Patterson

Thanks, Sheila, and welcome to those of you dialing in for today’s call. We appreciate the interest in the company. Joining me today is Alan Krenek, our Chief Financial Officer.

Today I’ll recap our first quarter results, give an operational overview and update the current activity levels. Alan will then discuss our financial results in more detail, and I’ll wrap things up with some final comments about the year ahead.

2014 started much as we had hoped it would with customers executing their capital plans early and continuing the activity pace we saw at year end. Winter weather interruptions hampered activity slightly in January and early February, but strong customer activity during the fair weather period of the late February and in March allowed for us to offset most of the weather impact. This uptick in activity is reflected in the sequential increases in revenue generated in each of our operating segments.

Completion and Remedial Services saw most of the impressive growth led by our stimulation business. All of our service lines experienced improved utilization rates towards the end of the quarter and we expect this momentum to continue at today’s commodity price levels.

Pricing remains stable but competitive in most markets as excessive service capacity has yet to be completely soaked up by increases in activity. We’ve seen some improvements in pricing for selective markets where higher wages have typically been the driver for rate increases.

The impact of these price improvements has generally been a pure offset at this point. These selected markets also present opportunities for additional assets, which we are currently taking advantage of.

As previously disclosed, we sold our inland workover barge fleet four rigs at quarter end. This was a limited growth market for us and we felt the capital we had tied up in this operation could be better spent in other markets.

The proceeds of the divestiture will be applied to the growth opportunities, we now see in our strongest segments. We initiated our capital campaign in the first quarter. As we previously disclosed we have a modest expansion program included in those plans, which will now grow to $104 million with the addition of the barge proceeds.

Now let’s review our individual business segments. Our Completion and Remedial Services segment experienced an 11% sequential increase in revenue quarter-over-quarter.

Pricing in our Pumping segment especially our frac work was stable over the quarter with modest improvements in various margins. In addition, we experienced better weather, fewer holidays this quarter versus the fourth quarter of 2013, helping to improve our results.

Our Stimulation services segment located mainly in the Rockies, the Permian Basin and the Mid-Continent region showed marked improvement utilization allowing for an addition of 4,000 horsepower during the quarter. In addition barring weather delays, our coil tubing utilization reached near record levels at times during the quarter and this helped drive our revenue improvement.

First quarter margins for Completion and Remedial Services were 37% versus 35% in the fourth quarter. Increases in wages, payroll taxes, sand costs and other operating costs were offset by our better utilization and pricing. We expect these results to continue in the second quarter as our calendar remains relatively full and so we will continue to add assets.

We currently have around 39,000 horsepower on order with 85% of that new capacity directed to our Stimulation segment. This will essentially be one additional spread and some additional support horsepower for the rest of our practice. The bulk of which will be delivered in the late second quarter.

As previously mentioned, we will also be growing our Coil Tubing segment with one new 2-3/8 adapter unit being delivered in late Q2 and two new 2-inch spreads delivered in late Q3. We will also be adding more power equipment to our Rental and Fishing Tools Services segment, which are tailored for servicing work in our long lateral horizontal wells.

Our Well Servicing segment showed an 11% sequential increase in revenue. Average utilization increased to 73% from 66% last quarter, as activity levels in busy markets like the Permian Basin strengthened demand for our rigs in services like horizontal well completion, workovers and routine maintenance.

Pricing overall picked up quarter-over-quarter, finishing the first quarter at an average rate of $417 per hour, up from $404 per hour at year-end. Pricing improvements in a few selected markets and strong utilization from our four barge rigs, which usually operate on a 24-hour basis, contributed to the average rig rate.

Without the barge rig contribution, average rig rates would have been $402 per hour and $406 per hour for the fourth quarter and the first quarter, respectively. We expect this average rig rate to trend even higher in the second quarter if activity levels continue.

Margins in this segment declined in the first quarter from -- to 25% from 27% in the fourth quarter. This decline was mainly attributable to annual reset of payroll taxes and some increases in insurance costs.

With these costs subsiding, as the year progresses, we expect margins to be back in the upper 20s by the end of the second quarter assuming all activity levels hold. Pricing improvements will remain scattered as most markets while busy have enough supply to keep a sealing on rates. We will continue to build new 500 class rigs for replacement purposes and we will continue to reactivate our high quality stack rigs as demand dictates.

