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Basic Energy Services, Inc. (NYSE:BAS)

Q3 2007 Earnings Call

November 9, 2007 10:00 am ET

Executives

Sheila Stuewe - Investor Relations

Ken Huseman - President and Chief Executive Officer

Alan Krenek - Chief Financial Officer

Analysts

James West - Lehman Brothers

Jim Rollyson - Raymond James

Daniel Boyd - Goldman Sachs

Dan Pickering - Tudor Pickering

Mike Drickamer - Morgan Keegan

David Anderson - UBS

Erick Kalamas - Wachovia

Robert Christensen - Buckingham Research Group

Doug Becker - Banc Of America Securities

Jim Borklyn - Carlson

Mike Heart - Satellite Asset Management

Operator

Good morning, ladies and gentlemen. Thank you for standingby and welcome to the Basic Energy Services Third Quarter Earnings ConferenceCall. During today's presentation, all parties will be in a listen-only modeand following the presentation; the conference will be open for questions.

(Operator Instructions) This conference is being recordedtoday; Friday, November 9, 2007. I would now like to turn the conference overto Ms. Sheila Stuewe. Ma'am you may now begin the conference.

Sheila Stuewe

Thank you Craig and good morning and welcome to the BasicEnergy Services 2007 third quarter conference call. We appreciate you joiningus today. Before I turn the call over to management, I have a few items to goover.

If you'd like to be on our email distribution list toreceive future news releases or if you experience a technical problem and did notget one last evening, please call us at 713-529-6600.

If you would like to listen to a replay of today's call, itwill be available via webcast by going to the Investor Relations section of theCompany's website at www.basicenergyservices.com or via a recorded instantreplay until November, 16 2007.

This information was also provided in yesterday's earningsrelease. Information reported on this call speaks only as of today November,9th and therefore, you are advised that time-sensitive information may nolonger be accurate as of the time of any replay.

Before we begin, let me remind you that certain statementsmade my management during this call may constitute forward-looking statementswithin the meaning of Private Securities Litigation Reform Act of 1995.

All statements regarding the Company's expected futurefinancial position and 2007 guidance are forward-looking statements. Theseforward-looking statements are based on management's current expectations andinclude known and unknown risks, uncertainties, and other factors, many ofwhich the company is unable to predict or control, that may cause the company'sactual results or performance to be materially different from any futureresults or performance expressed or implied by those statements.

These risks and uncertainties include the risk factorsdisclosed by the company in their registration statements with the SEC.

Furthermore, as we start this call please also refer to thestatements regarding forward-looking statements incorporated in the company'spress release issued yesterday. And please note that the content of ourconference call this morning are covered by those statements.

At this point, I'll turn the call over to Ken Huseman,President and Chief Executive Officer of Basic Energy Services.

Ken Huseman

Thanks, Sheila. And welcome to those joining us on the call.With me today is Alan Krenek, our CFO. We’ll review the highlights of ourperformance for the quarter and along with current market conditions and devotemost of time allotted for the call to questions.

We recorded net income of $24.4 million, 11% less than the$27.3 million reported in the third quarter last year. Fully diluted earningsper share of $0.59 was 17% less than the $0.71 reported last year. Revenues of$229 million increased by 18% over last year and established another new recordfor the Company.

EBITDA $68.8 million, also a new record, was 6% higher thanlast year. But the 30% margin was 3 percentage points below what we recordedlast year. We were not able to push the higher revenue through to the bottomline due to lower utilization levels that we enjoyed in the third quarter of2006.

Compared to last year there are sufficient equipment tomatch demand in most of our markets, so backlogs and waiting list have beensharply reduced. We’ve also seen some reduction and activity in gas-orientedmarkets causing relocation of equipment to our oil driven market.

Regarding cost laborers are biggest expense and managementchallenge as the industry continues to be short of experienced people. Wespending a larger proportion of revenue on labor compared to last year, due tolow utilization and continued competition for the most qualified personnel.

Wage pressure has moderated along with the slower growth inthe drilling rig accounted since the first of the year, but still exist inparticular in the most specialized positioned. Even with less favorable marketconditions than we enjoyed last year and more competitors in many of ourmarkets, each of our main segments produced the meaning full year-over-yearrevenue increases.

Our well servicing segment produce revenue in the quarter13% higher than 2006. The sledge acquisition contributed about two-thirds ofthat increase. The remaining one-third was generated by the 11% growth in ourwell servicing fleet and 9% higher hourly well servicing rates.

Offsetting those positives, well service reutilization at78% was 12 percentage points lower than last year, reflecting the marketfactors that already mentioned. This segment's operating margin declined by 4.9percentage points due to lower utilization and the resulting under-absorbedlabor.

By comparison, in the third quarter 2006, we had essentiallyfull utilization of our equipment. And the 45% operating margin was at or closeto an all time high. It's important to note that our drilling operationproduced margins just slightly below our well servicing operations.

Our completion of remedial services segment continues to beour fastest growing and is now our second largest in terms of revenue. Thisgroup, which includes pressure pumping, wire line, under-balance drilling, andrental tools grew by about 57% over the course of the year, driven primarily byacquisitions.

