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Basic Energy Services, Inc. (NYSE:BAS)

Barclays CEO Energy-Power Conference Call

September 6, 2012 11:05 am ET

Executives

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

Unidentified Analyst

All right everyone. We’ll move right along here. Next up this morning is Basic Energy Services, a leading North America well service company. Speaking for the company this morning is Ken Huseman, the President and CEO. Ken has had a long history in the well service industry and has been President and CEO since joining the company in 1999. Prior to his involvement with Basic, Ken was the Chief Operating Officer at Key Energy Services from 1996 to 1999, following positions at both Pool Energy Services and WellTech. During his time at Key Energy, he executed over 50 acquisitions and grew the companies well service rig fleet from 200 to over 1,400 rigs.

Ken had bought on a similar strategy when he joined Basic through strategic acquisitions, adding well service rigs, trucking and drilling operations, moving the company into pressure pumping and coiled tubing and establishing a presence in most of the major U.S. basins. Please help me welcome back to the CEO Energy Conference Ken Huseman. Ken?

Kenneth V. Huseman

Thanks, Jack, and thanks to Barclays for allowing us to present. We appreciate the opportunity, it’s always well attended, one of the big deals of the year as far as the conferences. Of course we need you to go through the forward-looking statements that you’ve seen all this before; it’s the same as everybody else, just be aware; I may say something that doesn’t come true.

Those of you who are familiar with Basic know that we’ve been known primarily as a well servicing or a work over company and a Fluid Services company. Over the last several years, we’ve diversified our service offering extensively to allow us to participate in virtually every stage of the wells life from drilling through completion, ongoing production and plugging at the end of its life.

So, our two traditional business lines now each account for about a fourth of our business, our revenue stream. Our completion of Remedial segment is now our largest segment. It includes an array of services, bit more technically oriented services including a pressure pumping fleet involved in frac, cementing, acidizing, et cetera, a network of rental and fishing tool stores, snubbing, most recently coiled tubing along with some other specialized services that are smaller such as underbalanced drilling, et cetera. And then our smaller segment is now our contract drilling business, all situated in West Texas, focused on the vertical, more of the shallower horizons that are still being drilled very actively in West Texas.

We do have an extensive footprint in most of the – in all of the more active oil and gas basins in the U.S. with the exception of California. The orange dots on this map represent our service points. We tend to be focused in areas with a large well count. I think it’s always important to remember that while there are about 2,000 drilling rigs running in the U.S. there are almost a million existing producing oil and gas wells throughout the country that require ongoing maintenance throughout their life and it’s also important to realize, I think that these wells stay in production for 10s of years.

We routinely work on wells throughout the country particularly in West Texas that were drilled in the 1940s and 1950s. So, the spend by our customers to keep those wells in production is pretty significant and represents probably around a half of our revenue stream throughout the cycle. But we’re also located each of those service points also give us good access to the more active drilling areas, which are highlighted in green on this map, it’s the same equipment that can support ongoing production, it’s the same equipment that supports new well drilling frac activity completions, et cetera.

So, we are involved throughout the life of the well and it is important an ongoing production related work as an important anchor to our business. The graphic on the right shows the well count, existing well count in each of those markets and that tends to be our anchor in any business. You won’t see us be the first to show up in a new drilling play unless there is a significant well count in the area.

We also are fairly evenly split depending on which part of the cycle you’re on between oil and gas exposure right now, probably 70% of our business on oil-directed projects. Two years ago, we’ve felt like we’re more evenly split when gas drilling was a little bit busier and there were more work over projects in the gas fields.

So right now, with the slump in gas prices, we’ve naturally gravitated more to the oil portions of our footprint. We’ve been able to move, relocate a lot of equipment out of the East Texas and Barnett Shale markets to the busier parts of the Eagle Ford in South Texas, as well as the Permian Basin and parts of the Rockies that are oil oriented.

The Permian Basin is where the company started back in ’92. It’s been the largest revenue generator for our business since then and currently represents about 40% of our revenue stream. I think it’s – we’ve been in the Permian as I say before the Permian was cool, it’s always been the largest oilfield market in the U.S. and with the recent shale plays and the new frac technologies that’s opening up a lot of the old reservoirs, it’s really become an important part of the business for everybody in the U.S.

We’ve taken advantage of our footprint by continuing to move equipment into the market from the East Texas and Barnett Shale over the last several years. And the graphic shows our existing equipment count about – we continue to be one of the major players in well servicing business with – over 180 well service rigs out of our 400 rig fleet are located in this basin. All of our drilling rigs, over 40% of our fluid services trucks are located in this market along with significant piece of our Fishing and Rental tool business and our pumping capacity.

We’ve always liked the Permian Basin because it’s very user-friendly market. Weather is great, the train is flat and typically we have a lot of experienced personnel. So it’s always been one of our most profitable areas and continues to be even with the current shortage of personnel and all that is going on out there.

Our customer-base, very diversified, we have over 2,000 customers. This graphic shows the top 10. You probably recognize all the names, but there are quite a few significant players, which you might not have heard of in the local oilfield markets that we count as our customers. I think it’s also important to mention that only, that the largest customer represented less than 7% of our revenue stream last year. So not much concentration even amongst those larger players.

To recap, our recent commentary and outlook from our second quarter and our July activity update, we are projecting demand to be relatively flat through the end of the year and into the first quarter of next year, recent oil prices volatility has caused customers to rethink their plans. We’ve seen some reduction in rig counts among some of the larger players in the Permian. Oil prices have recovered, but those dips tend to remind customers that this is a commodity business.

We’ve also seen a lower NGL prices upset plans in some markets and then certainly sub-economic gas prices continue to keep activity in those dry gas markets at a pretty low level. That’s led to redeployments of equipment from the slower gas driven markets and even some of the oil related plays that got a little bit overstocked.

So we’ve seen equipment migrate into the Permian, which is the last great market in the U.S. We’ve also seen some additional equipment that’s been on order late last year, early this year being delivered. So with demand flat and increased equipment and service company competition chasing available work, we have seen pricing come under pressure and certainly utilization is playing down.

We think that activity will continue to be stable in our oil markets as long as weather holds up, we’ll get into the seasonal slowdown in the fourth quarter, which I think will be more pronounced then maybe last year as the sense of urgency has declined a little bit.

So we’re thinking with the combination of all these, margins will be down 200 basis points sequentially each quarter, activity pretty flat to down through the seasonal fourth and first quarters and then we’ll see what gas, what oil prices bring and if we see any help from the gas price in the mid next year.

We don’t need $5 and $6 gas for those gas markets to become fairly busy and benefit our services particularly on the – primarily on the work over side, but we do need to see, I think a level of gas prices that we have our customers confidence at prices are trending up rather than cratering as has been the concern over the last several quarters.

Our strategy as we look ahead will be to continue to retain market share, maximize utilization of existing equipment. It’s important to remember that labor is a significant – is the most significant portion of our cost stream. We have to retain that experienced labor and to do that we need to keep them on revenue generating jobs. And so we will be responsive to rate pressure for various competitors whether they are existing competition in local markets or some of the new players that are entering these markets. We’re going to keep our customer base. We’re going to keep our employees intact.

We’ll restrict the capital spending and control cost, we’ve reduced our guidance on CapEx to the rest of this year. We pretty well spent the CapEx we intend to deploy this year. I think we’ll take delivery at the last 20 fluid services trucks within the next month or so. We have a couple of disposal wells we hope to complete by the end of the year and a few rental items, but no significant CapEx on horizon in terms of growth CapEx.

Next year, we will at this point at least until we see something different restrict CapEx to what we call a sustaining level that will keep the existing fleet in the field. We will try to permit and complete about a dozen disposal wells next year and we will continue to augment our existing fishing and rental tool specialty equipment fleet, but beyond that we don’t at this point see significant growth CapEx for 2013. Of course that’s subject to change depending on what we see in the commodity price arena, but that’s what we’re seeing at this point based on kind of the status quo.

We will be ready to take advantage and we have the balance sheet to take advantage of displacements in the market in terms of competitors needing to exit whether – of any size and we will also be ready to deploy capital to take advantage of activity increases in local markets within our regions. We have the balance sheet to do that and I’ll show that slide in a bit.

I’d mentioned most of what’s going on on this slide. Acquisitions continue to be an important part of the company. We’ve probably completed about 70 acquisitions over the last 10 years or so. That’s how we grew the company. We continue to look at acquisitions, we continue to have a strong deal flow. We completed three in the first half of 2012 for $42 million.

We continue to look for those acquisitions that bring premium equipment, minimal integration issues in terms of folding their workforce into ours and compelling valuations and transactions in the $10 million to $50 million range, we would fund out of existing cash, larger transactions probably above the $50 million level would require a combination of cash and stock.

We move between growth CapEx and acquisitions pretty freely. We are not tied to one or the other. We see a great opportunity in local market. We will purchase equipment to take advantage of it or if we see an opportunity to pick up an acquisition that meets our criteria we’ll jump on that.

We don’t have any particular area targeted, we do look at each one as they come down the pack and make an assessment pretty quickly whether we think those acquisitions fit or not. It’s just really hard to target a particular part of the map and say we’re going to find an acquisition in that business line or that geography because they are not always out there. So as they come up, we think we get to see just about every deal that becomes available and take advantage or pass on as we see them.

We have repurchased 1.2 million shares of our stock in the May-June time period at an average price of $9.50. We still have about $24 million available under our share repurchase authorization for 2008, but I think that our recent purchases below $10 and our purchases back in the ’09 period under $9 were an indication of what we think a compelling value would be for additional share repurchases.

A little bit more about each of our segments. As I said earlier, our Completion and Remedial segment is now our largest by quite a bit. That segment overall is comprised of 70% of the revenue stream as it derives from pumping, that includes cementing, stimulation, acidizing, remedial services, et cetera.

Rental and Fishing revenue was about 15% of the overall segment. Coil tubing is of 8% now and on a full-year basis, that will probably creep up to 11% or 12%, as we get a full-year impact of the units that were delivered in the second quarter, and Snubbing services is 5% and others which includes underbalanced drilling and a few other things represent about 2%.

We are focused on the smaller markets that traditionally are underserved by the major service companies, particularly in the pumping side of the business. We have a frac spread that routinely works Hugoton in Southwest Kansas market, Central Oklahoma, squeeze cementing for instance in East Texas, a lot of cementing in North Texas.

So, we’re not one of the major players on the national level, but we are a significant player in the local markets where we tend to focus our activities and we typically are one of the leading in terms of size in those local markets. And we take that approach on all of our service lines, we’re not necessarily trying to be the largest on the national level, but at the local level, we typically are the number one or number two competitor in each of those services.

The pie chart on the right shows the location of our horsepower and that includes all horsepower whether in order to cementing or stimulation. Mid-Continent, which includes North Texas, the Barnett Shale, all of Oklahoma and Southwest Kansas, holds over half of our frac, our pumping equipment. We have one spread in the Permian Basin and a couple of spreads in the Rocky Mountains, small horsepower spread in Ark-La-Tex doing primarily remedial type work.

This graphic dates back to ’08 and shows the full cycle. The yellow line shows the number of frac jobs that have been performed over time. The red line is the acid and pumping and then the green is cementing, and you see by far the largest number of jobs are generated in the cementing activity.

We do a lot of small jobs. We bounce around a lot. So, I think that if you try to compare us or even this segment to the traditional pumping service company, we’ll probably have a bit different profile with a more orientation to cementing and some of the other sub-segments of that than you might see with a pure frac related company. So that’s the important takeaway from this is to show how we are probably different more than how we are similar to other pumping service companies.

Our fluid services business is probably the segment that we see the most near-term growth in. This business follows recently and lockstep with growth in the frac related activity as these new wells virtually in every basin now have substantial fracs deployed on them.

Each of those fracs require a significant amount of fluid, a significant amount of storage, and then ultimately disposal of the flow back. And so we see that to be a growth opportunity for the company. Given our footprint in the business in the existing markets as well as the growth that we see coming as additional horizontal wells are drilled in West Texas, additional frac stages are deployed, et cetera.

Our largest market for this segment is in the Permian Basin with over 40% of our truck fleet deployed in that market. I think about 20, over a third of our disposal wells are in the Permian Basin. And we see that, as I said earlier, continuing as a growth opportunity. We will have a three more wells online out there by the end of this year if everything goes according to plan and then another half a dozen or more next year depending on the permitting process and that sort of thing.

We have the – probably one of the most comprehensive networks of disposal wells and service points in East Texas, South Texas, and West Texas, which affords us a competitive advantage compared to those companies who provide just the fluid truck or just the frac tanks or just the disposal well.

We are able to bundle that as necessary to provide the most cost effective service to the customer from providing them, in West Texas for instance, we can sell the fluid, sell the water out of our own wells, haul it to location at our dredge storage, in our frac tanks, capture the flow back in our frac tanks, haul it and dispose it in our disposal wells. So we think we’re uniquely positioned to continue to grow that business whether organically or through acquisition of those sole service providers.

Revenue per truck is the metric that we track in this business. Now, we roll all of that revenue stream from frac tanks and disposal wells and truck related revenue in to a single metric revenue per truck. You can see that we’ve recovered – we’re on our road to recovery through 2011.

In the second quarter, we saw a drop in overall revenue per truck as we redeployed equipment from some markets into West Texas. I think we’ll resume the revenue per truck growth probably not to the previous peak as competitive pressures have held rates down a bit. So we’ll see that revenue per truck moderate a bit just won’t because of rate pressure although activity continues to be pretty strong particularly in the Permian Basin.

Truck hours, a number of trucks are shown on this graphic by the yellow line. We’ll add another 20 trucks or so by the end of the year. The truck hours took a bit of a drop in June and back up as we got the assets redeployed. We’ll see those truck hours increase a little bit I think not at a significant level, and then of course pricing is down a bit as well.

Our well servicing business, this business is the least tied to new well drilling, but the most tied to well count as well servicing rig is used in keeping a well in production over its life, anytime the well needs to be opened up once it completed, typically a well servicing rig moves on provides the hoisting mechanism to move the production equipment and tools into now the well bore and place the well back on production. Now, new well drilling completion related work does provide an element of demand for the work over rig fleet, but the vast majority of activity in this segment is involved in keeping the 600,000 or so wells in our market in production.

So, again the profile or the distribution of rig fleet almost perfectly matches the well count distribution throughout our footprint. So over 40% of our rigs are in the Permian Basin, there are over a 150,000 wells in that market. So there’s no mystery why that’s the largest well service market in the country. And then you can see pretty even distribution amongst our other regions.

We still have about 9% of our fleets stacked. We thought earlier in the year, we might be able to activate all those rigs primarily into the Permian Basin, but with the recent influx of competitors into that market, the tightness of the labor market, et cetera, we’ve decided just to hold back while trying to redeploy more equipment and kind of wait it out a little bit to see what the New Year brings.

The graphic on the lower right shows the rig hour trends over the last several years. You can see the green line represents our oil related activity. It’s been on a pretty steady rise over the last several years, while the gas related activity has been pretty flat. And really the red line on the lower right kind of describes the status of this segment of our business. The oil related activities has not increased enough to fully absorb all of the well servicing assets that were formerly deployed in the gas market. It’s absorbed a lot of it, but not quite there.

So there is still some underutilized equipment in those gas markets and I think that’ll continue until we some improvement in gas fundamentals. The major metric in this business of course is revenue per rig hour. We’ve almost fully recovered from the ’08 drop off in activity, we’ve seen slight improvements in over the last several quarters in rates per hour. That’s probably going to flatten out as we continue to redeploy equipment into the lower rate well servicing markets in the Permian basin from the higher rate gas work over markets. So that would probably flatten out as that’s pretty much done and very little opportunity to raise prices at this point in the cycle.

Well servicing rig utilization moved up to the mid 70s and it has gone pretty much sideways over the last several quarters, we think that will continue through the end of the year, affected not only by seasonal factors. We tend to work this equipment during daylight hours only as the daylight hours reduced going into the end of the year, we will see natural deterioration and utilization. We’ll also see some impact from holidays, which shortened the number of work days in the fourth quarter particularly and then of course weather interrupts activity as well. So we think sideways movement over the next several quarters is probably is good as we can expect in this segment and probably into the second quarter next year.

Our drilling business again is focused in the Permian Basin. We have two 1,200 horsepower rigs that were added to our fleet earlier this year that are capable of addressing about any project in the Permian. The other 10 rigs though are focused on the shallower vertical projects that continue to be drilled in that market. So, we think we’re well positioned. We are kind of a niche player in those shallower portion of that business, but expect to have fairly good activity through – for the foreseeable future.

This chart shows the full cycle in the oilfield over the last several years. We have recovered quite a bit in the first half of this year in terms of revenue. We’re on track to exceed 2011 revenue. Margins are not quite where they were in 2011. We will see EBITDA probably move sideways in terms of the margin over the next several quarters. CapEx, we’ve moderated that, and which I talked about our CapEx spend earlier. We’ve – the first half is about half of what we think we will spend this year, but it included, it was kind front loaded a bit on several projects.

Our capitalization where we are fairly levered – fairly heavily levered with a 67% debt-to-cap, but we’re comfortable with our debt level in terms of our ability to manage that debt, there are no principal payments until 2016, on a interest rate basis it’s fairly affordable debt.

We think we will continue to pile up cash, as we expect acquisition opportunities to increase over the next several quarters. If that doesn’t occur, if we don’t see deals that we like we all certainly have the option of paying down those 2016 notes, but at this point we think that the opportunities should provide much better returns to the company that paying that debt down. And of course, as I said earlier we still have the opportunity to buyback additional shares if our share price comes under pressure. So, we think we have a lot of flexibility with cash on cash and the cash flow that we expect to generate and the outlook that we have fairly conservative outlook we have for next year.

A little bit more about each segments, we talked about this quite a bit on our conference calls. So, there is no news here. I think we expect again revenue to drift down slightly over the next several quarters, margins to be flat to down slightly reflecting that and until we see some stability in – or improving in gas fundamentals, and we’ll see how the customers develop their 2013 budgets.

We expect to be hearing more formal announcements of what we hear in the field. I think early indications are that our Permian Basin based customers or the Permian Basin activity along our customers is going to be somewhat higher next year. Some budgets have been spent already. I think it’s pretty late in the year with the recent oil price volatility, customers have elected to just kind of hold rather than supplement budgets just to wait for next year, so we are seeing a bit of sideways tack in that respect, but we expect the budgets to be significantly higher next year in the oil-oriented markets assuming that oil prices kind of stick where they have been very recently.

So I think to sum up we feel like we have a very diversified offering of services that revolves throughout the life of the well. We have the ability to continue to expand our operations in the more liquids focused markets as we have over last several years a modern fleet that’s matched to the market.

We have some of the newest equipment in the market, broad capabilities to satisfy all the needs out there, and management has been in this business through numerous cycles, so we know how to react accordingly on that – not only on the downside where we have to start cutting back, but to identify opportunities and move accordingly.

So, thanks for your interest.

Unidentified Analyst

All right thanks Ken. Ken will be available in the Liberty 3 breakout room for any questions you might have. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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