Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Sheila Stuewe

Kenneth V. Huseman - Chief Executive Officer, President and Director

Alan Krenek - Chief Financial Officer, Senior Vice President of Finance, Treasurer and Secretary

Analysts

James C. West - Barclays Capital, Research Division

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

John R. Keller - Stephens Inc., Research Division

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Luke M. Lemoine - Capital One Southcoast, Inc., Research Division

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Jim Spicer - Wells Fargo & Company

Travis Z. Bartlett - Simmons & Company International, Research Division

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Basic Energy Services (BAS) Q2 2012 Earnings Call July 27, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to Basic Energy's Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, July 27, 2012. I would now like to turn the conference over to Sheila Stuewe. Please go ahead, ma'am.

Sheila Stuewe

Thank you, and good morning, everyone. Welcome to the Basic Energy Services 2012 Second Quarter Earnings 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 listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the company's website at www.basicenergyservices.com, or by telephonic replay until August 10, 2012.

Information was provided in yesterday's earnings release. The information reported on this call speaks only as of today, July 27, 2012, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of the 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. These forward-looking statements are based on management's current expectations, include known and unknown risks and 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 materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include risk factors disclosed by the company in its registration statement or its Form 10-Q for the year ended December 31, 2012 and subsequent Form 10-Qs filed with the SEC. Furthermore, as we start this call, please also refer to the statements regarding forward-looking statements incorporated in our press release issued yesterday, and please note the contents of this conference call are covered by these statements.

At this time, I'll turn the call over to Ken Huseman, President and Chief Executive Officer.

Kenneth V. Huseman

Thank you, Sheila. Welcome to those joining us on the call. Alan Krenek, our Senior Vice President and Chief Financial Officer, is joining me on the call today. Our earnings announcement released yesterday evening provides a fairly comprehensive discussion of our second quarter results.

Rather than reread that, I'll ask Alan to take us through the financial statements before coming back on to discuss operational details and our outlook.

Alan Krenek

Thanks, Ken, and good morning. Upfront, I wanted to review the special items that occurred in the second quarter. Included in G&A expense was a charge of $2.9 million for an accrual of an estimated liability for sales and use tax based on an audit by the state of Texas for the years 2006 through 2010. This $2.9 million charge represents 0.1% of the amount of sales and expenses that were subject to this audit for the 4-year period.

It also included an expense of $1 million of pro-rata cost for our headquarters’ relocation to Fort Worth. We expect to incur an additional $6.2 million of costs in the second half of this year for this relocation.

Included in the tax provision is a $1.1 million -- or $1.9 million pretax reduction due to a refund of 2008 Texas margin tax. All further discussions will be based on results, excluding these special items unless specifically identified. Next, I'm going to give an overview of the sequential changes for the second quarter, segment revenue and profit margins. Ken will come back later to talk in detail about each segment's performance.

Second quarter revenue was $362 million compared to $371 million in the first quarter, down 2.5%. Completion and Remedial Services revenue was down 5%, due mainly to lower frac pumping pricing during the quarter as well as lower pass-through revenue for sand, guar and chemicals.

Fluid Services revenue declined by 5% due to lower nontrucking revenue and lower activity in our Rocky Mountain region due to unseasonably warmer weather in the second quarter.

Well Servicing revenue increased by 3% because of increased revenue from our Taylor Rig manufacturing operation and an increase in plugging rig hours, which have a higher revenue per hour rate than workover rigs.

And finally, Contract Drilling was up 3% due to full utilization of our 2 largest drilling rigs, which started on contract in mid-January.

Second quarter segment profit margins were $129 million or 36% of revenue compared to $134 million or 36% in the first quarter. Fluid Services and Contract Drilling profit margins were both up, Fluid Services by 200 basis points to 36%; Contract Drilling up by 400 basis points, 37%. Completion and Remedial Services profit margin was flat at 41%, and Well Servicing was down by 300 basis points to 27%.

EBITDA on the second quarter was $87 million or 24% of revenue compared to $92 million or 25% of revenue in the first quarter.

Moving on to other parts of the income statement. G&A expense was $41.6 million or 11% of revenue compared to $41.3 million, also at 11% of revenue for the first quarter.

Increased personnel and stock incentive costs in the second quarter were offset by lower unemployment taxes. We anticipate the G&A will be about 11.5% of revenue as we go through the next 2 quarters of this year.

Depreciation and amortization increased to $45.5 million in the second quarter from $44 million in the first quarter as predicted. The increase is mainly due to the full quarter effect of the 2 acquisitions we completed in the first quarter, partial quarter effect of the Surface Stac acquisition in the second quarter, and capital expenditure additions in the second quarter.

