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Executives

Jack Lascar – IR, DRG&E

Ken Huseman – President and CEO

Alan Krenek – SVP, CFO, Treasurer and Secretary

Analysts

James West – Lehman Brothers

Dan Pickering – Tudor, Pickering, Holt & Co.

Dan Boyd – Goldman Sachs

Michael Drickamer – Morgan Keegan

Jud Bailey – Jefferies & Co.

Pierre Conner – Capital One Southcoast

Doug Becker – Bank of America

John Fitzgerald – Raymond James

John Daniel – Simmons and Company

Jack Wagner – MJX Asset Management

Basic Energy Services, Inc. (BAS) Q2 2008 Earnings Call Transcript August 5, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Basic Energy Services second quarter 2008 earnings conference call.

During today’s presentation, all parties will be in a listen only mode. Following the presentation, the conference will be opened for questions. If you have a question, please press the star followed by the one on your touchtone phone. Please press star zero for operator assistance at any time. For participants using speaker equipment, it may be necessary to pick up your handset before making your selection. This conference is being recorded today, Tuesday, August 5th of 2008.

I would now like to turn the conference over to Jack Lascar. Please go ahead, sir.

Jack Lascar

Thank you, Brittany, and good morning to everyone, and welcome to the Basic Energy Services second quarter 2008 earning 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 would like to be on our email distribution list to receive future news releases or if you experience a technical problem and didn’t get one last night, please call us at 713-529-6600.

If you 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 instant replay until August 19, 2008. This information was also provided in yesterday’s earning release. The information reported on this call speaks only as of today, August 5, 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 and on the transcript of this conference call includes forward-looking statements and projections made in reliance of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Basic Energy Services has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. The important risk factors that could cause actual results to differ materially from expectations are disclosed in item 1A of Basic’s Form 10-K and Form 10-Q filed with the SEC.

While Basic makes these statements and projections in good faith, neither Basic nor its management can guarantee that the anticipated future results will be achieved. Basic assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by Basic, whether as a result of new information, future events or otherwise.

At this point, I’ll turn the call over to Ken Huseman, President and CEO of Basic Energy Services.

Ken Huseman

Thanks, Jack, and welcome to those joining us on the call. With me on the call today is our Chief Financial Officer, Alan Krenek.

As stated in the press release, we are pleased with our results for the second quarter and have a very positive outlook for the remainder of the year.

But before reviewing our performance for the quarter, we should comment on the costs related to termination of the Grey Wolf merger. We recorded $6.6 million of those costs in the quarter which translates to approximately $0.10 per fully diluted share. We’ve adjusted the impact of those costs which are truly one time and non-recurring out of the numbers I am reviewing in this part of the call. We will report additional costs related to that deal in the third quarter, but the termination fee received from Grey Wolf fully offsets those for no third quarter P&L impact.

Revenue for the quarter of $252 million increased $28 million from the year earlier quarter and established another new record for the company. The revenue increase was driven by a combination of the acquisitions completed over the course of the last 12 months and investment in new capital equipment in our three main segments. This 12.7% increase in year-over-year revenue reflects the benefit of our broad geographic footprint and exposure to the busiest oil and gas markets in the country.

We have numerous opportunities to expand our business throughout the cycle through a variety of acquisitions and internal growth initiatives. Our EBITDA margin of 28.5% declined a full percentage point compared to the year ago quarter. Lower rates in our well servicing and drilling segments compared to last year combined with cost increases, particularly fuel, compressed margins in each segment. On the other hand, activity levels trended higher during the quarter and were close to matching the year ago levels in all segments. Overall pricing was firm in the second quarter.

Fully diluted earnings per share of $0.55 compared favorably to the $0.52 reported in the second quarter of 2007. The substantially higher revenue, good cost control and relatively flat G&A allowed us to increase our earnings per share. The press release provides the detailed year-over-year second quarter comparison by segment, so I won’t spend more time on that here.

Reviewing our performance on a sequential basis, revenue increased by $22 million or 9.4% from the seasonally slower first quarter. We closed two acquisitions during the quarter but higher activity in each segment was the main driver of the revenue increase. EBITDA in the quarter was $5.5 million or 8.3% higher than the first quarter but the EBITDA margin was 20 basis points lower. We were not able to move rates fast enough to offset cost increases in the quarter.

