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Executives

Sheila Stuewe - Director of Investor Relations

Kenneth V. Huseman – President, Chief Executive Officer

Alan Krenek - Chief Financial Officer

Analysts

James West - Lehman Brothers

Michael Drickamer - Morgan Keegan

Pierre Conner - Capital One Southcoast

Mike Urban - Deutsche Bank

Operator

Welcome to the Basic Energy Services fourth quarter earnings conference call. (Operator Instructions) I’ll now turn the conference over to Miss. Sheila Stuewe, please go ahead.

Sheila Stuewe

Thank you, Michael. Good morning and welcome to the Basic Energy Services 2007 fourth quarter and year end conference call. We appreciate you joining us today. Before I turn over the call over to management I have a few items to go over.

If you’d like to be on our e-mail distribution list to receive future news releases or if you have experienced a technical problem and didn’t get one last night, please call us at 713-529-6600. If you’d 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 recorded replay until March 17, 2008. This information was also provided in yesterday’s earnings release.

Information reported on this call speaks only as of today, March 4, 2008 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 by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the company’s expected future financial position and 2008 guidance are forward-looking statements.

These forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and 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 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 the contents 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 CEO of Basic Energy Services.

Kenneth V. Huseman

Thanks, Sheila and welcome to those joining us on the call. With me on the call today is our Chief Financial Officer, Alan Krenek. You’ve probably read the press release, so we’ll briefly review our performance for the quarter and comment on current market conditions, but try to devote most of the time allotted for the call to questions.

As you read in our press release, our fourth quarter financial results were significantly below the fourth quarter of 2006. Stagnant pricing and lower utilization impacted each of our business segments. Net income of $19.5 million was 29% less than the $27.3 million reported in the fourth quarter of last year. Fully diluted earnings per share of $0.47 was 33% below the $0.70 earned in the fourth quarter 2006.

We continue to build the company with acquisitions and internal growth. Revenue for the fourth quarter of $226 million was 14% higher than the $197 million reported in the fourth quarter of 2006. That growth in revenue pushed EBITDA to $64.4 million, 4% higher than last year but the 28.5% margin was 3 percentage points lower.

The combination of new equipment delivered into every segment of the industry during 2007 and some reduction in gas-related activity resulted in there being sufficient equipment to match demand in most of our markets. Lengthy waiting list during the seasonally slower fourth quarter were uncommon in 2007. As a result, our utilization was down from the prior year and we had to be less aggressive on pricing.

As stated in our prior calls, labor continues to be our biggest expense and management challenge as the industry has a chronic shortage of experienced people. Wage pressure has moderated along with the slower growth in the drilling count in 2007 but still exists in selected markets and particularly in the more specialized positions.

More recently, fuel prices are adding pressure on margins directly and indirectly by driving the cost of most of our inputs higher. The press release provides the fourth quarter comparison by segment so I won’t spend more time on that here.

Briefly recapping the full year of 2007, revenue grew by 20% over 2006 to $877 million due to the impact of several acquisitions and our internal growth initiatives. Compared to 2005 and 2006 rate increases were smaller and more difficult to implement and did not offset the impact of higher cost and lower utilization. EBITDA increased by 12% reflecting a more competitive environment and the cost pressures we faced during the year. Fully diluted earnings per share declined to $2.13 in 2007 from $2.56 earned in 2006 as higher depreciation and interest expense consumed a large proportion of revenues.

Now on a sequential basis, revenue for the fourth quarter was down by $3 million or 1.5% from the third quarter. The revenue decline was actually less than we expected given the seasonal decline in activity related to shorter work days, holidays and less favorable weather. A full quarter of the West Oil acquisition, our fluid services business which closed in the third quarter, added approximately $2.3 million or 1% to total revenue and partially offset the seasonal slowdown. Segment margins were down slightly reflecting lower utilization rates.

EBITDA decreased by $4.3 million or 6% from the third quarter, with the EBITDA margin deteriorating by about 1.5 percentage points. Fully diluted earnings per share of $0.47, decreased from the $0.59 reported in the third quarter reflecting lower revenue and margins while fixed costs were flat.