Taylor Industries segment profit was down about $500,000 in the first quarter, mainly due to an increase in these internal newbuild projects and subsequent decrease outside sales activity.

Our Fluid Services business segment experienced increased revenue of about 6% in the first quarter. Trucking hours increased 5% if we added nine trucks during the quarter and favorable weather conditions improved our utilization rates.

While segment profit was up, segment margin was down by 90 basis points for the fourth quarter to 28% in the first quarter. Slightly elevated costs driven mainly by the reset of the payroll taxes weighed on our margins.

These cost input should decrease as we move to the second quarter and while we expect this segment to remain price competitive in the near-term, we have maintained our market share through our advanced disposal well network and so we expect margins to return to third quarter 2013 levels of approximately 30% by the end of the second quarter.

We will continue to grow our number of disposal wells and we have several projects in the queue. As we add these wells, we should consistently create room for additional Fluid Services trucks.

Our Drilling segment, which is our smallest segment, had a revenue increase to 6% in the fourth quarter to finish out at $13.5 million for the first quarter. Rates in this segment were basically flat up slightly, but utilization was up to 71% to 76% first quarter. Our 3,000 horsepower drilling rigs experienced a little better utilization as demand for our mid-depth vertical drilling rigs improved slightly in the first quarter.

As we’ve stated before the vertical program currently acted at the Permian Basin. Our legacy drilling programs with high returns for our customers and we expect those to remain in place. Our shallow or mechanical rigs that run in the Permian and our larger horsepower electric rigs that run in the Permian continue to maintain stable rates and utilization.

Margins in this segment were down 35% to 32% on repair and maintenance costs. Most of these expenses are routine in nature, but tend to fluctuate our margins because of our small size of our drilling fleet.

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

Alan Krenek

Thanks, Roe. This morning I’ll provide additional details on our first quarter income statement, as well as discuss selected balance sheet and cash flow items. As customary, when making comparisons, comment wills focus on sequential changes unless otherwise noted. First, I’d like to cover a few components of our revenue and segment profit.

In our Well Servicing segment, Taylor Rig Manufacturing produced revenue of $2.2 million in the first quarter, down from $3.4 million in the fourth quarter. Taylor segment profit plan to $134,000 compared to $624,000 in the fourth quarter. Decline in revenue and segment profit from the fourth quarter is attributable to more internal projects during the first quarter.

Pro forma for the sale of our four inland workover barge rigs in March, our Well Servicing utilization rate would have been 71% in the first quarter compared to the 73% we’ve reported. In the fourth quarter, it would have been 65% compared to the 66% we reported.

For the Completion and Remedial segment in the first quarter, 62% of the revenue was generated from pumping services, 20% from rental tools, 13% from coil tubing and 5% from snubbing. The Permian Basin continues to be the market where we generate the largest portion of our revenue. During the first quarter, we generated approximately 45% of our revenue in the Permian.

Our G&A expense in the first quarter was $39.6 million, in line with our guidance of $39 million. G&A, as percent of total revenue, was 12%, same as in the prior quarter. Last year in the first quarter, G&A was $42 million, or 14% of revenue. The decline in year-over-year G&A was due to the cost control initiatives we launched in 2013 as well as a decrease in bad debt expense. The G&A reduction was due to the efforts of the entire organization, and we congratulate our team for this achievement. Looking forward, we expect that G&A expense in the second quarter will be about $40 million.

Depreciation and amortization expense was $52 million in the first quarter, down from the previous quarter’s $54 million. We expect depreciation and amortization expense for the second quarter will be approximately $54 million.

Net interest expense was $17 million in both the first quarter and last year’s fourth quarter. We expect no change in the quarterly net interest expense going forward.

Our first quarter effective tax benefit rate was 24% versus 39% in the prior quarter. Estimating an effective tax rate for 2014 becomes a little complicated as permanent book and tax differences have a more significant impact on the effective tax rate, as pre-tax income is closer to breakeven. Because of this, we expect our effective tax rate for the full year of 2014 to be around 50%. As our pre-tax income increases, the effective tax rate will approach our normalized rate in the 35% range.

Our net loss for the first quarter was $1.9 million, or $0.05 a share, for both basic and diluted shares. Weighted average shares outstanding were 40.6 million during the first quarter. We did not repurchase any shares in the quarter and $20 million remains under our share repurchase plan. However, we did acquire approximately 250,000 treasury shares through net share settlements of employee incentive plan shares, which vested in the first quarter of 2014.

