Basic Energy Services, Inc. (BAS) Q3 2014 Earnings Conference Call October 24, 2014 9:00 AM ET
Executives
Jack Lascar - Dennard-Lascar Associates, IR
Roe Patterson - President and CEO
Alan Krenek - CFO
Analysts
Trey Stolz - IBERIA
Daniel Burke - Johnson Rice
Marshall Adkins - Raymond James
Jeff Tillery - Tudor, Pickering, Holt
John Daniel - Simmons
Marc Bianchi - Cowen
Neal Dingmann- SunTrust
Blake Hutchinson - Howard Weil
Jason Wrangler - Wunderlich
Walt Chancellor - Macquarie
Brad Handler - Jefferies
Operator
Please standby. Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Basic Energy Services Third 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.
And I would now like to turn the conference over to Jack Lascar. Please go ahead, sir.
Thank you, Yolanda, and good morning everyone. Welcome to the Basic Energy Services third 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' views about future events and their potential impact on performance. These views include the risk factors disclosed by the company in its registration statements on Form 10-Qs and 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 are covered by these statements. In addition, the information reported on this call speak only as of today, October 24, 2014. Therefore, you're 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.
Roe 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 our third quarter results, give an operational overview of the quarter and provide an update on 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 fourth quarter and what we are currently anticipating for 2015.
During the third quarter of 2014, we continue to benefit from the robust activity levels in our oilier markets as well as slow but steady activity in our gas markets. Our customers have continued their strong capital spending campaigns in all directed activity.
In the Permian Basin, expanded horizontal drilling programs, continued legacy vertical drilling programs and production maintenance activity allowed the Permian to remain the busiest market in the U.S. Our results in the third quarter reflect our exposure to all of this Permian activity.
Additionally, we also saw strong activity from our other oil-driven markets like the mid-continent area, the Niobrara, the Bakken and the Eagle Ford.
Revenues increased by about 10% from the second quarter. Weather interruptions were generally mild, except for some heavy rain that impacted our Permian Basin and mid-continent regions.
Completion and Remedial Services continues to share the most impressive growth, led by our stimulation business. Completion-oriented demand for our services in this segment was very strong, which drove our utilization rates higher. We've seen improved pricing, particularly on the frac side, which more than offset input costs, allowing for margin expansion.
We've also encountered very few logistical issues with regard to sand and other material supplies. Pricing in the Well Servicing and Fluid Services segments remains competitive. It's stable in most markets, as excess service capacity remains an issue.
In this competitive climate, maximizing utilization rates and protecting market share are the highest priorities. Overall, company-wide gross margins grew from 32% in the second quarter to 33% in the third quarter.
Our capital spending program is beginning to wrap up. We received approximately 62,000 hydraulic horsepower by the end of the third quarter to end the quarter at 413,000 total horsepower.
Our 2-inch coil tubing units were delivered and activated in mid October. We have very few large capital item commitments remaining for 2014, and our capital program should finish the year just over 300 million.
We'll review customer demand for additional assets and current utilization rates on a routine basis. As in the past, we'll carefully deploy cash based on market conditions.
Now, let's review our individual business segments. Completion and Remedial Services experienced an 18% increase in revenue quarter-over-quarter, and revenue was up 57% from the beginning of the year. Pricing in our Pumping segment, especially stimulation and frac work was up 3% to 5% in the third quarter. This business segment maintain high utilization levels and continues to have a full calendar of activity.
In addition, our coil tubing segment performed at or above second quarter levels and continues to be our highest margin business. Our rental and fishing tool services and our snubbing services also experienced strong utilization and revenue.
Overall, third quarter margins for Completion and Remedial Services were up to 39% versus 38% in the second quarter. We expect these results to continue as our near-term calendar remains full for the fourth quarter and on into 2015.
Our management team has done a great job ensuring that we experience very few logistical issues by lining up multiple sources for materials and transportation. We expect this trend to continue. We've also had relatively seamless activation of our new horsepower and experiencing only the normal start-up expenses.
Our Well Servicing segment revenue was 91.1 million, a 2% sequential increase. Average utilization was flat at 71%, as activity levels in busy markets like the Permian Basin ensured continued demand for our rigs in horizontal completions, workovers and routine maintenance.
Pricing was down marginally to an average rate of $405 per hour versus $410 in the second quarter. This decline was mainly attributable to a decrease in plugging operations, which maintain higher rig rates. Rates excluding plugging operations were relatively flat with the second quarter, and we expect average rates to remain flat at current activity levels.