The JetStar acquisition, which closed in the first quarterof this year, was the largest of those and added approximately $18 million torevenue in the quarter. The 48% direct margin for this year was down from theextremely high 51% margin recorded in the same quarter last year. Thisreduction in operating margin reflects some slight deterioration in pricing andcontinued pressure on wages for the specialized labor required for the writingof these services.

By the revenue and related margin contribution from theJetStar assets substantially received the historical amounts attributed to thedeal at the time it was announced. The performance of the people and assetsacquired are more than meeting our investment parameters.

Revenue in our fluid services segment increased by 4% overthe first quarter of 2006 on a 16% larger truck fleet but 2% lower revenue pertruck. That modest decline in unit revenue has more to do with the mix ofservices provided than a rate decline.

Our operating margin at 37% was down less than twopercentage points indicating good cost control and stable pricing. Our smallestsegment, well site construction, had a revenue decline of 19% on lower drillingactivity in southwest Wyoming with a bulk of our business in this segment hasdried.

We were able to hold the direct margin in this segment flatat 30% compared to the year ago quarter. On a sequential basis, total companyrevenue was up over the second quarter by about $6 million, or 2.7% drivenprimarily by internal growth as no acquisition were closed until very late inthe quarter.

Operating margins were essentially flat with the priorquarter again indicating success at holding our rates and our cost control.EBITDA increased by $2.9 million or 4% from last quarter with our EBITDA marginup about a half percentage point.

Fully diluted earnings per share of $0.59 increased from the$0.52 reported in the second quarter driven primarily by the higher operatingprofit.

At this point I'll turn the call over to Alan to take youthrough the remainder of the income statement and balance sheet. And then I'llget back on to discuss our outlook.

Alan Krenek

Thanks, Ken. And good morning to all of you. This morning,I'd like to review our income statement in further detail and then discuss ourliquidity and capital resources.

Our G&A expense increased by 22% to $25.5 million overthe third quarter of 2006 and was flat sequentially. Majority of this increasefrom the third quarter of 2006 reflects the rapid expansion of the Company. Asa percent of revenue, it was 11.1% of revenue in the third quarter of 2007compared to 10.7% in last year's quarter.

Depreciation and amortization expense in the third quarterwas $24 million compared to $17 million in the same period of 2006. Thisincrease reflects the substantial capital expenditure program we've had inplace as well as the eight acquisitions that we closed in the past twelvemonths.

Sequentially depreciation and amortization expense was flatdue mainly to the large amount of retirements in the current quarter and anadjustment procuring that depreciation on an acquisition made in the earlierpart of the year.

Net interest expense in the third quarter of 2007 was $6.5million up from $4.1 million in the prior year quarter. This increase is duemainly to the interest expense from the utilization of $150 million of creditrevolver for the cash portion of the JetStar Sledge Drilling, and Wild Horseacquisitions that have closed in 2007.

The effective tax rate in the third quarter was 36.8%,compared to 37.5% in the last year's quarter. We expect that our effective taxrate for 2007 will be between 37.5% and 38.

As Ken mentioned earlier, we have net income of $24.4million or $0.59 per diluted share, in the second quarter of 2007. Weightedaverage diluted shares for the quarter were approximately $41.6 million.

We expect our weighted average share count for the fourthquarter weighted average diluted shares for the quarter were approximately$41.6 million. We expect our weighted average share count for the third quarterof 2007.

Our balance sheet remains solid. At September 30th, we havebalance of approximately $57 million and total liquidity of $117 million. Forthe nine months of 2007, we generated a $144 million of cash flow fromoperations, which is 22% of revenue for that period.

At September 30th, our revolver had a $150 million ofborrowings and change from June 30th. We paid for the acquisitions of SteveCarter, Inc. and Hughes Services in late September from our existing cashbalances.

Our debt-to-EBITDA ratio was 1.6 times and total debt tototal capitalization was 45.5%. Capital expenditures including capital leases,but excluding acquisitions for the third quarter were $37 million, of which $17million was for expansion capital and $11 million or 4.7% of total revenues formaintenance capital.

Other capital expenditures were $9 million during thequarter, mainly for facilities and IT infrastructure, complies from remainderof capital spending for the third quarter. As Kenneth's privacy said, we nowexpect CapEx to be approximately a $115 million for 2007.

At this point, I'll turn it over to Ken for his concludingremarks.

Ken Huseman

Thanks, Alan. All prices are certainly well abovereinvestment level for most E&P companies. Gas prices on the other handwill have to increase to support the current level of drilling into next year.Our customers have been keeping all their existing wells in production. We'reseeing indications of all operators ramping up capital spending to optimizefield performance with major workovers, enhanced recovery projects, andinternal drilling programs. Many of those projects are long lead-time projectsrequiring substantial engineering and legal work.

People shortages are a factor throughout the oilfield andthe capital programs of some of our customers are likely being restricted by alack of personnel and field technical and professional positions. We have avery positive outlook as we near year-end. The projecting activity levels goinginto the fourth quarter and early next year is a real guessing game. We expectour business activity to remain relatively steady through year-end with weeklyfluctuations for the seasonal impact of weather and holidays.

Contrary to our comment in previous conference calls, wehave initiated modest price rollbacks in selected markets due to competitivepressures. Those reductions amounting to 3 to 5% in our wealth servicing andfluid services segments, will impact results in the fourth quarter. We willcontinue to monitor pricing in each segment and market area and respond asnecessary to maintain our customer base.