On March 31, we had a cash balance of $117 million, up from $112 million at year-end and increasing from $81 million at March 31, 2013. During the first quarter, we generated $29 million of cash from operating activities, used $10 million in investing activities which is net of the $19 million we received for the sale of the workover barges in March and used $13 million from financing activities.

Total liquidity, including availability under our revolver, was $329 million, with no amounts gone on new revolver. Our DSO at the end of March was 60 compared to 64. At year end 2013, we ended the first quarter with $881 million of debt, consisting of $300 million of senior notes due in 2022, $476 million of notes that are due in 2019, and $105 million of capital leases.

Our first quarter total debt-to-EBITDA ratio was 3.4 times, well within our amended revolver covenant of 4.25 times and improved from 3.7 times we had in the fourth quarter. The interest coverage ratio on March 31 was four times.

During the first quarter, total capital expenditures were $37 million, which included $17 million for expansion projects, $18 million for sustaining and replacement, and $2 million for other. Expansion and spending included $11 million for the Completion and Remedial segment, $5 million for the Fluid Services segment and the rest for other. In the second quarter, we expect that our capital spending will be higher as we progress on the fabrication of the additional pumping horsepower and coil tubing units.

We will be hosting our first Analyst and Investor Day on May 29 in Houston. For those who have not registered yet, please contact Jack Lascar or Sheila Stuewe by at 713-529-6600, and they will take care of you.

At this point, I’ll turn the call back over to Roe for his concluding remarks.

Roe Patterson

All right. Thanks, Alan. Well, 2014 is off to a much better start than 2013. Our customers are busy and activity levels are definitely headed in the right direction. Strong crude markets are driving new well work, recompletions, workovers and an increased urgency for maintenance projects.

Stable natural gas prices have begun to stimulate overdue maintenance and workover projects in dry gas markets. Combined, these dynamics paint the picture of a robust activity level for the remainder of the year for our service line. We will continue to find opportunities to grow our business, expand customer relationships, and capitalize on our existing footprint in busy markets like the Permian basin.

We’ll also continue to benefit from the growing number of horizontal wells and pad drilling. Our capital budget plan reflects the current demand for our services, but we will execute those plans at an orderly pace. Reining in spending, we see the market fundamentals begin to deteriorate.

Heading into the second quarter, we anticipate revenue will be up 5 to 6% sequentially. Now, although we didn’t close any acquisitions in the first quarter, we continue to actively review the growing acquisition pipeline and we continue to feel this year will be one of consolidation in the service space.

Well, that’s the end of our prepared remarks. So, operator, we’ll open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Trey Stolz with Iberia Capital Partners. Please go ahead.

Trey Stolz - Iberia Capital Partners

Good morning, guys. Congrats on the quarter. Talking about the Pressure Pumping segment or the Completion and Remedial segment, Alan, how much of that revenue line was non-pressure pumping business? And then, I guess, what I’m trying to infer from that is the implied rate increase or utilization increase and how those two are trending 1Q to 2Q, what we can feel out better for the remainder of 2014?

Alan Krenek

Well, the pumping services was 62% of the total revenue in that segment, and roughly about the same percentage of the 62% -- 62% of 62% is frac or pressure pumping and the rest of it being cementing and acidizing and other pump services.

Trey Stolz - Iberia Capital Partners

Okay. And then, so it implies high revenue for horsepower figure from 4Q?

Alan Krenek

That’s correct.

Trey Stolz - Iberia Capital Partners

How much of that can we interrupt as being utilization? How much price increasing -- or price increase is coming and by region, what can we think about there?

Alan Krenek

Well, we’ve seen 2% to 5% price increases, which mainly offset input cost increases. And I think what we’re going to see for the balance of the year as the completion activity increases that we will get higher -- we will get higher pricing and we will get some incremental pricing to the bottom line, that more than offsets the cost input increases.

Trey Stolz - Iberia Capital Partners

And then moving over to Well Services segment, I guess, same question, how are we seeing that trending and how far off -- with utilization creeping up in the 70% range, how far off are we from pricing traction?

