Basic Energy Services' (BAS) CEO Roe Patterson on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: Basic Energy (BAS)

Basic Energy Services, Inc (NYSE:BAS)

Q2 2014 Earnings Conference Call

July 25, 2014 09:00 AM ET

Executives

Jack Lascar – Dennard-Lascar Associates, IR

Thomas Monroe Patterson – President and Chief Executive Officer

Alan Krenek – Chief Financial Officer, Senior Vice President, Treasurer and Secretary

Analysts

Michael Marino – Stephens Investment Inc.

Daniel J. Burke – Johnson Rice & Co. LLC

Trey A. Stolz – IBERIA Capital Partners LLC

J. Marshall Adkins – Raymond James & Associates, Inc.

Luke M. Lemoine – Capital One Securities, Inc.

Jeff Spittel – Clarkson Capital Markets

Jeff Tillery – Tudor, Pickering, Holt & Co.

Marc Bianchi – Cowen and Company

Neal Dingmann – SunTrust Robinson Humphrey

Blake Hutchinson – Howard Weil Inc.

Walt A. Chancellor – Macquarie Capital (NYSE:USA), Inc.

John M. Daniel – Simmons & Co.,

Mark Brown – Global Hunter Securities

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Basic Energy Services Second Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded.

I would now like to turn the conference over to Jack Lascar. Please go ahead sir.

Jack Lascar

Thank you, Jim, and good morning, everyone. Welcome to the Basic Energy Services second quarter 2014 earnings conference call. We appreciate you joining us today. Before we begin, I would like to remind everyone that today’s comments includes 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 also note that the content of this conference call are covered by these statements. In addition, the information reported on this call is only as of today, July 25, 2014. Therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

With that, I’ll turn the call over to Roe Patterson, President and CEO.

Thomas Monroe Patterson

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

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

During the second quarter of 2014, we continue to benefit from the robust activity levels in our oilier markets as well as steady activity in our gas markets. We were pleased with the capital spending pace of our customers in all directed activity. The Permian Basin, where drilling rig counts continue to grow during the quarter was the lead driver of our performance. But we also saw strong activity from other oil driven markets like the mid-continent region, the Niobrara, the Bakken and the Eagle Ford.

We were able to increase revenues by 7% sequentially from the first quarter or by 9% excluding the revenue impact of the inland work over barge business that was sold at the end of the first quarter. Weather interruptions were minimal except for some rain that slightly impacted our Permian Basin and mid-continent regions during the month of June.

Pricing in the well servicing and fluid services segments remain competitive, less stable and in most markets excess service capacity remains an issue. In this competitive climate, maximizing utilization rates and protecting market shares are the highest priorities. The completion and remedial services segment continues to show the most impressive growth led by our stimulation business, tightening of pumping markets is driving this growth.

We’ve seen improvements in pumping and coil tubing prices during the second quarter, and strong demand in these segments has allowed us to offset increased wages, input costs, increases such as frac sand and even expand our margins in these segments beyond pure cost offsets.

Overall, company wide gross margins grew from 31% in the first quarter to 32% in the second quarter. As previously announced, our revised capital campaign is now $285 million, of which $114 million is directed towards expansion in our completion and remedial services segments.

This spending is in full swing as we received approximately 50,000 hydraulic horsepower during the second quarter, so in the quarter it’s 351,000 horsepower. We expect an additional 50,000 horsepower to be delivered by the end of the third quarter as well as one complete expansion 2 inch coil tubing spread.

A second expansion 2-inch spread should be delivered late in fourth quarter. Now let’s review our individual business segments. Completion and remedial services experienced a 20% sequential increase in revenue quarter-over-quarter. Pricing in our pumping segment, especially stimulation or frac work was up 4% to 5% in the second quarter. Our stimulation service is located mainly in the Rocky Mountains, Permian Basin and the mid-continent regions showed improvements in utilization with very full calendars of activity.

In addition our coil tubing utilization reached record levels of times during the quarter helping to drive our revenue improvement, our rental and fishing tool services and our snubbing services also experienced strong utilization, and improved revenue.

Second quarter margins for completion and remedial services were up to 38% from 37% in the first quarter. We expect these results to continue in the third quarter as our near-term calendar remains full, and it looks very busy also to the remaining year.

Pricing in our stimulation and coil segments still continue to move higher as demand remained very strong within our footprint. Well servicing, for our well servicing review, I would use the first quarter numbers that exclude our inland work over barge business for comparison purposes.

Our well servicing segment showed a 2% sequential increase in revenue, average utilization was flat at 71% as activity levels remain busy in markets like the Permian Basin. And we maintained demand for our rigs for horizontal completions, work overs and routine maintenance.

Pricing overall ticked up only slightly quarter-over-quarter finishing the second quarter at an average rate of $410 an hour up from $407 an hour at the end of the first quarter. We except this average rate to trend slightly higher in the third quarter if current activity levels continue.

Margins in this segment increased in the second quarter to 28% from 24% in the first quarter. This increase was mainly attributable to lower unemployment payroll taxes and a reduction in some insurance costs that we experienced in the first quarter. Broad pricing traction is still unachievable in most all markets while busy, they have plenty of supply to keep a lid on rates.