Margins in this segment decreased in the third quarter to 26% from 28% in the second quarter. This decrease was mainly attributable to heavy rains in the Permian Basin and the mid-continent regions during the quarter. Labor costs have also risen in the Permian Basin, putting downward pressure on margins. The level of competition remains fierce in the Permian, therefore, offsetting rate increases have been generally unachievable. However, a balance of service supply and demand does exist in most of our other oil markets making rate offsets more attainable.
Dry gas market activity was steady, but these markets are still weaker compared to the historic levels. Accordingly, broad pricing improvements in the Well Servicing will remain scattered and only achievable where demand and service capacity are in better balance. We expect this rate climate to continue as long as soft natural gas prices persist.
Our Fluid Services segment experienced increased revenue of about 3% to 93 million in the third quarter. Utilization was consistent throughout the quarter, and truck hours increased 2%. We also added 29 trucks during the quarter in conjunction with adding two more disposal wells, bringing our total count of disposal wells to 85, nationwide.
Segment margins were also up on steady utilization rates, coming in at 29% for the third quarter versus 28% in the second quarter. While we expect this segment to remain price competitive in the near-term, we have maintained our market share and utilization levels through our advanced disposable network. We will continue to grow the number of disposal wells, and we have several projects in the queue.
Our Drilling segment revenue was up about 6% to 16.3 million from the second quarter. Average rates in this segment were up $500 a day. As our 3000 horsepower drilling rigs experienced better utilization because demand for mid-depth vertical drilling improved. This demand pushed utilization higher from the prior quarter to 86%, excuse me, from the prior quarter of 86% up to 88% in the third quarter. As we have stated before, vertical programs currently active in the Permian Basin are legacy drilling programs, high returns for our customers, and we expect those to remain in place.
Our larger horsepower electric rigs continue to maintain stable rates in utilization on horizontal projects. We also saw an increase in our Permian Basin rig moving business, as roughly 30% of the rigs running in the U.S. are running there in the Permian Basin. Margins in this segment were relatively flat at about 31%.
Now, I'll turn the call over to Alan for a more in-depth review of our financial results from the quarter.
Alan Krenek
Thanks, Roe. This morning, I'll provide additional details on our third quarter income statement, as well as discuss selected balance sheet and cash flow items. As customary when making comparison, comments will focus on sequential changes unless otherwise noted.
In addition, special item charges from the second quarter are excluded. First, I'd like to cover a few components of our revenue and segment profit. Overall, revenues during the third quarter were up 10%, and gross margin was 33%, up slightly from the second quarter, as a result of increased activity levels and equipment additions during the third quarter.
In our Well Servicing segment, Taylor Rig Manufacturing produced revenue of 3 million in the third quarter, up from 1.9 million in the second quarter, led by an increase in external workover rig sales. Taylor segment profit improved to 472,000 compared to 241,000 in the second quarter.
In the Completion and Remedial segment, 67% of the revenue is generated from pumping services, 17% from rental tools, 13% from coiled tubing, and 3% from other services.
With the full impact of third quarter horsepower editions, we'd expect that pumping services would represent approximately 70% of revenue from this segment in the fourth quarter.
Reported net income for the third quarter was 9.9 million, or $0.24 per diluted share, compared to net income of 5.4 million or $0.13 per diluted share in the second quarter. Weighted average shares outstanding for the third quarter were 42.2 million. Adjusted EBITDA was 88.5 million or 23% of revenue compared to second quarter EBITDA of 78.5 million or 22% of revenue.
G&A expense in the third quarter was 41 million or 10% of revenue compared to 38 million or 11% of revenue in the second quarter. The increase of G&A in the third quarter was mainly attributable to higher incentive compensation. We expect that G&A expense in the fourth quarter will be about 41 million.
Depreciation and amortization expense was 55 million in the third quarter, an increase from the previous quarter due to the new pumping equipment that was put in the service during the third quarter. We expect fourth quarter depreciation to be approximately 57 million to 58 million, increasing due to additional equipment being deployed and the full quarter impact of the horsepower editions in the third quarter.
Net interest expense was 17 million in both the third and second quarter. We expect no change in the quarterly net interest expense going forward.
Our third quarter effective tax rate was 39% compared to a 42% rate in the prior quarter. We still expect our effective tax rate for the full year 2014 to be around 40% with the fourth quarter effective tax rate currently anticipated to be around 38% to 39%.