Looking a little deeper into our major segments, well servicing revenue declined by $6 million or 6% from the third quarter, actually less of a drop off in activity than we expected. Rig utilization averaged about 73% in the quarter versus 78% in the third quarter. We operated an average of 386 rigs in the quarter, 1% more than the third quarter.

We added eight new rigs during the quarter, but retired seven 30-plus-year-old rigs, which will have a continuing positive effect on margins in future quarters. Hourly rates were stable for the quarter, averaging $409 per hour, compared to $414 per hour in the third quarter. That roughly 1% decline in hourly rate reflects the full impact of the rate reduction taken in the Permian market during the third quarter and was not an indication of further rate deterioration. I think you will recall we discussed that rate reduction in the third quarter call.

Segment profits of 38.5% was down from the 40.2% for the third quarter reflecting seasonally lower utilization. We have seen utilization in our well servicing segment improve modestly in the first quarter and expect it to trend up as the year progresses. As that occurs, we see a good chance of rate improvement mid-year.

Our contract drilling revenue declined by 500,000 in the quarter. We worked ten rigs at a utilization rate of 81% compared to nine rigs in the third quarter at about 87%. The fourth and last new built drilling rig was placed in service in September so we had a full quarter utilization for that rig in the fourth quarter. The average day rate of $14,600 was down 7% from the third quarter, as the market for our shallow rigs became more competitive. Lower day rates and lower utilization combined to drive the daily margin down to $5,300 per day from $6,700 per day in the third quarter. Day rates may suffer a bit more decline through mid year but an increased ratio of footage work may actually move our reported day rate higher. Margins will remain under pressure as competition for the best people causes wages to hitch higher and general price inflation seeps in.

Our completion and remedial services segment recorded a 3% decline in revenue compared to the third quarter. A modest amount of new equipment helped offset the seasonal impact of the quarter. Direct margins for this segment declined to 46.2% from 47.6% reflecting the fixed cost of labor. We think demand for these services will remain strong and pricing should be firm to increasing as the year progresses.

Revenue for the fluid services segment in the fourth quarter was $56 million compared to $52.7 million in third quarter. About two-thirds of that increase related to the full quarter impact of the West Oil acquisition. The remainder of the revenue increase was spread around our operations and reflects an overall increase in activity.

We sorted through our fleet to eliminate the older, less efficient trucks accumulated over the last several years; we retired and sold several dozen trucks in the quarter without hampering our productivity. Revenue and EBITDA increased by $4,000 and $2,000 per truck for the quarter respectively. The segment profit margin of 37.5% was up slightly from the 36.8% margin in the third quarter, reflecting the higher fleet efficiency.

At this point I’ll turn the call over to Alan to take you through the remainder of income statement and balance sheet.

Alan Krenek

Thanks Ken, and good morning to all of you. This morning I would like to review our income statement in more detail and then discuss our liquidity and capital resources. Our G&A expense for the fourth quarter of 2007 was $25.3 million compared to $22.3 million during the fourth quarter of 2006 and was essentially flat sequentially. The majority of this increase from the fourth quarter of 2006 reflects the growth of the company during 2007 particularly from the Jet Star and Sledge acquisitions. G&A as percent of revenue was 11% in the fourth quarter of 2007, the same as in 2006. In 2008, we expect the G&A expense as a percent of revenue will also average 11%.

Depreciation and amortization expense in the fourth quarter of 2007 was $26 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 have closed in the past 12 months, particularly the Sledge acquisition that closed in April 2007, and the Jet Star acquisition that closed in March 2007.

For 2008, we estimate that depreciation and amortization expense will be between $118 million to $120 million. This estimate includes the depreciation from the two acquisitions closed in late January as well as approximately $2 million of amortization of intangibles recorded from the Sledge and Jet Star acquisitions.

Net interest expense in the fourth quarter of 2007 was $6.7 million, up from $4.5 million in the fourth quarter of 2006. This increase is due mainly to the interest expense from the utilization of $150 million of our credit revolver for the cash portion in the Jet Star, Sledge Drilling and Wild Horse acquisitions that closed in 2007.

The effective tax rate in the fourth quarter of 2007 was 38% compared to 32% in the fourth quarter of 2006. We expect our tax rate will be 38% for 2008. As Ken mentioned earlier, we had net income of $19.5 million or $0.27 per diluted share for the quarter. Weighted average diluted share for the quarter were approximately 41.5 million. We do not expect our weighted average diluted share count in 2008 to differ that much from the count in the fourth quarter.

Our balance sheet remains solid. At December 31 we had a cash balance of approximately $92 million. Please note that in late January 2008, we used approximately $23 million of our cash balance for the Xterra and Lackey acquisitions.

For 2007, we had cash flow from operations of $199 million or 23% revenues compared to $146 million for 2006. Adjusted for the acquisitions that we made in late January 2008 we have liquidity of $129 million at December 31. In addition, we have $88 million of additional capacity for capital leases.

On December 31, our revolver had $150 million of borrowings unchanged from September 30. Our debt to EBITDA ratio was 1.6 times and total debt to total capitalization was 45%. Cash capital expenditures for 2007 were $98 million, $7 million less than 2006. We also entered into $27 million of capital leases for additional equipment in 2007.

During 2007, we completed eight acquisitions using combination of cash in our revolver of $201 million, plus $51 million of our equity for a total of $252 million consideration. We plan for cash capital expenditures for 2008 to be approximately $115 million which includes 24 new build rigs, 20 of which will be replacing older, less efficient rigs. In addition, we plan on $33 million of capital leases for additional equipment.

As a final note, in order to better reflect how we now manage the company, we will be revising our business segments beginning in the first quarter of 2008. Our business segments will be well servicing, contract drilling, fluid services and completion and remedial services. The well site construction services segment will be consolidated into fluid services. Very shortly we will provide the historical numbers based on the revised segments be an 8-K.

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

Kenneth V. Huseman

Thanks, Alan. Oil prices are certainly well above reinvestment levels for virtually all E&P companies. Gas prices on the other hand will have to show signs of sticking it current levels a little longer before we expect to see substantial increases in gas drilling.

Our customers have been keeping all their existing wells in production. As stated in our last call, we’re seeing indications of oil operators ramping up capital spending to optimize fuel performance with major workovers, enhanced recovery projects and infield drilling programs. Many of those are long lead time projects requiring substantial engineering and legal work.

As already stated, people shortages are a factor throughout the oilfield and the capital spending programs of many of our customers are likely being restricted by lack of personnel in field, technical and professional positions. Those projects however should start impacting demand by midyear.

Given what we hear from customers, we’ve developed a more positive outlook as we near the end of the first quarter. We expect our business activity to improve as the year progresses, sort of the opposite what we experienced in 2007. Based on our internal planning, we may see the opportunity to increase rates around midyear as activity improves. We will, however, continue to monitor pricing in each segment and market area and respond as necessary to maintain our customer base.

Regarding acquisitions, we believe the opportunities in the current environment are excellent and will likely increase through the year. We have previously stated that the recent turmoil in the debt markets would probably eliminate some of the financial players from the market for the deals we like to do. That seems to be proving true as the deal flow has definitely increased over the last several months. We expect to find a number of deals which fit our criteria.

Adding to the above, we expect a growing level of concern among sellers over the probable tax law changes which will impact capital gains associated with selling a business. That may drive some sellers to action before year end.

We closed two acquisitions in January which were previously announced. Those are representative of the deals available. We have several more under consideration at this time but again, due to the uncertainty in the timing of the close of those deals, we do not project the effect of those in any of the guidance we provide.

At this point, let’s turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Our first question will be coming from James West - Lehman Brothers.

