Premature to Gush About Basic Energy Services' Prospects

• The Company: Basic Energy, servicing every stage in the well lifecycle.
• The Filing: Form 10-Q filed with the SEC on August 2008.
• The Finding: On September 9, Ken Huseman, Chief Executive Officer of Basic Energy Services, said selected operating data for August 2008 -- utilization in well servicing and drilling segments -- signaled that the company was successfully leveraging its wide footprint and range of services to take advantage of market conditions over the last year. Left unanswered, however, was whether the increased level of activity in each of the company's three primary business segments (well servicing, fluid services, and completion/remedial services) would lead to pricing and margin improvements, too.

Although rig hours climbed to 77,900 for August 2008 (compared with 71,000 in the 3Q:07), management was reticent on actual revenue received per rig hour. I bring this metric to the forefront because there was a reduction in revenue per rig hour to $399 in the first six months of 2008 from $413 in the first six months of 2007, due to increased competition in certain areas of Basic Energy's markets. In addition, profits per rig hour declined to $152 in the second-quarter 2008, from $166 in the prior year period, resulting from a shift to lower margin work and increased competition.

Fluid Services revenue and Completion and remedial segment revenues increased 13 percent and 35 percent in the same year-on-year period -- principally due to expansion through acquisitions!

The Question(s): Should gas prices remain at the $7.60 per MMbtu level, will Basic Energy witness a curtailment of new well drilling programs in the higher cost shale plays? And, would active drilling and workover plans in the more established plays be able to offset lost profitability from shut-in business?