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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

Basic Energy Services, Inc. (BAS) Q3 2007 Earnings Call November 9, 2007 10:00 AM ET

Operator

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 and following the presentation; the conference will be open for questions.

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

Sheila Stuewe

Thank you Craig and good morning and welcome to the Basic Energy Services 2007 third quarter conference call. We appreciate you joining us today. Before I turn the call over to management, I have a few items to go over.

If you'd like to be on our email distribution list to receive future news releases or if you experience a technical problem and did not get one last evening, please call us at 713-529-6600.

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

This information was also provided in yesterday's earnings release. Information reported on this call speaks only as of today November, 9th and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

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

All statements regarding the Company's expected future financial position and 2007 guidance are forward-looking statements. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties, and other factors, many of which the company is unable to predict or control, that may cause the company's actual results or performance to be materially different from any future results or performance expressed or implied by those statements.

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

Furthermore, as we start this call please also refer to the statements regarding forward-looking statements incorporated in the company's press release issued yesterday. And please note that the content of our conference 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 our performance for the quarter and along with current market conditions and devote most 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 earnings per 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 record for the Company.

EBITDA $68.8 million, also a new record, was 6% higher than last year. But the 30% margin was 3 percentage points below what we recorded last year. We were not able to push the higher revenue through to the bottom line due to lower utilization levels that we enjoyed in the third quarter of 2006.

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

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

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

Our well servicing segment produce revenue in the quarter 13% higher than 2006. The sledge acquisition contributed about two-thirds of that increase. The remaining one-third was generated by the 11% growth in our well servicing fleet and 9% higher hourly well servicing rates.

Offsetting those positives, well service reutilization at 78% was 12 percentage points lower than last year, reflecting the market factors that already mentioned. This segment's operating margin declined by 4.9 percentage points due to lower utilization and the resulting under-absorbed labor.

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

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

The JetStar acquisition, which closed in the first quarter of this year, was the largest of those and added approximately $18 million to revenue in the quarter. The 48% direct margin for this year was down from the extremely high 51% margin recorded in the same quarter last year. This reduction in operating margin reflects some slight deterioration in pricing and continued pressure on wages for the specialized labor required for the writing of these services.

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

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

Our operating margin at 37% was down less than two percentage points indicating good cost control and stable pricing. Our smallest segment, well site construction, had a revenue decline of 19% on lower drilling activity in southwest Wyoming with a bulk of our business in this segment has dried.

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

Operating margins were essentially flat with the prior quarter 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 margin up 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 operating profit.

At this point I'll turn the call over to Alan to take you through the remainder of the income statement and balance sheet. And then I'll get 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 our liquidity and capital resources.

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

Depreciation and amortization expense in the third quarter was $24 million compared to $17 million in the same period of 2006. This increase reflects the substantial capital expenditure program we've had in place as well as the eight acquisitions that we closed in the past twelve months.

Sequentially depreciation and amortization expense was flat due mainly to the large amount of retirements in the current quarter and an adjustment procuring that depreciation on an acquisition made in the earlier part of the year.

Net interest expense in the third quarter of 2007 was $6.5 million up from $4.1 million in the prior year quarter. This increase is due mainly to the interest expense from the utilization of $150 million of credit revolver for the cash portion of the JetStar Sledge Drilling, and Wild Horse acquisitions 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 tax rate for 2007 will be between 37.5% and 38.

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

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

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

At September 30th, our revolver had a $150 million of borrowings and change from June 30th. We paid for the acquisitions of Steve Carter, Inc. and Hughes Services in late September from our existing cash balances.

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

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

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

Ken Huseman

Thanks, Alan. All prices are certainly well above reinvestment level for most E&P companies. Gas prices on the other hand will 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're seeing indications of all operators ramping up capital spending to optimize field performance with major workovers, enhanced recovery projects, and internal drilling programs. Many of those projects are long lead-time projects requiring substantial engineering and legal work.

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

Contrary to our comment in previous conference calls, we have initiated modest price rollbacks in selected markets due to competitive pressures. Those reductions amounting to 3 to 5% in our wealth servicing and fluid services segments, will impact results in the fourth quarter. We will continue to monitor pricing in each segment and market area and respond as necessary to maintain our customer base.

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

While we don’t include the impact of acquisitions in our guidance, we believe the opportunities in the current market are excellent and will likely get increased even more. We stated last quarter that the recent turmoil in the debt markets would probably eliminate some of the financial players from the market for the deals we'd like to do. That seems to be proving true as the deal flow has definitely increased over the last several months and should result in our finding more deals, which meet our criteria.

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

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

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

The range of service and market coverage in the most active oil and gas fields provides and excellent platform for us to continue our growth.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the 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 know you've alluded to some 3% to 5% pricing discounts recently both in the pressure pumping business and well service, rig business.

In the fourth quarter than first quarter which tend to be seasonally slower in terms of utilization, do you expect further pricing decline, and I guess, could you characterize which regions you saw the kind of 5% decline and which regions are more flattish?

Ken Huseman

Well, let me correct something, you mentioned that the pressure pumping and well service exactly are fluid services in well servicing business line.

James West - Lehman Brothers

Okay. By mistake.

Ken Huseman

Based on the pricing. We've responded in West Texas where there are just in across the board rate decline, I think it was about 3%. And then in some of the other markets it's more of a bit more by localized approach.

South Texas has been particularly weak, its showing signs of improving just in the last couple of weeks its activities increased and East Texas 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 as pretty 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 everybody understands this seasonal decline just depends on how much equipment gets moved around, what the outlook for the gas activity is. If gas activity stays flat through the first quarter then we might see some more redeployment of equipment into these oil markets.

James West - Lehman Brothers

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

Ken Huseman

Very little. What we've seen there boys is rapid, few lately over 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 put through. And I think we've been recovering costs, but we've been getting much additional margin on those inputs.

James West - Lehman Brothers

Okay. I see. Then on the acquisition front, it sounds like your fluid increase pretty significantly. Could you make a comment on the quality of the acquisition to this point of the companies and the assets they are up or so.

Ken Huseman

Yes, it's pretty much across the spectrum. There are just more of them, more deal flow, some of the financial players that got in the business 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 say its 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 with Raymond 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 some of the gas areas and to some of the oily areas. And I think you said that kind of the lead times in some of those was taking a bit of time.

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

Ken Huseman

Okay. We direct the some of the new deals earlier in the year second, third quarter from the Rockies to Princess West Texas and some of the 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 or oil that are trying to move into some of the oil areas that they haven’t been in before. If you look at kind of the ASE rig count. I think about third of the rigs, the third of the well servicing rigs roughly maybe acquire between the fourth and the third of the existing well services rigs they are in the Permian Basins and always have been.

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

So, I guess to answer your question, the oil markets have not been able to observe that equipment without some utilization erosion and now pricing erosion.

Jim Rollyson - Raymond James

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

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

Ken Huseman

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

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

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

But currently all of our new bills are going for, virtually all 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 Boyd with 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 what business lines you’re seeing, I guess, you’re seeing the most opportunity and couple quarters ago you talked a little bit more about expanding further into land drilling, can you just update us on your thoughts there?

Ken Huseman

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

Some of those owners are wanting some relief. Some activity in well servicing has popped up again recently. Fluid services; there’s always a few mom and pop deals out there. So, I’d say it’s across the board just as I said 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 in the Canada or are they more in the regions you’re currently operating?

Ken Huseman

The opportunities are definitely there to expand into Canada, 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 any estimates there? What you see the capacity additions industry-wide are going to be over the next 6 to 12 months.

Ken Huseman

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

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

Obviously, with activity, gas activity, where it is right now, 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 Pickering with 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 industry is 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. Is it sold into different service, can it come back at you at some in time or is it really gone.

Ken Huseman

Well, it’s a combination of things, we canalize a few rigs or 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 shallow oil fields, gas fields where we don't compete. Generally, we don't feel like they're competitive in the market that we participate in or would keep them.

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

So, we sold those rigs for about 3,000 a piece and so if we look 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 see a little bit better value to the company and sell again. We do think they're going 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 talking you're price roll back is that, Ken is that, are you guys being proactive there. Are you kind of the first in the market to do this or are you following others that have done it. I'm just trying to understand if you're leading or following one of those price action.

Ken Huseman

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

Dan Pickering - Tudor Pickering

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

Ken Huseman

Well, obviously, through the cycle you make a judgment based on what you foresee utilization going to what’s causing the drop in utilization. What’s coming down pack; certainly our utilization numbers that you get to or you really just start idling even new rigs and shuttering offices and 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 these independent, the mom and pops that are more cash flow oriented, as long as I don’t have to buy a money to buy the rigs, they take a little different view of it.

Alan Krenek

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

Dan Pickering - Tudor Pickering

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

Ken Huseman

That’s correct and just based on a recent review of the recent AES rig camp and weather if it put outs. If you look at the, you have the kind of add all the numbers together, but the industry added about almost a 100 rigs in the quarter. They only increased its active rigs by about 15; the stacked rig count grew quit a bit, so that just means that people moved in from active as they got those new rigs in and staked older rigs.

And we are doing little bit more work to understand that and I think we will have more clarity on that in the next conference call exactly what the industry is doing in that respect. But we have said in the past that we felt at least half of the rigs that were coming in were going to allow retirement 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 CapEx budget have you set that yet?

Ken Huseman

We are working on it. We are preparing down the wish list right now. Our guys in the field are still pretty anxious to get more equipment that they think they think they can work at great rates. So, but we are not ready to release any rate yet. We are trimming it back and given what, I just said in this conference call.

Alan Krenek

Sure.

Dan Pickering - Tudor Pickering

Just kind of qualitatively, do you think that number is active 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 it out, you specifically mentioned well services and the fluids business as kind of two areas of price weakness. You didn’t mentioned your pressure pumping business and again, I apologize if you talked about it earlier, but it sounds like your utilization and activity levels very strong enough to kind of hold pipe levels at the current level?

Ken Huseman

Yes. It’s as I said the main pressure on margins in that business is labor, because of the specialized nature that labor force and some of 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 we haven’t, so I guess, that was driving our margin a little bit of margin deterioration. 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 Drickamer with 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 about opportunities to either increase efficiencies and or decrease operating cost going forward here?

Ken Huseman

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

Try to drive some costs out of the business. Of course labor costs are an issue right now because of low unemployment in virtually every oil field, oil and gas field in the country. So there is not whole lot we can do in terms of driving wage rates down in this environment and that’s not a way to build 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 fleet forward in our fluid services business with newer trucks.

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

Mike Drickamer - Morgan Keegan

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

Alan Krenek

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

Mike Drickamer - Morgan Keegan

Okay. Alan, kind of following up on a CapEx discussion for 2008. I think you commented that your third quarter of maintenance CapEx was about $11 million. Would it be fair to say that your annual maintenance CapEx would be something around of $44 million range then?

Alan Krenek

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

Mike Drickamer - Morgan Keegan

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

Alan Krenek

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

Mike Drickamer - Morgan Keegan

Okay.

Alan Krenek

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

Mike Drickamer - Morgan Keegan

Okay.

Alan Krenek

And as far as G&A for the fourth quarter, it's going to be 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 Kincaid with UBS. Please go ahead.

David Anderson - UBS

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

Ken Huseman

Yeah. I think we will see a bit of rate, already rate reduction in the fourth quarter because we've rolled back pricing which didn't really impact the third quarter numbers too significantly. So, we are definitely 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 guess now. When you think they kind of bottoms out. Are we looking at kind of discontinued and kind of slide until who knows when or you think it maybe second half '08 and starts picking up again.

Ken Huseman

Well, I think it’s probably a function of gas field activity. 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 winner with gas demand up and gas prices up then it goes the other way.

David Anderson - UBS

Okay. And one of your competitor is talking very specifically about the fluid services saying that they've thought they saw probably 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 a little bit about in terms of the pricing there, I think you made a blank statement across both of those segments there 3% to 5% price declines. Is it harder, I mean I guess it’s a severe in the fluid service side, and we would you expect that to get worse.

Ken Huseman

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

We’ve seen the growth in the fleet, for sure, but probably not to the magnitude that you might see in, for instance the Barnett Shale and some of other place that are people are chasing those big fracs.

David Anderson - UBS

So in other words, your fluid services side you feel a little better about kind of holding that steadier whereas well servicing sound there 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 the same 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 are seeing equipments adds our sales and other competitors in our markets. But not the 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 the third quarter, I am sure there’s a reason for that, but what are we looking for the fourth quarter here?

Alan Krenek

I would say be pretty similar to what it’s been for the last two 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 on capital spending for ’08. But where would you envision the greatest opportunity to be, we talked about some of the risk might be, where you think some of the greatest opportunity might be headed out in 2001 to 2008?

Ken Huseman

Probably, in the run of acquisition more than the internal growth, because of the shake out that the sideways movement and activity and downward movement activity causes.

Erick Kalamas - Wachovia

Would you expect in that context, I think may look one or two other competitors signaled the same type of behavior, would you suspect that multiple might not come down as much it is anticipated. Just give an increase 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 expect that we all have our criteria that we’re going to confirm too and we’re not going to bid up anything beyond what we’re willing to pay.

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

Erick Kalamas - Wachovia

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

Ken Huseman

That’s not in the quandary now, if we keep piling up cash like 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 Christensen with Buckingham Research Group. Please go ahead.

Robert Christensen - Buckingham Research Group

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 mean materializing here in the last two months. I mean, I think the world was kind of giving a custom-built $65, $70 a barrel and surprise, surprise, $98. We bail a lot of the ground today with a whole hell of a lot more, I would think there'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 that is available was being done, our customers who are keeping and all operators who are keeping their wells in production.

I think what we’re seeing now and what we expect to grow our efforts to boost production further through enhanced recovery and some of these old ageing oil fields, infield drilling and more extensive workovers at little bit more capital intensive and require longer, longer view than just putting a well back on line, so to speak.

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

Robert Christensen - Buckingham Research Group

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 one half of your fleet over since ’04, do we have a standard engine that maybe has a longer life on it than the other engines and maybe is more fuel efficient in terms of gallons per hour?

Ken Huseman

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

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

Robert Christensen - Buckingham Research Group

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

Ken Huseman

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

Robert Christensen - Buckingham Research Group

Thank you.

Ken Huseman

Okay.

Operator

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

Doug Becker - Banc Of America Securities

Thanks. Alan, circling back on CapEx, you're reducing spending in 2007, what type of investments are you scaling back on? Is there any 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 the expansion, as well as just generally in the fourth quarter you're going to get somewhat of a slowdown in CapEx, just because of time of the year. But it's pretty much going to be every time I would think.

Alan Krenek

But most of the expansion and work investment was done earlier in the year. So, we don’t have much of that left to do this year. And so what we see is just kind of normal maintenance or sustaining CapEx just to keep 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 what it accounts for the $15 million to $20 million reduction, just in the fourth quarter, 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 receiving have 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 to this time, as well as any equipment for pressure pump and in wireline group.

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

Doug Becker - Banc Of America Securities

Okay, understood. And Ken, you've certainly done your part of consolidating some of the smaller players in the fragmented industry. I just wanted to get your various thoughts on the pros and cons of consolidation among the 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-up question 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 capacity additions, and to make sure I am completely understand you. So, you expect about 300 rigs to come on over the next 12 months, and of that you expect 250 to be retired industry wide, and of those 250 you would expect about 25 to be basic world servicing rigs?

Ken Huseman

Yes.

Daniel Boyd - Goldman Sachs

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

Ken Huseman

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

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 the fourth quarter, and 24 in ’08.

Daniel Boyd - Goldman Sachs

And as you mentioned in the press release the economic remained pretty compelling for additional newbuilds. So would you expect that order book of 300 to continue to grow especially from some of the smaller private competitors?

Ken Huseman

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

Daniel Boyd - Goldman Sachs

I guess, would anticipate that really was going on, there’s a lot of displacement in the market, so all of the newbuilds that are coming on are actually going to work whereas it’s the order rigs been pushed out or is that 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 in the field and as I said in previous conference call customers put up with that all due inefficient equipment till they have a choice.

Daniel Boyd - Goldman Sachs

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

Ken Huseman

I think, if you wanted one or two rigs, you can probably get it within the next three or four months. You wanted to order of slice it would take quite a bit longer, you could probably get a rig a month or so. But it will take 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 with Carlson (ph). Please go ahead.

Jim Borklyn - Carlson

This is actually Jim Borklyn (ph). Good morning guys. Ken who 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 in tied 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 that you're storing and waiting for a more opportunity time or you selling them to competitors or you shipping them Mexico?

Ken Huseman

Well we cannibalizing a few we are stacking a few that we're just going to differ the rebuild until we see a need it down the road. But for the most part we’re selling them. These are for instance back in 73, 1965 model rigs that are just too small, or have absolutely components to fit our operating 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 our memories on the contractual status of your land rigs, how many are going to have term deals and how many are in the spot market? Thanks.

Ken Huseman

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

Mike Heart - Satellite Asset Management

Okay. Thanks again.

Operator

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

Ken Huseman

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

Operator

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

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Source: Basic Energy Services Q3 2007 Earnings Call Transcript
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