We expect depreciation and amortization to be approximately $47 million in the third quarter, reflecting a full quarter effect of the Surface Stac acquisition and the capital expenditure additions expected in the third quarter.

Net interest expense in the second quarter was $14.8 million, slightly lower than the first quarter. As we capitalize $240,000 of interest in the second quarter, we expect the quarterly net interest expense to be $15 million per quarter going forward.

Our second quarter effective tax rate was 38%. We anticipate that our effective tax rate for the full year 2012 will also be 38%.

We generated diluted earnings per share of $0.39 in the second quarter, as reported diluted earnings per share which included the special items was $0.36. Weighted average outstanding diluted shares were 41.4 million.

As stated in our earnings release, we have repurchased approximately 1.1 million of our shares through July 25 at an average price of $9.47 per share. We do share repurchases as one of the best investment opportunities at current share price.

To the balance sheet, our cash balance rose $104 million at the end of the second quarter from $67 million at March 31. Our total liquidity, including availability under our revolver, was $335 million at quarter end. There were no amounts drawn on our revolver.

During the 6 months -- first 6 months of 2012, we generated $178 million in cash from operating activities. We used $125 million in investing activities, including $42 million for acquisitions and $87 million for cash capital expenditures.

We used $28 million, including $5 million for share repurchases, for financing activities. Our DSO at the end of the second quarter was 63 days, up slightly from 61 at the end of our first quarter.

During the second quarter, total capital expenditures, including capital leases, were $58 million, comprised of $19 million for expansion projects, $35 million for sustaining and replacement projects and $4 million for other.

Expansion capital spending included $10 million for the Completion and Remedial Segment, $6 million for Fluid Services, $2 million for Well Servicing and $1 million for Contract Drilling.

At June 30, we have $790 million of total debt, consisting of $225 million of senior notes due 2016, $477 million of senior notes due 2019 and $88 million of capital leases. Our total debt-to-EBITDA leverage as of June 30 was 2x and interest coverage ratio was 6.8x. Net debt to capitalization was 67%, with a longer term goal to get it down to 50%.

At this point, I'll turn the call back over to Ken.

Kenneth V. Huseman

Okay. Thanks, Alan. A review of our monthly operating updates reveal our steadily-deteriorating outlook from that provided on the first quarter earnings call. Continued softness in gas prices caused activity to decline further in the dry gas markets, while lower oil and NGL prices curtailed growth in the oilier markets.

In addition, the migration of equipment of all types into those busier markets capped utilization and pricing while creating additional competition for labor. We expect all of those factors to impact our business through the end of the year.

Now I'll talk a bit about each of our segments and start by dissecting the largest, our Completion and Remedial Services business. This segment really includes more than 1 dozen discrete service lines, many of which are very small in relation to the total company. This segment probably includes both our tightest and our most oversupplied service lines.

Pumping services, which comprises about 2/3 of the segment's revenue stream, includes stimulation and cementing assets. That group showed a revenue decline of $8 million or 7%, with the change related to lower stimulation activity and pricing. Revenue derived from our cementing business was essentially flat in the quarter.

While we managed the availability of guar and sand over the last several years, the cost of those inputs have become a substantial factor in the price of our services, accounting for as much as 75% of the total frac build in some cases. With the increased competition, we have not been able to tack on much of any markup on those commodities in recent quarters, which reduced overall margins to roughly 38%. Availability of both commodities improved dramatically during the quarter, with leading-edge prices for sand and guar down by 50% and more from recent highs.

We'll have to pass on those lower costs to the customer to remain competitive, but further erosion of margin should be more limited than otherwise would have been the case. We continue to forecast a relatively-full calendar for our pumping fleet through year-end, although pricing will remain very competitive.

The next largest service line in this segment, rental and fishing tools, comprises about 20% of the revenue stream and grew 7% sequentially. Open hole fishing services, driven by the drilling rig count growth in the Permian Basin, along with additions to the rental equipment fleet, drove that increase. Direct margins in this subsegment remain close to 50%.

We have one of the most extensive inventories of rental tools in the markets we serve. That inventory, along with close alignment with our workover business, provides the opportunity to add incrementally to this service line.

The third major revenue stream within the Completion and Remedial segment is our coil tubing and nitrogen service line, which accounted for about 10% of segment revenue in the quarter. The deployment of the 2 new -- 2-inch coil tubing units in May augmented the fully utilized fleet and drove the 5% growth in revenue for the quarter. Direct margins for this asset group continues to exceed 45%.

We expect our fleet to remain fully utilized through year-end. Despite that strong level of utilization, we do not plan to add equipment in this segment until we see improved industry utilization. We think we had great execution by our management teams across all the service lines in the Completion and Remedial segment as we have been able to protect, if not grow our markets in a very competitive environment.