Fully diluted earnings per share of $0.55 was $0.08 higher than the first quarter due to the growth in revenue. Sequentially each segment produced higher revenues but also incurred higher unit costs with the result being modestly lower margins in all but our contract drilling segment. In our well servicing segment, revenue increased by $8.5 million on growth in our rig count, higher utilization and slightly higher hourly rates. The direct margins of 37.9% was a 190 basis points lower than the first quarter as the price of fuel increased rapidly and we experienced part labor cost increases.

We added a net of 11 rigs during the quarter including eight purchased in two acquisitions. The utilization of 77% increased from the 72% recorded in the first quarter and the average hourly rate increased by $2 to $400 per hour. We are encouraged by the utilization and pricing trends in this segment and expect further improvements in the third quarter.

Our fluid services segment revenue for the quarter increased by $1.2 million despite the sale of our mat business in the Gulf Coast market which produced a $1.6 million revenue in the first quarter. We didn’t see growth opportunities in that mat business and took the opportunity to sell it to a local competitor during the quarter. Adjusting for that divestiture, the revenue growth in this segment of almost $3 million was driven by somewhat higher activity throughout the company and the acquisitions of the small Barnett Shale based company which added 17 trucks and related assets to this business line.

Revenue rates were essentially flat compared to the prior quarter. Fast rising fuel cost and continued competition for labor caused the segment margins to slip by 190 basis points compared to the first quarter. We expect improving activity levels to allow a higher level recovery of increased costs and further fleet and labor efficiencies as the year progresses in this segment.

The completion and remedial services segment continues to be our fastest growing as evidenced by the $11 million or 16% increase in revenue for the quarter. The Triple N acquisition completed in late May and some new capital deployed in the quarter each contributed modestly to the revenue increase but the bulk of the growth in revenue reflects improved demand in each of our markets. Despite the increased revenue, however, the segment margin did show a 130 basis points decline primarily due to fuel and other cost increases in the pressure pumping portion of the segment. With current activity levels, we’ll be increasing rates in all services in this segment and margins should edge in succeeding quarters.

Our contract drilling segment showed a $800,000 increase in revenue as day rates ticked up by about $100 a day. Utilization improved to 83% from 79% in the first quarter. Margins improved by 150 basis points as we absorbed more of the high level of fixed costs associated with this nine rig operation. Day rates should show meaningful increases in the third quarter along with further margins improvement. We continue to look for ways to expand our presence in this segment.

At this point, I will turn the call over to Alan to take you through the remainder of the income statements and the balance sheet.

Alan Krenek

Thanks, Ken, and good morning. This morning I would like to review our G&A and non-operating items in more detail and then discuss our balance sheet and capital resources.

Our G&A expense for the second quarter of 2008 was $26.8 million or 10.7% of revenue compared to $25.6 million or 11.4% of revenue during the second quarter of 2007 and was up approximately 4% sequentially. For 2008, we expect that G&A expense as a percent of revenue will average 11%, no change from prior guidance.

Depreciation and amortization expense in the second quarter of 2008 was $29 million compared to $24 million in the same period of 2007. This increase reflects our continuing capital expenditure program as well as the acquisitions that we have closed in the past year. For 2008, based on our current capital expenditure program, we estimate that depreciation and amortization expense will be between $118 million to $120 million representing no change from prior guidance.

Gain on disposal of assets was $809,000 in the second quarter of this year of which approximately $650,000 was related to the sale of our mat business in Southeast Texas. Net interest expense in the second quarter of 2008 was $6 million down from $6.8 million in the second quarter of 2007 and $6.6 million in the first quarter of 2008. This reduction in interest was mainly due to lower effective interest rates on the outstanding balance on our revolver.

The effective tax rate in the second quarter of 2008 was 38.3% and 37.9% year to date. We expect our tax rate will be approximately 38% for the full year in 2008. As Ken mentioned earlier, we generated a net income of $22.9 million or $0.55 per diluted share for the quarter excluding $4.2 million or $0.10 per diluted share of after-tax merger related expenses. It should be noted that in the third quarter, we will recognize the $5 million expenses reimbursement that we received on July 15 from Grey Wolf. This will be offset by approximately $5 million of additional M&A and financial commitment fees we incurred as a result of the termination of the merger agreement on July 15.