As to the growth in our fleet, only our well servicingsegment will see much growth in the fourth quarter. We have a 11 well servicerigs scheduled to be delivered by year-end. That will probably some of thosenew bills with a few more retirements of oldest least-efficient rigs. Again, weselect rigs for retirement on a case-by-case basis as those inefficient andrefurbishment. In our other segments we won't see much of any change in ourcapacity between and year-end.

While we don’t include the impact of acquisitions in ourguidance, we believe the opportunities in the current market are excellent andwill likely get increased even more. We stated last quarter that the recentturmoil in the debt markets would probably eliminate some of the financialplayers from the market for the deals we'd like to do. That seems to be provingtrue as the deal flow has definitely increased over the last several months andshould result in our finding more deals, which meet our criteria.

We do expect to close an acquisition or two before year-endas we have several under consideration at any point in time. But again, due tothe uncertainty of the timing of the closing of those deals, we do not projectthe effect of any of those in the guidance we may provide.

Before turning the call over to questions, I would like toremind our investors of the role we play in the energy services industry. Wepurposely focused our growth over the last several years on the most prolificoil and gas producing regions in the country. Our footprint provides access toa market comprised of over 500,000 existing oil and gas wells. That'sapproximately 70% of the existing oil and gas production in the U.S.

So regardless of the direction and level of oil and gasprices, the type of services we provide are essential to well owners inmaintaining and optimizing production from those wells throughout their life.Those same market areas can also provide access to about 80% of the drillingactivity in the country. So we participate in our customers' drilling programas well.

The range of service and market coverage in the most activeoil and gas fields provides and excellent platform for us to continue ourgrowth.

At this point, let's turn the call back to the operator forquestions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes fromthe line of James West with Lehman Brothers. Please proceed at this time.

James West - Lehman Brothers

Hey, Good morning guys.

Ken Huseman

Hello James.

James West - Lehman Brothers

Ken, with respect to pricing as we go forward here I knowyou've alluded to some 3% to 5% pricing discounts recently both in the pressurepumping business and well service, rig business.

In the fourth quarter than first quarter which tend to beseasonally slower in terms of utilization, do you expect further pricingdecline, and I guess, could you characterize which regions you saw the kind of5% decline and which regions are more flattish?

Ken Huseman

Well, let me correct something, you mentioned that thepressure pumping and well service exactly are fluid services in well servicingbusiness line.

James West - Lehman Brothers

Okay. By mistake.

Ken Huseman

Based on the pricing. We've responded in West Texas wherethere are just in across the board rate decline, I think it was about 3%. Andthen in some of the other markets it's more of a bit more by localizedapproach.

South Texas has been particularly weak, its showing signs ofimproving just in the last couple of weeks its activities increased and EastTexas has been stable. Mid Continent, we saw a little bit of pressure. Rockies,of course, we saw some rate pressure and then Mid to West Texas is really aspretty much the same in both fluid services and well servicing.

James West - Lehman Brothers

Okay.

Ken Huseman

And as far as the first quarter. I think everybodyunderstands this seasonal decline just depends on how much equipment gets movedaround, what the outlook for the gas activity is. If gas activity stays flatthrough the first quarter then we might see some more redeployment of equipmentinto these oil markets.

James West - Lehman Brothers

Okay. And then, I guess, since you build up in the pressurepumping side are you suggesting that you have not seen pricing weakness inpressure pumping?

Ken Huseman

Very little. What we've seen there boys is rapid, few latelyover the last six or eight months, these rapid increases in the input sand,things like that we had to stay here along in getting costs increases putthrough. And I think we've been recovering costs, but we've been getting muchadditional margin on those inputs.

James West - Lehman Brothers

Okay. I see. Then on the acquisition front, it sounds likeyour fluid increase pretty significantly. Could you make a comment on thequality of the acquisition to this point of the companies and the assets theyare up or so.

Ken Huseman

Yes, it's pretty much across the spectrum. There are justmore of them, more deal flow, some of the financial players that got in thebusiness have backed away from competing for some of the deals that we like,and in some of those deals they've rolled up are now on the market. But I’d sayits just kind of more, of each element of the quality spectrum.

James West - Lehman Brothers

Okay, Great. Thanks Ken.

Ken Huseman

Okay. Thank you.

Operator

And our next question comes from the line Jim Rollyson withRaymond James. Please go ahead at this time.

Jim Rollyson - Raymond James

Good morning, guys.

Ken Huseman

Good morning Jim.

Jim Rollyson - Raymond James

Ken. You’ve talked about moving equipment maybe out of someof the gas areas and to some of the oily areas. And I think you said that kindof the lead times in some of those was taking a bit of time.

But in terms of magnitude do you see enough demand coming upin the oily areas to kind of help offset what you are seeing in the gas areasor is it just kind of helping things or maybe just kind of give us a sense ofthe relative size of the markets here?

Ken Huseman

Okay. We direct the some of the new deals earlier in theyear second, third quarter from the Rockies to Princess West Texas and some ofthe oil markets in part of Rockies. So we've done some of that already.

