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Edited Transcript of BAS earnings conference call or presentation 2-Nov-18 1:00pm GMT

Q3 2018 Basic Energy Services Inc Earnings Call

MIDLAND Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Basic Energy Services Inc earnings conference call or presentation Friday, November 2, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Scott Schorlemer

Basic Energy Services, Inc. - Senior VP, Treasurer, Secretary & CFO

* Trey Stolz

Basic Energy Services, Inc. - VP of Investor Relations

* Thomas Monroe Patterson

Basic Energy Services, Inc. - CEO, President & Director

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Conference Call Participants

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* Daniel Joseph Burke

Johnson Rice & Company, L.L.C., Research Division - Senior Analyst

* John Matthew Daniel

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* Luke Michael Lemoine

Capital One Securities, Inc., Research Division - Senior Analyst

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Basic Energy Services Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Trey Stolz, Vice President of Investor Relations. Thank you. Mr. Stolz, you may begin.

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Trey Stolz, Basic Energy Services, Inc. - VP of Investor Relations [2]

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Thank you, operator, and good morning, everyone. Welcome to the Basic Energy Services Third Quarter 2018 Earnings Conference Call. We appreciate you joining us today.

Before we begin, I'd 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 statements on Form 10-Q and 10-K for the year ended December 31, 2017. 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 these statements. In addition, the information reported on this call speaks only as of today, November 2, 2018, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay.

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

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [3]

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Okay. Thanks, Trey. Welcome to those of you dialing in for today's call. We appreciate your interest in our company. Joining me today is David Schorlemer, our new Chief Financial Officer, who joined Basic a little more than two months ago. I'm excited to welcome David to our organization. David joins Basic with a strong background in senior level positions with both public and private companies in such areas as finance, growth acquisitions, strategic and organizational planning, technology and capital markets transactions, among others. As Senior Vice President and Chief Financial Officer, he is now responsible for overseeing and managing all of Basic's finance, technology and accounting responsibilities. David is already making sizable impact on our organization.

I will now cover what we saw in the third quarter operationally. David will then discuss our financial results in more detail. I'll wrap things up with some comments about the remainder of 2018 and some preliminary comments about 2019.

Our third quarter results unfolded much as we had expected. We benefited from increased revenues and utilization from production-related services, expanded margins in both the Completion and Remedial and Water Logistics segments, and increased penetration of water disposal volumes through pipeline systems. Third quarter revenues declined slightly from second quarter levels due to interruptions from our previously announced strategic realignment initiative and larger-than-expected weather impacts during the quarter.

Even with these headwinds, we were able to maintain total direct company margins at around 23%. As a reminder, the strategic realignment initiative we launched during the second quarter was an internal initiative to exit non-core markets and business segments. We have relocated our assets to operating areas where our customers are the busiest, leaving some legacy markets that have really never fully recovered from the downturn. This initiative is proceeding as planned and should be complete by year-end.

We've already begun to see the positive impact on our margins, and we anticipate going forward it will accelerate profitability and free cash flow to improve utilization, cost efficiencies, lower maintenance CapEx and preferred pricing across all of our business segments.

We relocated frac assets from the Permian Basin, placing this equipment into the Mid-Con where our current operating scale is enabling higher utilization rates. We have also relocated rental tools, water trucks and well servicing rigs to core markets like the Permian Basin, the SCOOP/STACK and the Eagle Ford where we have market-leading positions. These moves are resulting in a steadier utilization rates of assets with higher gross margin potential.

We also made some divestitures such as our mining and construction yard in La Barge, Wyoming, which closed in early October. As anticipated, these relocations and divestitures caused some short-term disruptions to our top line. We fully expect those revenue levels to return once the initiative has been fully implemented, and then accelerate from there. Additionally, the benefits of higher margins, reduced CapEx requirements and the overall streamlining of our fleet, footprint and strategy will far outweigh any temporary downside results.

I'll now review our three main segments. The well servicing segment experienced strong utilization based on customer demand and current available labor, and as a result, we are seeing additional rate traction in the mid-single digit range for the remainder of 2018. Revenues increased around 4% largely on these rate increases. However, segment margin declined due to asset movements as part of the realignment initiative, as well as some severe weather impact.

Our manufacturing division, Taylor Industries, also increased its third quarter revenues and this work typically comes with lower margins. We estimate the negative impact to the segment revenue due to weather was approximately $2 million dollars during the quarter.

Demand for our 24-hour packages remained stable, averaging 23 active packages for the quarter. This average is down one from the second quarter due to the transit of two 24-hour rig packages from Appalachia to the Mid-Con region as part of our realignment initiative. We expect each 24-hour rig moved from Appalachia to earn approximately $1.9 million per year in incremental EBITDA in the Mid-Continent region versus Appalachia. It's important to note that associated revenues from ancillary equipment that is included with these large workovers and 24-hour packages is booked in our Completion and Remedial segment. Just to give a sense of the strong demand for this higher-margin market, we only averaged 11 packages in the third quarter of last year. We ended this quarter with 28 active 24-hour packages.

We expect the improving demand for these all-in-one 24-hour rig service packages to continue to gain further momentum in 2019. Our fleet is uniquely equipped to handle this demand as we combine our high-spec well servicing rigs with our rental and fishing tool assets to form these larger packages that are preferred by our customers. This is a differentiating factor as many of our peers do not have this extra capacity.

The Water Logistics segment continues to perform very well as the amount of total water disposal volumes via higher margin pipeline during the quarter increased by 22% sequentially to represent a new high of 28% of all disposed water volumes. In addition, our Permian Basin operations moved to almost 50% of its saltwater volumes via pipeline in the third quarter of 2018, another new record.

As water disposal volumes via pipeline continue to grow, we are reducing the number of active fluid trucks by replacing fewer of these trucks at lease expiration. Our average Water Logistic truck count was 865 trucks at the end of the third quarter compared to 970 trucks a year ago.

We ceased operations, as I previously said, in our Western Wyoming mining and construction business in August. Revenues from this operation were embedded in our Water Logistics segment, and these assets were located in La Barge, Wyoming and were mainly made up of heavy dirt moving equipment. This business line is not one we intend to grow, and therefore, we closed on the sale of these assets in early October as part of our strategic process. This yard represented approximately $12 million per year of Water Logistics revenue. We will use the proceeds from this sale to reinvest in operations in our core markets and business segments that have higher-margin potential.

In our Completion and Remedial services segment, we're already benefiting from this strategic realignment process as the segment delivered a 180-basis points improvement in margin. We moved our frac assets out of the Permian Basin to the Mid-Continent region where we have greater scale. These markets provide steadier utilization, greater cost efficiencies that we could not achieve in the Permian. We pump less sand in the Mid-Con and frac treating pressure and rates are lower, which reduces our maintenance CapEx burden for our pumping assets. The coiled tubing, snubbing and other rental businesses also saw sequential improvement quarter-over-quarter.

Now I will turn the call over to David and ask him to discuss not only the third quarter financial metrics in more detail, but also our recent efforts achieving an improved capital structure for the company.

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David Scott Schorlemer, Basic Energy Services, Inc. - Senior VP, Treasurer, Secretary & CFO [4]

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Thanks, Roe, and good morning to everyone.

Over the next few minutes, I plan to provide some details on our third quarter financial results and other aspects of our new capital structure.

Before I begin, I would like to say that I'm very excited about joining the Basic team. Since I arrived at Basic at the end of August, I've been impressed by the quality of the team and their enthusiasm and engagement in our mission. I was fortunate to start on the day of our last board meeting in which Roe and the team presented a new and comprehensive strategic plan, which was fully endorsed by the board. During our discussions, the decision was made to put in place a new capital structure that would complement and be supportive of our new strategy.

In connection with that decision, on October 2, we were successful in closing our previously announced offering of $300 million, 10.75% senior secured notes due 2023. In addition, we entered into a new $150 million Asset-based Lending Facility that includes a $50 million sublimit for letters of credit, which freed up over $45 million of our restricted cash. The new ABL has up to a five-year term and replaces our prior ABL facility.

On a pro-forma basis as of October 2, our long-term debt stood at $364.5 million, inclusive of our new debt facilities and existing capital leases net of discounts and deferred financing costs. Our cash on hand was $86 million and availability under the new ABL facility net of issued and outstanding LC's was $81 million, resulting in total liquidity on a pro forma basis of $167 million.

With these actions, we now have the liquidity and capital structure necessary to pursue our realignment and strategic growth initiatives with the flexibility necessary to do so with confidence. There are several initiatives Roe has discussed regarding our realignment along with significant attention to benchmarking our G&A and streamlining business processes which we expect to benefit from in the coming quarters. There remains much good work to be done, and the mandate is clear.

Moving on to some specifics on our third quarter results regarding our business. For the Company as a whole, the reported net loss for the third quarter was $27.3 million or $1.03 per share. This compares to a net loss of $40.1 million or a loss of $1.51 per share in the second quarter. Weighted average shares outstanding for the third quarter were 26.5 million. Special charges in the third quarter included $0.7 million of non-cash impairment expense related to inventory at our Taylor Industries business and $2.2 million related to our strategic realignment initiative, which was made up of both consulting fees and relocation, severance and retention costs.

Now moving into our segments. In our Completion and Remedial services segment, revenues declined sequentially by $11 million, $6 million of which is attributable to reduced sand volumes in the Mid-Continent as compared to the Permian Basin. In spite of the decline in revenues, the C&R segment direct margin remained essentially flat at $26.2 million as compared to $26.4 million in Q2. We were very pleased with these results given the realignment underway and attention to managing our cost structure in this segment.

With respect to revenues in our Completion and Remedial segment, 63% of the revenue was generated from Pumping Services compared to 68% last quarter. Within Pumping Services, the breakdown was 68% fracturing versus 77% in the last quarter, 32% in cementing and acidizing versus 23%. So you can see a percentage of fracturing overall is diminishing somewhat. 15% from coil tubing of the overall Completion and Remedial services segment revenues versus 12% last quarter, 20% from raft or rental and fishing tools compared to 17% last quarter, and the remainder for was from other services.

Revenues in Well Service increased $2.8 million sequentially, largely due to increases in our Permian Basin, Rockies and California regions, along with $1.8 million increase in external sales at Taylor Industries. The revenue increase was tempered by approximately $2.6 million in lost revenues from yard closures as part of our realignment initiative and weather impacts at the end of the quarter due to heavy rains in Texas and Oklahoma, which also was a drag on margins, along with a non-cash inventory impairment of $0.7 million at Taylor, as mentioned earlier.

Water Logistics revenues were essentially flat at $59.5 million but experienced direct margin expansion of $1.1 million or 6.9% increase sequentially due to an improved mix of business due to our realignment initiatives and from increasing pipe volumes in our disposal business, which increased 22% sequentially.

From a regional and division perspective of which much of our strategic realignment is based on, our Permian Basin operations experienced nearly 50% incremental EBITDA margins sequentially. Additionally, our Pumping Services division increased EBITDA by almost 36% on reduced revenues of nearly $11 million.

Third quarter G&A included $5.6 million of non-cash stock incentive expense while the second quarter included $6 million. We expect G&A expense in the fourth quarter to be approximately $37 million, inclusive of non-cash stock compensation of $5.5 million. G&A expense, excluding non-cash stock incentive compensation for the third quarter, was $31.8 million or 13% of revenue compared to $30.5 million or 12% of revenue in the prior quarter. Adjusted EBITDA for the third quarter was $24.9 million or 10.1% of revenue compared to $27 million or 10.6% of revenue in the second quarter. This excludes the special items mentioned earlier.

Certain other nonoperational costs, including actual health care expenses, during the quarter increased approximately $3 million as compared to the first and second quarter levels due to condensed claims activity experienced during the quarter. Had these costs been normalized between the quarters, margins of continuing operations, that is, excluding results of our Appalachia and La Barge operations would have increased approximately $2 million or 110 basis points sequentially in the third quarter.

Depreciation and amortization expense was $32.8 million versus $31.2 million on the second quarter. We anticipate depreciation and amortization expense in the fourth quarter to be approximately $32 million.

Net interest expense was $10.8 million in the third quarter compared to $12.8 million in the second quarter. We expect quarterly net interest expense to be approximately $10.5 million after the fourth quarter of 2018. However, the reported fourth quarter interest expense will be approximately $37 million due to an additional $17.5 million of make-whole redemption costs and $7 million of retirement of the unamortized discount related to the extinguishment of the previous Term Loan.

Going forward starting in the first quarter of 2019, interest expense is expected to be in the range of $10 million to $11 million, driven by our new capital structure and diminishing capital lease balances.

The effective tax rate for the third quarter was 0%. We expect the full-year operating 2018 tax benefit rate will also be 0% due to the valuation allowance offsetting any potential tax benefit. We do not expect to pay federal income taxes for the foreseeable future given our cumulative net operating losses of $775 million.

Regarding liquidity, our cash balance was $30.8 million at September 30 compared to $30.7 million at June 30. Restricted cash at September 30 was $45 million, down from $47 million at June 30. As noted earlier, total cash at the closing of the refinancing on October 2 was $86.1 million with total liquidity of $167 million, which remains at these levels today.

Our DSO at the end of September was 60 days, up from the 56 at the end of June. Our over 90-day receivables represented 4% of our accounts receivable balance at September 30. For the three months ended September 30, total capital expenditures were $23.1 million, including $5.5 million financial capital leases. Spending was comprised of $17.9 million for sustaining and replacement projects, $4.8 million for expansion projects and $0.4 million for other projects. Expansion capital spending included $1.8 million for the Completion and Remedial segment, $1.9 million for Well Servicing and $0.7 million for Water Logistics.

Capital leases were approximately $75 million at September 30, down $10 million from the $85 million at June 30. We expect to reduce capital leases by another $17 million in the fourth quarter and $12 million in the first quarter of '19, less any additions.

We currently expect our capital spending for 2018 to be between $80 million to $90 million, which includes approximately $20 million in the form of capital leases and some 2019 items that were pulling forward in which are funded proceeds from recent divestitures. Expansion projects will represent approximately 25% of our spend, with maintenance and sustaining items the remaining 75%.

I'm going to now turn the call back to Roe for some final comments.

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [5]

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All right. Thank you, David.

We currently expect the fourth quarter to be very similar to the third quarter in terms of pricing. Seasonality is always an issue we deal with here at year-end with shorter daylight hours and normal impacts of weather and holidays. These put pressure on our utilization rates which in turn move margins slightly lower.

In addition, we will be implementing the final phases of our strategic realignment initiative, which should have a small impact on revenues.

General customer feedbacks suggest that there will be a normal winding down of capital budgets through the end of the fourth quarter. We've heard a lot of talk about budget exhaustion, but frankly we see nothing abnormal with customer behavior. We are encouraged to see some customers actually bucking the trend of this normal year-end slowdown.

A select group of our customers have actually increased their activity levels and are scheduling additional projects to be completed before year-end. This is an encouraging sign for 2019.

So considering all of these factors, we anticipate a typical fourth quarter with respect to revenue. This usually means a top line decrease of mid- to high single digits on a sequential percentage basis. Offsetting this seasonality somewhat are the results from our initiatives and improved pricing in all of our segments.

We are clearly optimistic about 2019 as current and future oil prices offer compelling returns for most of our customers in these core basins where our assets and facilities are highly concentrated. In addition, customer feedback on planned capital expenditures remains very promising for 2019.

We're also anticipating a gradual easing for the takeaway capacity challenges in the Permian Basin during the second half of 2019, which should have a material and positive impact on our results there.

Overall, we currently expect first half of 2019 to deliver improved top line results in the high single-digit percentage range compared to the first half of 2018.

And with that, I'm going to turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Luke Lemoine with Capital One.

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Luke Michael Lemoine, Capital One Securities, Inc., Research Division - Senior Analyst [2]

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Nice job on the strategic realignment row. There's a lot of moving pieces in C&R there in 3Q with the relocation of horsepower and rental tools. Can you give us a sense of how margins progress and exit the quarter or what do you think these look like on a run rate now that the moves are complete?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [3]

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So the average improvement for the quarter was 180. It's obviously higher than that at the end of the quarter, probably more of a sequential improvement of more like 300 basis points. I think that we'll see that continue to climb during the first quarter of next year. I don't think we'll see it here in the fourth quarter. I expect it to be pretty flat here in the fourth quarter just because of weather and short daylight. But I think coming out of the first quarter, based on the spin that we're hearing from our customers right now, we think first quarter is going to kind of blow out at the end of first quarter, and we should see some meaningful sequential improvements in all C&R toward the latter part of first quarter.

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Luke Michael Lemoine, Capital One Securities, Inc., Research Division - Senior Analyst [4]

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Okay. And then in water management, it looks like your volumes are pretty flat year-on-year, but your pipe percentage has increased from 18%, about 28% during that time, and your margins are up 700 bps year-on-year. How much of that margin increased would you attribute to the increased pipe volumes?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [5]

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Almost all of it because it's such a better way of transport for us and higher margin transporting that water, so it represents almost all of it. We had some type flowback in October of '17. A couple of projects that we were doing for some Permian guys that sort of spiked our numbers and then they returned back to normalized numbers there in the latter part of Q4 '17. But overall, seeing this big shift of water is really beneficial to our margins, and we expect it to continue. We're encouraging more projects. We're actually funding some of this infrastructure now, and we will continue to build out gathering systems on our existing saltwater disposal footprint. And with that, we have less need for trucks. We're still trucking flowback, and we're still trucking freshwater. We truck a lot of produced water too especially for customers who had smaller concentration wellbores and can't really afford the infrastructure cost of putting pipelines in. But more and more, as we see these fields get developed, and it's not just the Permian, it's really across all of our footprint in these core markets, we're seeing more and more pipeline opportunities and we'll continue to expand those.

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Luke Michael Lemoine, Capital One Securities, Inc., Research Division - Senior Analyst [6]

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Okay. And then last one for me. In 4Q -- I'm sorry, in 3Q, there's a lot of noise in well servicing with the weather and the realignment. When you look at 4Q, is it possible for well service margins to be between 2Q and 3Q levels? Or should we expect this to be down again?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [7]

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No. It should be up. The noise that was created from moving our 24-hour packages out of Appalachia created a lot of pressure on overall well servicing margin, plus Taylor went from about $1.1 million in revenue in the second quarter up to $2.9 million, that ought to flatten back out, so they made pretty small margins on the manufacturing. We had some other Well Servicing trends during the third quarter, rain in the Permian and Eagle Ford, those markets are finally drying out here at the end of October. First of October was really wet again, but we're back to those high levels of activity already. So I expect a better margin performance for Well Servicing in the fourth quarter.

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Operator [8]

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Our next question is from Daniel Burke with Johnson Rice and Company.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [9]

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I guess just try to tie all that together then, Roe. I mean, I think I heard you explain the loop that C&R margins could be pretty flat Q4 against Q3 while service margins on a percentage basis up Q3, Q4. Can we just tie all that together at the overall gross profit level? Is it fair to say margins on a percentage basis should be flat, I guess, just tying in Water Logistics, really, at that point.

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [10]

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Yes. We'll just have to see what water and rentals do. Flat would be a great outcome. We'll just have to see what water does. So right now, I don't want to speculate much more than that. Flat would be a super outcome, and it's definitely something that we would be happy to see.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [11]

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Fair enough. Okay. And then I know Q3 is probably not the most representative, but can you put a finer point on fracturing margin in Q3? Did fracturing percentage margin improved in Q3?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [12]

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It did.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [13]

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It did. Okay. Great, great. Good to see that, and recognize obviously you guys had some costs associated with the realignment embedded there. Okay.

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [14]

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Yes. So we offset all of that and still saw an improvement. So lots of good results from those moves.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [15]

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Okay. And then can you update us just on as you sit today having transitioned or shifted the frac equipment towards the Mid-Con, maybe how much active frac horsepower you're maintaining, maybe how many active fleet that is and sort of go forward plans at this point?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [16]

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Right now, we're up to eight fleets. We expect those to stay pretty busy through the fourth quarter. There's a little white space in the calendar, but not much, and that looks like that will be that pace, pretty much that's kind of all we can handle with our amount of horsepower is about eight spreads right now. So that's what you can expect on a go forward. What I expect in the first part of 2019 is that white space to go away and see utilization improvements in the first quarter. But we have a pretty busy calendar here in Q4, too. We're very pleased with some of our customers that have chosen to pick up the pace here at year-end, trying to knock some things out before year-end. So we're excited about that. We're expecting some delays with normal holiday and weather, but being as most of those are 24-hour packages we're working on horizontals, the daylight hours really don't really affect that business.

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Operator [17]

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Our next question is from Tommy Moll with Stephens.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [18]

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So the produced water landscape is shifting pretty quickly from truck to pipe, and you guys are definitely participating in that. As you look forward into '19, do you see opportunities to build more pipe? Is it more just around gathering? Are there opportunities to allow customers to fund the CapEx themselves and then tie into your SWD? Or do you view it more as you guys would be participating in a lot of the fix pipe as well?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [19]

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Both. So we will continue to allow customers to pipe directly to us if they're proximal and close enough to our SWDs. We certainly encourage them to build the pipe and fund that CapEx directly to us. But we're also building some gathering that's going to them. So we have about 3 different projects underway where we're actually going to build gathering loops that tie our SWDs together to create not only redundancy with multiple SWDs in a chain, but also to take our gathering closer to the customer where we would achieve both a tariff on the water and a disposal fee. So those will be contracted obligations through either minimum volumes or acreage dedications with our customers. All of those are underway and under discussion, and those projects are being started. So we'll do both of those initiatives this coming year. So I expect a lot of continued amount of customer piping directly to us and then these gathering systems that actually reach out to them.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [20]

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Moving on to well servicing. Continued rate traction in that segment. Can you give us a sense how much of that is net price versus cost inflation? And I would assume most of the inflation is on the labor side. Any comments you could give us about the labor market there would be helpful as well.

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [21]

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It's been kind of half and half. Half of the increase associated with labor offset and then the rest has been just us trying to either offset other cost increases such as fuel or other wearables that we use on the rigs every day, and then a small amount going directly to us trying to improve overall margins. So we've been able to tack on some for the company, too. But if I would say about half of it has been labor oriented.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [22]

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Okay. And then my last question, moving to the high level here. In recent weeks, some others in the marketplace have been pretty vocal with their opinions about the need for industry consolidation. A lot of those comments came when you guys already had your hands full with the refi and the strategic realignment. But now that the dust has settled, I wonder if we can get your take.

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [23]

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Well, if you kind of remember back, I've always been a proponent of industry consolidation. I think it's needed to reset the cost structures for the whole industry, especially for integrators like us to be able to achieve so meaningful margin improvement and cash generation, the synergies created by consolidation are one of the best and quickest ways to get that done. So I've always said that. With respect to potential combinations out there, Basic expects to be treated fairly. So if we're going to do a combination, a lot of things are going to go into consideration. What are the multiples trading at, what the EBITDA generation, what's the overall assets values, there's a lot of things to consider. And as long as we're treated on a relative basis, we think that we'd be a good partner for these potential transactions. So we're always on the hunt for them. We're always looking for ways to do them. And I think if the shareholders and various boards of directors can be constructive and give everyone a relative fair treatment, some of those things can get done in 2019. It sure feels like to me that the atmosphere and attitudes around all of that are improving, and so I think the prospects for some of those big combinations look very good.

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Operator [24]

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Our next question is from Mike Urban with Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [25]

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So a lot of moving parts with the realignment and restructuring of the business. I'm wondering if you can give us a sense for once the dust all settles and you get everything positioned the way that you wanted, have you thought about the structural uplift from that realignment? So in other words, on a -- kind of a price activity neutral basis, how much higher would your margins, cash flow be, however, you want to characterize it?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [26]

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Well, sure. I mean, I think it's hard to put a lot of numbers around it because we just have to wait and see what happens with overall customer spend and activity levels. But if all things being equal, we think we're going to see margin improvements generally in the kind of 500 bps range. We ought to see high single-digit to low double-digit revenue growth overall as we move these assets into markets where utilization is so much better. It's not that these other markets we were in were dead, but the work was sporadic. Customers would go hot and cold on us. And we just said the heck with it. These other markets are just not responding to the recovery. They're not coming back the way we hope and thought they would, and it's time to bail. We can always go back if they get busy again, but they're not busy enough right now. And we can take a lot of that capacity, move into markets where we know we have excess demand from our customers, and that's what we've done. And we've seen the results almost immediately. So I definitely think you'll see both top line and margin improvement. I think all things kind of equal, if it was flat demand year-over-year, like I said, you're going to see high single-digit, low double-digit revenue growth, and you're going to see margin improvement in the range of 500 or north of that in overall margin.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [27]

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Great. That's really helpful. Exactly what I'm looking for. And at those kind of levels of margin -- revenue and margin improvement, again, all else equal and recognizing our forecast, that's kind of a pro forma, how will that impact your cash generation?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [28]

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Well, we're about breakeven to slightly positive now. We would expect to generate meaningful free cash if we can achieve those margins.

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Operator [29]

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(Operator Instructions) Our next question is from John Daniel with Simmons Energy.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [30]

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Well, I guess the first one for me, you got -- as you proceed with the strategic realignment and sort of spin off some of the -- so I'll call them underperforming assets, can you quantify what the cash proceeds have been thus far and what you might expect in the coming months?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [31]

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Yes. Most of our fourth quarter event, so we didn't put them in the third quarter results. But generally, in the neighborhood of about $8 million to $9 million in proceeds so far that we intend to reinvest.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [32]

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Do you see that accelerating? Or do you think you kind of done what you need to do in the near term?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [33]

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We're done.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [34]

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Okay. Got it. 24-hour pipe...

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [35]

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John, let me back that up. If we were to sell an entire segment, that could be different. For instance, if a contract drilling business is one that we're not growing right now, we don't have a for sale sign on it. We're active with three rigs right now out of our 11, but that is a business that we don't intend to grow and therefore not core to the overall strategy. So if we found an opportunity to divest of that business, we would have to consider.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [36]

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Okay. Is there any application with those drilling rigs to do the 24-hour completion work that you're going with the workover rigs?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [37]

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No.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [38]

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Okay. And then back on the 24-hour packages, really nice growth there. I think you said 28 active today. I know it's hard to quantify what that target would be, but I mean, how much more opportunity do you see over the course of the next 3 or 4 quarters to take that higher?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [39]

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So I gave the group a goal of getting to 40 by midyear next year. We think the demand is there to easily get to that mark. We think we can run 34 today. We probably have to add some equipment to get beyond 34. But the group has a target to get to 40 by midyear next year, and that's big. I mean, that's a lot of assets. That's a lot of work, a lot of crews. Crews are the toughest thing to really foster that business because it just requires so many people. It's not just a daylight crew and a night crew - you have to have relief crews. It's just a very complex type of business, but it's been a really beneficial one for all of our margins and hours.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [40]

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Okay. So if you did get to 40, hopefully you do, I mean, that's a material update for your well service margins. Fair?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [41]

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Fair. Yes.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [42]

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Last one for me. I'm not asking you to endorse or bless this number. But the Street has you're right on the $120 million or so for EBITDA in '19. If that were to directionally be in line with your model, where would CapEx be in that environment for next year?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [43]

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So typically, I mean, it's pretty consistent that we run between 7% to 8% of revenue for sustaining and then any growth projects kind of on top of that. But right now, we've got about $20 million in growth planned for next year, about $100 million overall, so about $80 million in sustaining. That could change if we start to see margin expansion and some other opportunities come up such as these pipeline projects that present themselves, where we could build that infrastructure out, we may increase the expansion piece a little bit. But right now, I think that $100 million bogey is a good bogey.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [44]

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Okay. I'm assuming that the financing you guys just did, there's no issues if you were to do acquisitions with equity, is that fair, no limitations?

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [45]

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No limitations.

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Operator [46]

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There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

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Thomas Monroe Patterson, Basic Energy Services, Inc. - CEO, President & Director [47]

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All right. Thank you to everybody. We appreciate it. We'll talk to you next quarter.

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Operator [48]

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