Weighted average diluted share count for the quarter was approximately $41.7 million and we expect the same share count for the third and fourth quarters. Our balance sheet remains strong and we continue to generate good cash flow. Our cash balance as of June 30 was $78 million down $22 million from the end of the first quarter of 2008, primarily due to the two acquisitions that we completed in the second quarter for approximately $24 million in cash.

During the first six months of 2008, we generated cash flow from operations of approximately $87 million or 18% of revenues. Total capital expenditures during the first half of 2008 were $66 million of which approximately one-third was for expansion. Cash capital expenditures during the first half of 2008 were $45 million and we had $21 million of CapEx finance through capital leases.

For the full year, we still expect cash capital expenditures to be approximately $115 million which includes 24 new build well servicing rigs of which about two-thirds will be expansion units and the remainder replacing older and less efficient rigs. In addition, we plan of $33 million of leases for additional equipment.

We had total liquidity of approximately $138 million at June 30. Our debt to EBITDA ratio was 1.6 times while total debt to capitalization was 43%. We have the liquidity and the financial strength to act quickly on acquisitions and growth the opportunities as they arise.

At this point I will turn it back to Ken who will wind up our prepared remarks.

Ken Huseman

Thank, Alan.

As stated at the beginning of the call, we are optimistic in our outlook for the remainder of the year. Current weekly activity continues to trend higher as longer days and favorable weather thus far has allowed us to get to all work as is scheduled. We are seeing more and more capital spending projects in the form of major work ever and re-entry projects, enhanced recovery projects and infill drilling programs designed to maximize recovery in oil reservoirs.

In addition, drilling activity is increasing in the resource plays and conventional gas markets pretty much throughout the country. With that outlook we have been extending the retirements dates on several of our older rigs to allow further fleet expansion with our existing new build program as well as stepping up our refurbishment activity in order to expand our rig fleet.

In our other lines, we are evaluating capital spending initiatives to allow us to build out our existing market position in each of those segments. We also have to emphasize as we have on our prior calls, labor continue s to be our biggest expenses and management challenge. The industry has a chronic shortage of experienced people. While wage pressure moderated along with a slower growth in rig count in 2007, 10% and even higher wage increases are now being implemented by drilling contractors. Those increases will percolate throughout the industry as the quarter and year progresses.

Fuel price increases may have run their course for the moment, but we have not seen the full effect to our operating cost. We expect inflation to become a more significant factor as the year progresses and the cost of fuel and higher wages creep into the general economy. Despite those concerns, we are confident that we can regain most if not all of the margins lost over the last several quarters, as we move rates up in the third and fourth quarter. We do not, however, want to project margins returning to the historically high levels experienced in 2006.

On the acquisition front, we believe the opportunities in the current environment are excellent and will likely increase through the year. We have mentioned the two acquisitions closed in the second quarter bringing to a total of four completed thus far in 2008. Those acquisitions were all closed with prices well within the full multiple of EBITDA we’ve stated as a critical part of our investment criteria.

The Grey Wolf merger process did cause us to redirect our focus from our acquisitions efforts in the second quarter. As a result, we will have a bit of a lag in acquisition closing while we refill the pipeline. But we have resumed the steady deal flow and should be back on track to close a deal every month or so fairly quickly. Those deals in the $5 million to $50 million range along with the numerous opportunities our field management teams are developing allow us to build out our footprint and each of our services lines to continue growing the company and shareholder value regardless of the commodity price.

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

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. (Operator instructions) Our first question is from the James West with Lehman Brothers. Please go ahead.

James West – Lehman Brothers

Hi, good morning guys.

Ken Huseman

Hello, James.

James West – Lehman Brothers

Ken, I was wondering if you could comment on the magnitude of the price increases that you are pushing through at this point if that very significantly by product line and then also by region?

Ken Huseman

Well, it varies – it will vary from region to region and certainly within product line as well. I think the – we are formulating those in most cases, they are not going to be double digit overall. They should move the margins up modestly single, mid single digit ranges. But we’ve not put out a nation wide price increase like you hear some folks doing. These will be really regionally targeted.

James West – Lehman Brothers

Okay. When do you plan to roll those price increases out?