What we are seeing is some other people who had equipment oroil that are trying to move into some of the oil areas that they haven’t beenin before. If you look at kind of the ASE rig count. I think about third of therigs, the third of the well servicing rigs roughly maybe acquire between thefourth and the third of the existing well services rigs they are in the PermianBasins and always have been.

All the other markets are much smaller, well servicingmarket and fluid service market for that matter. So, that’s one of the reasonswe’re seeing some price erosion, certainly some utilization erosion as peoplecrowding into the oil markets.

So, I guess to answer your question, the oil markets havenot been able to observe that equipment without some utilization erosion andnow pricing erosion.

Jim Rollyson - Raymond James

Understood. And then, just a follow up, you talked aboutequipment additions and kind of retirements, I think you said ’11, wellservicing rigs, it looks like you already retired a couple just based on whatyou’re October activity report had.

How many more, if you will cross your fleet today and maybecharacterize what you have left on the new build program, but just how manymore rigs do you see as likely candidates to kind of get retired, you keeprunning, you been running just fairly above adding a little bit, is thatcontinued for the next year?

Ken Huseman

Yes. We have roughly just like everybody else’s ispredominantly made up of rigs build prior to 1982. Now at this point there thisyear about half of our fleet is either a new rig delivered since ‘04 or freshlyrebuilt.

The other half of those rigs that remains close to 180, 190rigs are still fairly old and we’ve identified about 25 rigs that are olderthen the 1975 model. We planned to take out the fleet on the course of thenext, by the end of 2008.

So, the remaining rig we have on order will predominantly begiven current market conditions replacements. Now, if things change andutilization gets of to the races again some of that equipment could berefurbished or repaired and still be competitive.

But currently all of our new bills are going for, virtuallyall of our new bills are going for replacements.

Jim Rollyson - Raymond James

Great. Thank you.

Ken Huseman

Okay.

Operator

And our next question comes from the line of Daniel Boydwith Goldman Sachs. Please go ahead.

Daniel Boyd - Goldman Sachs

Hi good morning.

Ken Huseman

Good morning Daniel

Daniel Boyd - Goldman Sachs

Can you touch a little bit more on acquisitions and whatbusiness lines you’re seeing, I guess, you’re seeing the most opportunity andcouple quarters ago you talked a little bit more about expanding further intoland drilling, can you just update us on your thoughts there?

Ken Huseman

Well, we’ll move on any of these business lines that we’rein as we see acquisitions that fit our criteria. So we generally don’t havepreference other then finding the, moving on to best deal that we see at thetime. As far as the types of the business lines that we’re seeing the most dealflow in, it’s really, pretty much across the board, lots of pressure pumpingequipment, knocking around, looking for a new home.

Some of those owners are wanting some relief. Some activityin well servicing has popped up again recently. Fluid services; there’s alwaysa few mom and pop deals out there. So, I’d say it’s across the board just as Isaid earlier there’s just more of them than they were just a month or two ago.

Daniel Boyd - Goldman Sachs

Are you seeing any opportunities to expand potentially inthe Canada or are they more in the regions you’re currently operating?

Ken Huseman

The opportunities are definitely there to expand intoCanada, we just haven’t gotten up the courage to pursue them yet.

Daniel Boyd - Goldman Sachs

Okay. And then on the capacity additions, have you taken anyestimates there? What you see the capacity additions industry-wide are going tobe over the next 6 to 12 months.

Ken Huseman

Yes. I just looked at the ASC, was it whether for rig countand I think last quarter, there were about, let’s see, I am going to checkthis. As far as available rigs, there showed to about 15 rigs added in thequarter. In terms of active rigs, about100 rigs were actually added in theoverall fleet, but the number of stacked and idle rigs increased.

So, we’re kind of seeing about a 15% growth in the fleet forthe rigs that are added. So, we think that there’s about 300 new rigs comingon. So if that holds true, we’ll see the active fleet grow by what, 45 rigsover the course of the next year, which I think, generally the industry canabsorb assuming gas prices moved back to what people think that’ll be.

Obviously, with activity, gas activity, where it is rightnow, the industry doesn’t need any more new rigs.

Daniel Boyd - Goldman Sachs

Okay. Thanks.

Operator

And our next question comes from the line of Dan Pickeringwith Tudor Pickering.

Ken Huseman

Good morning, Dan.

Dan Pickering - Tudor Pickering

Hello, good afternoon Ken and Alan

Dan Pickering - Tudor Pickering

Ken, you mentioned the retirement, and I think the industryis doing a fairly good job of taking capacity out on the well service side.When you say retirement what does that mean, does that rig wind up cut up. Isit sold into different service, can it come back at you at some in time or isit really gone.

Ken Huseman

Well, it’s a combination of things, we canalize a few rigsor parts to keep some other lack equipment in the field longer. By and large,we sell those rigs in an auction process and those typically go into shallowoil fields, gas fields where we don't compete. Generally, we don't feel likethey're competitive in the market that we participate in or would keep them.

Generally, the last batch that we sold were kind of theprofile was a 73 model or 64 model, fairly light rig that we would have had toinvest about $4,000 to $5,000 into make reliable on a daily basis in our schemeof things.

So, we sold those rigs for about 3,000 a piece and so if welook at it like that, we're getting into a new rig for about a $100,000 met.Some of our competitors cut those rigs up and we apply those actions but we seea little bit better value to the company and sell again. We do think they'regoing to come into competition in the markets where we compete.