Roe Patterson

Trey, this is Roe. I think we’re probably looking at a third quarter to fourth quarter event if we see it at all this year in 2014. There’s just a lot of rigs in the market, and there’s some more on the way. We’ve kind of heard the noise and the static from the newbuild market out there and there is a lot of rigs being built. So we think there’s going to be stable pricing in well servicing, but we don’t see a lot of traction in well servicing pricing coming anytime soon. We feel like those utilization rates kind of broadly across our footprint need to be in the high 70s, low 80s before we’re going to see any kind of pricing traction. So we’re ways from that yet.

Trey Stolz - Iberia Capital Partners

Understood. Thanks. I’ll re-queue. Thanks.

Operator

Thank you. Our next question comes from the line of Michael Marino with Stephens Inc. Please go ahead.

Michael Marino - Stephens Inc

Thanks. Good morning.

Roe Patterson

Good morning, Mike.

Michael Marino - Stephens Inc

Roe, the topline guidance you gave of plus 5% or 6% sequentially, how does that compare to your March exit rate or your Q1 exit rate?

Roe Patterson

It’s right in line with it. I mean, we feel like March was a good month. It’s got some pricing traction built in there for some of our completion remedial segments, and then stable pricing across the rest of the segments, and then what we think is going to be the traction for utilization throughout the second quarter because of the longer daylight hours and better weather. So, it’s kind of trending that way. March was a good month for weather and we did experience some longer daylight, so it’s headed in that direction.

Michael Marino - Stephens Inc

And could you -- if looking at Q1 was, was there any one service line that was more impacted by weather than others, or was your kind of weather impacts early in the quarter kind of across the board?

Roe Patterson

They were really across the board. I’d say, Well Servicing and pumping probably saw the biggest impact. Coil definitely saw some impact. Fluid Services probably got affected the least but it’s still -- we still checked trucks down because of the icing conditions that we experienced in January and early February.

Michael Marino - Stephens Inc

Okay. Great. Thanks. That’s all I have.

Operator

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

Jeff Tillery- Tudor, Pickering, Holt

Hi, good morning.

Roe Patterson

Good morning.

Jeff Tillery- Tudor, Pickering, Holt

Roe, if I think about where you guys are going to focus growth capital and efforts on M&A. Do I think about that really being centered in the Completion and Remedial business? The commentary you had on rigs makes it sound like you’re kind of least excited about that. I just want to make sure I’m thinking about your strategy the right way.

Roe Patterson

Well, we certainly target those higher return on capital business segments for growth capital. We’ve got a pretty healthy replacement newbuild program for the existing rig fleet and we’re continuing with that. That’s a plan we’ve had in place for sometime.

As far as acquisitions go, I wouldn’t say that that -- we’re kind of isolating that to any one segment, or any one group of segments, because we’ve always been an aggressive acquirer if we find the right deal. So if it has the right value, it creates the opportunity. We inherit good people with good equipment. We’ll jump all over it.

And if it’s Well Servicing or Fluid Services and it puts us into a pocket of an existing footprint that we weren’t currently in, maybe it builds up some mass in an individual market that we didn’t have, filling gaps, then we’ll certainly do that. So, I think -- wouldn’t say, take my comments on Well Servicing meaning that we wouldn’t do a deal there. We would, if we found the right one in the right value.

Jeff Tillery- Tudor, Pickering, Holt

That makes sense. And then you sound more optimistic around M&A. Is that the buyers’ expectation is around growth increasing? Is it sellers, just more sellers in the market? I’m just curious what drives it?

Roe Patterson

More seller. Value -- the expectations on the sellers’ side are still pretty lofty, but they’re definitely coming into more of a balance with us but more deals. Just seeing more deals is what’s got me feeling like we’re really going to start to see some good opportunities on the M&A front.

Jeff Tillery- Tudor, Pickering, Holt

And my last question, if I think about kind of sort of easy targets, kind of stretch goals as I think about Q3 being likely, the kind of peak of the year just given the Q4 seasonality, does it give you guys heartburn to think about kind of Well Service utilization. We see a month of north of 80% utilization or completion and remedial margins with kind of 40% as the over under [ogy] (ph).

Alan Krenek

Well, on the Completion and Remedial margins, the 37% basically with no price increases incrementally hitting, hitting the bottom line just mainly just due to volume as we progress through this year, we would expect that climb from 37% up to and near 40% by that third quarter timeframe.

Jeff Tillery- Tudor, Pickering, Holt

That’s helpful, Alan. Thank you.

Alan Krenek

What was the other part of that question?