Our Fluid Services segment revenue declined by 5% due to a combination of fewer truck hours and lower non-truck-related revenue. The decrease in truck hours related to lower utilization and gas-related markets, while our activity in oil markets flattened out. Gas activity declined throughout the quarter, while the growth in the competitive fleet in our liquids market held our growth in check. Seasonal declines in frac water heating in the Bakken market and lower revenue from skim oil sales reduced the average revenue per truck.

Even with the reduction in those high-margin services and increased competition, the segment direct margin improved by 170 basis points sequentially, but remains 120 basis points less than the level achieved in the fourth quarter.

Given the continued migration of the competitive equipment into the Permian Basin, where more than 40% of our Fluid Services assets are located and intense competition for labor, we believe margins will stick in the mid-30% range until growth of the drilling rig count resumes or gas markets improve and absorb some of the underutilized industry fleet.

Anticipated growth in demand for the full range of Fluid Services supports new capacity, particularly for disposal wells. We placed 3 wells in service during the quarter and expect to add another 6 to 10 wells by year-end. We'll also expand the truck fleet gradually through the remainder of the year and should end the year with over 930 trucks in the fleet. We are adding 36 LNG-powered trucks in cooperation with a major customer. The first of those have just been placed in service, so we'll report on the benefits of that technology in the next quarterly report.

Revenue from our Well Servicing segment grew 3%, driven by a 1% increase in rig hours and a 2% increase in rate per hour. The increases in rig hours and the rate per hour were due primarily to the full quarter impact of the 2 acquisitions closed in the first quarter. Lower activity in the Appalachian market and other dry gas markets caused utilization to decline.

Segment market declined by 300 basis points with 1/3 of that due to a shift in the amount of rig manufacturing revenue included in the quarter and the balance related to lower utilization in our gas markets. The Appalachian market saw several programs delayed due to weather and lower gas prices. It's difficult to downsize or reduce labor costs in the short term in that market, which reduced overall margins in this segment by almost 200 basis points compared to the prior quarter.

We have seen a significant pickup in activity in that market since the 4th of July, but have also revised our rotation and pay practices to mitigate the impact of the softness we anticipate will plague that market until gas prices improve.

The busier Well Servicing markets have seen intense competition develop, as service companies migrate from the oversupplied markets in the Barnett Shale, East Texas and Marcellus areas. Again, intense competition for labor is driving up wages while placing a cap on rates. We should see margins improve to the 30% level, but are backing off our expectations for mid-30% level margins until the industry can absorb the inventory of idle well servicing rigs. We don't expect that to occur until next year, so we've scaled back plans to reactivate the remaining stacked rigs until we can generate a good return on our -- on the capital required to do so.

Our smallest segment turned in the strongest sequential performance for the quarter. Daily margins in our drilling business increased 11% sequentially to $57.46 per day on essentially a flat day rate. The two 1,200 horsepower rigs activated in the first quarter, combined with effective full utilization of the 12-rig fleet, produced a segment margin of 37%, the highest margin achieved since late 2007.

We expect some pressure on day rates to develop between now and year-end as our current contracts roll off. Recent softness in oil prices has caused several operators to scale back plans, and new rigs entering the market may cause day rates to decline over the course of the next several quarters.

While well-qualified labor for this segment remains tight, we don't anticipate the extreme competition to develop as we're seeing in other segments in the Permian Basin. Obviously, if day rates soften, margins will follow. We do not anticipate building additional rigs in the current market.

In summary, we think the remainder of the year is going to be very competitive as demand remains flat and plenty of equipment is chasing the available work. Third quarter activity should benefit from favorable weather and long workdays throughout our footprint, but lower rates will likely trim revenue by as much as 3% sequentially. Margins will decline 200 basis points as some of the cost factors in the second quarter will be mitigated.

While in this environment, we consider projecting the fourth quarter to be long-term forecasting, we believe the seasonal fourth quarter downturn will be more pronounced than usual, with activity in pricing causing a 3% to 5% sequential reduction in revenue.

Regardless of the accuracy of those forecasts, we will focus on being competitive to protect our utilization and retain our experienced workforce. We have all the requirements to manage through this environment and take advantage of opportunities as they arise.

Before turning the call to questions, I would like to mention that this is the last quarter we will conduct the call from our Midland offices. Our location in Midland has allowed us to build a substantial presence in the Permian Basin, but our size and breadth of operations has made it increasingly difficult to find the quantity of qualified people required to manage the business and build for the future.

The ongoing drills in the oilfield in the Permian Basin has caused a severe personnel shortage that shows no signs of abating. I'd like to thank the people in this -- in our Midland office and the West Texas community who have helped us get to this point.

With that, operator, let's open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of James West with Barclays.