On September 30th, we had a cash balance of 58 million, down from 99 million at the end of the second quarter and down from a 100 million at September 30, 2013. We expect capital expenditures to be down in the fourth quarter, which should allow us to increase our cash balance by year end.
Our DSO at the end of September was 60, compared to 59 at the end of the second quarter. During the third quarter, we generated 38 million of cash from operating activities, used 83 million in investing activities and financing activities provided 4 million.
Total liquidity, including availability under our revolver was 240 million; 16 million was drawn on our revolver in the third quarter to pay for the pioneer rental tool acquisition. We ended the third quarter with 910 million of debt consisting of 300 million of senior notes due in 2022, 476 million of notes that are due in 2019, 16 million under our revolver, and 118 million of capital leases.
Our third quarter total debt to EBITDA ratio was three times, well within our amended or within our revolver covenant of four times, and improved from 3.25 times in the second quarter. We expect our total debt to EBITDA ratio at December 31st to be under three times. Due to increased profitability, the interest coverage ratio for September 30th was 4.7 times.
During the third quarter, total capital expenditures were a 104 million, which included 53 million for expansion projects and 51 million for sustaining and replacement. Expansion spending included 44 million for the Completion and Remedial segments, 7 million for Fluid Services and the rest for other.
At this point, I'll turn the call back over to Roe for his concluding remarks.
Roe Patterson
Thanks, Alan. The third quarter turned out to be as good as advertised, delivering improved results that exceeded the first half of 2014. Current activity levels indicate a busy finish to the year. We continue to benefit from the growing number of horizontal wells and pad drilling across our footprint.
New well drilling and completion activity in oily markets continues to be the focus for many of our customers, and our equipment is allocated in the right geography, such that we can take advantage of this environment.
Meanwhile, we also benefit from recompletions, workovers and increasing maintenance project, as some customers shift to high cost exploration -- shift from high cost exploration projects to development and production programs.
Natural gas prices have retreated below $4, further delaying any meaningful recovery in gas-related activity.
Our capital program this year was for the most part frontloaded, and therefore we currently have less equipment on order. We executed that capital plan at an orderly pace, spending expansion CapEx on the service segments offering the greatest rate of return. With the recent decline in oil prices, we could quickly reign in all spending if we see the market fundamentals and utilization begin to deteriorate. Having no major pending expenditures allows us to remain very nimble should drilling activity soften. However, current service request from our customer base seem to be growing, heading into the fourth quarter.
With the current pace of activity combined with a full quarter of recently added frac horsepower and coil tubing units, we expect revenue for the fourth quarter to be relatively flat with the third quarter, mostly offsetting seasonal and holiday impacts. This expectation is also somewhat predicated on the current forecast calling for a milder weather period during the quarter. So, one or more severe weather events could trim these expectations.
As for acquisitions, we closed on one deal in the third quarter, and we continue to actively review the acquisition pipeline. However, we'd obviously like to see the market settle down before we take on any new projects.
Our 2015 plans were closely matched, what we hear from our customers. Currently, peers that I've spoken with, with several EMPs are not changing their plans to spend at or above 2014 levels. Some had even indicated aggressive growth over 2014 levels. Most do not feel that oil prices will remain soft very long, because of relatively consistent worldwide demand growth.
Whatever next year holds for us, we have historically reacted quickly to any changes in demand for our services, and we will continue to do the same.
Well, that's the end of our prepared remarks. So, operator, we will now open the call up for questions.
Question-and-Answer Session
Operator
Thank you, sir. (Operator Instructions) Our first question will come from Trey Stolz with IBERIA Capital Partners.
Trey Stolz - IBERIA
All right, good morning guys. I guess, first off, I want to touch on the margin progression here. Going into 4Q, you had a full quarter of additional horsepower, you had additional coil tubing unit, which is on the high margin side, and the recent acquisition, which I believe was high margin, so are we looking at right up on 40% of potentially above for 4Q, and to what extent can that carryover into 1Q in the Completion and Remedial Services segment, absent the payroll tax impact there?
Roe Patterson
Trey, in prior discussions we've said that we thought that we'd be heading toward 40%, and that we probably touch it sometime in the third quarter, and that happens. So the progression during the quarter, of course we incur these additional start-up costs associated with bringing this additional horsepower online. And then in the month of October when we had the majority of the horsepower in the field; that allowed us to get those margins up to 40%.
We expect that to go into the fourth quarter because we'll have full deployment of those assets happening in the fourth quarter. And our expectation would be that we'd average over 40% in 2015 for that segment. How much over 40%, that's a question, but we believe that we'll be averaging at least 40% during 2015.