Dan Pickering - Tudor Pickering

Got you. Okay. And then in the areas where you were talkingyou're price roll back is that, Ken is that, are you guys being proactivethere. Are you kind of the first in the market to do this or are you followingothers that have done it. I'm just trying to understand if you're leading orfollowing one of those price action.

Ken Huseman

No, no we're not going to jump after at all. We're not acharity case. We're going to follow, our guys stay on top of it, they tell uswhat they're seeing in the field, what their customers are saying in the WestTexas and our Permian Basin operation, we followed one of the household namesthat you hear in their price roll back.

Dan Pickering - Tudor Pickering

Okay. Got you. And when think about sort of how long do weor how aggressive does this game get. Do you feel like, is there a utilizationlevel that you want to protect or is it just the market. The market is what themarket is and we let that play out.

Ken Huseman

Well, obviously, through the cycle you make a judgment basedon what you foresee utilization going to what’s causing the drop inutilization. What’s coming down pack; certainly our utilization numbers thatyou get to or you really just start idling even new rigs and shuttering officesand things like that, we are a long way from that.

As I said in our previously, the returns being generated in,by this equipment, still promotes some additions particularly by theseindependent, the mom and pops that are more cash flow oriented, as long as Idon’t have to buy a money to buy the rigs, they take a little different view ofit.

Alan Krenek

But I think right now even with margins that we are seeingnow at the upper end of the historical range. You could justify, we couldjustify building more equipment into this market and we're not, we on afinancial return basis if you could?

Dan Pickering - Tudor Pickering

And I'm not sure that you mentioned a couple of numbers aminute ago, I missed or didn’t understand the kind of, what you were saying youtalked about, I think it was in reference to the well service business capacityadditions in '08. You mentioned 300 being added and then 45 net adds whichimplied 250 retirement, so that I am…

Ken Huseman

That’s correct and just based on a recent review of therecent AES rig camp and weather if it put outs. If you look at the, you havethe kind of add all the numbers together, but the industry added about almost a100 rigs in the quarter. They only increased its active rigs by about 15; thestacked rig count grew quit a bit, so that just means that people moved in fromactive as they got those new rigs in and staked older rigs.

And we are doing little bit more work to understand that andI think we will have more clarity on that in the next conference call exactlywhat the industry is doing in that respect. But we have said in the past thatwe felt at least half of the rigs that were coming in were going to allowretirement of other rigs and maybe as more then that.

Dan Pickering - Tudor Pickering

All right.

Ken Huseman

Okay?

Dan Pickering - Tudor Pickering

Just two more quick questions, one, an easy one, 2008 CapExbudget have you set that yet?

Ken Huseman

We are working on it. We are preparing down the wish listright now. Our guys in the field are still pretty anxious to get more equipmentthat they think they think they can work at great rates. So, but we are notready to release any rate yet. We are trimming it back and given what, I justsaid in this conference call.

Alan Krenek

Sure.

Dan Pickering - Tudor Pickering

Just kind of qualitatively, do you think that number isactive acquisition up next year, down next year or is it still flattish?

Alan Krenek

One of those.

Dan Pickering - Tudor Pickering

I will wait for further clarity. Last question you talked itout, you specifically mentioned well services and the fluids business as kindof two areas of price weakness. You didn’t mentioned your pressure pumpingbusiness and again, I apologize if you talked about it earlier, but it soundslike your utilization and activity levels very strong enough to kind of holdpipe levels at the current level?

Ken Huseman

Yes. It’s as I said the main pressure on margins in thatbusiness is labor, because of the specialized nature that labor force and someof the input Sand really took a big run up earlier in the year.

So we’ve not moved rates, as we had in the past, but wehaven’t, so I guess, that was driving our margin a little bit of margindeterioration. But we’ve not reduced rates.

Dan Pickering - Tudor Pickering

Great. Thank you, very much.

Operator

And our next question comes from the line of Mike Drickamerwith Morgan Keegan. Please go ahead.

Mike Drickamer - Morgan Keegan

Good morning, guys.

Ken Huseman

Good morning, Mike.

Mike Drickamer - Morgan Keegan

Ken, as we look out here you've been talking about pricing pressure,but there are other ways to protect their margins. Can you talk aboutopportunities to either increase efficiencies and or decrease operating costgoing forward here?

Ken Huseman

Well, increasing efficiencies we are always looking for waysto do that. We have some initiatives in terms of adding some GPS equipment, sowe can dispatch more effectively, monitor our the performance of our driversand that's we're staying more effectively.

Try to drive some costs out of the business. Of course laborcosts are an issue right now because of low unemployment in virtually every oilfield, oil and gas field in the country. So there is not whole lot we can do interms of driving wage rates down in this environment and that’s not a way tobuild the business at any point really.

So obviously, replacing these older rigs with newer rigs is,we'll move the number up, but incrementally we are continuing to roll our fleetforward in our fluid services business with newer trucks.

But there is nothing revolutionary it’s just daily payingattention to the pennies and nickels in this business.

Mike Drickamer - Morgan Keegan

Okay. So, it sounds like you have some long-termopportunities. There’s just not a lot that can be done in the short-term as faras reducing your cost.