James C. West - Barclays Capital, Research Division

Ken, obviously, we know the problems of pricing and stimulation. But if you could highlight your other business lines, where you're seeing any kind of -- where you're seeing price weakness, if any, and where you might see actual price gains just given your product mix?

Kenneth V. Huseman

I wouldn't say that we're seeing ability to just raise prices in any segment right now. It's pretty competitive everywhere. It's our -- the location of our assets and our rental and fishing business and particularly -- in particular, in areas that are extremely busy, allows us rig utilization, stable pricing and, of course, working in close association with our Well Servicing business, really drives utilization and margins in that business. But we're not just able to raise rates across the board, really, any place, in any segment. I'd say that's our strongest subsegment. Coil has been very stable. We have a bit of a niche position in that market. Margins are good there. All of the other smaller subsegments within Completion and Remedial are pretty solid. Really, the price softness is isolated in the stimulation portion of the business.

James C. West - Barclays Capital, Research Division

Right. Right. Okay. And, Ken, have you seen any positive movement in gas plays given the recent move in gas prices?

Kenneth V. Huseman

We have seen instances where customers have started or resumed some workover activity. It's a -- I wouldn't call anything that we're going to count on changing the way we live, so to speak. But certainly, it works from a attitude standpoint on the part of the customer. The reduction in drilling activity really is the cause for the softness of the gas markets over the quarter.

Operator

Our next question comes from the line of Michael Cerasoli with Goldman Sachs.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

I'm interested in your comments about the equipment migration driving more competition. Has Basic completed its relocation program? Are there more to move -- more assets to move around? And then also, can you discuss who, in your view, is left at this point to relocate? Is it mostly the private players that are going to come -- that are going to be coming into the oil plays? Or do you expect more imports from larger players?

Kenneth V. Huseman

We've completed most of the repositioning that we intend to do. We feel like we have a base of business in those markets, and we're competing for that to retain that market position in every market we're in. So we're not abandoning any market, which, if we made more equipment moves would cause that. I think 2 of our larger competitors have commented that they are still in the mode of moving equipment around. But we've also seen a lot of small contractors move from the Barnett to the Permian, Appalachia to the Rockies, East Texas to the Permian, those sorts of moves. There's still some equipment left to move just depending on whether the competitors decide to do it.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Okay. And then thinking about the strategy of bringing Well Services back into -- bring some of your well service rigs back into service, how much visibility would you need on forward cash flow to get comfortable with kind of changing that strategy back to reactivation? How much does it cost to activate a rig? And then also, if labor cost inflation wasn't an issue, which I realize is quite a stretch, but if it wasn't an issue, would your strategy for rig activation have stayed consistent with where it was before?

Kenneth V. Huseman

Well, the real driver for that decision is the lack of available labor. It's just extremely tight for experienced people. We're in the -- we constantly have rig personnel in training. But it's hard to just pop out a bunch of experienced people in the short period of time. So that's one element. We've seen a lot of competition, rate competition, on deploying more equipment. So at this point, we have some assets left to, more fully utilizable, do that. But our earlier plan to activate the remaining 3 dozen or so rigs has just been put on hold. We'll take a more gradual approach. The cost to activate that equipment ranges from as little as $50,000 or $60,000 on up to several hundred thousand. So we're just going to take a wait-and-see attitude through this, the rest of this year. And we have the opportunity to act pretty quickly. I think you'll see them come out at 1 and 2 a month rather than 5 and 6 a month that we had projected earlier.

Operator

Our next question comes from the line of Jeffrey Spittel with Global Hunter Securities.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Maybe if you could speak a little bit to some of the new competition that you're seeing showing up in the Fluids business. Is this mostly mom and pops or is it some larger guys? And if it's smaller people, how much longer do you think that can continue?

Kenneth V. Huseman

Well, as long as the returns on a used truck are what we're generating now, it won't abate. A lot of these are sole proprietors that are buying some used equipment, putting it in the field. Large scale redeployments by major competitors, I think, has pretty much occurred.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Okay. And shifting over to Contract Drilling, could you just give us a reminder on what your contract coverage looks like and when things are set to reprice here over the next couple of quarters?

Kenneth V. Huseman

I think all of our contracts roll over by the end of the year or shortly thereafter.

Alan Krenek

Except for the 2.

Kenneth V. Huseman

Except for the 2...

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Except for the 2 new ones, right?

Kenneth V. Huseman

1,200 horsepower rigs, right, that...

Operator

Our next question comes from the line of John Keller with Stephens.

John R. Keller - Stephens Inc., Research Division

Just a couple of quick ones for you. I was wondering if you could maybe hit on some of the regional discrepancies, or if there are any, in the pumping business, kind of where you're seeing utilization and pricing, how it compares, say, from the Permian to the Rockies to the mid-Continent region?

