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Edited Transcript of BAS earnings conference call or presentation 21-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Basic Energy Services Inc Earnings Call

MIDLAND Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Basic Energy Services Inc earnings conference call or presentation Friday, April 21, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Krenek

Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary

* Roe Patterson

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

* Kaitlin Ross

Basic Energy Services, Inc. - Investor Relations

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Conference Call Participants

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* Trey Stolz

Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services

* John Daniel

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

* John Watson

Simmons & Company - Analyst

* Jonathan Evans

SG Capital Management LLC - Research Analyst

* Matthew Johnston

Nomura Securities Co. Ltd., Research Division - VP

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Presentation

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Operator [1]

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

It is now my pleasure to introduce your host, Kaitlin Ross, Investor Relations. Thank you. Ms. Ross, you may begin.

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Kaitlin Ross, Basic Energy Services, Inc. - Investor Relations [2]

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Thank you, Michelle, and good morning, everyone. Welcome to the Basic Energy Services' First Quarter 2017 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-K and Form 10-Q for the year ended December 31, 2016. Further, refer to these statements regarding forward-looking statements incorporated in our press release from yesterday. Please also note that contents of this conference call are covered by those statements. In addition, the information reported on this call speaks only as of today, April 21, 2017. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

With that, I will turn the call over to Roe Patterson, President and CEO. Roe?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [3]

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Thanks, Kaitlin, and welcome to those of you dialing in for today's call. We appreciate your interest in our company. Joining me today on the call is Alan Krenek, our Chief Financial Officer.

First, I'll cover what we saw in Q1 operationally and where we stand today. Alan will then discuss our financial results in more detail. And I'll wrap things up with some final comments about Q2 and the remainder of the year.

As I mentioned a month ago on our previous call, oil prices have rebounded from their lows and activity has picked up in several basins where we are fortunate to have very large positions. The increased level of activity that originated in the Permian Basin and the STACK and SCOOP areas in Oklahoma is now spreading into other basins, strengthening our base of business. As a result of more stable oil prices, our customers are taking advantage of this improved environment to increase and/or restart their CapEx programs. This led to our first quarter revenue increase of 17%, ahead of our original expectations of 13% to 15% sequentially.

Pumping and coil tubing revenues led the majority of the improvement, but we experienced better than anticipated activity in every segment, including production services. Customer optimism remains high, and incoming requests for services are increasing. This pickup in activity also led to a material improvement in first quarter margins of 300 basis points over what we saw in Q4.

Margins improved in all of our service lines due to increased utilization and some modest price improvements. The margin expansion was tempered somewhat by the redeployment and training costs associated with bringing stacked equipment back into our operating fleet and staffing those assets. Additionally, margin shrugged off the annual reset of unemployment taxes, which had a negative impact on margins of approximately 190 basis points. We're pleased that our business appears to be heading in a very positive direction. We currently anticipate that margin improvement will continue in the second quarter as pricing and utilization continue to rise and the impact of payroll taxes dissipates. Longer daylight hours will also benefit our utilization levels.

Our fixed costs should remain in check for the most part, allowing increased operating leverage. During the first quarter, we unstacked all of our remaining frac horsepower. As a reminder, the 74,000 of idle frac horsepower that we bought in February makes up essentially 2 full spreads. One is in the field this month and the second will be active in May. It appears the general attrition rates of the overall U.S. frac fleet over the past 2 years have been deep enough that the current drilling rig counts are quickly catching up with available frac capacity. Currently, our frac calendars and large coil tubing spreads are sold out through the end of Q3 and will soon be booked through the remainder of the year. We are currently booking dates into 2018.

We also unstacked 4 additional well-servicing rigs in the first quarter, and we've already unstacked more here in the second quarter, as we started to experience some rate traction in March. Our fluid service equipment has also seen an increase in activity led by a surge in frac water flowback hauling and a significant pickup in hot oiling activity.

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

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [4]

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Thanks, Roe. Good morning. I will provide some details on our first quarter income statement as well as discuss selected balance sheet and cash flow items. I would like to cover a few components of our revenue and segment profits.

In our well servicing segment, Taylor Rig manufacturing generated $230,000 in revenue compared to $1.3 million in the fourth quarter. Taylor segment operating margin was $17,000 compared to a loss of $9,000 in the fourth quarter.

In the completion remedial segment, for the first quarter, 63% of the revenue was generated from pumping services compared to 58% last quarter; 18% from coiled tubing, same as last quarter; and 19% from rental tools compared to 22% last quarter. Nearly 80% of the pumping revenue in the first quarter was from our frac service line.

The reported net loss for the first quarter was $38.6 million or $1.49 per share. This compares to net income of $141.9 million or $3.15 per diluted share in the fourth quarter. Special charges in the first quarter included a $14.2 million valuation allowance on tax operating losses, $1.6 million pretax of reorganization expenses and a pretax $1.4 million write-off of retention bonuses that were associated with our restructuring process. Excluding the impact of special items, Basic reported a net loss of $22.6 million or $0.87 per share compared to a net loss of $60.2 million or $1.41 per share in the fourth quarter, which also excluded special items.

Weighted average shares outstanding for the first quarter were 26 million. Adjusted EBITDA was a negative $1.2 million or 0.7% of revenue compared to a negative $5.2 million or 4% of revenue in the fourth quarter. This excludes the special items mentioned earlier.

Excluding costs associated with the bankruptcy and restructuring and retention expenses, G&A expense in the first quarter was $31.2 million or 17% of revenue compared to $27.5 million or 18% of revenue in the prior quarter. The sequential upturn in G&A expense was due to a full quarter impact of the equity awards associated with the MIP that were granted under the restructuring support agreement. The amount of noncash stock expense in the first quarter was $4.9 million. We expect G&A expense in the second quarter to be around $32 million.

Depreciation and amortization expense was $25.4 million versus $54.1 million in the fourth quarter, as depreciation expense in the first quarter was impacted by the adjustment of our fixed and intangible assets from the fresh start accounting process. Due to the capital expenditures made in the first quarter and the anticipated additional capital expenditures in the second quarter, we expect depreciation and amortization expense to be around $26 million to $27 million in the second quarter. Then increasing accordingly as we add capital expenditures during the remainder of 2017.

Net interest expense was $9.1 million in the first quarter compared to $29.4 million in the fourth quarter. Interest expense was also significantly impacted by the fresh start accounting process and includes approximately $1.5 million of accretion on discounts taken on the company's term loan and capital leases as part of the fair value process. We expect quarterly net interest expense to be approximately $10 million in the second quarter.

The operating tax benefit rate for the first quarter was 36%, excluding the valuation allowance related to the temporary impairments of the company's tax NOLs. On an operating basis, we expect that the full year 2017 tax benefit rate will be -- will also be 36%. However, the tax benefit rate for 2017 on our reported financial statements will be impacted by the valuation allowances on our approximately $630 million of tax NOLs until we get to positive pretax income.

Our cash balance was $50.6 million at March 31. No amounts were outstanding under the credit facility. We had $52 million of letter of credits outstanding for insurance collateral at March 31, leaving $23 million of availability under the facility.

Our DSO at the end of March was 62, down from 65 at the end of December, due mainly to payments from our larger customers. Our 90-day receivables only represented 4% of our total accounts receivable balance at March 31. We continue to experience good collection results.

Total debt at March 31 was comprised of $164 million for a term loan due in 2021, $90 million of capital leases and other notes for a total of $254 million, which is offset by a $17 million of unamortized discounts and deferred debt costs, resulting in total reported debt of $237 million. $42 million of our debt was classified as current at March 31.

During the first quarter, total capital expenditures were $48.3 million, including $22.4 million for capital leases and finance purchases. First quarter spending was comprised of $23.7 million for sustaining and replacement projects, $24.4 million for expansion and $200,000 for other projects. Expansion projects of $24.4 million included $19.9 million for our completion and remedial services segment, $4.2 million for well servicing and $300,000 for fluid services.

We continue to expect that capital expenditures for 2017 will be in the vicinity of $115 million, of which $70 million will be in the form of capital leases, with $45 million of expansion capital and $70 million for sustaining and replacement projects.

I would like to end by reminding everyone that last week, we filed two S-3 registration statements with the Securities and Exchange Commission. First, the universal shelf that would allow us from time to time to sell up to $1 billion of mixed securities. We consider this multi-purpose-shelf registration to be good corporate governance, and a shelf offering that would allow certain of our former bondholders to sell approximately 9.5 million shares in registered transactions from time to time without other security law limitations. And I would add that the SEC has not indicated whether it will undertake a review process with respect to either of these S-3 filings.

At this point, I'll turn the call back over to Roe for his closing comments.

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [5]

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All right. Thanks, Alan.

So as we look forward, I believe stable oil prices in the $50 per barrel range will be needed to hold the current pace of recovery in our business. So far, our customers have shown a steady demand for our services and a willingness to work through oil price fluctuations. This gives us a certain degree of optimism about the near term. As Alan stated, remaining CapEx is currently estimated to be around $67 million for primarily maintenance projects if activity levels meet the current outlook. But we can change this quickly if demand for our services goes up or down.

On the personnel front, we've been blessed to retain one of the finest workforces in the services sector through this downturn. However, as we reactivate equipment, hiring experienced personnel continues to be difficult and costly, as much of the field level expertise has left the industry for more stable employment in less cyclical careers. Competition for experienced personnel will continue to push labor rates and serve as the primary driver for overall pricing increases. As a result, pricing for our services is currently being quoted on a spot basis in order to give us flexibility to adjust our rates for increasing labor and other input costs. We've been approached to lock up some services with contracts, and we are considering those opportunities. If we do sign any agreements, clauses for adjusting prices for increased input costs will have to apply. We are determined to pass through any cost increases.

Overall, the steady pace of this recovery has been promising. We currently expect second quarter revenues to be 18% to 20% higher sequentially, and we expect to deliver positive EBITDA in every month of the second quarter. As I said, our services are largely committed through 2017, and we're very pleased with this outlook.

As I mentioned a month ago, many balance sheets have been reset, paving the way for more acceptable and attractive transactions. We have and will continue to review potential transactions that make good sense for our shareholders.

And with that, operator, we'll open the call to any questions if there are any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Trey Stolz with Coker Palmer Institutional.

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Trey Stolz, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services [2]

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Can you talk about (inaudible). Yes, can you hear me?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [3]

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I can now. And I don't think that the Star 1 command got communicated there. But go ahead.

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Trey Stolz, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services [4]

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All right. Well, I guess a question on the revenue guidance for 2Q, the 18% to 20% sequential growth. You all mentioned production-related businesses starting to turn up. How much of that is reflected in the 18% to 20% sequential growth?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [5]

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The majority of it is in the completion remedial segment and then followed by well servicing, which is probably somewhere around the 8% to 9% range, and then fluid services is probably 5% or so.

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Trey Stolz, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services [6]

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All right. And as utilization picks up on those businesses, how are incremental margins differing there versus pressure pump -- the pressure pumping side?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [7]

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So for the production-oriented businesses, well servicing and fluid services, those incremental margins will be in the range of mid-30s. And we're still sticking to the 45% range for completion and remedial incrementals. Now be careful, when you go from the first quarter numbers to the second quarter's, to get to those incremental margins, you have to add back the impact of the payroll tax reset to the first quarter numbers and then take those incrementals I just talked about and apply them to those adjusted first quarter margins.

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Trey Stolz, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services [8]

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All right. And then, I guess my last one is, do you all care to mention at all an update on pricing, the frac pricing, I guess, across your different regions? What it's look -- what it looks like currently versus a few weeks ago or at the beginning of the year?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [9]

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So for the first quarter, I've said it's up about 30% from the end of Q4 to the end of Q1, generally. It changes from basin to basin a little bit, but I would say, generally, that's what you can expect. And we expect that pricing improvement to continue kind of on the same trend line going to the second quarter. It's driven a lot by labor. Obviously, by sand cost, that sort of plateaued a little bit, but chemical cost continued to inch up, but labor is the primary driver for those rate increases.

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Trey Stolz, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services [10]

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So a similar 30% climb is possible in 2Q is what you're choreographing?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [11]

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I think that's probably a good expectation.

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Trey Stolz, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services [12]

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And not -- how much of it offset by higher labor at this point?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [13]

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I'd say, the pricing increase is probably about half of that.

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Trey Stolz, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst - Oilfield Services [14]

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And then, is that a temporary? As you hire on new crews and pay for that first month, or is that a go-forward kind of impact?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [15]

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No, it dissipates over time. You start to add back some incremental from the price increase.

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Operator [16]

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Our next question comes from the line of John Watson with Simmons & Company.

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John Watson, Simmons & Company - Analyst [17]

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Roe, you touched on this briefly, but can you quantify the margin headwinds in Q1 from -- and stacking horsepower if there were any? And then maybe any color on possible margin headwinds in 2Q as you put the other 2 fleets back to work?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [18]

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So right around 200 bps is what unstacking and training new hires cost us in margins in the first quarter. I don't expect really to see any of that in the second quarter. I think that the overall activation cost of this 74,000-horsepower or so should be muted pretty much by strong activity levels. So it could be as much as much as, say, 50 bps or so, but I just don't expect it to be material enough for us to even comment on in the second quarter.

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John Watson, Simmons & Company - Analyst [19]

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Okay. Great. And then, in the release and in your prepared remarks, you mention that you're experiencing a ramp up in activity for fluid services. Do you think that'll lead to improved pricing during 2Q or 3Q?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [20]

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Yes, I think so. It's coming in a little slower than well servicing, and of course, the completion and remedial segments. I think that's just a function of just the number of competitors and the amount capacity that's out there, but it's coming, and we're seeing it. So yes, I expect fluid service rates to continue to move up.

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John Watson, Simmons & Company - Analyst [21]

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Got it. And then, lastly, on the new equipment side, you've announced the number of orders already this year. Have there been any more over the past month or so? Or do you have pooling in for other further orders?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [22]

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No, no. We -- other than the coil that's coming in, that'll be here in Q3, we really don't have any newbuild plans right now. The expansion plans are all on hold. I think if you're going to grow your fleet at this point in the cycle, you need to buy it, you don't need to build it.

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Operator [23]

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Our next question comes from Matthew Johnston with Nomura.

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Matthew Johnston, Nomura Securities Co. Ltd., Research Division - VP [24]

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So it's interesting that you're already starting to see demand for your completion service equipment into 2018. I'm wondering, as you talk to your customers, do you think that they've already made all of their arrangements on the pumping side for 2017? I'm just trying to get a sense around whether or not if we continue to see the rig count move higher, is that already kind of baked into their own plans with respect to going out and sourcing crews? Or do you think maybe there's some incremental demand that is yet to materialize for this year?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [25]

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Well, I think there's a lot of incremental demand that's yet to come. Unfortunately, we probably won't be able to take on a lot of it because we're booked up. But I think that -- so I -- but I think other frac companies are going to experience the same level of inbounds that we are. So I think generally, we're expecting a strong incremental demand for the remainder of the year. And I think that's why you're seeing, I think, a little bit of sourcing for 2018 occurring now because customers see that horsepower is probably going to get tight, and anybody that thinks there's plenty of horsepower out there is not paying attention.

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [26]

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Yes. I mean, even though, we won't benefit from increased utilization. But that tightening of the demand, we will definitely benefit from pricing that'll be higher than probably what we expect.

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Matthew Johnston, Nomura Securities Co. Ltd., Research Division - VP [27]

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Sure. Yes, exactly. So how much further do you think pricing needs to improve on the frac side before you'd start maybe contemplating building some new equipment? I know you mentioned it, it's not in your plans now, but can you envision pricing maybe getting to a point where you'd start thinking about it? And how far away from that point do you think we are?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [28]

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I think we are ways away. Our feeling is that the market needs to consolidate, that new build is something that we're a long way away from. So for us, it's not necessarily just about pricing. It's just overall return on capital, and we're not there yet. I almost think that, kind of looking at our numbers, return on capital projections from here would almost have to double before we would be incentivized to even consider a newbuild. Now I don't -- now buying horsepower, if you could find it for the right price, would be something that we would find more compelling, and that's existing horsepower. But building new build, we are ways away. So.

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Operator [29]

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(Operator Instructions) Our next question comes from Jon Evans with SG Capital.

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Jonathan Evans, SG Capital Management LLC - Research Analyst [30]

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Alan, I was just curious to understand to make sure I'm getting this right. So basically, you're talking about completions going from about $80 million to $111 million sequentially? Is that kind of right?

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [31]

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It's in the territory.

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Jonathan Evans, SG Capital Management LLC - Research Analyst [32]

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Yes. And so that's roughly about $30 million of new revenue. So is it $30 million -- that $30 million at 45%? So you get $13.5 million of EBITDA for that?

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [33]

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No, no, no. Basically, the incremental margin (inaudible)

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Jonathan Evans, SG Capital Management LLC - Research Analyst [34]

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So when you're talking about 45% -- yes, 45% incremental margin.

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [35]

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Right.

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Jonathan Evans, SG Capital Management LLC - Research Analyst [36]

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I'm sorry, I missed it. I apologize.

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [37]

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Yes. No problem.

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Jonathan Evans, SG Capital Management LLC - Research Analyst [38]

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And then, the other question is just on the well servicing side. Have you started to see any price lift there? Or where -- if you do the 8% to 9% sequential, kind of where will that put you from utilization? And should that set you up to get pricing starting in Q3 or no?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [39]

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Yes. So as I said in my remarks, we have seen some pricing improvement in well servicing. It's probably been from the end of Q4 to the end of Q1, about 10% pricing improvement, right around that number, and that's broad because it shifts from market-to-market. We're in about 7 distinct well servicing markets, so it changes from market-to-market. But that's a broad brush that you can paint that with. I think that in 2Q, we will see some additional improvement in utilization. I expect utilization to start to hit something with a 6 handle sometime in Q2. We're not there yet, but -- so something 60%-plus for utilization hit that mark in Q2 at some point. And I expect to see another 5% to 10% of pricing improvement in that segment during the quarter.

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Jonathan Evans, SG Capital Management LLC - Research Analyst [40]

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Okay. And, Alan, I'm just sorry, my phone broke up, I apologize. But so if you do $30 million in incremental revenues in completions in Q2, what do we think that $30 million drops to the EBIT line? What's the incremental margin on that $30 million in revenue?

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [41]

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Well, if you got $30 million of incremental revenue, the incremental margin on that is 45%. So that drops down, that's roughly...

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Jonathan Evans, SG Capital Management LLC - Research Analyst [42]

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So that's $13.5 million in EBIT just in the completion side, correct?

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [43]

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Right.

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Jonathan Evans, SG Capital Management LLC - Research Analyst [44]

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Okay. And so there -- and that's with the payroll tax, there's nothing else if -- with what you're seeing in pricing right now, that's what should drop?

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Alan Krenek, Basic Energy Services, Inc. - CFO, SVP, Treasurer and Secretary [45]

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That is correct.

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Operator [46]

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Our next question comes from John Daniel with Simmons & Company.

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John Daniel, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [47]

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Roe, a real quick on just acquisition strategy. At this point, would you say you're more biased to consolidating within the C&R segment? Or is there more appetites to other production service businesses?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [48]

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Well, I'd say the appetite is wherever the best value is, but as what we've always said, we want to buy where the best value is. The problem with buying in the completion and remedial segment is that everything cost too much right now. There may be some opportunities down the road, but I think a lot of particularly in, say, frac horsepower, a lot of the estimates out there for value are based on what some of these IPOs have traded at lately, and that's just too expensive to go buy. That may get cheaper later in the cycle, so we would be interested, but right now, I would say, the best value creation that you can find is in production services businesses where things haven't gotten as frothy. So we would be more interested right now to chase value in the production-oriented services rather than the completion-and-remedial-oriented services.

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John Daniel, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [49]

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Okay. And then just one additional one for me is on inputs on the frac business. There's obviously lots of interest out there on frac sand and debate out there. Can you just speak to the availability of sand, not only today, but just regular B1, all these other fleets are reactivated, and thoughts on continued price increases in the frac sand space?

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [50]

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Well, for us, being spot on all of our pricing, it's an immediate passthrough whenever sand goes up. I mean, it's day to day for us. So if it goes up tomorrow, we're going to raise the rates the next day. So we don't get caught feeding that way like some of these other guys that lock in prices. I think sand availability right now is good. We--we're finding the sand we need. We're doing a good job internally of making sure that we have plenty of sourcing out in through the frac calendar. So right now, we see no issues with availability. I know of a lot of sand that's coming to the market down the road. So as far as I can see, my crystal ball goes, sand looks like it's going to be okay. We're going to have availability, and pricing is not going to get too out of whack, and everything's going to moderate.

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Operator [51]

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Thank you. There are no further questions at this time. I would like to turn the floor back over to Roe Patterson for closing remarks.

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Roe Patterson, Basic Energy Services, Inc. - CEO, President and Director [52]

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Okay. Well, thanks for everyone dialing in, and we'll talk to you next quarter.

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Operator [53]

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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.