Dry gas markets have steady well servicing activity with second quarter natural gas prices averaging above $4, but these markets are still weaker compared to historic levels. So pricing improvements in well servicing segment will remain scattered and only achievable where demand and service capacity are in better balance.

We expect this climate for rates to continue as long as these soft natural gas prices persists. We will continue to build new 500 series rigs for replacement purposes and continue to re-activate high quality stack rigs as demand dictates.

Our fluid services segment experienced decreased revenue of about 3% in the second quarter, however trucking hours increased 4% as we added 9 trucks during the quarter. The lower revenue was mainly due to less frac heating and hot oiling work during the warmer months of the second quarter, as well as some rain impact in the Permian and mid-continent regions in the month of June.

While segment revenue was slightly down, segment margins were flat at 28%. The increases in trucking hours offset the decreases in the non-trucking revenues like frac heating.

While we expect this segment to remain very competitive in the near term, we’ve maintained our market share and utilization levels through our advanced disposal well network. With longer daylight hours and favorable weather, we would expect margins to improve in the third quarter towards historical levels nearing 30%.

We will continue to grow our number of disposal wells and then we had several projects in the queue. We added two disposal wells during the second quarter to bring our total count to 83 disposal wells nationwide.

Our drilling services segment revenue was up 14% to $15.4 million in the second quarter. Rates in this segment were relatively flat, but utilization was up from the prior quarter of 76% to 86%. Our 3000 horsepower drilling rigs experienced better utilization and demand for our mid-depth vertical drilling programs.

As we stated before, the vertical program is currently active in the Permian Basin, our legacy drilling programs with high returns for our customers and we expect those to remain in place. Our larger horsepower electric rigs continue to maintain stable rates and utilization on horizontal projects. Margins in this segment were flat at 32%.

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

Alan Krenek

Thank you, Roe. This morning I’ll provide additional details on our second quarter income statement as well as discuss selected balance sheet and cash flow items. As customary, when making comparisons, comments will 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 $1.9 million in the second quarter, down from $2.2 million in the first quarter. However, Taylor segment profit improved to $241,000 compared to $134,000 in the first quarter. The increase in segment profit from the first quarter is attributable to improved efficiencies on manufacturing of external equipment sales.

For the Completion and Remedial segment in the second quarter, 64% of the revenue was generated from pumping services, 18% 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 second quarter, approximately 45% of our revenue was from our operations in the Permian.

Our reported net income for the second quarter was $2.4 million or $0.06 per basic and diluted share, compared to a net loss of $1.9 million, or $0.05 per share in the first quarter. We had a special item in the second quarter related to a $2.9 million or $0.07 per diluted share after-tax insurance settlement associated with the 2013 lawsuit. Excluding the special item, basic generated operating income of $5.4 million, or $0.13 per diluted share.

Weighted average shares outstanding were 42 million during the second quarter. We did not repurchase any shares in the quarter, and $20 million still remains under our share repurchase plan.

Our G&A expense in the second quarter was $38.3 million, which excludes the impact of the special item that I discussed earlier or 11% of revenue below the 12% in the prior quarter.

Adjusted G&A in the second quarter of last year was $41 million or 13% of revenue. We expect the G&A expense in the third quarter will be about $40 million.

Depreciation and amortization expense was approximately $52 million in the second quarter, flat with the previous quarter as capital expenditure additions offset the lower depreciation expense associated with the sale of the barge operations.

We expect depreciation and amortization expense to increase in the third quarter to about $55 million due to the increased amounts of capital expenditure additions, and the full quarter of impact of those items added in the second quarter.

Net interest expense was $17 million in both second and first quarter of this year. We expect no change in the quarterly net interest expense going forward.

Our second quarter effective tax rate was 42%, which excludes the impact of the special item on this desk earlier compared to a tax benefit rate of 24% in the prior quarter. We now expect our effective tax rate for the full year of 2014 to be around 40% in light of our current forecast for the full year.

On June 30, we had a cash balance of $99 million, down from $177 million at the end of the first quarter, and up from $96 million at June 30, 2013. Our DSO at the end of June was 59 compared to 60 at end of the first quarter. During the second quarter, we generated $65 million of cash from operating activities, used $72 million in investing activities and used $11 million from financing activities. We continue to do a good job in maximizing cash flows.

Total liquidity, including availability under our revolver, was $311 million, with no amount drawn on the revolver. We ended the second quarter with $879 million of debt, consisting of $300 million of senior notes due in 2022, $476 million of notes due in 2019, and $103 million of capital leases.

Our second quarter total debt-to-EBITDA ratio was 3.25 times, well within our amended revolver covenant of 4.25 times and improved from 3.4 times we had at the end of the first quarter. The interest coverage ratio at June 30 was 4.25 times.

During the second quarter, total capital expenditures were $84 million, which included $52 million for expansion projects, $30 million for sustaining and replacement, and $2 million for other.

Expansion and spending included $45 million for the Completion and Remedial segment, $3 million for the Fluid Services and the rest for other. In the third quarter, we expect that our capital spending will be higher as we progress on the fabrication of the additional pumping horsepower in coil tubing units.

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

Thomas Monroe Patterson

Thanks, Alan. Well, the first half of 2014 delivered promising results. Current activity levels make us optimistic about the remainder of the year. Our customers appear to be primed for a busy finish to 2014. Strong crude markets are driving new well work, re-completions, work overs and increased urgency for maintenance projects.

Natural gas prices have just recently retreated to below $4, so we will have to see if these lower gas prices curve the improved activity for maintenance and work over projects in the dry gas markets that we saw in the second quarter.

Meanwhile we will continue to find opportunities to grow our business, expand customer relationships, and capitalize on our strong existing footprint in busy markets like the Permian basin.

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

Heading into the third quarter, we anticipate revenue will be up 4% to 6% sequentially. If the pumping market continues to tighten, and we continue to receive and deploy our new assets timely, we could see those revenue expectations trend even higher. As for acquisitions, although we didn’t close any in the first half of the year, we continue to actively review the acquisition pipeline. We expect to close on a few smaller acquisitions in the near term, and we remain hopeful that some larger deals could be done before the end of the year.

Well, that’s the end of our prepared remarks. Operator, we’ll turn the call over for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Michael Marino with Stephens Investment. Please go ahead with your question.

Michael Marino – Stephens Investment Inc.

Good morning, guys.

Thomas Monroe Patterson

Good morning.

Michael Marino – Stephens Investment Inc.

A question on the guidance, Roe, and you kind of alluded to this, but is most of the growth associated with the guide sequentially, is that, you guys think about that, the completion and remedial services or is that kind of 4% to 6% more broad based. I mean, are you seeing growth in the well service, in the fluids kind of as we look into Q3? I guess, this is what I’m asking.

Alan Krenek

Yeah, Mike. This is Alan. We don’t expect much growth at all from the well servicing and fluid service segments with the majority of the growth being in the completion and remedial, particularly the pumping services.

Michael Marino – Stephens Investment Inc.

And I guess, that’s probably driven by the new horsepower additions.

Alan Krenek

It is.

Michael Marino – Stephens Investment Inc.

And how does that – I guess how should we think about margins with the new horsepower coming on, should we factor in any kind of startup friction or did you kind of work through that in the second quarter?

Alan Krenek

It will be pretty minimal Mike. We’ll see some, there is always some startup expense to activate that newer equipment, but it will be pretty minimal. We expect margins to be pretty similar to what we’ve experienced in the second quarter or even higher. And we feel like we could get some pricing improvements in completion and remedial services segments in the third quarter as well.

So, that is combination of the additional equipment, some improved pricing, good utilization, we got to see some margin expansion there. And on the well servicing and fluid services segments, we should see some improvements in the revenue numbers, but the lion share of the sequential increase in revenue is going to come from that completion and remedial services segment.

Michael Marino – Stephens Investment Inc.

So is it fair to say that as Q2 unfolded, you saw some margin expansion throughout the quarter, and kind of exiting into Q3, I mean, you’re moving in the right direction in terms of margin and revenue.

Thomas Monroe Patterson

That’s right. And as I’ve said in my comments, we’ve offset those increases in the input costs, and we’ve actually even been able to expand a little bit on margins over and above those input costs. So we hope that trend continues, we feel like it will, if the market stays like it is.

Michael Marino – Stephens Investment Inc.

Okay. Great. Thanks guys.

Operator

Daniel Burke with Johnson Rice, please go ahead with your question.

Daniel J. Burke – Johnson Rice & Co. LLC

Good morning, guys.

Thomas Monroe Patterson

Good morning.

Alan Krenek

Daniel.

Daniel J. Burke – Johnson Rice & Co. LLC

Roe, your fluids and well service businesses both have pretty extensive Permian footprints. You alluded earlier to the fact that, obviously activity in the dry gas markets is not exactly robust, but can you differentiate more specifically the environment you see for fluids and well service in the Permian market versus elsewhere in your footprint?

Thomas Monroe Patterson

Well, obviously the commodity price mix change for the Permian drives a lot more maintenance work over work than these dry gas markets. Customers are willing to sit on their hands, and sit on maintenance projects in the dry gas markets to try to wait for a better pricing environment and better gas prices.

Now, we’ve seen some steady work through the second quarter in these dry gas markets. We’ll see if the tailing off of gas prices that we’ve seen just recently below – to go below $4 is going to impact that. But it wasn’t that great anyway, I mean it was steady work, but we weren’t seeing big, huge demand on our services, it was just good steady work. We had already scaled those regions back.

In the oilier markets like the Permian, where we do have that footprint and economies of scale that we can maximize, we see a robust demand for our equipment for work over and maintenance projects as well as the completion projects that soak up a lot of capacity. So there is just a lot going on in those oilier markets, but there is a lot of competition there too.

These guys that left – these gas markets don’t have any choice but to try to go into these oilier markets like the Eagle Ford, like the Permian, like the Scoop, the Niobrara and chase the work that’s out there and we all get crowded into the same space.

Daniel J. Burke – Johnson Rice & Co. LLC

Okay, that’s helpful. And then a little bit more practically may be, the next 50,000 horsepower tranche, I think you all know that you’ll see it right before the end of Q3, are you contemplating seeing a revenue and margin contribution from that sloth of horsepower in Q3 in the guidance or it realistically is that sort of contemplated as a contributor beginning in Q4?

Thomas Monroe Patterson

Yeah, we expect of course to see a full quarter impact in the fourth quarter. We will see a little bit of it in the third quarter. As you said, we expect it to come in towards the end, but it won’t be a major contributor in the third quarter.

Daniel J. Burke – Johnson Rice & Co. LLC

Okay, but it is contemplated forecast.

Thomas Monroe Patterson

Yes.

Daniel J. Burke – Johnson Rice & Co. LLC

All right, guys. Thank you.

Thomas Monroe Patterson

Thanks.

Operator

Trey Stolz with IBERIA Capital Partners. Please go ahead with your question?

Trey A. Stolz – IBERIA Capital Partners LLC

Good morning, guys. Focusing on Completion and Remedial segment for a bit if you can, the margin progression there, if you could breakdown what you had in pressure pumping versus higher end frac jobs, I guess what percent higher in frac jobs, what I’m looking for I guess is, what exposure you might be – you might have on that end to sand costs, where did sand costs play a role in your quarter. And how do we see that market margin progression or how did we see it with pricing improvement if you could break that down a little bit more for us.

Thomas Monroe Patterson

Well, as far as sand, any cost increases that we’re getting from our suppliers we’re passing on to our customers. So I think we’re doing a pretty good job of covering those cost increases. But we are starting to see slight net pricing increases in those areas that we can get; we’re going to our customers. Directly those new customers that were fracking for – we’re able to get those price increases.

Alan Krenek

Hey, Trey, I would. Just a follow-up, I would also say that, cement and asset prices have come up, but the better improvement has been on the frac side. So general pump, asset and cement what we call general pump hasn’t been as – the price increase hasn’t escalated as much as it has in the frac side.

We’ve seen sand costs generally go up about 10%, we’ve had 100 mesh go up as much as 50% from some suppliers, but 2014 wise, we pump a lot of is really a – we’ve seen 5% to 10% increases there, and we’ve been able to pass those on with really no pushback from our customers.

Trey A. Stolz – IBERIA Capital Partners LLC

And what percent of that business this past quarter was high-end frac jobs?

Thomas Monroe Patterson

Margin type laterals.

Trey A. Stolz – IBERIA Capital Partners LLC

All the laterals?

Alan Krenek

Very small. Less than 10% for the long lateral high pressure north of 100 barrels a minute that made up less than 10% of our work. Majority of our work was right around that 100 barrel a minute range. With pressure somewhere in the 7500 psi range, that’s generally in day light operations, that’s where the bulk of our pumping frac work is.

Trey A. Stolz – IBERIA Capital Partners LLC

And Roe, would you care to quantify all the price increases that we’re seeing in kind of on a scattered basis in the Permian or how could we understand that?

Thomas Monroe Patterson

Where we pump, we’ve gotten the price increases everywhere. So that includes the mid-continent regions; that is Oklahoma, North Texas, even the Kansas market. We increased our pricing in the Rocky Mountain region, in the Niobrara and on the Western Slope, where we’re doing some pumping in the Vernal area and then also the Permian. We’ve been able to achieve those price increases across that pumping footprint where we’re fracking.

Trey A. Stolz – IBERIA Capital Partners LLC

On your revenue growth guidance, just because you open the door on this with your comment, but where you said it could be potential upside, what kind of pricing increases quarter-over-quarter would result in your view – upside to your current guidance?

Thomas Monroe Patterson

Well, I think if we can move anything north of 5%, it’s going to start to go to the bottom line, and really offset any kind of expected cost increases that we’re seeing right now or expecting right now. We improved pricing 3% to 5% generally in the first quarter; we did it again sequentially in the second quarter. So if we’re to do 5% or north of that in the third, I expect a good amount of that to hit the bottom line.

Trey A. Stolz – IBERIA Capital Partners LLC

Got you. And then the last one, you talked about your calendar being full for hydraulic fracking services for the remainder of 2014, can you quantify that for us at all, is that larger type jobs or is that a percent of potential availability for the remainder of the year, how can we understand that?

Thomas Monroe Patterson

Well, we don’t have, we’ve got commitments from customers for every spread we have, and including spreads coming in through the remainder of the year. I would say we have specific dates set, 90 days out. But we have commitments from customers for all of that equipment through the remainder of the year, and even though equipment that’s yet to come in.

Trey A. Stolz – IBERIA Capital Partners LLC

All right. Okay, fair enough. I’ll re-queue, I guess for the rest of them, thanks.

Operator

And Marshall Adkins with Raymond James. Please go ahead with your question?

J. Marshall Adkins – Raymond James & Associates, Inc.

Good morning, guys. I’ll try to limit it to two; pressure pumping is obviously driving the boat here, can we get the revenue per horsepower back to the peak we saw in 2011, do you think that’s achievable over the next 18 months?

Thomas Monroe Patterson

I think so. With the trajectory we’re on right now, right now we’d have to say yes, it looks like we could get there. The manufacturers out there typically don’t have the same capacity to put out new equipment that they had in 2011; again they rent back up, yes, and will they? I’m sure they will. But we’re not there yet, so that could be the rest of pit to get back on that trajectory for revenue per horse power that we saw in 2011. So I don’t think that’s unachievable.

J. Marshall Adkins – Raymond James & Associates, Inc.

All right. And just, you’ve gone through it a couple of times, and I want to make sure I’m hearing it right, and understanding it. The price increases you’re getting now are at least meeting the cost increases, and then going forward probably been exceeding the cost increase you’re getting. And likewise, you’re not seeing any issues with sand capacity. Is that, am I hearing that correctly?

Thomas Monroe Patterson

I would say, yes, generally yes that you’re hearing that correct. We have some sand agreements out there for supply and we feel very comfortable with what we have in place currently. We’ve also bought from somewhere in the neighborhood of 17 different vendors, and we’re doing that on purpose, and we feel like we have a good broad supply chain for sand. And so if any one vendor gets in a buying, he can’t deliver, we feel like we can cover with other vendors that we have agreements with. So we’re pretty comfortable right now with where we are on sand.

J. Marshall Adkins – Raymond James & Associates, Inc.

Perfect. Thank you.

Thomas Monroe Patterson

Thanks.

Operator

(Operator Instructions) We’ll take our next question from Luke Lemoine from Capital One Securities.

Luke M. Lemoine – Capital One Securities, Inc.

Hey, good morning.

Thomas Monroe Patterson

Good morning.

Luke M. Lemoine – Capital One Securities, Inc.

Yeah, I’m about to violate the two-question rule here. Alan, I apologize if you gave it, but what was the C&R revenue split between the product lines in the quarter?

Alan Krenek

Yeah, it was 64% from pumping; 18% from rental tool; 13% from coil; and 5% from snubbing.

Luke M. Lemoine – Capital One Securities, Inc.

Okay. And then on your revenue guidance, this includes the 50,000 horsepower delivered in 2Q, but excludes the 50,000 to be delivered in 3Q correct?

Alan Krenek

For the most part on the delivery on the second 50,000.

Luke M. Lemoine – Capital One Securities, Inc.

Okay. And then if I just use kind of June exit rates, and work over in fluid hauling, and layering the 50,000 horsepower, I bet you probably got a minimal benefit for in 2Q, now I’m getting kind of closer to 7% revenue growth, and this doesn’t even assume further activity gains or price increases. What am I missing here?

Thomas Monroe Patterson

Well, we did have, probably you are missing that, that we had some revenue impact from that original 50,000 that we got in the second quarter, I mean, we did have some of that in the second quarter. We probably got about half of that in May and received revenue from it in May and about the other half, about the first part of June, and so pump, the majority of June with the full 50. So that’s probably the piece you are missing is – is that we did have some second quarter impact.

Luke M. Lemoine – Capital One Securities, Inc.

Okay. And then roughly kind of what percent of your C&R revs came in June?

Alan Krenek

It’s just over a third…

Thomas Monroe Patterson

Yeah. Yeah.

Alan Krenek

It’s just over a third.

Luke M. Lemoine – Capital One Securities, Inc.

34%, 35%.

Alan Krenek

Yeah.

Luke M. Lemoine – Capital One Securities, Inc.

Okay. And then can you also talk about your comfort in your margin guidance that you laid out at your Analyst Day for completion and remedial work over and fluid hauling?

Thomas Monroe Patterson

I think we’re very comfortable with completion and remedial right now. Fluid hauling, and well servicing you know, we’ll see what the utilization rates look like in the third quarter, it’s just extremely competitive, we were hoping that the gas price is would hold up better than they have, and continue to see some good steady activity in the gas markets. Right now that hasn’t tailed off yet.

So, but with sub-four we can’t expect it to, so we’re building some of that in, we don’t have a choice because the last time we fell below four, we did see an impact to maintenance projects in those gas markets. So, I feel like the margin guidance to get close to 30 for fluid is still there, and to be in the upper 20s close to 30 for well servicing if possible, it would be – I feel lot more comfortable with it if we could just see some gas activity, but that 28%, 29% number is still a good number, it just – it’s hard to get over the hurdle without gas activity.

Alan Krenek

Yeah. I would say that we were pretty pleased with the progression in the second quarter except in our fluid business, and we would expected it to be a little higher than when it was, but well servicing, completion and remedial, drilling all performed pretty much where we thought they’d be at the second quarter.

Luke M. Lemoine – Capital One Securities, Inc.

Okay. So, it seems like you are very comfortable with your completion and remedial margin, it’s not a reasonable thing that you could do that in 3Q.

Alan Krenek

No, I mean, yeah that’s where we expect it to be, slightly higher.

Luke M. Lemoine – Capital One Securities, Inc.

Okay. All right. Good deal, appreciate it.

Operator

Jeff Spittel with Clarkson Capital Markets. Please go ahead with your question.

Jeff Spittel – Clarkson Capital Markets

Maybe if we could keep harping on completion and remedial margins. I know last quarter, we talked a little bit about maybe they could start with a four in the third quarter. Is that still a realistic bogey? I know you've talked about a little bit of margin expansion; we don't have that far to go.

Thomas Monroe Patterson

They are going to be up. Like we said it’s going to be higher. We expect it to be higher than the second quarter, but I don’t think it will start with the four.

Jeff Spittel – Clarkson Capital Markets

Okay.

Thomas Monroe Patterson

I think we’ve said that was – I think in the last earnings call we said it would be heading toward that.

Jeff Spittel – Clarkson Capital Markets

Sure.

Thomas Monroe Patterson

Level. And but it will progress through there – through the end of the year. Of course you get the full of impact of all the horsepower adds in the fourth quarter.

Jeff Spittel – Clarkson Capital Markets

Okay. Good news. Despite some of the daylight headwinds, et cetera. I got it.

Thomas Monroe Patterson

That’s correct.

Jeff Spittel – Clarkson Capital Markets

Okay. And then maybe, we've heard a lot of indications from the public companies who concentrate a little bit more in the exotic end of the frac market that they are adding horsepower. How about the guys who focus a little bit more on vertical stuff and the privates? What are you seeing there, in terms of their behavior on the ordering side?

Alan Krenek

It’s a split group. We’ve got a group of them that aren’t doing anything incrementally. They are not adding anything. They are kind of just hanging on to what they have and chasing work. But we do have another group that is got a robust build program also, and they are adding equipment as well. So, there is kind of a split in that niche group.

Jeff Spittel – Clarkson Capital Markets

All right. Appreciate it guys. I will give Trey a chance to participate. Thanks

Thomas Monroe Patterson

All right.

Operator

Jeff Tillery with Tudor, Pickering & Holt. Please go ahead with your question.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Hi good morning.

Thomas Monroe Patterson

Good morning.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Alan, you mentioned in response to one of the prior questions you were a little bit disappointed with the fluid services margins. I guess if I look back over the past decade or so, the – it's atypical for revenues to go down in the second quarter. So I understand some of the winter helps go away. But I'm just curious, what, if anything, surprised you in terms of the progression Q2 versus Q1 in the fluid services top line?

Alan Krenek

Well. I mean a lot of it relates to the – what you just said as far as the slowdown of the frac heating, frac water heating and the hot oiling. And then, we are still under pressure on the right side on the trucking part. So, even though ours were up sequentially, those rates, trucking rates are still very competitive in – our strategy is always been to hold or increase utilization. And if pricing declines, we still want to maintain market share or gain market share.

Thomas Monroe Patterson

I would also add that propane costs for – what we use for frac heating and hot oiling was double this year what normally was, so that price doubled, and that had a big impact on our revenue number.

Jeff Tillery – Tudor, Pickering, Holt & Co.

To this tougher comp, sequentially, it’s normal as well.

Thomas Monroe Patterson

That’s correct.

Jeff Tillery – Tudor, Pickering, Holt & Co.

And I know it’s a small piece of the overall progress. So, my question, I mean we’ve heard a number of the drillers talk about kind of positive rate momentum really across-the-board on the drilling rigs, whether it’d be mechanical rigs or SCR. Are you seeing any help from that, are you anticipating any help from that as we go through the second half of the year on the rate side?

Thomas Monroe Patterson

Well, we haven’t got the renewal date yet really on our bigger rigs, when we get there we expect to hopefully participate in any rigs movement. The vertical rig market is in the Permian, the legacy mid-depth verticals for Wolfberry type of work, still pretty competitive, because there were the lot of those rigs out there when the shift started from vertical to horizontal.

Now we’ve seen that absolute vertical rig count go up in the second quarter in the Permian as well as the horizontal rig count go up. So that’s what’s got our utilization up, but those rates have still not really moved, because that market is not as tight as the horizontal market. So, if we saw rig movement in contract drilling, we would expect it on our larger SCR rigs that are doing horizontal work.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Okay. And just a follow-up, the renewal dates for those, this year are they next year?

Thomas Monroe Patterson

This year. They are coming up.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Okay. Great. Thank you, Roe.

Operator

Marc Bianchi with Cowen and Company. Please go ahead with your question.

Marc Bianchi – Cowen and Company

Hey guys, good morning.

Thomas Monroe Patterson

Good morning

Marc Bianchi – Cowen and Company

Maybe, if you could talk a little bit about the utilization in the frac fleet as you kind of move through second quarter, and maybe where the potential is to kind of get to full utilization and what that would look like in terms of revenue. Trying to remove the additional 50,000 horsepower that’s coming in.

Thomas Monroe Patterson

Okay. Well we moved second spread out of Fairview, Oklahoma in the Midland Texas early in the quarter, and we didn’t get a full quarter out of it, but we got close that definitely helped Midland quite a bit. We also took a spread from the eastern side of the Rocky Mountain slope over to the western side; we did that about mid second quarter. So we expect right now to get a full third quarter out of that. Other than that, pretty much everything we had that could run was run.

Marc Bianchi – Cowen and Company

And how does that compared to the first quarter?

Thomas Monroe Patterson

That equipment was just slightly less utilized in the first quarter, it was still very busy, but we didn’t see that kind of five, six to eight week pumping until we reallocated the assets to those different geographies.

Marc Bianchi – Cowen and Company

Okay. I was just a little bit surprised by the 20% revenue increase, and only a small increase of margins. And is it safe to say, since you’re fully utilized there or very highly utilized, maybe a lot of that revenue increase is due to the raw material pass through?

Alan Krenek

No. I would say that a lot of it’s like on this, some of this new horsepower that was added. We are incurring some cost to get that equipment out in the field, that’s not always reacting quite like you think it would when you first get it out there, plus we’re training new people for this new horsepower that’s coming in. So a lot of payroll costs really went up because of that.

Thomas Monroe Patterson

But we also increased prices, broadly 3% to 5% and not all of that went to offset input costs, some of that went right to the margin.

Marc Bianchi – Cowen and Company

Yeah. Got it. Okay. Were there price increases that were sort of implemented towards the end of the quarter that are going to be realized during the third quarter in excess of that 3% to 5%?

Thomas Monroe Patterson

Correct. That did happen. In June we did move some pricing in a couple of markets that we didn’t see a full quarter from.

Marc Bianchi – Cowen and Company

What kind of increase is that?

Thomas Monroe Patterson

Generally about 5%, that’s what we were seeing.

Marc Bianchi – Cowen and Company

Okay. Thanks, Roe. I will turn it back guys.

Thomas Monroe Patterson

Thank you.

Operator

Neal Dingmann with SunTrust. Please go ahead with your question.

Neal Dingmann – SunTrust Robinson Humphrey

Good morning, guys. You’ve touched obviously a lot about margins, and just on the sales side, but guys I’m wondering, I know in the past you’ve mentioned that you are likely not to do at least at this time prepared to do a lot of term deals. So, maybe Roe, I’m just wondering how does bidding activity right now pacing versus earlier in the year. I am just wondering, and maybe what you’d have to see to schedule more horsepower added to your schedule?

Thomas Monroe Patterson

Well, we’re turning down work right now in almost every market we’re in. And whenever that happens, you start to really see pricing start to move, and you start to look at your hold card and see if there is a possibility to add horsepower. And the pace of that – of those requests will determine the emphasis we put on adding more to it.

But right now, we’ve got enough coming in, we need to get it here, we need to get it chewed up, get it activated, deploy it, and make sure that we’re hitting on all cylinders with that, and getting the results we want before we start to look beyond that, and adding even more horsepower.

With respect to contracts, we feel like rates have got room to move, and we want to be the beneficiary of that, so we don’t want to lock anything up right now. We’ve got plenty of utilization that’s not the issue. We want to be able to ride that tied if rates really ramp up.

Neal Dingmann – SunTrust Robinson Humphrey

And then lastly, Roe, just wondering you mentioned, I’m just kind of wondering, I know that across the line, it looks like margins continue to be strong, it continue to move up. How much do they vary on your regions, I know obviously you are pretty dominant in the Permian, but when you compare that to some of your other areas, is there much variance?

Alan Krenek

Not really.

Thomas Monroe Patterson

Not really. The margins are pretty consistent.

Alan Krenek

Yeah.

Neal Dingmann – SunTrust Robinson Humphrey

Okay. Okay, got it. Thanks guys.

Operator

Blake Hutchinson with Howard Weil. Please go ahead with your question.

Blake Hutchinson – Howard Weil Inc.

Good morning.

Thomas Monroe Patterson

Good morning.

Blake Hutchinson – Howard Weil Inc.

Just Roe, I was interested to get your thoughts on the well service market in terms of big picture. Is that your sense that on a year-over-year basis, maybe or however you want to look at it that, it’s just an issue that production budgets are flat maybe even down that is impacting the industry or is it more as you said, as capacity moves into different basins, maybe you end up with a bit of a, kind of the dual pricing model where you and other publicly traded names try to maintain pricing and maybe are losing share on the margin. Which one of those factors you think at this point is it, your sense weighing more on the market?

Thomas Monroe Patterson

I think the two most important factors are, the lack of gas activity to help sock up any kind of excess capacity in these oilier markets or the lack of a growing gas activity I should say, it’s – we have what we have in those markets. And then pretty flat production budgets from the bulk of our customers. They have a busy schedule, they have a lot of maintenance projects and we’re very busy, but there is just a lot of rigs out there.

We are probably a little different than some of our peers on the public side, we are aggressive with pricing. So we feel like we need to move up or down in any movement we will. We’re not trying to – we’re trying to maintain market share and utilization rate, and pricing is just a tool in the toolkit.

Blake Hutchinson – Howard Weil Inc.

Right. Got you. And then just to add to all the margin talk, you gave us kind of a frac margin gross margin of 20% to 30% as what you kind of been running at the Analyst Days. Is it safe to say in 2Q or moving into 3Q we’re moving above that level?

Alan Krenek

It’s slightly above 30%

Blake Hutchinson – Howard Weil Inc.

Okay.

Alan Krenek

On the frac side.

Blake Hutchinson – Howard Weil Inc.

Okay. Appreciate the time guys. Thank you.

Operator

(Operator Instructions) Walt Chancellor with Macquarie. Please go ahead with your question.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Yeah. Hi, good morning. Roe, in your remarks you mentioned a busy end 2014. I guess what’s driving that, I know we’ve seen some Q4 sort of back-end loaded completion schedules in the Permian. But those early indications, are those more broad based or is that more of a Permian focus you are seeing?

Thomas Monroe Patterson

I know it’s pretty broad, and we feel like the pace of activity is going to be, and especially in these oily markets it’s going to be broad through the end of the year. Now, we will have shorter daylight hours, and we’ll have some weather impact in the fourth quarter, but we also expect to have some full impact of these equipment adds. So, we’re pretty bullish on the fourth quarter right now with what our customers are saying.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Okay, great. I appreciate that color. And then, I guess just to change gears, you touched on it little bit, but we’ve heard a lot about logistics challenges that didn’t get much mention from you. How are you feeling about, how you are situated on that side, so that’d be a challenge moving forward, and what did you see in Q2?

Thomas Monroe Patterson

Well, it’s always a challenge, I think our group has done a great job of maintaining their logistics, I mean; we have people out there working on our supply side every day, all day. So, they do a fantastic job of lining up sand, lining up fuel, lining up all the chemicals that we use and maintaining good vendor relations, broad vendor relations so that we’re never short on anything.

We have a lot of storage capacity or some excess in case we run into a problem so that helps us well, but I think more than anything the fact that we try to stay away from the 24 hour jobs is probably what helps us on the logistical side, and keeps efficiencies very good for us, in fact I think it's what helps drive our margins up. Gross margin is up compared to those guys that are doing the 24x7 work, because it’s just easier to manage that logistical supply side, when you are doing daylight work.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Great. I really appreciate the color. Thanks.

Thomas Monroe Patterson

Thanks.

Operator

John Daniel with Simmons & Company. Please go ahead with your question.

John M. Daniel – Simmons & Co.,

Hey, thanks for taking my call. Alan, there are couple of companies out there, small ones with SWDs now pursuing, or purportedly pursuing, MLP strategies and that’s leading more clients ask about the prospects for larger companies such as yourself to pursue a similar strategy. My question is this, what would prevent you from pursuing an MLP on the trucking business?

Thomas Monroe Patterson

There would be nothing that would prevent us, I mean, we’ve been looking at it for quite a while for a variety of different factors, we haven’t taken any further other than the initial review, but it’s – I don’t think there is anything that would prevent us from doing it.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Okay. Can you provide any color as to what’s limited thus far?

Thomas Monroe Patterson

Well, a couple of things, number one is, our debt structure, kind of figure that out, also the close connection between our well servicing and our fluid service business. How you would break that out. And then, the other thing is just the general market trend on fluid services and how we would do that when the market is somewhat at a constant basis rather than an up tick.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Fair enough. Okay. And then…

Thomas Monroe Patterson

If we could really look at it.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Roe, given the competitive sort of capacity issues facing both well service and trucking, are those areas where you would concentrate your M&A efforts from a consolidation standpoint or do you prefer to get to some of the better returning other businesses like C&R?

Thomas Monroe Patterson

We are looking at everything to be honest with you. We haven’t eliminated anything from the pipeline, obviously those – those businesses that bring the most cash to the bottom line in a pretty quick timeframe are pretty appealing, but strategically if we see a good well servicing opportunity or good fluid service opportunity we are not afraid to go after it at all. So I would say we are not concentrating our efforts on any specific line of business right now.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Okay. And then just a last one from me. You’ve seen any evidence that the larger frac companies are being predatory with respect to locking up the sand or the transportation logistics market?

Thomas Monroe Patterson

No, zero.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Okay.

Thomas Monroe Patterson

I mean, if you are trying to – if they are trying to doing a poor job.

Walt A. Chancellor – Macquarie Capital (USA), Inc.

Okay. Thank you.

Operator

Mark Brown with Global Hunter Securities. Please go ahead with your question.

Mark Brown – Global Hunter Securities

Hey, guys. Just wanted to check on interesting significant pressure on labor costs and whether there is sufficient availability of labor and how that differs depending on the base and our product line?

Thomas Monroe Patterson

In these oilier markets where we are very busy and I’ve spoken to those specifically the Bakken, the Niobrara, the mid-continent area, the Permian, the Eagle Ford where there is plenty oily activity going, wages are an impact in every single line of business. We’re seeing labor rates, over the second quarter we saw labor rates increase broadly in every single line of business. We tried to pass as much of that through as we could to our customers, and we were successful with very little push back, and we continue to do that, and we will continue to do that. So it is a fact.

Mark Brown – Global Hunter Securities

All right. Other question I had was on your coiled tubing increases added a spread by the end of the third quarter and another by the end of the fourth quarter. Did you say; where those were going, and do you have a pretty good idea of what customers would be using that equipment, do you typically know that in advance?

Thomas Monroe Patterson

Yes. We’ve got customers that have already committed to those spreads, and those will be going in the Niobrara.

Mark Brown – Global Hunter Securities

All right. Thank you very much.

Operator

Management, please go ahead?

Thomas Monroe Patterson

It looks like that. Thanks everybody for calling in.

Operator

Ladies and gentlemen, this concludes today’s conference. We do thank you for your participation. You may now disconnect.

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Basic Energy Services (NYSE:BAS): Q2 EPS of $0.13 beats by $0.04. Revenue of $359.7M (+10.4% Y/Y) beats by $3.43M.