Kenneth V. Huseman

Well, I think our utilization is pretty consistently -- pretty consistent across all those segments. We've moved equipment around. If equipment is underutilized, it's -- it's been moved to where it could be more fully utilized. So where we're located, we have essentially full utilization of that equipment.

John R. Keller - Stephens Inc., Research Division

And are there any big changes to sort of pricing dynamics one market versus another? Just trying to understand if the Permian or the Rockies or one of these particular areas is more contributing to the margin pressure?

Kenneth V. Huseman

No, I think it's -- I think the pricing is generally in sync around the country, at least from our -- for our participation. But again, we're not a player in the Bakken or the Marcellus or the Eagle Ford or those high-horsepower markets, so we're not a good proxy for what's going on out there.

John R. Keller - Stephens Inc., Research Division

Sure. Fair enough. And then just as you kind of think about the prospect of stable to possibly slightly lower activity levels as we look out over the next 6 or 12 months. And how do you kind of wrestle or sort of juggle that with how tight labor is, and the fact that these markets can turn on a dime? And do you keep your crews? Do you continue to pay people even through a period of slack utilization? Or -- I mean, how do you guys approach that or think about that?

Kenneth V. Huseman

Well, obviously, all the equipment doesn't do any good without qualified people. So over the last several years, we have adopted more of a retain -- a retention program during slower times. And that really whacked us in the second quarter in the Marcellus market, when we had equipment idle for a period of time but retained those people. Now we have revised our rotations and that sort of thing to try to mitigate that. But we try to high grade our equipment, highgrade personnel during periods of slowdowns, but keep as many of the experienced people as we can. We reshuffle crews, reconstitute crews with more experienced people, retain those and terminate the less experienced or the less productive employees. So it becomes a bit of a fixed cost compared to where we were 10 or 12 years ago, when there was plenty of people that you could pick up but -- on pretty short notice. So it does put downward pressure on margins when activity is pretty slow. That's why utilization, to us, is very important. And we really focus on retaining that work with existing customers and -- so that we can cover that employee cost.

Operator

Our next question comes from the line of Joe Hill with Tudor, Pickering.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Alan, what was your snubbing revenue for C&R in the quarter?

Alan Krenek

Just a second, let's see. It was about $7 million.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

$7 million?

Alan Krenek

Yes.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then you guys are talking about 1% to 3% margin degradation in Completions and Remedial over the next several quarters. How would you model that? 50 basis points a quarter?

Alan Krenek

I think you just have it going down gradually until you get to that 1% to 3% -- I mean, 100 to 300 basis point decline. It's not going to all happen at once, but you should probably model it for a gradual decline.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then the 1% to 3% is a little bit different than the 2% to 4% I think you guys were talking about last quarter. Is there a change in viewpoint here or am I missing something?

Alan Krenek

Well, it's not actually that much different. I mean, we -- last quarter, we had a 41%, but because of some unusual items, we said you should start off at a base of 43%. So margins went from "43% to 41%" so there was 200 points of the decline. So you -- we're basically saying another 200 basis points.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. That's helpful. And then with regards to the share repo, Alan, you said you've got a target debt-to-cap ratio of 50%, which is down pretty significantly from where it is today. But you're buying back stock and you look like, even in an environment we're talking about, you ought to be throwing off some free cash. So is the plan still to continue to buy back stock, or are we going to get more aggressive on paying down debt or creating cash for the debt targets?

Alan Krenek

I think for the present time with our share price in the groove that it's in, we view that as the most attractive investment that we can make versus paying down debt, which our first principal repayment is not until 2016. So we feel pretty comfortable with the debt position. And at this time, we would much rather buy back shares. We've got about 25 million left in our current program.

Kenneth V. Huseman

Yes, that's not a bottomless pit of share repurchase either. It's, as Alan said, 25 million of -- we'll continue to build cash between now and year-end.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. That's a good 2.5 million shares at current prices or so, so it's -- beats a poke in the eye.

Operator

Our next question comes from the line of Luke Lemoine with Capital One Southcoast.

Luke M. Lemoine - Capital One Southcoast, Inc., Research Division

Alan, I apologize if I missed this, but what was the Taylor OpEx during 2Q?

Alan Krenek

They had revenue of about $6 million, and the margin that it threw off was a little over $1 million. So $4 million -- I mean $5 million.

Luke M. Lemoine - Capital One Southcoast, Inc., Research Division

Okay. And then, Ken, I appreciate the forward-looking commentary on each segment, but what should we expect within Completion, Remedial and pumping? What should be the revenue decline there in 3Q? How should that kind of trend? I know it's a dynamic environment, but...

Alan Krenek

It should be pretty consistent with -- probably at about another 5%, Luke.

Operator

Our next question comes from the line of Marshall Adkins with Raymond James.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Ken, are you seeing any easing at all in the labor situation out there in the Permian now that things seem to be flattening a little bit?

Kenneth V. Huseman

It's -- not for the experienced people and the A level personnel, and that's what's driving this overall cost. There is still a real shortage of experienced people now. We're getting some more people into the market, but their productivity and experience and usefulness just isn't up to what you'd get if you could steal somebody else's experienced guy. So that's still a critical -- there's a critical shortage. And there's a critical shortage of everything across the spectrum, everything from a McDonald's store on up to accountants in the office.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Let's just, for now, assume things stay relatively flat through next year. If that's the case, tell me what should we be thinking about CapEx, just maintenance CapEx, or do you keep investing money in more equipment or you just buy back more stock?

Kenneth V. Huseman

There will be a combination. We're going to continue to address opportunities that come up. I think I've mentioned our rental and fishing tool business continues to provide opportunities to deploy capital. That's a fairly small business, but we have opportunities in our fluids business to add more disposal wells. We have a number of those in the permitting process, which will turn into capital projects next year. Additional trucks -- so we can grow our businesses virtually across the board to some level, almost regardless of what the market conditions are. So it will be, I'd say, fairly modest compared to last year's CapEx level in terms of expansion. But yes, we'll be able -- we'll continue to generate cash and we'll address growth opportunities, some acquisitions. We're looking at a lot of acquisitions. We're sort of waiting for expectations to reset a bit there. But certainly, share price -- share buyback, if the price stays in the neighborhood it's in now. And then we'll still build cash -- even with all that, I think we'll still build some cash to ultimately retire some debt down the road.

Alan Krenek

And, Martin, you should, as far as maintenance CapEx, it should be -- the base on that will be slightly over $108 or so.

Operator

Our next question comes from the line of Neal Dingmann of SunTrust Robinson Humphrey.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Say, Ken, what did you -- just want to make sure I heard you right, you said the downturn -- the seasonal downturn you think in fourth quarter just overall will cause -- overall revenue will be down another 4% to 5% because of pricing? Or if you could just clarify a little bit what you were saying around that, Ken.

Kenneth V. Huseman

Some of it will be activity, but we think the third quarter will be flat activity-wise. We'll see some price degradation. In the fourth quarter, we'll see some activity decline as well because of seasonal factors: shorter or fewer daylight hours, for instance, in our Well Servicing business; weather in certain markets starts to kick in. So it's probably just going to be evenly split there between activity declines and some pricing deterioration given the current market. Maybe that will abate by then, but that's not the way it'd been.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Okay. No, I understood. And then on the projections that you now are giving, kind of some of the, I guess, looking like you said at the 1% to 3% decline in the completion margins, et cetera, what kind of pricing, I guess, just sort of generically are you, on oil, are you assuming, Ken? Or what kind of oil -- or kind of rig count are you assuming as well? Rather flat from here, or what are you kind of assuming for the remainder of the year?

Kenneth V. Huseman

Well, we tend to forecast what we see right now, so that's what we see right now.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

I think that's a good idea. And then, lastly, just wondering on contracts now, you mentioned but -- all but a few couple of your contracts rolling off. Just wondering right now, what you're talking about, is bidding activity around that area, around the frac and the completion area, is that still stalled? I mean, everything you're seeing out there, everybody just wants to talk about just sort of day rates, or is there still opportunities to at least lock some people, and maybe not as long as you once did, but may be at least better than just typical day sort of rates.

Kenneth V. Huseman

Now, we're not a big fan other than, obviously, our drilling segment, which is driven by term contracts more or less. We've never tried to tie our pumping business up under term contracts. So we haven't changed our approach there, and I don't think the customers now are interested in it either. So we just haven't seen any -- we haven't changed our approach to that for sure.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then just lastly now on a go-forward for -- maybe for Alan. Just on the SG&A, it looked like it was down a little bit, not terribly much. Should that trend about, I think you said, about flat, Alan, going forward based on the second quarter?

Alan Krenek

Yes. I mean, we'll see a slight downtick in the dollar amount of G&A, but I think the percentage to revenue, it should be somewhere around 11.5%.

Operator

Our next question comes from the line of Blake Hutchinson with Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

First question -- sorry to revisit some of the opening commentary there, Ken, but wanted to understand again how you get from the 27-or-so-percent level on margins and well servicing to 30%. Was your commentary that, that's mainly improved activity and some change of practices in terms of rotation and pay in well servicing in that market, and that's more or less all the build back? Or are there other places within the franchise that you're getting back some margin as well?

Kenneth V. Huseman

The primary change would be an improvement in our Appalachian or Marcellus area, where we saw a pretty rapid decline in activity. It just couldn't get ahead of the cost there. But since then, we've not only revised how we move people around, but we've seen a recovery in that utilization. So...

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. So that fully explains the better guidance.

Kenneth V. Huseman

That's a big chunk of it now. We'll see some other improvements kind of incrementally around the country as well, but that's the main part.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay, great. Some commentary in the release about -- as Fluid Service activity declines in some of these regions, you get -- tend to get some more leakage in place like skim oil and frac tanks especially, small portions of the business but good profit centers. Do you think most of that has run its course and give you kind of a higher degree of confidence that you can kind of maintain margins because you don't have those kind of secondary hits coming at you?

Kenneth V. Huseman

Some of that was seasonal. We don't need to -- customers don't need to spend as much money heating frac water during the spring and summer as they do in the wintertime. So that's a seasonal -- we probably should have clarified that more. The drop-off in frac heating was -- is a seasonal event that occurs every year as weather warms up. But it occurred more quickly and to a greater extent this year because weather warmed up in the Rockies...

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

So sequentially, you can get actually some add-back from that?

Kenneth V. Huseman

Yes, as we go into the winter, we'll get the -- that will be the opposite impact. Skim oil sales, we sell that oil at prevailing oil prices. So there's nothing you can do about that other than hope the price of oil goes up. And also, in this environment, as things slow down, customers tend to process their water a little bit more before they let us have it. It'll have less skim oil entrained in it. So it's a combination of factors there. But I think the big lick has been taken on that, particularly in the frac heating side for the summer months.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Great. And then kind of through the course of the quarter with your monthly releases, Ken, you're pretty honest about specific customers detailing decreases in spending plans in the back half. I mean, was that mainly specific, first of all, mainly specific to your rig business? And secondly, I mean, does the -- you were -- we were releasing, at times, you had sub-$80 oil? Does that conversation change? $90 oil, is it that sensitive an instrument? Just trying to get your kind of bigger picture thoughts on that.

Kenneth V. Huseman

I think it probably relates to the outlook. People don't react to daily fluctuations, but they do react to where expectations are going to be 3 and 6 and 9 months down the road. So if oil prices moved up solidly above $90, I think in several months, and stayed there, I think in several months we'd be talking a different tune.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

And were the specific changes in plan more of an impact to kind of your rig business directly than elsewhere? Were those the conversations?

Kenneth V. Huseman

Now, though, it didn't impact our rig business yet, our drilling rig business yet. It impacts overall demand for everything, though, whether it was our rig or somebody else's. It puts a piece of equipment on the market. So it trickles through --and then, of course, they're drilling less wells, so they need less frac equipment, will need fewer trucks, tanks, et cetera. So it trickles through, sooner or later, to everybody.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Got you. Got you. So it's just a bigger picture commentary. And then sometimes when you start to -- off with the holiday and a down market or softer markets kind of linger for the month, but it didn't sound like the impact of 4th of July kept activity from kind of coming out strong out of the gates. Is that reading that commentary correctly?

Kenneth V. Huseman

I think that generally the 4th of July holiday wasn't much worse than we would have projected. It's hard to nail that down exactly. It fell in the middle of the week, which is kind of an oddity this year. So the impact lingered around or kind of impacted the week before and the week after a little bit.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

But no feeling that you have kind of a lost month because things started out so poorly?

Kenneth V. Huseman

No, we're not going to use 4th of July as an excuse, I guess.

Operator

Our next question comes from the line of Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

I think most of my questions have been answered. More of a, I guess, tactical...

Kenneth V. Huseman

Did we lose you?

[Technical Difficulty]

Operator

And our next question comes from the line of James Spicer with Wells Fargo.

Jim Spicer - Wells Fargo & Company

Quick question. Given that you have no borrowings under your credit facility today and you're building cash, is there anything that we should read into your increasing the 5-year credit facility during the quarter?

Kenneth V. Huseman

None other than that it was available at an attractive price and the opportunity.

Alan Krenek

I think it reflects more the size of the company than anything else.

Jim Spicer - Wells Fargo & Company

Okay. And maybe just a follow-up to that then, do you think that the increased competitive environment out there might shake out some of the smaller, less well-capitalized guys and create some opportunities for you on the M&A side? And how aggressively are you thinking about that?

Kenneth V. Huseman

Well, that's what we're waiting for, I think, it depends on how long this slowdown lasts. Frankly, from a historical perspective, the margins we're generating now are pretty darn good, so I doubt anybody is choking just yet. If we see -- overall, particularly in the oilier markets. Now, the gassier year markets certainly there's some discomfort setting in. We've gotten some calls on some opportunities there. And it's not the really small moms and pops, it's the kind of the intermediate roll-ups and some of the private equity capital-sponsored deals that I think we might see some opportunities in. But the expectations have not been reset just yet. So we want to maintain the liquidity to address those opportunities when they come up, but we don't see them just yet.