Jeff Tillery- Tudor, Pickering, Holt

It was really just around well service utilization. Do you guys see the potential or we could see a month, July, August, September, sometime in that timeframe where we see 80% utilization?

Alan Krenek

Yes, I wouldn’t look at it on a per month basis. I’d like at it on a per week basis because you’ve got two big holidays in the third quarter, Labor Day and July 4 so. But you should have some weeks where it will be approaching 80%. That’s correct.

Jeff Tillery- Tudor, Pickering, Holt

Thank you.

Operator

Thank you. Our next question comes from the line of Marc Bianchi with Cowen and Company. Please go ahead.

Marc Bianchi - Cowen and Company

Hey, guys. I was hoping you could clarify the commentary on stack rig reactivations and really what the opportunity is there. It seems like it contradicts a little bit the commentary about new capacity coming in, so maybe you could address that a little bit more?

Roe Patterson

Well, we’re constantly doing refurbishments. So if we see a high-quality stack rig that we feel like we can put back to work and the refurb is economical, we may pull that rig and bring another rig that needs refurbishment in and swap them. So it’s an ongoing maintenance program. It’s nothing different than what we’ve been doing and we’re maintaining our fleet size. So we’re not changing the overall rig count, or the overall marketed rig count. We’re just constantly in a state of upgrading our fleet.

Marc Bianchi - Cowen and Company

Got you. Okay. Continuing on the Well Servicing side, have you seen any gas activity and what’s the expectation there with gas prices having moved up here?

Roe Patterson

We have seen it start to move a little bit. We’ve seen some maintenance projects kick off and some workover projects kick off that that were idle, kind of the low-hanging fruit that was sitting in the dry gas markets. Projects that were in the queue just waiting for the right economics. We’ve had some of our gas customers do some hedging because the strip has improved so that’s allowed them to feel like they have a little more room to do these, to spend this capital and to go out and reinvest in their wells so to get a wetter better return. So we’ve definitely seen an increase in there. Is it anything that a meter mover at this point? No. But it’s a great sign and it’s the type of sign that we were looking for and have been looking for some time.

Marc Bianchi - Cowen and Company

Okay. Great. Thanks, Roe. I’ll turn it back.

Roe Patterson

Sure.

Operator

Thank you. Our next question comes from the line of Agata Bielicki with Simmons & Company. Please go ahead.

Agata Bielicki - Simmons & Company

Good morning. There was a nice --

Roe Patterson

Good morning.

Agata Bielicki - Simmons & Company

There was a nice step-up in the well service rig rate per hours, if you want. Is that increase due to pricing or rig mix, and do you expect a similar increase in Q2?

Alan Krenek

Yeah. It’s really due to rig mix. We had very good utilization of our barge rigs in the first quarter compared to the fourth quarter, which has a much higher rate than our normal workover rig. And then we saw places like in Appalachia where the rig rate is higher there. We had higher utilization. So it’s really -- it’s a matter of mix.

Agata Bielicki - Simmons & Company

Okay. Great. That’s helpful. And then with respect to growth CapEx, when do you expect those equipment additions to begin contributing to revenue? And can you remind us of what some of the additions are beyond the ones that you mentioned in your opening remarks?

Roe Patterson

Sure. Well, the horsepower that we have on order, as I mentioned was about 39,000. The bulk of that will come in late Q2. I’m not sure we’re going to get Q2 revenue out of it. We’re trying to get it all in and get it active. That’s a -- that’d be a great target to hit, but it’s probably going to be more of a Q3 event.

Likewise, when the coil gets in -- especially, the new 2-inch units, we won’t see an effect of those until probably Q4 because they -- we won’t get them completely activated and ready until the end of Q3. So that’s those additions. I think that the rest of the additions will be the salt water disposal wells that we get done between now and the end of the year. Every time, we do one of those we create a market for more trucks that we’ll add, so we’ll have a small incremental add to our truck fleet between now and year end.

And then our rental and fishing tool assets that we’ve ordered, these are larger pumps, larger swivels that augment our fleet, our current fleet. And it’s just to help better service the long lateral horizontal wells that are coming online that require larger equipment. Now we have a lot of that larger equipment already in our existing fleet, so this is just additions because of demand.

Agata Bielicki - Simmons & Company

Okay. Great. Thanks so much.

Operator

Thank you. Our next question comes from the line of Neal Dingmann with SunTrust. Please go ahead.

Neal Dingmann - SunTrust

Good morning, guys. Hey, just a question, Roe, on -- you put out there I guess on that 5% to 6% sort of sequential growth you’re anticipating. Is that based on some bidding activity that you already have a ramp in bidding activity, you’re already seeing or some other evidence that you’re already seeing? I mean, you obviously mentioned here about the better weather and longer daylight hours, but just wonder if there’s other things sort of tied to that certainly that you now have?

Roe Patterson

Yeah. I mean, we’re seeing some better pricing out there on the bids that we’re putting out for work in the second quarter, especially on the stimulation side. So it’s a combination of all of those factors that you mentioned, but we’re definitely seeing the momentum on pricing for some of these segments, going in the right direction. I think we’ve said what those are. Coil looks good.

Our stimulation services have seen improvements. We’ve had some spotty improvements in the Well Servicing side. It’s really only in those markets where we’ve seen a balance between service capacity and the demand that the customers are asking for. But that hasn’t been a broad event. That’s been really isolated, really no traction on pricing and Fluid Services so far.

We have seen some of those competitors go by the wayside though. So that’s encouraging to think that if that fleet shrinks or the excess capacity shrinks that maybe we can reach an equilibrium there. But we think that’s maybe a quarter or two or more out. So we’re just going to have to wait and see. But definitely, we’ve seen some improved bidding so far.

Neal Dingmann - SunTrust

Okay. And then Roe, I know for a while early on, even in years prior, the knock was always that you guys were just doing more vertical work. And I know now, you’ve got a pretty detailed slide out there that shows all the horizontal work. I’m just wondering on the supply that you’re adding either on the additional frac capacity and some others. Will a lot of this new capacity going forward go after the horizontal work as well or you know, again is it -- will it continue to be kind of a mix between the vertical and horizontal wells?

Roe Patterson

It will be a mix. We’re still having -- we still have a lot of demand from our vertical customers. So we’ve got -- we’re going to meet that as well as the horizontal demand. So the great thing is the equipment doesn’t care whether it’s working on a horizontal well or a vertical well.

So we can -- we can put it on either. It’s functional for either and that goes for pretty much every single business line except for drilling where we only have two horizontal rigs. We can work the equipment on horizontal and so it’s a mix. And whatever the customer needs that’s what we’re going to do.

Neal Dingmann - SunTrust

Great to hear. Then last one real quick, just on overall frac supply, I know it sounds like some of the big guys last week basically didn’t say that they were going to be adding too much. Just, Roe, you or Alan’s personal opinion on how much new supply will be coming sort of the remainder of this year and into next year. At this point to me, it doesn’t appear like too material. Just your thoughts around that? Thanks.

Roe Patterson

That was a question was on the frac horsepower?

Neal Dingmann - SunTrust

Yes, sir.

Roe Patterson

We’ve heard some new supply out there. I think one of our peers mentioned that they were adding horsepower as well. Talking to some of the builders out there, they’re starting to get some orders. So we think there is some horsepower coming between now and year end. I don’t think it’s going to be anything that’s going to drown the market based on what I’ve seen from the attrition side.

I think more horsepower was gobbled up because of 24-hour jobs and high rate pumping and just really tough wear and tear on the existing fleet. So I think there was more attrition in the fleet than what the industry really baked in. So I believe that there is room for some additional horsepower and it’s needed. And that’s why we’re seeing all this pent up demand and the drive to fill the needs that these customers are requesting.

So I think that it’s not going to drown the market. But I definitely think there is going to be a considerable amount of newbuild between now and year end. How much horsepower is that? You probably have to ask these guys that are surveying everyone. We don’t know. But -- and I think we can easily see our 39,000 that we’ve got out there going to work immediately as soon as it’s ready. And we could build more if that demand stays where it’s at.

Neal Dingmann - SunTrust

That’s great color. Thanks, Roe.

Roe Patterson

Yes.

Operator

Thank you. (Operator Instructions) Our next question is a follow-up question from the line of Trey Stolz with Iberia Capital Partners. Please go ahead.

Trey Stolz - Iberia Capital Partners

Going back to completion remedial service margins, maybe said this earlier, the impact of payroll taxes in 1Q?

Alan Krenek

Completion remedial is about 60 basis points.

Trey Stolz - Iberia Capital Partners

60 basis points. Okay. And so that’s an add back in 2Q, we should see whatever margin extension you’re talking.

Alan Krenek

The benefit of the increased revenue utilization.

Trey Stolz - Iberia Capital Partners

Understood. On a rig services, I think you kind of touched on this, Roe, a little bit. On the service rigs. Last year, you saw the higher demand on the smaller inside the lower horsepower rigs. How are those trends this year? Was that completion related? How is demand shaping up by asset type in the service rig segment?

Roe Patterson

On the service rig side?

Trey Stolz - Iberia Capital Partners

Yes.

Roe Patterson

Okay. It’s good. I mean, we have a strong demand for really -- our fleet is predominantly 500 class rig. That’s the largest portion of our fleet is made up that way. That rig is very versatile. It can do virtually any horizontal job and it can do a shallow or vertical job if it has to. It may be a little bigger and it’s a little bigger than really what’s required but it’s a very capable rig.

So the demand on those rigs is great. The rest of the fleet may be a little larger than that 500 class is seeing healthy demand. Nothing that I would -- we’re going to build a couple of those in this year and continue to augment that. But there’s not a lot of strong demand for those 600 class, 700 class rigs. It’s only completion -- really completion oriented for the most part. And there’s plenty of those rigs out there. So we’ll augment that fleets on but it’s not going to drive things.

We think that 500 class rig is the mix that and the type of rig that’s really necessary for these long lateral horizontals and to handle the maintenance projects of the shallower wells. The smaller rigs still have plenty of work because there’s so many fields out there that are small field, two floods, water floods, legacy production, vertical production that we have to work on every day. So we still have a lot of demand for those smaller horsepower rigs as well. And it’s a small part of our fleet but it’s a busy one.

Trey Stolz - Iberia Capital Partners

We know 500-horsepower and below, what percent of your current fleet does that make up and how much of a bifurcation in terms of utilization are we seeing between those and the higher demand, higher horsepower rigs you had referenced?

Roe Patterson

Well, I think the demand is pretty much consistent. There’s not a lot of bifurcation in demand. Probably, around three quarter percent of the fleet is in that 500 class or larger. So the other 25% of the fleet that is in maybe a 400 class or somewhere in there is still seeing a lot of demand, the equal demand and same kind of utilization.

Trey Stolz - Iberia Capital Partners

Okay. And then one last one with the ramp-up in pressure pumping we’re seeing some other pressure pumpers adding equipment. Any potential bottlenecks you see on the equipment side? The fluid ends have been a problem historically. I mean, we’re probably too early to see this but do you see anything approaching in 2014 that could be a bottleneck whether it’d be equipment or labor?

Roe Patterson

Yeah. I mean, it’s coming. If things continue the way they’re going, yeah, we’ll see some bottlenecks. It will probably -- I don’t think it will be necessarily in fluid ends altogether, probably a new pump delivery times, but that’s just the nature of the business. As more orders come in, the delivery dates start to get extended.

We’ve already seen that on the newbuild pumps. We were -- we could get probably a 45- to 60-day delivery on some of those. And now that’s moving out to 120 days and maybe even out to 180 days for some suppliers. So definitely, we’re seeing some extended delivery dates and that tells you that the orders are creeping in. And they’ll match that with the increased production for the new equipment. As their demand increases, they’ll add capacity to fill those orders.

So I don’t see any immediate bottlenecks. But down the road, if things continue the way they are, I could see some extended delivery dates starting to really creep in where we could see some things that we saw in the past.

Trey Stolz - Iberia Capital Partners

How is your burn through of equipment versus, say, in the previous go around?

Roe Patterson

It’s a little better because the wearability efficiency of the equipment, the newer stuff has improved. So we’re seeing some better built fluid ends that have a little more life to them. So it’s a little better than it was. But you have to remember, we kind of target that 100-barrel a minute or less market, a little lower rate and that typically allows us to have extended life on our pumps versus some of our peers that pump the 24x7 very high-rate work.

Trey Stolz - Iberia Capital Partners

Got it. All right. Thanks.

Operator

Thank you. (Operator Instructions)

Roe Patterson

All right.

Operator

And I’m showing no additional questions in the queue at this time, sir. I would like to turn the call over to Mr. Patterson for any closing remarks.

Roe Patterson

All right. Well, thanks everybody for calling in. We appreciate it. We’ll talk to you next quarter.

Operator

Thank you. Ladies and gentlemen, this concludes the Basic Energy Services first quarter 2014 earnings conference call. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Basic Energy Services' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts