Basic Energy Services (BAS) CEO Thomas Monroe Patterson on Q4 2016 Results - Earnings Call Transcript

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Basic Energy Services, Inc. (NYSE:BAS) Q4 2016 Earnings Conference Call March 24, 2017 9:00 AM ET

Executives

Jack Lascar - President & Managing Partner

Thomas Patterson - President & CEO

Alan Krenek - CFO

Analysts

John Daniel - Simmons & Co.

Daniel Burke - Johnson Rice

Trey Stolz - Coker Palmer Institutional

John Evans - SG Capital

Mark Brown - Seaport Global Securities

Michael Urban - Deutsche Bank

Operator

Greetings and welcome to the Basic Energy Services Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jack Lascar. Thank you, Mr. Lascar, you may begin.

Jack Lascar

Thank you, Michelle, and good morning, everyone. Welcome to the Basic Energy Services Fourth Quarter 2016 Earnings Conference Call. We appreciate you joining us today. Before we begin, I would like to remind everyone that today's comments include forward-looking statements reflecting Basic Energy Services' view of future events and therefore potential impact on performance. These views include the risk factors disclosed by the Company in its registration statement on Form 10-Q and Form 10-K for the year ended December 31, 2015.

Further, refer to these statements regarding forward-looking statements incorporated in our press release from yesterday. Please also note that the contents of this conference call are covered by those statements. In addition, the information reported on this call speaks only as of today, March 24, 2016, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

With that, I'll turn the call over to Roe Patterson, President and CEO.

Thomas Patterson

Thanks, Jack, and welcome to those of you dialing in to today's call. We appreciate your interest in our Company. Joining me today is Alan Krenek, our Chief Financial Officer. First, I'll make some comments about our restructuring process that occurred in Q4 of 2016, then I'll make some general comments about what we saw on Q4 operationally and where we stand today. Alan will then discuss our financial results and statistics in more detail and I'll wrap things up with some final comments about Q1 2017 and the remainder of the year.

We're pleased to have emerged from late last year from restructuring recapitalization process with a solid financial foundation from which we will continue to strengthen our business. I'm proud of our employees for their dedication and contributions as their support has been an integral part to successful outcome of this process. I'm also thankful for the continued support of our customers, suppliers and various stakeholders. With their help, we saw little to no disruptions in our daily business environment. At the same time, we acknowledge and deplore the loss of value to our former shareholders.

Faced with very limited options, the restructuring path was the best choice to secure the company's future in a sustainable way. We're now in a much healthier financial position, allowing us to continue to support our customers with industry-leading expertise and safe efficient services. Without a doubt, 2016 was another very challenging year and possibly the worst in our industry's history. U.S. land activity continue to decline during most of the year and our revenues fell 32% after having falling 46% during 2015.

However, all prices have rebounded from their lows and activity has picked up in several basins, but we're fortunate to have very large positions. These improvements are magnified in the Permian basin and the stack in scoop areas in Oklahoma. Our customers are taking advantage of this improved environment's increase and/or restart their CapEx programs. As a result, our fourth quarter revenues increased 10% sequentially. The fact that the fourth quarter revenues were greater than the third quarter revenues outweighing typical seasonal factors, the very positive sign gives us confidence in the near term outlook.

Despite the pickup in activity and the sequential increase in revenue, fourth quarter margins decline across all product lines impacted by seasonal weather interruptions, higher input cost, onboarding of newly hired employees and some reactivation cost of stacked equipment. This situation continued during the first quarter of 2017 and has been compounded slightly by rising labor rates and annual reset of payroll taxes.

While we are able to pass through most of the cost inflations in our pricing, there's always a slight degree of lag. Additionally, most utilization rates have still not reached the levels where incremental margin enhancement can be made. A pumping business is somewhat of an exception to my comment and I'll speak to that more in a moment.

We currently feel margin pressure has already begun to dissipate and we anticipate that this will continue in the second quarter as pricing and utilization continue to improve any impacts of weather and payroll taxes diminish. Longer daylight hours will benefit our utilization levels as well. Our fixed cost remain in check for the most part allowing for improved operating leverage.

During the fourth quarter and into the first quarter, we unstacked all of our remaining track horsepower. As previously announced, we've also purchased an additional 74,000 frac horsepower, making up essentially two full spreads that were staked during the down turn. Including purchase price and make-ready cost, we will have it active in the field for less than $400 for horsepower for approximately 38% of average newbuild cost. The first spread will be active in April, the second spread will be active in May.

Pricing and utilization in the pumping business has improved enough that we feel these investments are warrant. With the calendar that is very full through the second quarter, we expect margins to continue to improve in this business. It appears the general attrition rates of the overall U.S. frac fleet over the past two years have been deep enough that the current drilling rig counts are quickly catching up with available frac capacity. This gives us comfort around these expenditures and the future financial performance of this segment.

We also unstacked 10 well servicing rigs in the fourth quarter and we've unstacked a few more here in Q1. Our fluid service equipment has remained generally unstacked throughout the downturn, albeit with the press rates of utilization. With that, equipment has also seen a surge in activity and we expect improved financial performance.

We are fortunate to have a young fleet of equipment and it's been well-maintained. We've been very pleased that our reactivation cost have been fairly low across all segments. In addition to our pumping purchase, we ordered two -- two and 3H coil tubing units for [indiscernible] operations with expected delivery dates in late second quarter or late third quarter. We're also manufacturing two new well servicing rigs for our California operations with one unit being delivered by the end of March this month and the other expected delivery date in early April. California is a growing area for us and we penetrated that market with new well servicing rigs and we'll continue to grow our service footprint there.

With that, I'm going to turn the call over to Alan.

Alan Krenek

Thanks, Roe, and good morning. I will provide some details on our fourth quarter income statement, as well as discuss selected balance sheet and cash flow items. First, I would like to say a few words about fresh start accounting and the impact of emerging from Chapter 11 on our fourth quarter results and our balance sheet. This was included in our press release from last night, but I believe it's appropriate to review our fresh start accounting process.

In line with Basic's pre-package plan of reorganization, we reemerged from Chapter 11 on December 23 last year. We adopted Fresh Start Accounting which resulted in Basic coming a new entity for accounting and legal purposes upon emergence. We evaluated the events between December 23 and December 31 and concluded that the use of an accounting convenience date of December 31 do not have a material impact on the results of operation for financial position. As such, the application of fresh start accounting was reflected in our consolidated balance sheet as of December 31, 2016 and all fresh start accounting adjustments were included in the consolidated statement of operations for the year ended December 31, 2016.

Due to these adjustments, the financial statements as of December 31, 2016 are not comparable with information to provide it for prior periods. But now I'd like to cover a few components of our revenue and segment profit that were not in our earnings release yesterday. In our well servicing segment, tailor rig manufacturing generated $1.3 million in revenue, compared to $380,000 in the third quarter. Tailor segment operating margin was a loss of $9,000, compared to positive $18,000 in the third quarter.

In the completion of our remedial segment for the fourth quarter, 58% of the revenue was generated from pumping services compared to 42% last quarter. 18% from coil tubing compared to 25% last quarter and 22% from rental tools compared to 28% last quarter; the remainder of this from other services.

The reported net loss for the fourth quarter was $152.8 million or $3.58 per share. This compares the net loss of $92.1 million or loss of $2.16 per share in the third quarter. Special items and charges in the fourth quarter on a tax effective basis included professional and other fees associated with our restructuring of $44.4 million, accelerated investing of outstanding equity in our predecessor plan of $6.1 million, retention expense of $2.4 million and evaluation allowance on federal deferred taxes of $49.3 million.

Excluding the impact of special items, Basic reported a net loss of $50.6 million or $1.18 per share compared to a net loss excluding special items of $53.4 million or $1.25 per share in the third quarter. Weighted average shares outstanding for the fourth quarter were $42.7 million. For 2017, we expect weighted average shares to be $26 million. Adjusted EBITDA was a negative $5.2 million or 3% of revenue compared to the negative $4.7 million or 3% of revenue in the third quarter; this excludes the special items mentioned earlier.

Reported G&A expense was $38.5 million. Excluding predecessor expenses of $8.8 million for accelerated vesting of outstanding equity in our predecessor plan in $3.6 million for retention expense, adjusted G&A expense was $21.6 million or 17% of revenue compared to $30.1 million or 21% of revenue in the prior quarter. The lower G&A was due to lower incentive compensation, other cost saving initiative implemented during 2016 and year-end true-ups. We expect G&A expense in the first quarter to be around $29 million.

Depreciation and amortization expense was $49 million, down $4 million in the third quarter. Due to the fresh start adjustments to PP&A, we anticipate depreciation amortization expense to be around $25 million to $26 million in the first quarter; and then increasing appropriately as we add capital expenditures during 2017. Net interest expense declined to $20.3 million in the fourth quarter compared to $23.9 million in the prior quarter as interest stopped accruing upon the initiation in the Chapter 11 process in October 2016. We expect quarterly net interest expense to be approximately $7.5 million during 2017.

The operating tax benefit right for the quarter was 32%, splitting the valuation allowance related to the temporary impairments of the company's tax NOLs. On an operating basis, we expect that the 2017 tax benefit rate will be 36%. However, the tax benefit rate for 2017 on a reported financial statement will be impacted by valuation allowances on our approximately $600 million of tax NOLs until we get to a positive pretax income.

Our cash balance was $99 million at December 31. In connection with our emergence from Chapter 11, we amended and restated our $100 million revolving credit facility to a $75 million facility with a $25 million accordion. No amounts were outstanding under the credit facility at December 31. We had $52 million of letter credits outstanding for insurance collateral at December 31, leaving $23 million of availability under the facility.

Our DSO at the end of December was $65 million, up from $58 million at the end of September, mainly due to our larger customers. Our 90-day receivables represented 5% of our accounts receivable balance at year end and we continue to experience good collection results with the improving operating environment.

Total debt at December 31 was $223 million, of which $38 million was classified as current, in connection with emergence from Chapter 11, we amended and restated our $165 million term loan -- very few changes were made, mainly reducing the minimum cash amount requirement to $25 million and also allowing us to adjust the capital expenditure covenant in an improving business environment.

During the fourth quarter, total CapEx was $10.3 million, including $500,000 per capital leases. Fourth quarter spending was comprised of $6.6 million for sustaining and replacement projects, $2.7 million for expansion and $1 million for other profits. Growth [ph] outlined the expansion projects for 2017, we expect that CapEx for 2017 will be in the vicinity of $115 million, of which $70 million will be in the form of capital leases, leaving with the $45 million of expansion that leaves about $70 million for sustaining and replacement projects.

I would like to end up with a reminder about the impact of the payroll tax reset in the first quarter. Every year, payroll taxes, particularly unemployment payroll taxes reset. This reset impacts our more labor intensive business lines include services and wealth servicing the most. As a percent of revenue we expect the reset of the unemployment payroll tax will result in about 175 to 200 basis point reduction in EBITDA in the first quarter. After the first quarter, this returns to normal levels for the remainder of the year.

At this point I will turn the call back over to Roe for closing comments.

Thomas Patterson

Thanks, Alan. Looking forward, we are cautiously optimistic in the near-term, we expect a gradual improvement in pricing in utilization for the remainder of 2017. Our customers have expressed the same level of optimism as well, they have increased their levels of capital expenditure and they've expanded their budgets. However challenges do remain, continue to oil price fluctuations are worrisome and could rapidly impact our customers who haven't had their production. Also, hiring experienced personnel is becoming more difficult and costly as much of our field level expertise left the industry for more stable employment and less cyclical career.

As we turn to greener new hires to fill expansion roles, efficiencies could suffer in the short term. Competition for experienced personnel will continue and we'll drive labor rates and service the primary driver for overall pricing increases. Because of these headwinds, the recovery is likely to be even paced. So we will remain measured in our approach and ready to scale back quickly if anything should worsen. As Alan stated, remaining CapEx would be limited to around $70 million for maintenance projects if activity levels meet our current outlook. But we can move that quickly if we need to.

Because Q1 is mostly in the books, I could say that the steady pace of recovery has been promising and has turned to be true. We expect Q1 revenues to be 13% to 15% higher sequentially and we expect to exit Q1 with positive EBITDA in March. As I said, our services are largely committed through Q2 and we're pleased with this outlook.

The recent trend in OFS consolidation is very natural for this type of cycle and I expect Blackridge just beginning. Many balance sheets have been reset, paving the way for more acceptable and attractive transaction. We have and we'll continue to review potential transactions to make good sense for our shareholders.

With that, Operator, we will turn the call over to any questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of John Daniel with Simmons & Company. Please proceed with your question.

John Daniel

Hey, guys. Thank you. Roe, I'm just guessing -- just a couple of modeling clean up things here. Given where we are in the quarter, can you give us a view of your rig and truck hours for Q1? And also, just directionally the trend in the wealth service rate per hour trucking?

Thomas Patterson

Well, on the well service standpoint, we already announced that utilization was around 50% in January, above 50% in January and you can well expect in March with better weather and longer daylight hours that utilization is continuing that trend. On the trucking side, the hours are pretty consistent on what we've been expecting utilization somewhere in the upper 60%.

John Daniel

Okay. Do you see the work of the rate per hour?

Thomas Patterson

It would have been lower just because of mixed shift to Permian.

Alan Krenek

Well, we're actually trying to give the rate increases in the Permian, but it's obvious that the more hours we get from the Permian, the average rate, there is lower, so it's going to skew it the total accordingly but rates aren't going down, that's the question.

John Daniel

All right, there we go. And then, Roe, on the 101,000 frac horsepower that moved on stacked, to unstacked, to working, when do those fleet start working?

Thomas Patterson

The last of them were deployed middle-March, so I would say the bulk of it hit right around mid to late February. We got the rest of it in the field by mid to late March year. So everything is unstacked as of today.

John Daniel

Okay.

Thomas Patterson

For frac.

John Daniel

For frac? As we go into Q2 and got all of this horsepower going back to work, you get rid of the payroll tax issue and the reactivation cost – I know you're not going to give specific guidance on margins, but Is it safe to assume that you expect the material improvement in segment margins in Q2 versus Q1 at least for CNR?

Thomas Patterson

Yes. That said, across all segments, I expected the margin pressure to dissipate. That's what's going to happen. When the payroll taxes are gone, weather is better, daylight hours are longer and we got this onboarding out of the way – look, anytime you're bringing stuff out and you're hiring new folks, it's expensive. We'll have most of that flushed through the system. There will be a little bit of it early in Q2, but most of it will be flushed out in Q2.

John Daniel

Got it. Okay. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Daniel Burke with Johnson Rice. Please proceed with your question.

Daniel Burke

Yes. Good morning, guys.

Thomas Patterson

Hey, Dan.

Daniel Burke

One quick diagnostic question. If I did my math correctly, it looks like in CNR, you had a really nice progression from Q3 to Q4 on the pumping side. It looks like if we just caught all over CNR revenues dipped from Q3 to Q4. Was that correct and hat drove that, just kind of looking forward into the 2017 year?

Thomas Patterson

Mainly weather for a big part of it. For coil, it's primarily what it was. A little bit of daylight issues in the rental and fishing tool. It wasn't so much that they dipped the whole lot. Pumping just took off.

Alan Krenek

If you look at our rentals, operation, the revenues were essentially the same from third or fourth quarter. And on coil tubing, they just dipped slightly, but the lowering of their percentage of the total was mainly due to the increase in the pumping revenues.

Daniel Burke

Okay. Okay, great. And then in terms of the margin here in Q1 '17, when you talked about the pressures, you gave a good list of the reasons in January and February persisting. Did you mean to say that percent margins in those two months were lower than the percentage margins you saw in the fourth quarter, or similar?

Thomas Patterson

We didn't say either way.

Daniel Burke

Fair enough. And I know we're directionally now recovering from that, but I figured I'd try to put a fine point on that.

Thomas Patterson

You can figure today were repairing [ph] early part of the quarter because that's where the more significant weather issues are, but toward the end of the quarter, we had a profitable March, so you can expect that they start to improve. They really improved throughout the quarter.

Alan Krenek

February is better than January and then like Roe said, March is going to be better than February. It's a progressive deal.

Daniel Burke

Thanks, guys. Maybe just to cram one last one in on the CapEx side. I would assume and really think about CNR here. The acquisitional horsepower, I would assume that's included in the growth CapEx budget, but wanted to clarify that and then you refurb cost on the frac side. That would be included in the maintenance CapEx figure for this year?

Alan Krenek

That's correct.

Daniel Burke

Okay. All right, guys. Thank you for the time.

Alan Krenek

You bet.

Operator

Thank you. Our next question comes from the line of Trey Stolz with Coker Palmer Institutional. Please proceed with your question.

Trey Stolz

Good morning, guys. A couple of quick ones here. I guess first off is an ongoing call right now. Another [indiscernible] service company, they're talking about sand potentially impacting margins and then maybe it just become an issue. I know you said you're pointing access to sand, but can you give us an update on that? How that looks for 2017 with the improving outlook with demand taking that.

Thomas Patterson

So far, the primary fan company that we're dealing with have met our expectations and promise, continued to bring us supply in the future. We feel good about what is in the pipeline in the amount of mines that have started to reactivate here in the early spring. So we feel good about the sand volumes right now based on what we see looking out.

Trey Stolz

In pricing, really pricing has moved. Is that any concern about impacting margins going forward here?

Thomas Patterson

Well, I think if sand continues to move up, we're just going to pass it straight through. We can't afford to absorb any of that for our customers at all and we won't.

Trey Stolz

All right. And then looking at the equipment manufacturer, particularly in pressure pumping, we're hearing of shortages out there, that it's being sold out particularly fluid ends, pump, engines and it could be several months' wait depending on the equipment and the supplier. Are you all seeing that? Is that anything that could impact either ongoing operations, supply fluid ends; or conversely, is it potentially an advantage as other guys are trying to unstack at this time.

Thomas Patterson

Well, I think to the extent that they're trying to unstack and they've got a little more work to do to put those fleets back together than maybe what they thought earlier when they felt like that fleet was essentially intact and they could just turn the key and it's going to go back to work; then they find out maybe they're missing a transmission or two, missing an engine or two – sure, we love to jump in front of those spreads and take that work because we're ready to go. I think we probably did a good job of getting in front of any big issues with engine delivery and fluid end delivery –fluid ends being the primary wearable component that you should see in the pumping business. We got in front of that. We've got a decent supply, we're going to stay in front of it and make sure that we keep that supply in good share for what we're running and so far, we're just not seeing that as a big problem for us yet.

If it happens later in the year, it's probably going to happen to everyone. No one is going to go out and buy with oil [indiscernible] and doing some crazy things here lately. I don't think you're going to see someone go out by year supply of fluid ends at a 770-type rig camp pace or whatever. I just don't see anybody making that kind of bet. So if it does catch up with the market, it will catch up to us all at the end of the year. I expect that OEMs will respond accordingly. They always do and we'll get by.

Trey Stolz

All right. That's it for me. Thanks.

Thomas Patterson

Thanks, Trey.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of John Evans with SG Capital. Please proceed with your question.

John Evans

Can you just talk a little bit about – you've guided for 13% to 15% in Q1. You said you'll be slightly profitable on the EBITDA. How do you see with the frac equipment that you have in Q2? Do you grow double digits again sequentially and do you get the normal incrementals or the incrementals compressed in Q2 because of the catch up and pricing and the reactivation cost et cetera?

Thomas Patterson

Okay. What I said was that we would exit Q1 with positive EBITDA in March. Not that we would have [indiscernible] order.

John Evans

Got it. It doesn't mean you're going to be positive EBITDA for the quarter. Right?

Thomas Patterson

That's right.

John Evans

Okay, got it.

Thomas Patterson

I think that what we've seen in the pumping business is a very steady and measured pace of price improvements. We haven't seen the hockey sticks sort of ramp up in pressure pumping sizing. There are still a lot of competition out there, albeit that starting to shrink and I think these other pumping companies would tell you that their calendars are relatively full as well. So, pricing will move. One of the big drivers for pricing will be sand and it will be labor to the extent that any incremental margin can be built in that. I expect it to be at a normal pace for the most part, slightly compressed because it's early in the cycle. So I don't think you need to try to build incrementals in your models that are sort of 2014-ish. Don't do that because it's not time in this recovery yet. So I think it's going to be an even-pace recovery in both terms of rate increases and incremental margin improvement. There's just a lot of pressures out there and labor and onboarding of people is definitely one of the things that tends to sort of compress or cap wild swings in incremental margin improvement. So it's early. In this recovery, it's just early to be China-modeled, too much incremental improvement.

John Evans

Okay. And I don't mean to catch you off guard, but obviously, Halliburton is having a conference call right now and updating. They basically said they reactivated twice as much frac year as expected in Q1. I guess your first blush of that, does that make the market as we go into Q2 not as tight as anticipated, or does that make you less bullish about being able to push price because of that?

Thomas Patterson

Well, I don't really gaze our pumping business by exactly what Halliburtons do, to be real clear with you. I think if anything, it makes me more bullish that they're reactivating the horsepower, they're finding worth for that horsepower. They'll probably be price leaders in a lot of markets. I think that we're going to reactivate this spare capacity if the drilling rig count continues to move up and then we're going to find out where attrition rates for the last two years really were and we're going to find out how much frac capacity is really available.

But if the rates are telling you anything, they're telling you that we're getting there. We're starting to get to the end of it. If we weren't and the market is completely saturated with frac capacity, then we wouldn't be seeing pricing improvements like we're seeing and margin improvements like we're seeing. I think that the fact that they're redeploying more than what they thought and there's a pace of reactivation for them is better than what they thought, it's overall good thing for the whole market – we would have to agree because we saw the same result. We reactivated our fleet and unstacked it faster than what we thought and margin improvement came faster than we anticipated and that's why we went out and locked up some used horsepower that we found attractive.

By the way, we look for additional horsepower and kicked a lot of tires around the market to see if we could find additional horsepower and we just found very little that was attractive. Most everything we found beyond what we purchased was going to require significant amount of CapEx to reactivate and we just passed on that because I think at some point, when those reactivation cost get too high, you got to wait it out with what would cost you new bill, horsepower would cost you and I don't think margins are ready to justify either very expensive reactivations or newbuilds. At least our margin, we haven't seen that yet. We're ways away from I think the types of margins that would attract newbuild right now.

John Evans

Okay. So you don't think it's a change of strategy? Because toward, they were going for pricing and not market share and it seems like they've changed that. Okay. Thanks so much.

Thomas Patterson

Definitely. In our view, they definitely have shifted that strategy in the last 90-120 days.

John Evans

Okay. Thank you so much.

Thomas Patterson

You're welcome.

Operator

Thank you. Our next question comes from Mark Brown with Seaport Global Securities. Please proceed with your question.

Mark Brown

Hi. I was wondering if you can maybe comment a little bit about the deferred maintenance and work overs that have been deferred during the down turn and if you expect those to start kicking up in an accelerated fashion? I guess the question is whether the E&P companies are still going to be allocating most of their spending to drilling and completion or whether they'll start putting it to the maintenance of existing wells?

Thomas Patterson

Well, so far I would say it has tracked the price of oil pretty well. During the quarter when oil was in the low $50s, $53, $54, we saw a healthy amount of maintenance work, start to reoccur and it gave us a lot of positive feel for those deferred projects we're going to get back on the schedule and the day we're going to address some of that stuff that have been deferred over the last couple of years. We saw that in the fourth quarter, we saw that in the first quarter as well. I guess with prices dipping below $50, that it puts a big question mark. Right now, we haven't seen a drop in work over rig count, so we haven't seen a response. I think if it stays down, that's quite possibly we could see a response there that they could just reshelf those work over projects. Right now I think they've hedged some production, they're comfortable doing this work over work and as far as we can look out into Q2, we anticipate to be very busy.

Mark Brown

Okay.

Alan Krenek

That's why we unstacked and reactivated several work over rate.

Mark Brown

Good. I guess just on the frac side. If oil price, let's say is in the $45 a barrel to $50 a barrel range, do you expect to continue to see demand coming back strongly over the next couple of quarters if we don't get oil prices back above $50.

Thomas Patterson

I don't know. We'll just have to wait and see. It depends. I think it really is going to be answered by the number of people that hedged and how long did they hedge. At least judging by what they did in 2016 when pricing was at those $45 levels, I wouldn't want to go back to those utilization levels because they weren't as healthy as the ones we're at today. If you look back historically, that would not be a good outcome. We could hope that the amount of hedging that got done over the last quarter and then just the overall optimism about where the market is generally heading would drive our activity levels on a go for it and that's what we've seen so far. If you look at the demand we're seeing right now in the field from our customers, continues to increase for all service segments, so we feel like the focuses is on better pricing coming down the pipe in later in the year. That's what we would anticipate and hope for.

Mark Brown

If I can just have one more question. The 74,000 horsepower that you acquired for less than 400 per horsepower, were there many bitters? Was that a competitive process or did you just sort of have the relationship there that allowed you to get a good deal like that? But obviously, valuations for many of the publicly traded companies are certainly much higher than that.

Thomas Patterson

It was a relationship find and we were very fortunate to get our hands on it.

Mark Brown

Okay, sounds good. Thank you.

Alan Krenek

Okay, Mark.

Thomas Patterson

Thanks.

Operator

Thank you. Our next question comes from the line of Mike Urban with Deutsche Bank. Please proceed with your question.

Michael Urban

Thanks. Good morning, guys.

Thomas Patterson

Good morning, Mike.

Michael Urban

I apologize if this was asked before. I was on one other call. But I want to just think more broadly in how you're thinking about the business longer term now. Hopefully you have the luxury of doing that post the reorganization. And I guess one of the things that we've seen in the market over the last really several years is that historical relationship between the well service market and overall recounting spends seems to have disconnected a little bit. In other words, you think a little less beta on the upside, but more resilient on the downside. We haven't necessarily seen that. I don't know if there's a change in mentality on the part of the EMP companies and they feel like they get rewarded for drilling these big new wells and hey, if we're declining, so what? We're just going to drill another big new well. One, do you think that pattern reverse itself as things normalize and we get out of rapid growth mode here or longer term is that a structural change and that change how you think about how you think about allocating capital to different parts of your business over the course of the cycle?

Thomas Patterson

Well, I would agree with you that there was a disconnect this time around. There is a couple of reasons I think there was a disconnect; one was a number of competitive companies that came into the well servicing space during 2013 and 2014, it was a higher growth timeframe than most people probably realized, it was just a number of bidders that jumped into that business. A lot of PE-backed -- PE-sponsored well servicing companies were fostered. The depth and the length of the drop was definitely one that I think was so dramatic that we saw that disconnect magnified with people just really going into a holding pattern on their cash, not spending any money on maintenance projects where normally maybe if the dip was a little more V-shaped, they would continue with some of that maintenance and that tried to hold up their cash flow, they just sort of went into hunker down mode if you will on maintenance. They may have spent more of that money for acreage positions; we saw acreage positions increase during the trout and acreage prices increased during the trout for some of these hot markets like the Delaware Basin, the Scoop Stack; so maybe that's where those dollars were going versus being used for maintenance and the sustaining of cash flow.

But we agree, we saw the disconnect, I don't expect that to be something that sticks around because at the end of the day, this legacy production is very important to our customers as a great source of cash and it's the cheapest barrel that they can go after, it's one that they already know is there improving and all they need to do is enhance that production. So we feel like that we've seen an improvement in that behavior and we'll continue to see that improvement but definitely in this trout with as dramatic as it was and as difficult period it was we definitely saw that disconnect as well.

Michael Urban

And I guess -- again, the limited resources within a lot of your customers specially, I mean even some larger EMP companies that you've talked about this in the past, but you don't necessarily have a drilling department and a production department the way a large company might. Is there a sense that those types -- that type of customer can shift more focus to production enhancement and maintenance once where kind of the cycle matures a little bit here. So like you said, there has been this land rush, obviously lot of wealth ramping up rapidly; I mean is that something you ever hear from your customers?

Thomas Patterson

Yes, and we expect that shift to take place. One thing that really sort of puts that on the fast-track is change in ownership. So as a lot of M&A activity takes place on the customer side, we see a big pop in maintenance work because the new owners typically will come in and look for the low-hanging fruit to get the production numbers out and get immediate cash pop from their new purchase whereas the seller may have neglected a little bit, walked away from it a little bit, fully anticipate it that they were going to sell it. So why spend the money?

Michael Urban

Got you. That's all for me. Thank you.

Thomas Patterson

Okay. Thanks, Mike.

Operator

Thank you. Our next question is a follow-up from John Daniel with Simmons & Company. Please proceed with your question.

John Daniel

Hey. Thanks for putting me back in. Alan, any chance you could give us a rough estimate on what Q1 reactivation cost might be all parked?

Alan Krenek

In the completion remedial segment, on the pumping side?

John Daniel

Yes, sir.

Alan Krenek

Probably 100 basis points or so.

John Daniel

Okay.

Thomas Patterson

And then a little bit on the well servicing side, probably about the same.

John Daniel

Okay. All right. And as we think about the work over utilization, have you had any rig sales in Q1, or do you expect to have any rig sales going forward?

Thomas Patterson

Just the normal pace, John of what we normally dispose of and we'll keep the fleet steady at 421.

John Daniel

Got it. Okay. And then when you guys talk about – what would you say use a rough guess on average horsepower for your fleet? 40,000?

Thomas Patterson

Yes. That's probably ballpark. That includes some spare. When you've got two fleets that are doing horizontal work working close proximity to each other, you can share some spare capacity from time to time. That's probably a good ballpark for us.

John Daniel

Okay. It's all I have. Thanks for putting me back in.

Thomas Patterson

You bet.

Operator

Thank you and there are no further questions at this time. I would like to turn the call back over to Management for any closing remarks.

Thomas Patterson

Okay. Thanks, everybody for calling in. We'll talk to you next quarter. Thanks.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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