Operator

And our next question comes from the line of Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

I had a question on gas. Obviously, gas prices not really at a level where I think we'll see a lot of activity returning. But the industry has put a lot of time and effort on both sides, I think both the customers and the service industry, at significant dislocation and cost. If you did see activity return, how difficult of a process would that be? Would it be as disruptive or -- since you still have a presence in a lot of those basins, is it less of a concern and just trying to think through, if that were to happen, what that might imply. Again, it's obviously a positive to have that back, but we have to, again, go through a period of dislocation.

Kenneth V. Huseman

Well, I think it would depend on how dramatically demand surged, which of course is a function of the price. A gradual improvement that we expect, we'll see just higher utilization of existing equipment, which is still in place in most markets. If you're talking about a return to '08 levels of gas drilling, I'm not sure the industry could address that in any fashion, if oil activity is where it is today, because a lot of that equipment has been moved from gas to oil markets. And so there would be a dramatic shortage throughout the industry if we tried to go back to the number of gas rigs that were running in '08, say.

Operator

Our next question comes from the line of Travis Bartlett from Simmons & Company.

Travis Z. Bartlett - Simmons & Company International, Research Division

I thought it was interesting in the release that you've cited 20% of the revenue declines in the Completion and Remedial Services segment were due to lower costs of guar, sand and chemicals. And I guess, Alan, if you see another 5% revenue decline in Q3, how much of that do you think would be attributable to similar cost of goods sold declines?

Kenneth V. Huseman

We didn't factor much of that in, in that projection, because we're not sure how that's going to play out. We saw a lot of sand reduction, and I'm not sure we -- you may have misinterpreted the comment.

Alan Krenek

Yes, we just said the amount of the pass-through was down by 20%.

Kenneth V. Huseman

Of the -- 20% of the decline, 1/5 of the decline.

Travis Z. Bartlett - Simmons & Company International, Research Division

Right. Yes, I was just seeing if that was factored into the next one. I'm just trying to get an order of magnitude of those declines because you said it looks like leading edge, those costs were down another 50%, so [indiscernible].

Kenneth V. Huseman

Well, not necessarily our cost, but spot prices for guar. I mean, it's fallen off the table here lately. We had -- it hasn't been that magnitude for our particular cost stream, but spot prices got really jacked up and now they're coming back down. So that was trying to put into context what our customers are seeing in their frac bills.

Travis Z. Bartlett - Simmons & Company International, Research Division

Right, okay. Well, I guess asked a different way, if you had to rank those cost declines during the quarter in terms of order of magnitude, how would those kind of line up between the various costs? Did guar prices decline more than sand? And did that decline more than chemicals?

Kenneth V. Huseman

No, guar came in last. Sand was really the first and probably most significant in the quarter in terms of Arco.

Travis Z. Bartlett - Simmons & Company International, Research Division

Okay. And then one other one, just kind of looking for some additional color here on pricing in the Well Servicing. Have the new well service rig entrants in the Permian begun discounting price to win work? And if so, how much downside do you see to your fleet in that area?

Kenneth V. Huseman

That is how they enter the new market, is offering a lower price because they're unknown in the area, so that's there. We don't know how much more that will occur. We think that there's another point or so a month in that particular segment as these companies try to jockey for position with the available work. And, of course, they're paying more for labor as well, so it just depends on how -- what their staying power is.

Operator

And our next question comes from the line of Doug Garber with Dahlman Rose.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Did you guys talked about price recovery in the fracturing segment? I'm curious if you're not able to recover fracturing costs, would you consider idling equipment? What's your view on that?

Kenneth V. Huseman

Not at the margins we're generating right now. Again, I'll remind everybody that we're not in those high volume, high horsepower markets that -- where that sort of consideration really is important.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Okay. So within your fracture equipment, I mean, you guys have a few big fleets and then a lot of remedial equipment as well. Do you have any pockets of places where your margins are kind of approaching suboptimal levels or break-even levels at any point?

Kenneth V. Huseman

No, no.

Operator

That does conclude today's question-and-answer session. I would like to turn the call back to management for any closing remarks.

Kenneth V. Huseman

Okay. Well, thank you, operator, and I think we've pretty well given our outlook. So thanks, everyone, for joining us on the call, and we look forward to discussing our third quarter results from our Fort Worth offices. So thank you all.

Operator

Ladies and gentlemen, this does conclude today's conference call. If you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030, and enter access code 4549006. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Basic Energy Services Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts