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BAS > SEC Filings for BAS > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for BASIC ENERGY SERVICES INC

Form 10-Q for BASIC ENERGY SERVICES INC


30-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Overview

We provide a wide range of well site services to oil and natural gas drilling and producing companies, including completion and remedial services, fluid services and well site construction services, well servicing and contract drilling. Our results of operations reflect the impact of our acquisition strategy as a leading consolidator in the domestic land-based well services industry. Our acquisitions have increased our breadth of service offerings at the well site and expanded our market presence. In implementing our acquisition strategy, we purchased businesses and assets in seven separate acquisitions from January 1, 2011 to September 30, 2012. Our total hydraulic horsepower increased from 142,000 at December 31, 2010 to 277,000 at September 30, 2012. Our weighted average number of fluid service trucks increased from 820 in the first quarter of 2011 to 931 in the third quarter of 2012. Our weighted average number of well servicing rigs increased from 412 in the first quarter of 2011 to 431 in the third quarter of 2012. These acquisitions make our revenues, expenses and income not directly comparable between periods.

Our operating revenues from each of our segments, and their relative percentages of our total revenues, consisted of the following (dollars in millions):

                                                Nine Months Ended September 30,
                                                  2012                     2011
       Revenues:
       Completion and remedial services   $     464.3        44 %    $ 376.5        43 %
       Fluid services                           270.4        25 %      241.2        27 %
       Well servicing                           292.1        27 %      242.7        27 %
       Contract drilling                         46.0         4 %       28.5         3 %

       Total revenues                     $   1,072.8       100 %    $ 888.9       100 %

Our core businesses depend on our customers' willingness to make expenditures to produce, develop and explore for oil and natural gas in the United States. Industry conditions are influenced by numerous factors, such as the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries and merger and divestiture activity among oil and natural gas producers. The volatility of the oil and natural gas industry, and the consequent impact on exploration and production activity, has adversely impacted, and could continue to adversely impact, the level of drilling and workover activity by some of our customers. This volatility affects the demand for our services and the price of our services.

In the first half of 2009, utilization and pricing for our services declined due to low oil and natural gas prices. In the third quarter of 2009, oil prices began to increase and remained relatively stable through 2010. During the first half of 2011, oil prices increased primarily due to political instability in several oil producing countries. In the last half of 2011 and through the first nine months of 2012, oil prices remained at levels that allowed our customers to continue new drilling projects and workover activities. The trend in oil prices since 2009 has caused utilization and pricing for our services to increase in our oil-based operating areas. Utilization and pricing for our services in our natural gas-based operating areas throughout 2011 and during the first nine months of 2012 have remained depressed due to low natural gas prices.

We expect that our utilization levels across all of our business segments should decline slightly through the remainder of 2012 and into the first quarter of 2013 as competition has increased in our established oil-oriented market areas as competitors have moved equipment from slower gas-related areas. We anticipate activity in natural gas-oriented markets to remain at lower levels in the near term due to low natural gas prices. While we expect the current operating environment of lower activity and increased pricing pressure to continue into early 2013, preliminary feedback from our customers indicates that their capital spending for 2013 is likely to be similar to this year, although it is uncertain when that spending will be initiated.

We derive a significant portion of our revenues from services supporting production from existing oil and natural gas operations. Demand for these production-related services, including well servicing and fluid services, tends to remain relatively stable, even in moderate oil and natural gas price environments, as ongoing maintenance spending is required to sustain production. As oil and natural gas prices fluctuate, demand for all of our services changes correspondingly as our customers must balance maintenance and capital expenditures against their available cash flows. Because our services are required to support drilling and workover activities, we are also subject to changes in capital spending by our customers as oil and natural gas prices increase or decrease.

Our customers have been currently pursuing aggressive drilling and production programs in our oil and liquid rich markets. As new equipment has come on line and as equipment is shifted from natural gas rich areas to oil rich areas there has been increased price competition for our services, primarily in our pumping and completion services.


Table of Contents

We believe that the most important performance measures for our lines of business are as follows:

Completion and Remedial Services - segment profits as a percent of revenues;

Fluid Services - trucking hours, revenue per truck, segment profits per truck and segment profits as a percent of revenues;

Well Servicing - rig hours, rig utilization rate, revenue per rig hour, profits per rig hour and segment profits as a percent of revenues; and

Contract Drilling - rig operating days, revenue per drilling day, profits per drilling day and segment profits as a percent of revenues.

Segment profits are computed as segment operating revenues less direct operating costs. These measurements provide important information to us about the activity and profitability of our lines of business. For a detailed analysis of these indicators for our company, see below in "Segment Overview."

We will continue to evaluate opportunities to expand our business through selective acquisitions and internal growth initiatives. Our capital investment decisions are determined by an analysis of the projected return on capital employed for each of those alternatives, which is substantially driven by the cost to acquire existing assets from a third party, the capital required to build new equipment and the point in the oil and natural gas commodity price cycle. Based on these factors, we make capital investment decisions that we believe will support our long-term growth strategy. While we believe our costs of integration for prior acquisitions have been reflected in our historical results of operations, integration of acquisitions may result in unforeseen operational difficulties or require a disproportionate amount of our management's attention.

Selected Acquisitions

During 2011, we made four acquisitions that complemented our existing business segments. These included, among others:

The Maverick Companies

On July 8, 2011, we acquired all of the outstanding equity interests of Maverick Stimulation Company, LLC, Maverick Coil Tubing Services, LLC, Maverick Thru-Tubing Services, LLC, Maverick Solutions, LLC, The Maverick Companies, LLC, MCM Holdings, LLC, and MSM Leasing, LLC (collectively, the "Maverick Companies") for total cash consideration of $186.3 million including working capital. This acquisition operates in our completion and remedial services segment.

During the first nine months of 2012, we made three acquisitions that complemented our existing business segments, including:

Surface Stac, Inc.

On May 16, 2012, we acquired all of the assets of Surface Stac Inc. for total cash consideration of $24.6 million. This acquisition operates in our completion and remedial services segment.

Segment Overview

Completion and Remedial Services

During the first nine months of 2012, our completion and remedial services segment represented 44% of our revenues. Revenues from our completion and remedial services segment are generally derived from a variety of services designed to complete and stimulate new oil and natural gas production or place cement slurry within the wellbores. Our completion and remedial services segment includes pumping services, rental and fishing tool operations, coiled tubing services, nitrogen services, cased-hole wireline services, snubbing, water treatment and underbalanced drilling.

Our pumping services concentrate on providing single truck, lower-horsepower cementing, acidizing and fracturing services in selected markets. Our total hydraulic horsepower capacity for our pressure pumping operations was 277,000 and 269,000 at September 30, 2012 and September 30, 2011, respectively.

In this segment, we generally derive our revenues on a project-by-project basis in a competitive bidding process. Our bids are generally based on the amount and type of equipment and personnel required, with the materials consumed billed separately. During periods of decreased spending by oil and gas companies, we may be required to discount our rates to remain competitive, which would cause lower segment profits.


Table of Contents

The following is an analysis of our completion and remedial services segment for each of the quarters in 2011, the full year ended December 31, 2011 and the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 (dollars in thousands):

                                                      Segment
                                       Revenues      Profits %
                      2011:
                      First Quarter    $  97,507             44 %
                      Second Quarter   $ 121,807             44 %
                      Third Quarter    $ 157,121             46 %
                      Fourth Quarter   $ 160,699             45 %
                      Full Year        $ 537,134             45 %
                      2012:
                      First Quarter    $ 164,420             41 %
                      Second Quarter   $ 156,560             41 %
                      Third Quarter    $ 143,348             39 %

We gauge the performance of our completion and remedial services segment based on the segment's operating revenues and segment profits as a percent of revenues.

The decrease in completion and remedial services revenue to $143.3 million in the third quarter of 2012 from $156.6 million in the second quarter of 2012 resulted primarily from increased competition and lower pricing. Segment profits as a percentage of revenue decreased to 39% for the third quarter compared to 41% for both the first and second quarters of 2012 primarily due to lower rates for our services.

Fluid Services

During the first nine months of 2012, our fluid services segment represented 25% of our revenues. Revenues in our fluid services segment are earned from the sale, transportation, storage and disposal of fluids used in the drilling, production and maintenance of oil and natural gas wells. Revenues also include well site construction and maintenance services. The fluid services segment has a base level of business consisting of transporting and disposing of salt water produced as a by-product of the production of oil and natural gas. These services are necessary for our customers and generally have a stable demand but typically produce lower relative segment profits than other parts of our fluid services segment. Fluid services for completion and workover projects typically require fresh or brine water for making drilling mud, circulating fluids or frac fluids used during a job, and all of these fluids require storage tanks and hauling and disposal. Because we can provide a full complement of fluid sales, trucking, storage and disposal required on most drilling and workover projects, the add-on services associated with drilling and workover activity enable us to generate higher segment profits. The higher segment profits are due to the relatively small incremental labor costs associated with providing these services in addition to our base fluid services segment. Revenues from our well site construction services are derived primarily from preparing and maintaining access roads and well locations, installing small diameter gathering lines and pipelines, constructing foundations to support drilling rigs and providing maintenance services for oil and natural gas facilities. We typically price fluid services by the job, by the hour or by the quantities sold, disposed of or hauled. The following is an analysis of our fluid services operations for each of the quarters in 2011, the full year ended December 31, 2011 and the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 (dollars in thousands):

                                                                                              Segment
                                     Weighted                                                 Profits
                                      Average                                                   Per
                                     Number of                            Revenue Per          Fluid
                                   Fluid Service        Trucking         Fluid Service        Service        Segment
                                      Trucks              Hours              Truck             Truck        Profits %
2011:
First Quarter                                 820          494,700      $            88      $      29              33 %
Second Quarter                                837          525,700      $            97      $      36              37 %
Third Quarter                                 869          563,900      $           101      $      38              37 %
Fourth Quarter                                875          570,800      $           104      $      38              37 %
Full Year                                     850        2,155,100      $           391      $     141              36 %
2012:
First Quarter                                 900          580,700      $           106      $      36              34 %
Second Quarter                                918          552,400      $            99      $      35              36 %
Third Quarter                                 931          551,600      $            91      $      29              32 %


Table of Contents

We gauge activity levels in our fluid services segment based on trucking hours, revenue and segment profits per fluid service truck, and segment profits as a percent of revenues.

Revenue per fluid service truck decreased by 8% to $91,000 in the third quarter of 2012 compared to $99,000 in the second quarter of 2012, primarily due to increased competition in oil-oriented markets and a reduction of rental activity associated with new drilling projects. Segment profit percentage decreased to 32% for the third quarter of 2012 from 36% for the second quarter of 2012, primarily due to lower pricing from increased competition as well as a decrease in non-trucking revenue, including frac tank rentals and skim oil sales.

Well Servicing

During the first nine months of 2012, our well servicing segment represented 27% of our revenues. Revenue in our well servicing segment is derived from maintenance, workover, completion, manufacturing and plugging and abandonment services. We provide maintenance-related services as part of the normal, periodic upkeep of producing oil and natural gas wells. Maintenance-related services represent a relatively consistent component of our business. Workover and completion services generate more revenue per hour than maintenance work due to the use of auxiliary equipment, but demand for workover and completion services fluctuates more with the overall activity level in the industry. We also have a rig manufacturing and servicing facility that builds new workover rigs, performs large-scale refurbishments of used workover rigs and provides maintenance services on previously manufactured rigs.

We typically charge our well servicing rig customers for services on an hourly basis at rates that are determined by the type of service and equipment required, market conditions in the region in which the rig operates, the ancillary equipment provided on the rig and the necessary personnel. Depending on the type of job, we may also charge by the project or by the day. We measure the activity levels of our well servicing rigs on a weekly basis by calculating a rig utilization rate based on a 55-hour work week per rig. Our fleet increased from a weighted average number of 412 rigs in the first quarter of 2011 to 431 rigs in the third quarter of 2012.

The following is an analysis of our well servicing operations for each of the quarters in 2011, the full year ended December 31, 2011 and the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012:

                                  Weighted
                                   Average                          Rig                              Profits
                                  Number of         Rig         Utilization        Revenue Per       Per Rig       Segment
                                    Rigs           Hours           Rate             Rig Hour          Hour        Profits %
2011:
First Quarter                            412       184,700              62.7 %    $         356     $     105             30 %
Second Quarter                           412       205,700              69.8 %    $         376     $     122             32 %
Third Quarter                            415       222,100              74.8 %    $         386     $     117             31 %
Fourth Quarter                           417       217,100              72.8 %    $         398     $     132             33 %
Full Year                                414       829,600              70.1 %    $         380     $     119             31 %
2012:
First Quarter                            423       231,300              76.5 %    $         393     $     117             30 %
Second Quarter                           431       232,500              75.4 %    $         399     $     111             27 %
Third Quarter                            431       226,400              73.5 %    $         402     $     124             30 %

We gauge activity levels in our well servicing segment based on rig hours, rig utilization rate, revenue per rig hour, segment profits per rig hour and segment profits as a percent of revenues. Revenue per rig hour and profits per rig hour in the table above do not include revenues and profits from the rig manufacturing and maintenance division of this business segment.

Rig utilization decreased to 73.5% in the third quarter of 2012 compared to 75.4% in the second quarter of 2012. Lower utilization resulted from aggressive competition in oil markets. However, segment profit percentage increased to 30% during the third quarter of 2012 from 27% during the second quarter of 2012 due to lower maintenance and other operating costs.

Contract Drilling

During the first nine months of 2012, our contract drilling segment represented 4% of our revenues. Revenues from our contract drilling segment are derived primarily from the drilling of new wells.

Within this segment, we typically charge our drilling rig customers at a "daywork" daily rate, or "footage" at an established rate per number of feet drilled. We measure the activity level of our drilling rigs on a weekly basis by calculating a rig utilization rate based on a seven-day work week per rig. Our contract drilling rig fleet had a weighted average of 12 rigs during the third quarter of 2012 compared to a weighted average of six rigs in the first quarter of 2011, due to the purchase of six drilling rigs.


Table of Contents

The following is an analysis of our contract drilling segment for each of the quarters in 2011, the full year ended December 31, 2011 and the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012:

                                   Weighted
                                   Average            Rig                               Profits (Loss)
                                  Number of        Operating        Revenue Per          Per Drilling         Segment
                                     Rigs            Days           Drilling Day             Day             Profits %
2011:
First Quarter                              6              522      $       13,500      $          4,900              36 %
Second Quarter                            10              714      $       13,700      $          3,300              24 %
Third Quarter                             10              802      $       14,600      $          4,700              32 %
Fourth Quarter                            10              851      $       14,700      $          5,000              34 %
Full Year                                  9            2,889      $       14,200      $          4,500              31 %
2012:
First Quarter                             12              967      $       15,800      $          5,200              33 %
Second Quarter                            12            1,007      $       15,500      $          5,800              37 %
Third Quarter                             12              957      $       15,800      $          5,300              34 %

We gauge activity levels in our drilling operations based on rig operating days, revenue per drilling day, profits per drilling day and segment profits as a percent of revenues.

Revenue per day increased slightly to $15,800 in the third quarter of 2012 from $15,500 in the second quarter of 2012. Segment profit percentage decreased to 34% in the third quarter of 2012 from 37% in the second quarter of 2012 due to the decrease in rig operating days in the third quarter.

Operating Cost Overview

Our operating costs are comprised primarily of labor, including workers' compensation and health insurance, repair and maintenance, fuel and insurance. The majority of our employees are paid on an hourly basis. We also incur costs to employ personnel to sell and supervise our services and perform maintenance on our fleet. These costs are not directly tied to our level of business activity. Compensation for our administrative personnel in local operating yards and in our corporate office is accounted for as general and administrative expenses. Repair and maintenance are performed by our crews, company maintenance personnel and outside service providers. Insurance is generally a fixed cost regardless of utilization and relates to the number of rigs, trucks and other equipment in our fleet, employee payroll and safety record.

Critical Accounting Policies and Estimates

Our unaudited consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of our critical accounting policies is included in note 2 of the notes to our historical audited consolidated financial statements in our most recent annual report on Form 10-K. The following is a discussion of our critical accounting policies and estimates.

Critical Accounting Policies

We have identified below certain accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and that require the application of significant judgment by management.

Property and Equipment. Property and equipment are stated at cost or at estimated fair value at acquisition date if acquired in a business combination. Expenditures for repairs and maintenance are charged to expenses as incurred. We also review the capitalization of refurbishment of workover rigs as described in note 2 of the notes to our unaudited consolidated financial statements.

Impairments. We review our assets for impairment at least annually, or whenever, in management's judgment, events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recovered over its remaining service life. Provisions for asset impairment are charged to income when the sum of the estimated future cash flows, on an undiscounted basis, is less than the asset's carrying amount. When impairment is indicated, an impairment charge is recorded based on an estimate of future cash flows on a discounted basis.

Self-Insured Risk Accruals. We are self-insured up to retention limits with regard to workers' compensation, general liability claims, and medical and dental coverage of our employees. We generally maintain no physical property damage coverage on our workover rig fleet, with the exception of certain of our 24-hour workover rigs and newly manufactured rigs. We have deductibles per occurrence for workers' compensation, general liability claims, and medical and dental coverage of $1.0 million, $1.0 million and $300,000, respectively. We have lower deductibles per occurrence for automobile liability. We maintain accruals in our consolidated balance sheets related to self-insurance retentions based upon third-party actuarial data and claims history.


Table of Contents

Revenue Recognition. We recognize revenues when the services are performed, collection of the relevant receivables is probable, persuasive evidence of the arrangement exists and the price is fixed or determinable.

Income Taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that includes the statutory enactment date. A valuation allowance for deferred tax assets is recognized when it is more likely than not that the benefit of deferred tax assets will not be realized.

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. We analyze our estimates based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, actual results could differ from such estimates. The following is a discussion of our critical accounting estimates.

Depreciation and Amortization. In order to depreciate and amortize our property and equipment and our intangible assets with finite lives, we estimate the . . .

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