Trey Stolz - IBERIA
All right, thanks. Roe, you mentioned on the acquisition side, it sounded like your average might be backing off a little bit on the (indiscernible) acquisition, particularly a large one. Are seller expectations not coming in as one would think in this market? What are the next steps there that you're seeing?
Roe Patterson
Well, the recent changes in commodity price are still recent that we haven't seen any reflection in seller expectation yet. I think that's probably going to come down the road maybe, but what we need to do right now is just let all find its bottom here and settle out. Let the market settle out a little bit. And then we'll see if we're still at the same appetite for deals. It's not that there is not enough deals, and it's not that they are not there, but we just want to wait and see how things settle out before we get too aggressive. So we're staying in contact with all the sellers, and continue to evaluate deals. When we feel like the window is opened to get a deal done, then, we'll be quick to do it.
Operator
Thank you. Our next question will come from Daniel Burke with Johnson Rice.
Daniel Burke – Johnson Rice
Good morning, guys.
Roe Patterson
Good morning
Alan Krenek
Good morning, Dan.
Daniel Burke – Johnson Rice
Hey, Roe, I know the outlook in a way is in flux, but in terms the capital outlook, looking forward to 2015; can you just maybe update us on a couple of parameters there? What's the sustaining maintenance CapEx running at this point, [in order] (ph) for Q3 seemed a little high, and then I assume you're planning right now to overlay some growth capital in SWD, and was curious what kind of growth that the pioneer business might be in line for?
Roe Patterson
Well, it's running about a $130 million a year with today's run rate, activity levels, and we'd expect that to be the same going into '15 at the current pace of activity. I think we'll match growth CapEx and expansion CapEx to what our customers do. If they continue to demand services and they need more equipment and more capacity from us, and we're in undersupplied situations in various segments like the Pumping segment or the Coiled segment or rental and fishing tools, we'll apply that growth capital as we always have.
As far as the pioneer assets, we definitely feel like there's opportunity for growth there, but it's such a small deal. They'll get treated just like all of our other rental and fishing tool yards, and get the same kind of ability to request capital.
Daniel Burke – Johnson Rice
Okay, that's helpful. And then second question, I think you talked about how your customer requests of late seem to be growing, and I was just curious whether that comment was applicable to all three of the major segments, or whether that was really more specific to C&R, where you're seeing such a healthy growth this year.
Roe Patterson
With respect to growing service request, it is for C&R only. I'd characterize Well Servicing and Fluid Services as very steady. So, still strong demand there, lots of activity. We're very busy. But I wouldn't say growing service requests right now in those two segments. That's really singled out for Completion and Remedial.
Operator
Our next question will come from Marshall Adkins with Raymond James. Please go ahead.
Marshall Adkins – Raymond James
Good morning, gentlemen. Weather, almost your competitors have mentioned significant weather issues in the Permian, is a factor for sub par performance. Doesn't seem like it affected you as much, is that accurate, and if so, why not?
Roe Patterson
Well, I can't speak for these other guys. I can tell you what we did. It definitely impacted the Well Servicing segment and somewhat on the Fluid Services segment. On the frac side and the cementing side, asset side, what we did was work through the weekends to catch up, where normally we might take a break on a Sunday or a Saturday, customers were very quick to try to catch up on their completion activity. And so, that helped us make up the days that we missed on during that rainy weather.
It was severe. It was a severe weather event. Tropical depression sat over the Permian and the mid-continent area for several days, putting over 10 inches of rain in a lot of places and there is just not enough runoff there. So that just slowed down those segments where we have to drive the location, and we don't get to stay out there. So I would say that maybe that's the difference, Completion and Remedial Services was -- we're able to ramp up during the weekend periods and catch up.
Marshall Adkins – Raymond James
Staying on the completion side, the other issue a lot of people having is logistics cost and sand cost and particularly sand transportation, and you didn't seem to have that same issue. I presume that's because you're doing more vertical wells, or can you help us understand why you're not having logistics issues that maybe others are?
Roe Patterson
Well, we're doing lots of horizontals too. I don't think it's any kind of differentiation on vertical versus horizontal, because we do a lot of both. I'd say the difference maybe is that we just got ahead of the curve as far as logistics and sourcing materials. Our group has done a great job of making sure that every spread has come online, has adequate supply. We've done a good job of creating our own storage internally, so that any interruptions are smoothed out with our own supply. So we've just been aggressive from that standpoint and maybe we got ahead of the curve a little bit versus some of these other groups didn't.