Ken Huseman

Those are going out. Some actually went out late June, some are rolling out – it’s just market by market deal as we speak.

James West – Lehman Brothers

Okay. And then are you – I guess you alluded to your competitors talking about nationwide price increases, are you following their lead or are you leading this price increase? I guess what’s the competitive environment like on pricing?

Ken Huseman

Well, it’s our opinion that the nationwide price increase you spoke of actually brought them to our level. So, we will be – we always like – everybody says we are the product leaders, so everybody says the same thing.

James West – Lehman Brothers

Okay, understood. And then one last question from me. You guys are I guess deferring some retirement of rigs. You haven’t added or ordered additional equipment at this point in some programs you already have in place, do you expect to add additional rigs and have you seen your competitors start to add rigs?

Ken Huseman

We are now in that process now. The last several years we’ve in the August-September timeframe announced or negotiated new builds for the following year. In terms of the retirement deferment dates, what we’ve done is just slated more rigs for refurbishment keeping some of the older rigs in the field for a little longer. We are now outsourcing some refurbs that we couldn’t get to even though we’ve expanded our in house capability. So, we’re just sort of picking up the pace there. As far as the competitors, we haven’t seen anybody announcing any significant change. But I think that we will see incrementally a few more rigs from ourselves and our main competitors but nothing on the order of the drilling rig count announcement that you’ve seen.

James West – Lehman Brothers

I certainly would nope not. If you order a new rig today from Taylor or NOV, what kind of lead times would you have for delivery?

Ken Huseman

I think you could probably get one or two in fairly short order probably within 90 to 120 days, but you couldn’t get a quantity of them. I think it depends on what you want it to look like and that sort of thing. There are some small rig manufacturers that are pushing delivery days down a little quicker than that. But I think for our programs, we’d expect for a quantity probably more like six months to nine months.

James West – Lehman Brothers

And the payback on new rigs, is that still in the two year time period?

Ken Huseman

It’s probably stretched up to about three.

James West – Lehman Brothers

Three years, okay.

Ken Huseman

And it’s just a function of the utilization that you can experience and that’s really market dependant.

James West – Lehman Brothers

Okay, great. That’s very helpful. Thanks, Ken.

Ken Huseman

Okay.

Operator

Thank you. Our next question is from the line of Dan Pickering with Tudor, Pickering, Holt and Company. Please go ahead.

Dan Pickering – Tudor, Pickering, Holt & Co.

Good morning, guys.

Ken Huseman

Good morning, Dan.

Dan Pickering – Tudor, Pickering, Holt & Co.

Ken and Alan, with the Grey Wolf transaction no longer moving forward, could you just talk a little about how you view the land rig market and how you want to play there? Are you interested in getting bigger and if so is that a new build or an acquisition type of approach for you?

Ken Huseman

We are interested in expanding that line of business. We are looking at opportunities in both acquisitions and new build. We’ll stay pretty close to home in the new build program. Acquisitions might lead us a little bit further afield from where we are, at least at this point till we establish more base. Acquisition opportunities are somewhat few and far between in that segment. A lot of the old equipment that really is becoming probably less attractive as time goes on with the number of new builds on the horizon.

Dan Pickering – Tudor, Pickering, Holt & Co.

So, it sounds like new builds are the probably the area you might pursue and if you do that you are going to be focused on the regions you are currently operating in?

Ken Huseman

That’s correct.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay. And then you mentioned in the press release a Barnett growth imitative, could you talk a little bit more about that.

Ken Huseman

Well, we’ve been gradually building our presence in there over this last several years. We’ve completed a trucking – a fluid services acquisition, also had a couple of work over rigs in their fleet. We’ll continue to build that out, we’ve expanded our management presence in that – or management contingent in that market in our fluid services, well service business. We have a significant wire line business in there now, all our wire line fleet operates essentially in the Barnett shale, where the significant fishing and rental tool business over there, we’ll continue to expand that. So, we’ve been in the Barnett Shale for probably five years now, somewhat under the radar, and we’ve just been building it organically primarily. So, we’re just not getting to the size we are – I think people are starting to notice a little bit more and certainly starting to be a significant part of our portfolio.

Dan Pickering – Tudor, Pickering, Holt & Co.

So, it was really just you guys calling it out, not a dramatic change to what you are doing?

Ken Huseman

That’s correct. The good thing about the Barnett now is there is over 8,000 wells in that market which require ongoing maintenance, so it’s not just a completion market like it might have been three or four years ago which plays to our strength where we have a full suite of services devoted to not only helping complete wells but helping maintain existing production. So, as we said in the past, we tend to chase well count as opposed to rig count a bit more than other people might.

Dan Pickering – Tudor, Pickering, Holt & Co.

Right. Last question for you Ken, your businesses, particularly some of the production oriented businesses have always been kind of the pony end of the stick with relation to commodity price and they move early as operators, maybe they are not quite ready to drill wells, but their work over wells. We’ve seen both gas price and oil price pull back here, any of your kind of work over focused customers, any change in behavior, have you seen anybody walk away from planned work programs?

Ken Huseman

No, I don’t – we really don’t think anybody was drilling or working over a $140 barrel well. I think we have substantial freeboard between where prices are now and where they would go before we’d see wholesale cancellations of projects. Gas is a bit different; oil, certainly there’s plenty of room there, but gas is a bit more region specific. There’s other things as you know coming to play, pipeline access and all that kind of stuff which drives lot more variability and lifting costs, or I guess production costs.

Dan Pickering – Tudor, Pickering, Holt & Co.

Sure. But so far nothing where a customer has basically said, price is down, I am nervous, I am not going to do that work?

Ken Huseman

No. And I don’t think we are whistling past the graveyard. I just don’t think it’s people who are planning on those levels of prices sustaining.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay. Great, thank you.

Operator

Thank you. Our next question is from the line of Dan Boyd with Goldman Sachs. Please go ahead.

Dan Boyd – Goldman Sachs

Thanks. Good morning, guys.

Ken Huseman

Hello.

Dan Boyd – Goldman Sachs

Ken, you mentioned that the pricing increases are regionally targeted. Ken, are there any regions where you are unable to fully pass on the cost increases.

Ken Huseman

No, I think there is more of a – the amount of rate that we can push through. But even last year when things were fairly slow in a couple of markets, we pushed through some isolated increases where we had labor changes or particular situations develop. So, every market is open to just a finer degree [ph], I guess you should say.

Dan Boyd – Goldman Sachs

Okay. So, cost are increasing pretty much in all regions and every region is also seeing price increasing at least to maintain margins and some have expanding margins such as Haynesville, West Texas?

Ken Huseman

Yes. So, one thing we did go through last year and early this year in our pressure pumping business for instance was we didn’t see – we didn’t have the ability to raise rates, we just didn’t – we didn’t see much or any deterioration, but there is a lot of overhang coming in to the industry, at least there was a perception of a lot of overhang. So, people were just reluctant to raise rates in the pressure pumping business. Some companies actually increased their discount, we didn’t. But now we are seeing the opportunity to move those prices up.

Dan Boyd – Goldman Sachs

All right, thanks. And then one on the M&A side, can you talk about what divisions are seeing the most amount of I guess most amount of potential activity? And then also on the pricing of M&A out there, where are you seeing things? Your stock is currently, at least on our numbers, trading at about 5 times ’08 EBITDA and then below 4.5 times on the ’09. So, where are you seeing things in the private market?

Ken Huseman

Well, we can – the acquisitions we’ve done thus far are the ones we have in the pipeline and are seriously considering have to be under a four multiple. We terminate the process pretty early. So, I’d say that. The sellers are – most of these companies are in pretty strong hands, they are not going to react to short term swings in activity because generally – on pricing, because generally their certainly stays pretty solid. So, price of oil dropping 20 bucks doesn’t cause people to cut their asking price. It takes a bit longer than that to actually see activity shrink before they become motivated in that fashion.

So, there is a steady pipeline of opportunities out there, some driven by state management considerations. We are seeing some people get concerned about the change in the tax environment next year. That’s an element although nobody will take a big discount to beat the tax man. So, and – on a regional basis, it’s pretty much – we’ve opportunities in just about every part of the market. Recently, fluid services is the hot area where there’s been a number of rollups that have gotten to the size where they are wanting to market them. So, I’d say that seems to be the area that has or the segment that has the most activity of it.

Dan Boyd – Goldman Sachs

So, we should think fluid service certainly potentially drilling and completion having a little more, well servicing having less and more organic opportunities there?

Ken Huseman

Yes, that’s correct. The fleet, the existing fleet in the well servicing business has somewhat picked over and there are still some really good, really small companies out there but not many that are of size.

Dan Boyd – Goldman Sachs

Right, thanks.

Operator

Thank you. Our next question is from the line of Mike Drickamer with Morgan Keegan. Please go ahead.

Michael Drickamer – Morgan Keegan

Hi, good morning guys.

Ken Huseman

Hello, Mike.

Michael Drickamer – Morgan Keegan

Ken, you talked about improving margins, looking for some cost recoveries, you talked a lot about fuel prices, how are you trying to get back the fuel cost area? Is this solely through pricing or are you also pushing through fuel surcharges?

Ken Huseman

It depends on the segment and, of course, in our drilling business now fuel cost is paid by the operator. We did have late last year, early this year some footage contract where we incurred that burden. We are off of those completely. So, fuel in our drilling business is a non-issue. Well servicing typically, we recover that in the form of price increases, rate schedule increases. Trucking is more – has a higher tendency to have a surcharge because that is just more typical in that business. And then in our pressure pumping business is more of a rate increase, there are some fuel surcharges, but typically it’s more of a price schedule type of recovery.

Michael Drickamer – Morgan Keegan

Okay. So, with oil prices falling here in the third quarter, will these surcharges or price increases be sticky enough, or –

Ken Huseman

Well, the surcharges are formulated based on the price of diesel. Rate increases will stick.

Michael Drickamer – Morgan Keegan

Okay. Then that will a lot be of course driven by the higher activity levels, correct?

Ken Huseman

Right, that’s right. And that’s why we like rate increase as opposed to fuel surcharges because they tend to stick.

Michael Drickamer – Morgan Keegan

Makes great sense to me, thanks a lot guys.

Ken Huseman

Okay.

Operator

Thank you. Our next question is from the line of Jud Bailey with Jefferies & Company. Please go ahead.

Jud Bailey – Jefferies & Co.

Thanks, good morning. Couple of follow up questions here. Ken, if you are looking at doing some new builds on the land rig side, do we assume you could build those on a speculative basis or would you look to only build behind some term contracts some of your competitors are getting?

Ken Huseman

We are in the process of looking at that now. We’d be building on the – with the support of significant contract coverage, I’ll put it that way.

Jud Bailey – Jefferies & Co.

Okay, and did you have any –

Ken Huseman

I don’t think it’s going to be a guaranteed cost recovery. We’d have a significant contract support before we did something.

Jud Bailey – Jefferies & Co.

Okay. And the types of rigs you’d look at building, are we talking 1,000 or kind of the bigger 1,500 horsepower type rigs?

Ken Huseman

It’d probably be in the 1,000 to 1,200 horse, I don’t think we are looking at the 1,500 horse market.

Jud Bailey – Jefferies & Co.

Okay. And last one is, if you don’t make an acquisition, is there a critical size that you’d want to be at on the land rig side as far as number of units if you were to build a few rigs or would you still want one in kind of a one-off basis?

Ken Huseman

Yes, we’d like to be bigger, but we don’t have to be bigger. That market is – that business is profitable and we’ll be careful in what we and how we grow it opportunistic. We could manage a business as twice as big as it is really easily and even larger. So, I guess I am not going to answer your question directly.

Jud Bailey – Jefferies & Co.

Fair enough. Thank you, that’s all I’ve got.

Operator

Thank you. Our next question is from the line of Pierre Conner with Capital One Southcoast. Please go ahead.

Pierre Conner – Capital One Southcoast

Good morning, gentlemen.

Ken Huseman

Hello, Pierre.

Pierre Conner – Capital One Southcoast

Maybe for Alan, just could you walk us through sequentially the revenue gains in the completion services side, just so we could get a feel for whether that can be organic? And you mentioned the mat sale in there, could you break it down a little?

Alan Krenek

Yes. Hang on just a second.

Ken Huseman

While he’s doing that, Pierre, the mat sale came out of our fluid services segment not the pumping.

Pierre Conner – Capital One Southcoast

I am sorry. And what was the amount of that again, I am –

Ken Huseman

We did $1.6 million in revenue in that little piece of business in the Gulf Coast in the first quarter, so you can take that out of the first quarter for comparability purposes.

Pierre Conner – Capital One Southcoast

Okay, great. And then I mean generally what I am trying to get to is obviously you pointed out that that was a largest, fastest growing, and just kind of on a projected forward basis, how much of that is organic equipment that you delivered versus the acquisition?

Alan Krenek

I mean if you look at the acquisitions we did of Xterra in the first quarter, that was about $14 million a year run rate and we did that at the end of January. And then we did the Triple N deal in the end of May and that was about $14 million in annual revenue.

Ken Huseman

Most of that went into our well servicing business P&A side.

Alan Krenek

Right. There’s probably maybe 20% of that going into the acquisitions – I mean the completion and remedial side. So, you take the sum of those and that pretty much would be gain sequentially quarter over quarter. But we did – I can’t say we did add some equipment in the second quarter in the completion and remedial segment. I think we had expansion CapEx of about 12 million for the second quarter. So, I would say the majority of it would probably be organic.

Michael Drickamer – Morgan Keegan

And that came in ratably across the quarter or that equipment started –

Alan Krenek

That’s correct. Now it would come in pretty much pro rata over the quarter.

Michael Drickamer – Morgan Keegan

Okay. All right, now that’s helpful color. And just as a clarification as much as anything, I think my kind of – or you may have answered this a little bit, but you mentioned about fuel and the drilling business. Now, I would assume that the fuel cost is a straight pass through on the drilling side. Where you doing in fuel in general or was there something specific on your land drilling business?

Ken Huseman

In the last quarter of last year and the first quarter of this year, we had a few rigs on footage. And we’ve completely gotten off of that right in the first quarter so that the second quarter had no fuel impact in our drilling business. So, we’ve almost none, I should say. Whereas in the fourth quarter and the first quarter, we were seeing – we were incurring fuel cost on some of those drilling rigs.

Michael Drickamer – Morgan Keegan

Okay, right. I think the rest has been answered. Thanks, gentlemen.

Ken Huseman

Okay. Thanks, Pierre.

Operator

Thank you. Our next question is from the line of Doug Becker with Bank of America. Please go ahead.

Doug Becker – Bank of America

Thanks. Ken, you’ve been highlighting some of your exposure to the resource plays today. Just roughly speaking what percent of revenues come from the resource plays and where do you think that could be going just given the pick up in activity in those plays?

Ken Huseman

Well, we have a large exposure to the Haynesville, for instance, and probably Alan might help me on this. In our Ark-La-Tex, what we call the Ark-La-Tex region, which kind of surround the Haynesville, we probably generate a fourth of our business over that market, none of which or very little of which to date is related to the Haynesville play. So, we can participate in that as it occurs with our existing infrastructure there as well as new builds.

Alan Krenek

Yes, it’s actually in the fluid services, about 25% of the total.

Ken Huseman

Okay. So – and that’s – one of our largest fluid service yards in the country is in De Berry, Texas, which is right in the heart of the Haynesville. So, as far as what that might mean as the Haynesville develops, we’ll hold our market share over there, that could be significant. So, I can’t – I am not sure I can quantify unless you tell me how many drilling rigs are going to be there, I’d do those math what that might mean, but it will be significant.

Doug Becker – Bank of America

Right. So, even if you are not generating specifically from the resource plays right now, you are positioned to benefit in the future?

Ken Huseman

Right. We are there, and as I said in the Barnett, as well count has increased, it becomes a more significant piece of the action for us even though we are not chasing drilling rigs per se.

Doug Becker – Bank of America

I wanted to follow up on your commentary regarding completion remedial, if I understood correctly, you expect margins to tick up just a little bit in the third quarter versus the second quarter, what are you assuming from pressure pumping in that expectation?

Ken Huseman

Activity wise or margin wise?

Doug Becker – Bank of America

Well, I guess both.

Ken Huseman

Well, activity will continue to trend up. We are almost fully utilized on our existing fleet, so we will see some pricing improvements which would translate to margins improvement. And in our fishing rental business I think we are pretty happy with those margins right now. They are up in the 40% level, so we’ll see more cost maintenance there, margins maintenance there, I guess.

Doug Becker – Bank of America

But you do expect to see pricing improve for frac-ing in terms of –

Ken Huseman

Yes. Now, again, we don’t participate in those mega horsepower fracs, but we price in the sort of the shadow of what those guys charge, so as they increase their rates, and we are seeing them do that now, we should be able to improve our – increase our rates and improve our margins accordingly.

Doug Becker – Bank of America

Okay, understood. And given the outlook, any serious consideration of adding more frac-ing capacity?

Ken Huseman

Well, yes, but only in the smaller horsepower fracs that we chase, for instance the (inaudible) in Southwest Kansas. We are doing some smaller fracs in these other markets, but in terms of adding 50,000 horsepower spread to chase the Bakken or something like that, that’s really not our cup of tea.

Doug Becker – Bank of America

Okay, thank you.

Operator

Thank you. Our next question is from the line of John Fitzgerald with Raymond James. Please go ahead.

John Fitzgerald – Raymond James

Good morning, guys.

Ken Huseman

Hello.

John Fitzgerald – Raymond James

Could you guys comment on your revenue mix just kind of between oil and gas right now, I think it’s relatively even, but do you guys see it changing at all as you increase your exposures in these new plays?

Ken Huseman

We’d probably get a little gas here depending on how the Haynesville takes off. Obviously it’s going to pull our Ark-La-Tex business up and became a little gas here although we are adding assets in the oil markets as well. So, we’d like to – there’s a band, probably 60-40 and it flip flops as the market heat up and contract. It may be 60% gas and 40% oil or vice versa depending on the part of the year we are in, literally, but it should be in that band regardless of how far into the future we look.

John Fitzgerald – Raymond James

Okay, great. Thanks a lot.

Operator

Thank you. Our next question is from the line of John Daniel with Simmons and Company. Please go ahead.

John Daniel – Simmons & Co.

Hi, guys.

Ken Huseman

Hi, John.

John Daniel – Simmons & Co.

First question on the new capacity, it sounds like a lot of the public companies have cut back their new rig orders, yet seems to me like a lot of their rig builders are still pretty busy right now building work over rigs, any sense as to where they are going, and if we are going to see another (inaudible) start up here soon?

Ken Huseman

I think they are still – they are being dispersed throughout the industry as some people are just upgrading really, really old equipment, but there are still pockets of shortage out there in some of these local markets. And we know some cases where rigs have gone into markets that have previously been dominated by majors. So, I think it’s just across the waterfront, across the board of all different sizes.

John Daniel – Simmons & Co.

Okay. Have you seen any material cost increases on the new rigs, or that stayed in line given the kind of manufacturing capacity?

Ken Huseman

Yes, I think – yes, I am sure we will see it. We haven’t got the coals [ph] in yet on the new equipment, but I am expecting that they are under the same pressure as everybody else is regarding steel prices and fuel costs related to their inputs, et cetera. So, I am expecting us to see a higher number, I don’t know what it will be yet.

John Daniel – Simmons & Co.

Okay, thanks.

Operator

Thank you. (Operator instructions) Our next question is from the line of Jack Wagner with MJX Asset Management. Please go ahead?

Jack Wagner – MJX Asset Management

Yes, can you comment on wage using the level of price for oil and gas would be your customers to cut back on (inaudible).

Ken Huseman

On the gas side, it’s really market dependent. So, there is no one – I guess there’s less of a universal gas price. It certainly needs to be probably six plus in every market. Oil prices, I think anything north of $80 is pretty – we’re pretty comfortable with.

Jack Wagner – MJX Asset Management

Okay, thank you. Also you mentioned about your hurdle rate I think of four times for acquisitions of EBITDA, can you comment on the four acquisitions, what multiple of EBITDA they were during the year?

Ken Huseman

They were all less than four.

Jack Wagner – MJX Asset Management

Okay, fair enough. Thank you.

Ken Huseman

Okay.

Operator

There are no further questions at this time, I would like to turn it back to management for any closing remarks.

Ken Huseman

Okay. Well, thank you all for dialing in on the call, and we look forward to talking to you next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude the Basic Energy Services second quarter 2008 earnings conference call. If you would like to listen to a replay of today’s conference you can dial 303-590-3000 and enter pass code 11117430. That will be available today afternoon Eastern Time and will be available until August 19 at midnight. Once again thank you for your participation, you may now disconnect.

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