James West - Lehman Brothers

Ken, during your prepared comments and in all of my discussions with industry participants acquisitions come up over and over again. It seems like there are a number of companies for sale right now. It also seems like a lot of companies want cash and historically have wanted to take your stock in this kind of thing. How much leverage or more leverage are you willing to put in the company to get these deals done?

Alan Krenek

1.6 times. We would be comfortable all the way up to 2 times leverage and it would take a pretty substantial amount of debt with the related EBITDA flow to get it up to 2 times. Of course, any bigger deals we could drive the leverage up to 2.5 times and I think we as well as the rating agencies would be happy with that.

Kenneth V. Huseman

We have the liquidity along with our cash flow this year to fund upwards of$ 200 million in acquisitions which is pretty significant given the type that we concentrate on. Now we wanted to do a bigger deal, which we have a willingness to do, then we would have to go to the debt market.

James West - Lehman Brothers

Ken most of the acquisition you’re looking at now are under $50 million?

Kenneth V. Huseman

Yes. Without exception I think every one is under $50 million.

James West - Lehman Brothers

Ken, it seems like new build activity in the well service piece of the business is certainly slow; I know you guys have backed off your programs, some of your competitors have also announced they have slowed their programs. Industry capacity at this point, how many rigs could we add to the market this year relative to how many we added last year? It seems like some of the construction capacity has slipped?

Kenneth V. Huseman

I think all the [inaudible] that was building rigs last year is still out there although the appetite for new orders has dropped off so they’re probably not quite as fully utilized and may be cutting back on some overtime. But as far as I know, no plants have been shuttered. But it’s a fact that we have seen a reduction in orders from our sales, a couple of our major competitors.

The other thing to remember regarding fleet growth is probably still 2000 of the rigs that are out there -- at least that many -- have not been significantly rebuilt since they were built prior to 1982. So there is going to be a lot of attrition whether its voluntary or not over the next several years as these rigs, some of them are approaching 40 years old.

James West - Lehman Brothers

Can you give us a sense of how many that entered the market last year were replacement versus incremental?

Kenneth V. Huseman

Yes, we’ve said in the past that we thought about half of the rigs were replacements and I would stick with that. We have seen a survey, we co-sponsored an independent survey recently that indicates that was the case, maybe even a little more.

James West - Lehman Brothers

Do you think that this year that will remain the same case or could we see actually more of the rigs that are delivered being replacement rather than incremental?

Kenneth V. Huseman

I think that real fleet growth is going to be less than that level of new builds because, although the new rigs aren’t being purchased by the guy that has the oldest rig, in effect, that older rig is being squeezed out the back end. So, one way or the other they are replacements if you follow my logic.

James West - Lehman Brothers

That certainly makes sense. Looking at that scenario you laid out of improving gas markets possibly at some point this year and price increases around mid-year, do you think that these price increases will be enough to offset the cost inflation that you continue to see within labor and spare parts?

Kenneth V. Huseman

Yes. We’ve been moving prices up a little bit here and there in most of our segments. I think we’ll continue to be able to do that. The wholesale rate increases that we saw in ‘05 and ‘06 were a little harder to get; I think we’ll see those come back into play to fully offset cost inflation. But then most of that is labor, although fuel is certainly a popular topic right now.

Operator

Your next question comes from Michael Drickamer - Morgan Keegan.

Michael Drickamer - Morgan Keegan

I am following on the previous question about the fuel efficiency of the rigs and how fuel is becoming an increasing cost for you guys. Can you help quantify perhaps how much more fuel efficient the new rigs are, perhaps the 24 that will be added in 2008 versus the 20 that are going to be retired?

Kenneth V. Huseman

Well, probably less significant than you might think; most of our older rigs have been upgraded over the last five or six years with more fuel efficient engines so the fuel efficiency of a new rig parked next to the older rig that has been re-powered is not all that substantial. It’s more on the line of just general efficiency of the rig. We eliminate a piece of equipment that has chronic maintenance problems; may not be the right capacity to catch most of the work, et cetera. But we’ve been repowering our rigs over the last five or six years as more fuel efficient engines were available and the older engines wore out. So, I don’t want to put too big a load on that.

Michael Drickamer - Morgan Keegan

As you look at the fleet here and what you are going to be retiring in 2008, going forward, how many rigs do you still have in the fleet that are over this 30 years and could be retired in 2009?

Kenneth V. Huseman

Well, we indicate that over half of our fleet which is about 200 were built prior to ‘85 or have not been professionally refurbished. Now we will rebuild a portion of those, probably 25 or so year. We probably will need to replace 20 or so a year. This depends on the activity levels and really when we dig into those oldest rigs and determine whether they need to be rebuilt or retired. So we’ll continue to upgrade our fleet as we have since we started this project back in 2004.

Michael Drickamer - Morgan Keegan

I know its way early to comment on 2009, but on a macro basis looking forward, we could assume you will continue to replace about 20 rigs a year?

Kenneth V. Huseman

Yes, I think that would be a safe bet. We have about 200 rigs that are 20 something years old and as they get older we’ll need to keep pulling them off and replacing them with the newer rigs. That’s one of the advantages we have; we have a lot of really low cost, low capital cost rigs in our fleet. We can either rebuild and put them back out, retire them depending on the circumstances and then replace them. So we’re going to end up with a fleet that in the future has a very good age profile so that not all of our fleet is marching towards the cliff at the same time.

Michael Drickamer - Morgan Keegan

When you say retire these rigs, are we talking about cutting them up or they stacked out in yards where potentially they could come back at some point?

Kenneth V. Huseman

No, we don’t stack them out, we identify them as useful for parts, we cannibalize, we have other rigs that we see a benefit to do that with. But generally we sell them and they go into a market where we’re not interested in competing. Some of them leave the country. In fact, two out of the three that we sold recently are leaving the US or that’s at least what we understand.

Keep in mind that when we retire a rig, we expect it to require upwards of $0.5 million to put back into regular service where we can run it 50 hours a week. So we don’t consider selling that into the open market a major threat in our markets because we’re going to have to spend a lot of money on it to get it up to where they could run against us day in and day out.

Operator

Your next question comes from Pierre Conner - Capital One Southcoast.

Pierre Conner - Capital One Southcoast

A lot of good information on the counts and you are really looking at a net add of four; 24 new and then you are going to retire 20 that you could potentially upgrade, right? These will be 20 that you’ll take out of the fleet?

Kenneth V. Huseman

I would put the caveat on it that if business gets off and running like it was in late ‘05, ’06 we may delay the retirement of those 20 rigs but in the survey of the fleet by our operating management, those 20 rigs are scheduled for retirement. But as demand picks up if it gets to the heady levels of 2006 we can delay that retirement and keep working. Right now in this environment we don’t think they are competitive.

Pierre Conner - Capital One Southcoast

A little bit more on the pricing side, then. So in one thing I am interested in is in South Texas, I know there is a large competitor there that’s brought in some new equipment and you’ve felt that your pricing is stable here that we really don’t see any further reduction; so are you not seeing any more competition in South Texas that you need to meet, is it a different sort of market?

Kenneth V. Huseman

Well in South Texas I think the activity has picked up down there to offset some of that growth. Last year we had the phenomenon of two or three companies pumping a lot of new iron into that market in a fairly stagnant to declining market so there was a lot of rig on rig competition that seems to be abated, not only from the fact that the new builds have moderated somewhat but activity has picked up.

Pierre Conner - Capital One Southcoast

On the oil activity that you’ve mentioned, you made a callout specifically on enhanced recovery projects and I wondered if that was your analysis of the pricing or are you actively discussing with customers some potential large projects, some water floods, some injection work or something of that nature? Are you just sensing that’s the trend we are going to see?

Kenneth V. Huseman

No, we are seeing it. It is anecdotal but individual customers have projects underway that will be coming into play as the year progresses. Those things take a long time to develop the engineering. In some cases access to the C02 if that’s the way they are going, but it’s primarily just a result of the lead time associated with engineering those projects and in some case you are putting the land together and that sort of thing.

Pierre Conner - Capital One Southcoast

The nature of that work could be a lot of tubing leaks if you turn around and put CO2 in those wells, a lot of tubing because there is no way cold tubing could be used to replace the well service rig for that repair work.

Kenneth V. Huseman

Well, cold tubing is not a big threat on any well with threaded and joint pipe and so in these water flood conversions or enhanced recovery conversions typically I’m sure there is some application of cold tubing but typically a well serving rig is used to retrofit those wells and run whatever pipes they are going to use in the new wells, injectors and in the producers.

Pierre Conner - Capital One Southcoast

Moving on to fluid services, the revenue per truck increase was just efficiency gains and mix as a result of retiring the older trucks. Is that fair, is a pricing trend there?

Alan Krenek

Not pricing improvement per se, we in effect showed a increase in revenue per truck by reducing the denominator, eliminating some of the oldest trucks that we’ve acquired and that have got some age on them over the last several years and as activity shrunk a little bit in some markets we were able to high grade our fleet. You saw that, that tends to come in lumps. We will add a few trucks a month and then go through and peel off all the used ones all at once.

Pierre Conner - Capital One Southcoast

But there are no trends discernible up or down?

Alan Krenek

I think the pricing is okay in that business. We’re not to the point of jacking up rates. Now we do have a fuel surcharge in that business which automatically moves the rate per truck up as fuel increases. I would think that the revenue per truck, average for the quarter ought to be somewhere in between 85 and 87 on a go forward basis.

Pierre Conner - Capital One Southcoast

Ken, your 120,000 horsepower at the year end, where do you expect that to trend over the course of the year?

Kenneth V. Huseman

It will go up just modestly; we’ve got a few pieces of equipment that we are going to add. But not wholesale fleet additions like some of the competition is doing. We are adding a couple of trucks here and there. Not even 10% -- 5% or 6%.

Pierre Conner - Capital One Southcoast

Alan, you’ve said I think at the beginning on your change in reporting, were you going to give us historical and well site construction back into the other segments historically, is that what you said?

Alan Krenek

Yes. That’s correct. We’ll file an 8-K with that information here very shortly.

Operator

Your next question comes from Mike Urban - Deutsche Bank.

Mike Urban - Deutsche Bank

I wanted to dig in on the M&A side a little more. Certainly no secret you have seen some new capacity as new competitors are coming in on the well services side. Over the last year, year-and-a-half it seems like most of your efforts have been focused on the service side of the business, the drilling rig side of the business. Do you see an ability or a need to go back and reconsolidate the well service side of the business? That had been a trend for number of years there and then we seem to be seeing a little bit of deconsolidation?

Kenneth V. Huseman

Well, that is certainly a possibility; any of those companies that have an interest in exiting the business would be candidates for acquisition and we would be very interested. We’ve already purchase a flat rig company this year so there are a number of new competitors in various sizes out there that have come in over the last several years. I would expect some of those to be ready to sell.

For various reasons the market has gotten a little bit more competitive since ‘05 and ‘06 when it look pretty easy; seems a little tougher now. There are some advantages probably to sell before the end of this year in the event to tax code changes, depending on who gets elected. So we think there is going to be a busy last half of the year.

Mike Urban - Deutsche Bank

You’ve broken out the contract drilling side. Is that an indication of an interest to do more in that side of the business or just more transparency in the numbers?

Kenneth V. Huseman

Well, certainly more transparency when you add the contract drilling business to the well servicing business it kinds of goofs up the rates per hour, we end up breaking it out separately anyway, so we just break it out completely. But as we said when we did the Sledge Drilling acquisition, we have an interest in expanding that business. It’s not so significant now as a standalone service line, but it will be if we can execute our growth plans.

Operator

We haven’t registered any further questions at this time.

Kenneth V. Huseman

Thank you all for joining in and we look forward to talking to you next quarter.

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Source: Basic Energy Services Q4 2007 Earnings Call Transcript
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