Also, maybe these guys that are trying to do the 120 barrel a minute work, little higher volume, going through a lot more sand, maybe than what we do, maybe it catches them quicker than it catches us, but I think if you're in front of it and you're watching your sand allocation and you know what your throughput is, you just rely on your folks to stay ahead of it. We went out to over 20 different sand vendors the last quarter, making sure that we had plenty of supply, and we're continuing to do that.
Now, we have contracts with two or three in place for probably somewhere in the neighborhood of half of our volume. But we feel the other half with lots of different vendors making sure that we never get hung out to dry by one vendor who has some sort of interruption.
Operator
Thank you, sir. Our next question will come from Jeff Tillery, Tudor, Pickering and Holt. Please go ahead.
Jeff Tillery - Tudor, Pickering, Holt
Hi, good morning.
Roe Patterson
Good morning.
Jeff Tillery - Tudor, Pickering, Holt
As you've taken delivery of the rest of the hydraulic horsepower, could you just update us on regional exposures, I know, [Miss] (ph) Lime is a component, that's just an area that I know some of the client base has concern about activity continues to -- I want to get your color on activity there and just understand the regional exposures?
Roe Patterson
Well, we have put some of that out in the Miss Lime. A lot of it went to the Permian, probably somewhere around 50% or so went to the Permian. The rest of it scattered between North Texas, the Northern Barnett and the Miss Lime and the SCOOP area. So that was the stratification of the new horsepower. A very little of this last tranche of horsepower went to the Rockies. So that was kind of the geographic spread of the new horsepower. Tell me what your follow-up was, I'm sorry?
Jeff Tillery - Tudor, Pickering, Holt
In this case, what's your activity outlook is in the mid-continents for the pumping business. Are you seeing any change in behavior?
Roe Patterson
No. It's very strong. In fact, that's the area -- one of the areas where we're seeing the most request for additional horsepower capacity.
Jeff Tillery - Tudor, Pickering, Holt
And then, as you think about Q4, you mentioned in the press release that the frac calendar is full; how much wiggle room or how firm does that feel, and I'm just curious in a lower commodity price environment, do people just take weekends off and take holiday time, I'm just curious how Q4 is playing out from that respect?
Roe Patterson
Well, they line the dates up pretty aggressively. There really isn't a lot of downtime. We know we have to have a usually one day a week to try to get some service and maintenance work done to that horsepower. You can't just run it 24 hour a day or even seven days a week during daylight period, and expect not to have some service in a row. You have to take it down for little bit to do some maintenance.
But other than that, other than those maintenance periods, it's pretty stacked up, even through the holiday period. Most of our customers are very aggressive on their completion date. They want to get that new production online. And so, we haven't seen any change in that desire to quickly activate these wells after they're drilled because of lower oil prices. We haven't seen that. That's what we said. We haven't seen any indication that, that that pace is going to slow. They don't want to miss their frac day. They don't want to give it up to another customer. Right now, there's no change.
Operator
Thank you. Our next question will come from John Daniel, Simmons & Company. Please go ahead.
John Daniel – Simmons
Hey, guys, thanks for taking the call. I want to thank you for the margin commentary on the C&R segment, but in light of the competitive attentions within Well Services and Fluid Services, can you just elaborate on the prospects for the margins, not only for Q4, but just your initial thoughts for next year?
Roe Patterson
Yes. The margin is coming down in our Well Servicing segment because of the increase in competition. It's hard to recoup labor increases. I think that those margins are going to be stuck in the near-term between the 26% and 27% range. We try to maximize utilization. So we're going to be as competitive as we can to keep that yield ration right up. But those margins will suffer in that 26% to 27% range.
On Fluid Services, up slightly from the second quarter, 29%, we view that as a pretty good margin based on today's environment. Those will be flat at most slightly up, but they should be right around that 29% range.
John Daniel – Simmons
Okay. Do you envision a scenario next year where -- just given the increase in supply particularly on the rig side, where pricing will be coming down?
Roe Patterson
No, I think it will be -- it's been pretty flat for a long period of time.
John Daniel – Simmons
Well, I know. Right, but you guys identifies recently the competitive attention and that's why I'm asking the question.
Roe Patterson
Well, in effect, you do have indirect price decline because you're not able to raise pricing, because you've got higher costs. Labor costs probably might pick up some. So yes, you might have a little bit of deterioration.
Alan Krenek
Hey, John, just as a reference point. I know you like statistics. There is 27 new well servicing companies in the Permian Basin that weren't there a year ago. And there is a 155 well servicing rigs from those companies located in the Permian Basin that weren't there a year ago. That gives you an indication of how busy it is, number one, in the Permian and we've been able to absorb all of that with really no rate deterioration, but that gives you an idea why there's a lid on rates.
John Daniel – Simmons
All right, fair enough. Good color, and I do like that. Just two quick ones from me, and then I'll turn it over to next person, but -- well, assuming that your view on customer spending being slightly higher next year proves to be correct, and obviously we understand your budget is not done for next year and you have flexibility. But in that slightly higher EMP spending environment, would you expect to spend similar growth CapEx in '15 or would you rather allocate those dollars to acquisitions?
Roe Patterson
Well, great question, I'd say we would have more desire to balance it next year between acquisitions and organic growth, more so than we did this year. I do think that the market is still ripe for acquisition activity. So I think there's some consolidation coming, and it's needed. So I'd say it would be a healthy balance between the two. We would target maybe 50-50. And that in itself would bring our expansion CapEx down measurably from this year if we could get some deals done. So if that demand is there from the customers, we'll be looking to do a fair share of both.
John Daniel – Simmons
Okay. And then a last quick one, I'll turn over. Can you guys just discuss any new geographic markets and/or product lines that maybe worth pursuing next year? Thank you.
Roe Patterson
We're constantly looking for new markets. We've recently entered the tubular business, tubular rental business, and that's a very small segment for us, but it's one we intend to grow next year. We're entering California on the well servicing side in a small way. We hope to have some rigs activated by the end of the year. We felt like there was some opening there and opportunity there. We still feel good about that.
Always looking for new opportunities within the footprint and that we still think there are several that exist, but it's going to be driven by customer demand, where they need supply and where is it undersupplied, and we'll fill that gap. We're always watching for it. Those are just my examples for what we've done recently.
Operator
Thank you. And our next question will come from Marc Bianchi with Cowen.
Marc Bianchi – Cowen
Hey, guys, good morning.
Roe Patterson
Good morning.
Marc Bianchi – Cowen
I was hoping you could discuss and you mentioned that a little bit in the prepared remarks and some of the Q&A, the mix of vertical and horizontal work that you're doing and how that work is impacted by lower oil prices. I think there's a perception out there that a lot of the vertical work has a higher breakeven oil price, but you mentioned when you were talking about the drilling business where a lot of that is legacy work that your customers have. So, just curious if you could provide some more color on what the breakevens are, and what some of the business decisions are from the customer as it relates to keeping that activity going on vertical versus horizontals?
Roe Patterson
Well, I'm not an expert on all of our customers' breakeven. I'd venture to say that back to the opposite of what you have heard, the vertical work has a lower breakeven cost, not a higher breakeven cost. There's some vertical work in the Permian Basin that's going right now, that's probably got a breakeven cost in the $30 per barrel range. So, I'm not sure where you heard that, but you heard wrong.
The second thing I'd say is if you take a look at the vertical work, it's ongoing in the Permian Basin right now, still 40% of the market. We have a 30% of the rigs running in the U.S., running in the Permian and 40% of those are vertical. That gives you an indication of return on capital that these vertical programs have for our customers.
As far as our mix, we try to do all of it. We want to do as much of the horizontal work and as much as the vertical work as we can do. We've got a healthy mix across all of our business segments for both lines of business. We don't care whether we're on a horizontal well or a vertical well. Usually, it's the same equipment that shows up on both, and it does the same function. We don't really track it. I couldn't give you a number. All I can tell you is, we want as much of it and all of it, so we can get our hands on.
Marc Bianchi – Cowen
Okay, that's great, Roe, thanks. And just shifting gears a little bit, Alan, you mentioned the pressure pumping will be about 70% of the C&R just based on your outlook. I was hoping you guys could provide a little bit more detail on the various growth trajectories for the segments to get to the flat sequential revenue growth that you're looking for overall.
Alan Krenek
Well, obviously we know we'll get an increase in the Completion and Remedial segment just because of the full impact of the third quarter horsepower additions, plus the acquisition that we did. I'd say that well servicing gets hit hardest by seasonal factors. You'd probably see a 5% or so decline in that revenue. And then probably slightly not as much decline in our Fluid Services group. That would be all set by the increase from the Completion and Remedial segment to get to a flat scenario.
Operator
Thank you, sir. And we'll take our next question from Neal Dingmann with SunTrust. Please go ahead.
Neal Dingmann- SunTrust
Good morning, boys. Guys, just a couple of questions, first, Roe, you had mentioned on just on spending for acquisitions, what's going out there. I guess first question maybe for Alan, how do you guys look at that obviously in the new environment if you did see something, Alan, is there a leveraged liquidity position? Is that where you're comfortable with, does that change now given the environment or is that still about the same as when you and Roe discuss that?
Alan Krenek
No, it remains the same. It all depends on valuation, what the sellers are asking for, and really our approach to this hasn't really changed in light of the current circumstances. Obviously, the decline in the stock price does have some impact and the use of equity in the transaction, but we're pretty consistent in looking at these acquisitions and determining which ones to do and which ones not to do.
Neal Dingmann -SunTrust
And would that also include -- would you guys ever think about adding maybe your own sand or something that you don't mind, to go more vertically integrated on that front?
Alan Krenek
I don't think so, Neal. I think that traps you into using your own sand, and sometimes your sand may not be the best cost scenario for you. I think we've seen some of our peers that have their own sand, have fallen into that trap and that pit of having to use their own sand because it's some cost. That even if their sand is actually more expensive to deliver to the location, then, a competitor's sand, they are trapped into using their own volume because they already put the capital up for it. We don't want to get in that trap.
Operator
Thank you. We'll take our next question from Blake Hutchinson with Howard Weil.
Blake Hutchinson – Howard Weil
Good morning, guys.
Roe Patterson
Good morning.
Blake Hutchinson – Howard Weil
Clearly, Roe, you've checked in recently with the probably a good portion of your customer base and just done the gut check to come up with the 2015 number -- in a potential CapEx going up. If you got engaged in these conversations, is there a number out there in terms of WTI that keeps coming up where your customers say that that's the threshold of, I guess, pain where you really just have to pullback a bit?
Roe Patterson
Oh, man, that's a trick question. There is -- a lot of them use the numbers in the $60 range. I don't know. It changes customer-to-customer, and it almost changes, it of course it changes geography-to-geography, different place, different basins, but it also changes from customer-to-customer within those geographies. But I'd have to say, I've heard a lot of talk in about the $60 range being the threshold. But I think at the end of the day, they'd probably keep those numbers really pretty close to the West. So we can go up what they say, but we go up what they do more than what they say.
Blake Hutchinson – Howard Weil
Yes, absolutely. Didn't mean to push on the spot but it's nice to given that your conversations or price occurring, it's nice to get that feedback. So I appreciate that. And then just, Alan, maybe specifically thinking about what was stripped out of well service due to weather, I mean, should we think about the Permian and mid-con putting up some zeroes for a few days, in terms of what were stripped out on activity or is that really just you go out and try to prosecute the work, but it's more really more focused on the margin hit than the top line?
Alan Krenek
I think it's more of a margin hit. I don't think we had any zero days across the board. Depending on where you were in the Permian, you were more affected than others. But utilization was down, and we have people sitting on the bench causing us to have somewhat higher cost. But overall, it wasn't a huge impact, but it was noticeable.
Operator
Thank you. We'll take our next question from Jason Wrangler with Wunderlich Securities.
Jason Wrangler - Wunderlich
Hey, good morning guys. Alan, you walked through, so thank you as far as just kind of the segments and what you are expected from the seasonality aspect. I was just curious, on the completion side, given how busy you guys are. Do you see much or do you bake in much from a seasonality or just downtime aspect as we kind of headed in the couple of months that are this little bit more of a operator, is that modest a margin impact as well?
Alan Krenek
No. It probably gets impacted the least from weather at above the segments in business lines. Like Roe said, we really don't anticipate a harsh fourth quarter weather condition. So, we expect the on the frac and the pumping side, for those units to be running pretty much it is full utilization as we can.
Roe Patterson
I would also add that -- add as what happened in the -- similar to what happened in the third quarter, when you see our customers met the frac date in the current environment, they're really very willing to work through a holiday or over a weekend period to catch up on those missed days to get back on schedule. As far as well servicing goes, and somewhat in fluid services, that urgency and that sense of urgency doesn't exist. If they miss some days because of weather, they miss over a holiday period, there is no desire to catch up.
Jason Wrangler - Wunderlich
Great, and then just if I could as we kind of keep building up the completion side and that obviously becomes the bigger portion of the revenue mix. Does it - it seems that we're going to see kind of company wide margin expansion as well assuming that things go as we planned in the at least '15, is that fair to say?
Roe Patterson
We sure hope so.
Jason Wrangler - Wunderlich
I appreciate it. Thank you.
Roe Patterson
Thanks.
Operator
(Operator Instructions) We'll go next to Walt Chancellor with Macquarie.
Walt Chancellor – Macquarie
Good morning.
Roe Patterson
Good morning.
Walt Chancellor – Macquarie
Just hoping to try to translate that slightly higher spending outlook to activity levels maybe relative to Q3 or Q4 run rates, given how much we risen over the course of the year. In your view, does that mean flattish or slightly lower activity, just trying to correlate those two?
Alan Krenek
I think if you look at the year in total, if you're talking about customer spend year in total. To see something in the mid-single digits next year based on what we're hearing right now, wouldn't surprise us at all. Does that give you some, is that the color you wanted?
Walt Chancellor – Macquarie
Yes. I think that's helpful. I guess, then stepping to the on the 2015 CapEx outlook side, given this sort of dilemma we may be in, where activity levels are so strong right now, but certainly the commodity markets are offering some other signals. Are your hurdle rates rising for what you're looking at when you're looking to deploy capital in this type environment? Just how are you thinking about that sort of inner play there?
Roe Patterson
No. We're not changing our internal kind of rate to return targets, return on capital targets. We're not changing those as commodities move around. It's -- that stays pretty consistent for us.
Alan Krenek
Yes. Our decisions are based more on the operating environment and more that's going to link our (indiscernible) right, as Roe said, are pretty consistent over time.
Operator
Our next question will come from Brad Handler with Jefferies.
Brad Handler - Jefferies
Thanks. Good morning, guys.
Roe Patterson
Good morning.
Brad Handler - Jefferies
This question -- I'm going to ask this question sort of in a sense that you all, you really just give us good color on the market. So, maybe you can just teach me something. On the gas side, for well servicing you've talked about this sluggishness and it's obviously been a problem for most of the year. Your side is not -- is it a simple in your mind that it's not that because it is it, if it's a $60 number or as you mentioned, in some cases even a $30 breakeven. Are the economics just still so good that we're just well beyond or well above any kind of point where you'd have some slackening of demand? Is that simple, or are there some other things that work as well that we should be aware of?
Roe Patterson
There is a lot of variables to your question. I think one thing to remember is that as if commodity prices do retreat further from where they are now, sometimes customers and many times they'll switch over to that maintenance and sustaining work as a means to maintain and even increase production versus the high cost of new well drilling. So, if prices get sluggish, down in the $60 range, that might be where you see some of these customers revert back to some maintenance programs to make sure that they maintain current production and that they even had the ability to increase production because of recompletions and workovers, so as a means to keep their cash flow up, versus new well drilling, that's kind of one of the faces.
As far as gas work goes, the difference there is obviously completion. There is just not very many gas completions and there is maintenance projects that are maybe expensive workovers or expensive recompletions, and customers with these gas wells look at them and say, "You know, it's just not worth at 3.65 and M to go recomplete that well. The payout's too long. We'll wait until the price is 4.50 or 5.00, and then we'll go recomplete that well."
So we believe that there is a pile, an inventory of these maintenance projects in these gas markets that are waiting to be done as well as obviously new well prospects that probably won't get done unless gas is in the $5 to $6 range.
Brad Handler - Jefferies
Okay, that makes sense. Just a follow-up, so are there oil workovers easier than -- you stressed the complexity or some of the challenges of the gas works, is that a little easier and therefore that decision isn't difficult to make?
Roe Patterson
No, I don't think so. There's really not a lot of change in too much in complexity. There is some gas workovers that can be very complex, and there are some workovers in the oil market that can be very complex. It depends on what conditions you're dealt at the well board, but what I do think is that it's all about cash flow; it's all about maintaining cash flow if our customers have to slow down on a drilling program. They may look around for some workover opportunity that total dollar amount is less and therefore the return on that capital is quicker and it's an easier benchmark to achieve even at a low price, even at a low commodity price.
Brad Handler - Jefferies
Right, got it. Okay, that's really helpful. Thanks. I'll turn it back.
Operator
Thank you. And with that being our final question, I'd like to turn the call back over to management for any additional or closing remarks.
Roe Patterson
Well, thank you all for calling in. We appreciate it, and we'll talk to you next quarter.
Operator
Ladies and gentlemen, this concludes the Basic Energy Service's third quarter earnings conference call. You may now disconnect, and thank you for your participation.
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