Alan Krenek

That’s correct. We have to maintain our distribution pointsclose to where the work is and I think we have the flip print that allows us tobe very effective providers of services to our customers.

Mike Drickamer - Morgan Keegan

Okay. Alan, kind of following up on a CapEx discussion for2008. I think you commented that your third quarter of maintenance CapEx wasabout $11 million. Would it be fair to say that your annual maintenance CapExwould be something around of $44 million range then?

Alan Krenek

Yeah. Its going to be somewhere in between 4% and 5% ofrevenue. So, that’s probably a pretty good number.

Mike Drickamer - Morgan Keegan

Okay. And one more Alan; any guidance for fourth quarterG&A or depreciation?

Alan Krenek

Yeah. The guidance that we previously had given fordepreciation was $92 million and $94 million. So if you pick the middle ofthat, that outlook to year-to-date for the nine-months as you're going to bepretty close to what the fourth quarter would be.

Mike Drickamer - Morgan Keegan

Okay.

Alan Krenek

Which would be somewhere around $26 million and remember toowe had an acquisition that closes at the end of the third quarter for $20million. So you will have to, that depreciation will have to be included in thefourth quarter.

Mike Drickamer - Morgan Keegan

Okay.

Alan Krenek

And as far as G&A for the fourth quarter, it's going tobe pretty similar to what it was in the third quarter.

Mike Drickamer - Morgan Keegan

Okay. Thanks a lot guys.

Operator

And our next question comes from the line of James Kincaidwith UBS. Please go ahead.

David Anderson - UBS

Hey, guys David Anderson here. Going through to yourcomments on the pricing outlook on well servicing. For the first time on mynumbers, it looks like for the first time sequentially, your revenue per rigday declined. I'm just trying to give a sense as, within your comments thatshould we be expecting this dig continue to sequentially decline for the nextcouple of quarters. I assume like you probably have a little bit outlook atleast for the next couple of quarters, I would think.

Ken Huseman

Yeah. I think we will see a bit of rate, already ratereduction in the fourth quarter because we've rolled back pricing which didn'treally impact the third quarter numbers too significantly. So, we aredefinitely see a little bit of erosion here at this in the fourth quarter.

David Anderson - UBS

What's you're…

Ken Huseman

That's what at 3% to 5% comes from.

David Anderson - UBS

Right. And then so; right now I mean what’s your best guessnow. When you think they kind of bottoms out. Are we looking at kind ofdiscontinued and kind of slide until who knows when or you think it maybesecond half '08 and starts picking up again.

Ken Huseman

Well, I think it’s probably a function of gas fieldactivity. If we come out as the winner with the full storage it will continue,that side ways drifting down probably will continue. If we come out as winnerwith gas demand up and gas prices up then it goes the other way.

David Anderson - UBS

Okay. And one of your competitor is talking veryspecifically about the fluid services saying that they've thought they sawprobably the most amount of equipment coming into that part of the business,kind of it really seem to be the easiest part of its two out of equipment two.Yeah, you hold up your numbers pretty well in the revenue side. Can you talk alittle bit about in terms of the pricing there, I think you made a blankstatement across both of those segments there 3% to 5% price declines. Is itharder, I mean I guess it’s a severe in the fluid service side, and we wouldyou expect that to get worse.

Ken Huseman

Well, I think that’s a really regional issue in the fluidservice business. I think I'm not trying to put words in their mouth, but Ithink in the resource plays where those big frac place we’re drilling, therehas been just a, huge amount of new truck and tank fleet growth in thosemarkets; less so, in some of the more Mandan operating areas where we providemost of our services.

We’ve seen the growth in the fleet, for sure, but probablynot to the magnitude that you might see in, for instance the Barnett Shale andsome of other place that are people are chasing those big fracs.

David Anderson - UBS

So in other words, your fluid services side you feel alittle better about kind of holding that steadier whereas well servicing soundthere could might be a little bit more of a down…

Ken Huseman

No I think they’re kind of the same, where they are in thesame position in the markets where we’re in. We’ll see some drifting down,drifting sideways to down in the fluid services business too because we areseeing equipments adds our sales and other competitors in our markets. But notthe huge run up that we hear about in some of these other market.

David Anderson - UBS

Okay. And one last, you know, if I maybe hit this already.Net interest expense for fourth quarter kind of picked up good business in thethird quarter, I am sure there’s a reason for that, but what are we looking forthe fourth quarter here?

Alan Krenek

I would say be pretty similar to what it’s been for the lasttwo quarters.

David Anderson - UBS

Okay. It’s all for me.

Ken Huseman

It a little bit less depending on what our cash balance is.

David Anderson - UBS

Thanks Alan. Thanks Ken.

Ken Huseman

Okay.

Operator

And our next question comes from the line of Erick Kalamas(ph) with Wachovia. Please go ahead.

Erick Kalamas - Wachovia

Hi, good morning guys.

Ken Huseman

Good morning.

Erick Kalamas - Wachovia

Ken I am curious, I know you haven’t given guidance oncapital spending for ’08. But where would you envision the greatest opportunityto be, we talked about some of the risk might be, where you think some of thegreatest opportunity might be headed out in 2001 to 2008?

Ken Huseman

Probably, in the run of acquisition more than the internalgrowth, because of the shake out that the sideways movement and activity anddownward movement activity causes.

Erick Kalamas - Wachovia

Would you expect in that context, I think may look one ortwo other competitors signaled the same type of behavior, would you suspectthat multiple might not come down as much it is anticipated. Just give anincrease competition or how would you handle that?

Ken Huseman

It’s a multiple, acquisition multiples?

Erick Kalamas - Wachovia

Yeah.

Ken Huseman

That’s a good question. We just have to see, I would expectthat we all have our criteria that we’re going to confirm too and we’re notgoing to bid up anything beyond what we’re willing to pay.

So, at least from our perspective they will either be withinour criteria or where or we won’t be able get them done.

Erick Kalamas - Wachovia

And then, in relation to the kind of corporate financeactivity, would you consider during some equity repurchase?

Ken Huseman

That’s not in the quandary now, if we keep piling up cashlike we are right now and we can get deals done and we’ll revisit that idea,well quarterly.

Erick Kalamas - Wachovia

Thanks guys.

Operator

Our next question comes from the line of Robert Christensenwith Buckingham Research Group. Please go ahead.

Robert Christensen - Buckingham ResearchGroup

Yeah, two questions Ken on the oil markets that you serve,is there any sense of urgency that is build up with $98 oil, I meanmaterializing here in the last two months. I mean, I think the world was kindof giving a custom-built $65, $70 a barrel and surprise, surprise, $98. We baila lot of the ground today with a whole hell of a lot more, I would thinkthere'll be some urgency in your principal markets.

Ken Huseman

I don’t think anybody was letting a well lay idle. Even at$50 a barrel, the cash flow was pretty substantial. So, all of that worked thatis available was being done, our customers who are keeping and all operatorswho are keeping their wells in production.

I think what we’re seeing now and what we expect to grow ourefforts to boost production further through enhanced recovery and some of theseold ageing oil fields, infield drilling and more extensive workovers at littlebit more capital intensive and require longer, longer view than just putting awell back on line, so to speak.

However, those projects take a long time to engineer, lot oflegal work involved in putting properties together in some cases. And all ofthat requires human resources that are already stretched pretty thin across theoil field.

Robert Christensen - Buckingham ResearchGroup

Another follow-up question. On your fleet of work over rigs,how many would have, let's say, maybe a standard engine, if you've done onehalf of your fleet over since ’04, do we have a standard engine that maybe hasa longer life on it than the other engines and maybe is more fuel efficient interms of gallons per hour?

Ken Huseman

Yes. Even the half of the rigs that have not been completelyrefurbish and aren't new, and had engines upgraded over the last five or sixyears, most of our engines are now the more fuel efficient engines and we don’tlet till the rig goes down for refurbishment.

Wee replace the engines about every 10,000 hours, 6,000 to10,000 hours depending on use. So we cycle those engines, we place thoseengines with fuel-efficient engines, as they need to be replaced. So, a biggerproportion of our fleet already has been converted to that.

Robert Christensen - Buckingham ResearchGroup

Does that give you a little bit of a competitive advantageversus some of the people that have thought some of your older rigs that you'veput on the market, I mean, just fuel costs these days being what they are, doyou that advantage at least?

Ken Huseman

If they try to work those rigs that we’ve sold in theircurrent condition, they're definitely going to be at a competitivedisadvantage. And anybody that is, the any of our competitors, as an engine hasto be replaced, and as they say that we're out after 10,000 hours or so, 10,000hours, now that’s roughly four to five years over the work. They’re going to replaceit with a more fuel-efficient engine.

Robert Christensen - Buckingham ResearchGroup

Thank you.

Ken Huseman

Okay.

Operator

Our next question comes from the line of Doug Becker withBanc Of America. Please go ahead.

Doug Becker - Banc Of America Securities

Thanks. Alan, circling back on CapEx, you're reducingspending in 2007, what type of investments are you scaling back on? Is thereany theme there?

Alan Krenek

You mean for the fourth quarter?

Doug Becker - Banc Of America Securities

Correct.

Ken Huseman

Well, our well servicing segment is a little bit less in theexpansion, as well as just generally in the fourth quarter you're going to getsomewhat of a slowdown in CapEx, just because of time of the year. But it'spretty much going to be every time I would think.

Alan Krenek

But most of the expansion and work investment was doneearlier in the year. So, we don’t have much of that left to do this year. Andso what we see is just kind of normal maintenance or sustaining CapEx just tokeep the fleet in the field between now and end of the year.

Doug Becker - Banc Of America Securities

Right. So, I guess maybe just try to get the handle on whatit accounts for the $15 million to $20 million reduction, just in the fourthquarter, was that just something that’s cumulative over the course of the year,that what you’re seeing in the fourth quarter coming in a little bit lower?

Ken Huseman

Right. I mean, most of the rigs that we have been receivinghave been paid for pretty much. In the fluid service businesses like Ken said,all those trucks and drivers pretty much have been ordered and received up tothis time, as well as any equipment for pressure pump and in wireline group.

It’s generally going to be across the Board, but wellservice and we’ll take up a pretty good reduction just because of the defermentof those rigs until next year.

Doug Becker - Banc Of America Securities

Okay, understood. And Ken, you've certainly done your partof consolidating some of the smaller players in the fragmented industry. I justwanted to get your various thoughts on the pros and cons of consolidation amongthe larger players in the world servicing space?

Ken Huseman

All I could say…

Doug Becker - Banc Of America Securities

Understood. Thank you very much.

Operator

(Operator Instructions) And our next question is a follow-upquestion from the line of Daniel Boyd with Goldman Sachs. Please go ahead.

Daniel Boyd - Goldman Sachs

Hi, thanks. I just wanted to follow-up on the capacityadditions, and to make sure I am completely understand you. So, you expectabout 300 rigs to come on over the next 12 months, and of that you expect 250to be retired industry wide, and of those 250 you would expect about 25 to bebasic world servicing rigs?

Ken Huseman

Yes.

Daniel Boyd - Goldman Sachs

Okay. And then on your current order book, you mentionedthat 25 replacements would be offset by newbuild and you expect 11 moreservicing rigs in the fourth quarter. So that means your current order bookstands at about 14 deliveries in ’08?

Ken Huseman

No, I think we have eight rigs to be delivered in the fourthquarter.

Daniel Boyd - Goldman Sachs

Okay.

Ken Huseman

And then we differ 10 plus ordered another 12 to 14.

Daniel Boyd - Goldman Sachs

14, yeah.

Ken Huseman

So we have 24 schedules for delivery in ’08, eight in thefourth quarter, and 24 in ’08.

Daniel Boyd - Goldman Sachs

And as you mentioned in the press release the economicremained pretty compelling for additional newbuilds. So would you expect thatorder book of 300 to continue to grow especially from some of the smallerprivate competitors?

Ken Huseman

No. I think that the 300 is kind of our estimate of thecapacity out there. I don’t know what the order book actually looks like forthose manufacturers. But I doubt there is people lining up quite like they werea year or so ago, because utilization has started moving started moving sideways to down whereas last year it was moving up in two years ago moving up at apretty good pace.

Daniel Boyd - Goldman Sachs

I guess, would anticipate that really was going on, there’sa lot of displacement in the market, so all of the newbuilds that are coming onare actually going to work whereas it’s the order rigs been pushed out or isthat correct?

Ken Huseman

Yeah, that’s correct.

Daniel Boyd - Goldman Sachs

Okay.

Ken Huseman

There’s still lot of equipment that’s pre 1975, that’s inthe field and as I said in previous conference call customers put up with thatall due inefficient equipment till they have a choice.

Daniel Boyd - Goldman Sachs

And then lastly, what is the lead-time, right now, if youwanted to get order new well servicing units?

Ken Huseman

I think, if you wanted one or two rigs, you can probably getit within the next three or four months. You wanted to order of slice it would takequite a bit longer, you could probably get a rig a month or so. But it willtake a lot of build up sizable fleet.

Daniel Boyd - Goldman Sachs

Great. Thanks that’s a very good color.

Ken Huseman

Okay.

Operator

And our next question comes from the line of Shawn Waun withCarlson (ph). Please go ahead.

Jim Borklyn - Carlson

This is actually Jim Borklyn (ph). Good morning guys. Kenwho is building your work over rigs.

Ken Huseman

Excuse me Jim say again.

Jim Borklyn - Carlson

Who is building your work over rigs?

Ken Huseman

We get orders from trade or industries in (inaudible).

Jim Borklyn - Carlson

Okay. I notice this Stewart & Stevenson appears get intied up and their building rigs too. So I was just curious. You say tiring (ph)rigs, does that mean you are actually cutting them up? Or does that mean thatyou're storing and waiting for a more opportunity time or you selling them tocompetitors or you shipping them Mexico?

Ken Huseman

Well we cannibalizing a few we are stacking a few that we'rejust going to differ the rebuild until we see a need it down the road. But forthe most part we’re selling them. These are for instance back in 73, 1965 modelrigs that are just too small, or have absolutely components to fit ouroperating model.

Jim Borklyn - Carlson

Is there a market for this sell for the broker (ph).

Ken Huseman

I don’t think so.

Jim Borklyn - Carlson

Okay. Okay gentlemen thank you very much.

Ken Huseman

Okay.

Operator

And your next question comes from the line Mike Heart (ph),Satellite Asset Management.

Mike Heart - Satellite Asset Management

Good morning guys. I was hoping you could just refresh ourmemories on the contractual status of your land rigs, how many are going tohave term deals and how many are in the spot market? Thanks.

Ken Huseman

All of are drilling rigs are on the spot market. They allhave multi well programs but no term.

Mike Heart - Satellite Asset Management

Okay. Thanks again.

Operator

And at this time there are no further questions. Pleasecontinue with any closing comment that you may have.

Ken Huseman

Okay. Thanks for your participation in the conference calland we will do this again in 90 days.

Operator

Thank you. Ladies and gentlemen, this does conclude theBasic Energy Services third quarter earnings conference call. If you would liketo listen to a reply of this conference you may do so by dialing either303-590-3000 or 1800-405-2236. You will need to enter the access code of11099827. Once again those reply numbers are 303-590-3000 or 1800-405-2236.Again you'll need to enter the access code of 11099827.

We do thank you for participation and for using the ACTTeleconferencing. You may now disconnect your lines at this time.

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Source: Basic Energy Services Q3 2007 Earnings Call Transcript
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