e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the quarterly period ended March 31, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-32693
Basic Energy Services, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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54-2091194
(I.R.S. Employer Identification No.) |
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400 W. Illinois, Suite 800
Midland, Texas
(Address of principal executive offices)
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79701
(Zip code) |
(432) 620-5500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Act). (Check one)
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Large Accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
33,787,305 shares of the registrants Common Stock were outstanding as of May 10, 2006.
BASIC ENERGY SERVICES, INC.
Index to Form 10-Q
2
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements that are, or may be deemed to be, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based
these forward looking statements largely on our current expectations and projections about future
events and financial trends affecting the financial condition of our business. These
forward-looking statements are subject to a number of risks, uncertainties and assumptions,
including, among other things, the risk factors discussed in this report and other factors, most of
which are beyond our control.
The words believe, may, estimate, continue, anticipate, intend, plan, expect
and similar expressions are intended to identify forward-looking statements. All statements other
than statements of current or historical fact contained in this report are forward
looking-statements. Although we believe that the forward-looking statements contained in this
report are based upon reasonable assumptions, the forward-looking events and circumstances
discussed in this report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
Important factors that may affect our expectations, estimates or projections include:
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a decline in, or substantial volatility of, oil and gas prices, and any related changes
in expenditures by our customers; |
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the effects of future acquisitions on our business; |
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changes in customer requirements in markets or industries we serve; |
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competition within our industry; |
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general economic and market conditions; |
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our access to current or future financing arrangements; |
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our ability to replace or add workers at economic rates; and |
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environmental and other governmental regulations. |
Our forward-looking statements speak only as of the date of this report. Unless otherwise
required by law, we undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Basic Energy Services, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
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March 31, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
19,953 |
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$ |
32,845 |
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Trade accounts receivable, net of allowance of $2,984 and $2,775, respectively |
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101,241 |
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86,932 |
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Accounts receivable related parties |
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92 |
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65 |
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Inventories |
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1,851 |
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1,648 |
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Prepaid expenses |
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3,790 |
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3,112 |
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Other current assets |
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2,744 |
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2,060 |
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Deferred tax assets |
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6,700 |
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6,020 |
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Total current assets |
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136,371 |
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132,682 |
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Property and equipment, net |
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399,865 |
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309,075 |
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Deferred debt costs, net of amortization |
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4,583 |
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4,833 |
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Goodwill |
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73,201 |
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48,227 |
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Other assets |
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2,767 |
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2,140 |
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$ |
616,787 |
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$ |
496,957 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
11,376 |
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$ |
13,759 |
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Accrued expenses |
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39,711 |
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33,548 |
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Income taxes payable |
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13,124 |
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7,210 |
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Current portion of long-term debt |
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8,559 |
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7,646 |
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Other current liabilities |
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1,328 |
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1,124 |
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Total current liabilities |
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74,098 |
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63,287 |
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Long-term debt |
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201,488 |
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119,241 |
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Deferred income |
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11 |
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17 |
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Deferred tax liabilities |
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59,956 |
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53,770 |
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Other long-term liabilities |
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2,993 |
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2,067 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock; $.01 par value; 80,000,000 shares authorized;
33,931,935 shares issued;
33,787,305 shares outstanding at March 31, 2006 and
33,785,359 shares outstanding at
December 31, 2005, respectively |
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339 |
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339 |
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Additional paid-in capital |
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235,264 |
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239,218 |
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Deferred compensation |
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(7,341 |
) |
Retained earnings |
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46,174 |
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28,654 |
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Treasury stock, 144,630 shares at March 31, 2006, and 146,576 shares
at December 31, 2005, respectively, at cost |
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(3,618 |
) |
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(2,531 |
) |
Accumulated other comprehensive income |
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82 |
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236 |
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Total stockholders equity |
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278,241 |
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258,575 |
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$ |
616,787 |
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$ |
496,957 |
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See accompanying notes to consolidated financial statements.
4
Basic Energy Services, Inc.
Consolidated Statements of Operations and Comprehensive Income
(Dollars in thousands, except per share amounts)
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Three Months Ended March 31, |
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2006 |
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2005 |
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(Unaudited) |
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Revenues: |
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Well servicing |
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$ |
73,465 |
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$ |
44,798 |
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Fluid services |
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43,121 |
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29,303 |
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Drilling and completion services |
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27,455 |
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10,764 |
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Well site construction services |
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10,265 |
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8,948 |
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Total revenues |
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154,306 |
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93,813 |
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Expenses: |
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Well servicing |
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41,610 |
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28,191 |
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Fluid services |
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26,305 |
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19,238 |
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Drilling and completion services |
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13,854 |
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5,860 |
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Well site construction services |
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7,643 |
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7,108 |
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General and administrative, including stock-based compensation
of $758 and $591 in 2006 and 2005, respectively |
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18,005 |
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13,091 |
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Depreciation and amortization |
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12,837 |
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8,047 |
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(Gain) loss on disposal of assets |
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(200 |
) |
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102 |
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Total expenses |
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120,054 |
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81,637 |
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Operating income |
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34,252 |
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12,176 |
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Other income (expense): |
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Interest expense |
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(3,138 |
) |
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(3,061 |
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Interest income |
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359 |
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101 |
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Other income |
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27 |
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75 |
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Income from continuing operations before income taxes |
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31,500 |
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9,291 |
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Income tax expense |
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(11,819 |
) |
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(3,490 |
) |
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Net income |
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$ |
19,681 |
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$ |
5,801 |
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Earnings per share of common stock: |
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Basic |
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$ |
0.59 |
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$ |
0.21 |
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Diluted |
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$ |
0.53 |
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$ |
0.18 |
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Comprehensive Income: |
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Net income |
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$ |
19,681 |
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$ |
5,801 |
|
Unrealized gains (loss) on hedging activities |
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(154 |
) |
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|
314 |
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|
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Comprehensive Income |
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$ |
19,527 |
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$ |
6,115 |
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See accompanying notes to consolidated financial statements.
5
Basic Energy Services, Inc.
Consolidated Statements of Stockholders Equity
(in thousands, except share data)
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Deferred |
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Treasury |
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Retained |
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Comprehensive |
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Stockholders |
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Shares |
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Amount |
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Capital |
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Compensation |
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Stock |
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Earnings |
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Income |
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Equity |
|
Balance December 31, 2005 |
|
|
33,931,935 |
|
|
$ |
339 |
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|
$ |
239,218 |
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|
$ |
(7,341 |
) |
|
$ |
(2,531 |
) |
|
$ |
28,654 |
|
|
$ |
236 |
|
|
$ |
258,575 |
|
Adoption of new accounting
standard |
|
|
|
|
|
|
|
|
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(7,341 |
) |
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7,341 |
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|
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|
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|
|
|
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Amortization of deferred
compensation |
|
|
|
|
|
|
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|
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|
758 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
758 |
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Unrealized loss on interest
rate swap agreement |
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|
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|
|
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|
|
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|
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(154 |
) |
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|
(154 |
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Offering costs |
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|
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(161 |
) |
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|
|
|
|
|
|
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(161 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(3,248 |
) |
|
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|
|
|
|
|
|
|
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(3,248 |
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Exercise of stock options |
|
|
|
|
|
|
|
|
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|
2,790 |
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|
|
|
|
|
|
2,161 |
|
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|
(2,161 |
) |
|
|
|
|
|
|
2,790 |
|
Net income |
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
19,681 |
|
|
|
|
|
|
|
19,681 |
|
|
|
|
|
|
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|
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Balance March 31, 2006
(Unaudited) |
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33,931,935 |
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|
$ |
339 |
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|
$ |
235,264 |
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|
$ |
|
|
|
$ |
(3,618 |
) |
|
$ |
46,174 |
|
|
$ |
82 |
|
|
$ |
278,241 |
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|
|
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|
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See accompanying notes to consolidated financial statements.
6
Basic Energy Services, Inc.
Consolidated Statements of Cash Flows
( in thousands)
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Three Months Ended March 31, |
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2006 |
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2005 |
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(Unaudited) |
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Cash flows from operating activities: |
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Net income |
|
$ |
19,681 |
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|
$ |
5,801 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
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|
|
|
|
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|
Depreciation and amortization |
|
|
12,837 |
|
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|
8,047 |
|
Accretion on asset retirement obligation |
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|
19 |
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|
|
9 |
|
Change in allowance for doubtful accounts |
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|
209 |
|
|
|
450 |
|
Non-cash interest expense |
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|
310 |
|
|
|
263 |
|
Non-cash compensation |
|
|
758 |
|
|
|
591 |
|
(Gain) loss on disposal of assets |
|
|
(200 |
) |
|
|
102 |
|
Deferred income taxes |
|
|
(2,873 |
) |
|
|
3,490 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
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|
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Accounts receivable |
|
|
(10,708 |
) |
|
|
(2,763 |
) |
Inventories |
|
|
(18 |
) |
|
|
(171 |
) |
Prepaid expenses and other current assets |
|
|
(1,442 |
) |
|
|
(317 |
) |
Other assets |
|
|
(319 |
) |
|
|
(53 |
) |
Accounts payable |
|
|
(3,169 |
) |
|
|
(1,344 |
) |
Excess tax benefits from exercise of employee stock options |
|
|
(2,790 |
) |
|
|
|
|
Income tax payable |
|
|
7,449 |
|
|
|
|
|
Deferred income and other liabilities |
|
|
342 |
|
|
|
(122 |
) |
Accrued expenses |
|
|
5,829 |
|
|
|
2,751 |
|
|
|
|
|
|
|
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|
Net cash provided by operating activities |
|
|
25,915 |
|
|
|
16,734 |
|
|
|
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|
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|
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Cash flows from investing activities: |
|
|
|
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|
|
|
|
Purchase of property and equipment |
|
|
(24,812 |
) |
|
|
(16,083 |
) |
Proceeds from sale of assets |
|
|
1,141 |
|
|
|
95 |
|
Payments for other long-term assets |
|
|
(393 |
) |
|
|
(49 |
) |
Payments for businesses, net of cash acquired |
|
|
(87,520 |
) |
|
|
(3,909 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(111,584 |
) |
|
|
(19,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from debt |
|
|
80,000 |
|
|
|
129 |
|
Payments of debt |
|
|
(6,544 |
) |
|
|
(2,938 |
) |
Offering costs related to initial public offering |
|
|
(161 |
) |
|
|
|
|
Purchase of treasury stock |
|
|
(1,258 |
) |
|
|
|
|
Excess tax benefits from exercise of employee stock options |
|
|
2,790 |
|
|
|
|
|
Exercise of employee stock options |
|
|
(1,990 |
) |
|
|
|
|
Deferred loan costs and other financing activities |
|
|
(60 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
72,777 |
|
|
|
(2,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
(12,892 |
) |
|
|
(6,029 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period |
|
|
32,845 |
|
|
|
20,147 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
19,953 |
|
|
$ |
14,118 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
1.
Basis of Presentation and Nature of Operations
Basis of Presentation
The accompanying unaudited consolidated financial statements of Basic Energy Services, Inc.
and subsidiaries (Basic or the Company) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have been made in the
accompanying unaudited financial statements.
Nature of Operations
Basic provides a range of well site services to oil and gas drilling and producing companies,
including well servicing, fluid services, drilling and completion services and well site
construction services. These services are primarily provided by Basics fleet of equipment.
Basics operations are concentrated in the major United States onshore oil and gas producing
regions in Texas, New Mexico, Oklahoma and Louisiana, and the Rocky Mountain states.
8
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Basic and its
wholly-owned subsidiaries. Basic has no interest in any other organization, entity, partnership,
or contract that could require any evaluation under FASB Interpretation No. 46R or Accounting
Research Bulletin No. 51. All inter-company transactions and balances have been eliminated.
Revenue Recognition
Well Servicing Well servicing consists primarily of maintenance services, workover services,
completion services and plugging and abandonment services. Basic recognizes revenue when services
are performed, collection of the relevant receivables is probable, persuasive evidence of an
arrangement exists and the price is fixed or determinable. Basic prices well servicing by the hour
of service performed.
Fluid Services Fluid services consists primarily of the sale, transportation, storage and
disposal of fluids used in drilling, production and maintenance of oil and natural gas wells.
Basic recognizes revenue when services are performed, collection of the relevant receivables is
probable, persuasive evidence of an arrangement exists and the price is fixed or determinable.
Basic prices fluid services by the job, by the hour or by the quantities sold, disposed of or
hauled.
Drilling and Completion Services - Basic recognizes revenue when services are performed,
collection of the relevant receivables is probable, persuasive evidence of an arrangement exists
and the price is fixed or determinable. Basic prices drilling and completion services by the hour,
day, or project depending on the type of service performed. When Basic provides multiple services
to a customer, revenue is allocated to the services performed based on the fair values of the
services.
Well Site Construction Services Basic recognizes revenue when services are performed,
collection of the relevant receivables is probable, persuasive evidence of an arrangement exists
and the price is fixed or determinable. Basic prices well site construction services by the hour,
day, or project depending on the type of service performed.
Impairments
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144), long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are reviewed for
impairment at a minimum annually, or whenever, in managements judgment events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
such assets to estimated undiscounted future cash flows expected to be generated by the assets.
Expected future cash flows and carrying values are aggregated at their lowest identifiable level.
If the carrying amount of such assets exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of such assets exceeds the fair value of
the assets. Assets to be disposed of would be separately presented in the consolidated balance
sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities, if material, of a disposed group classified as
held for sale would be presented separately in the appropriate asset and liability sections of the
consolidated balance sheet.
Goodwill and intangible assets not subject to amortization are tested annually for impairment,
and are tested for impairment more frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds
the assets fair value.
Basic had no impairment expense in the three months ended March 31, 2006 and 2005,
respectively.
9
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
Deferred Debt Costs
Basic capitalizes certain costs in connection with obtaining its borrowings, such as lenders
fees and related attorneys fees. These costs are being amortized to interest expense using the
straight line method, which approximates the effective interest method over the terms of the
related debt.
Deferred debt costs of approximately $7.1 million at March 31, 2006 and $7.0 million at
December 31, 2005, respectively, represent debt issuance costs and are recorded net of accumulated
amortization of $2.5 million, and $2.2 million at March 31, 2006 and December 31, 2005,
respectively. Amortization of deferred debt costs totaled approximately $311,000 and $263,000 for
the three months ended March 31, 2006 and 2005, respectively.
Goodwill
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142) eliminates the amortization of goodwill and other intangible assets with
indefinite lives. Intangible assets with lives restricted by contractual, legal, or other means
will continue to be amortized over their useful lives. Goodwill and other intangible assets not
subject to amortization are tested for impairment annually or more frequently if events or changes
in circumstances indicate that the asset might be impaired. SFAS No. 142 requires a two-step
process for testing impairment. First, the fair value of each reporting unit is compared to its
carrying value to determine whether an indication of impairment exists. If impairment is
indicated, then the fair value of the reporting units goodwill is determined by allocating the
units fair value to its assets and liabilities (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination. The amount of impairment for
goodwill is measured as the excess of its carrying value over its fair value. Basic completed its
assessment of goodwill impairment as of the date of adoption and completed a subsequent annual
impairment assessment as of December 31 each year thereafter. The assessments did not result in
any indications of goodwill impairment.
Basic has identified its reporting units to be well servicing, fluid services, drilling and
completion services and well site construction services. The goodwill allocated to such reporting
units as of March 31, 2006 is $9.9 million, $30.7 million, $28.9 million and $3.7 million,
respectively. The change in the carrying amount of goodwill for the three months ended March 31,
2006 of $25.0 million relates to goodwill from acquisitions and payments pursuant to contingent
earn-out agreements, with approximately $10.1 million and $14.9 million of goodwill additions
relating to the fluid services and drilling and completion units, respectively.
Stock-Based Compensation
On January 1, 2006, Basic adopted Statement of Financial Accounting Standards No. 123 (revised
2004) Share-Based Payment (SFAS No. 123R). Prior to January 1, 2006, the Company accounted for
share-based payments under the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock issued to Employees (APB No. 25) which was permitted
by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123).
Basic adopted FAS No. 123R using both the modified prospective method and the prospective
method as applicable to the specific awards granted. The modified prospective method was applied
to awards granted subsequent to the Company becoming a public company. Awards granted prior to the
Company becoming public and which were accounted for under APB No. 25 were adopted by using the
prospective method. The results of prior periods have not been restated. Compensation expense
cost of the unvested portion of awards granted as a private company and outstanding as of January
1, 2006 will continue to be based upon the intrinsic value method calculated under APB No. 25.
10
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
Under SFAS No. 123R, entities using the minimum value method and the prospective application
are not permitted to provide the pro forma disclosures (as was required under Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (SFAS No. 123))
subsequent to adoption of SFAS 123R since they do not have the fair value information required by
SFAS No. 123R. Therefore, in accordance with 123R, Basic will no longer include pro forma
disclosures that were required by SFAS 123.
Asset Retirement Obligations
Basic owns and operates salt water disposal sites, brine water wells, gravel pits and land
farm sites, each of which is subject to rules and regulations regarding usage and eventual closure.
The following table reflects the changes in the liability during the three months ended March 31,
2006 (in thousands):
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
569 |
|
|
Additional asset retirement obligations recognized through acquisitions |
|
|
118 |
|
Accretion Expense |
|
|
19 |
|
Increase in asset retirement obligations due to change in estimate |
|
|
295 |
|
|
|
|
|
|
Balance, March 31, 2006 (unaudited) |
|
$ |
1,001 |
|
|
|
|
|
Environmental
Basic is subject to extensive federal, state and local environmental laws and regulations.
These laws, which are constantly changing, regulate the discharge of materials into the environment
and may require Basic to remove or mitigate the adverse environmental effects of disposal or
release of petroleum, chemical and other substances at various sites. Environmental expenditures
are expensed or capitalized depending on the future economic benefit. Expenditures that relate to
an existing condition caused by past operations and that have no future economic benefits are
expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable and the costs can be reasonably estimated.
Litigation and Self-Insured Risk Reserves
Basic estimates its reserves related to litigation and self-insured risks based on the facts
and circumstances specific to the litigation and self-insured claims and its past experience with
similar claims in accordance with Statement of Financial Accounting Standard No. 5 Accounting for
Contingencies. Basic maintains accruals in the consolidated balance sheets to cover
self-insurance retentions (See note 6).
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R. As discussed
under this Note 2, Stock-Based Compensation, Basic adopted the provisions of SFAS No. 123R on
January 1, 2006.
11
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
3. Acquisitions
In 2006 and 2005, Basic acquired either substantially all of the assets or all of the
outstanding capital stock of each of the following businesses, each of which were accounted for
using the purchase method of accounting (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Paid |
|
|
|
|
|
|
|
(net of cash |
|
|
|
Closing Date |
|
|
acquired) |
|
R & R Hot Oil Service |
|
January 5, 2005 |
|
$ |
1,702 |
|
Premier Vacuum Service, Inc. |
|
January 28, 2005 |
|
|
1,009 |
|
Spencers Coating Specialist |
|
February 9, 2005 |
|
|
619 |
|
Marks Well Service |
|
February 25, 2005 |
|
|
579 |
|
Max-Line, Inc. |
|
April 28, 2005 |
|
|
1,498 |
|
MD Well Service, Inc. |
|
May 17, 2005 |
|
|
4,478 |
|
179 Disposal, Inc. |
|
August 4, 2005 |
|
|
1,729 |
|
Oilwell Fracturing Services, Inc. |
|
October 11, 2005 |
|
|
13,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2005 |
|
|
|
|
|
$ |
25,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LeBus Oil Field Services Co. |
|
January 31, 2006 |
|
$ |
24,508 |
|
G&L Tool, Ltd. |
|
February 28, 2006 |
|
|
58,000 |
|
Arkla Cementing, Inc. |
|
March 27, 2006 |
|
|
5,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2006 |
|
|
|
|
|
$ |
87,520 |
|
|
|
|
|
|
|
|
|
Contingent Earn-out Arrangements and Final Purchase Price Allocations
Contingent earn-out arrangements are generally arrangements entered in certain acquisitions to
encourage the owner/manager to continue operating and building the business after the purchase
transaction. The contingent earn-out arrangements of the related acquisitions are generally linked
to certain financial measures and performance of the assets acquired in the various acquisitions.
All amounts paid or reasonably accrued for related to the contingent earn-out payments are
reflected as increases to the goodwill associated with the acquisition.
On February 28, 2006, Basic acquired substantially all of the assets of G&L Tool for $58.0
million plus a contingent earn-out payment not to exceed $21.0 million. The contingent earn out
payment will be equal to fifty percent of the amount by which the annual EBITDA earned by Basic
exceeds an annual targeted EBITDA. There is no guarantee or assurance that the targeted EBITDA
will be reached. This acquisition provided a platform to expand into the fishing and rental tool
market operations. The cost of the G&L acquisition was allocated $43.3 million to property and
equipment, $14.6 million to goodwill, and $51,000 to non-compete agreements. The allocations of
the purchase price are based upon preliminary estimates and assumptions. Accordingly, the
allocations are subject to revision when the Company receives final information, including
appraisals and other analyses. Revisions to the fair values, which may be significant, will be
recorded by the Company as further adjustments to the purchase price allocations.
12
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
The following unaudited pro-forma results of operations have been prepared as though the G&L
Tool acquisition had been completed on January 1, 2005. Pro forma amounts are based on the
preliminary purchase price allocations of the significant acquisitions and are not necessarily
indicative of the results that may be reported in the future (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2006 |
|
2005 |
|
|
(Unaudited) |
Revenues |
|
$ |
163,799 |
|
|
$ |
101,482 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,145 |
|
|
$ |
7,296 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
$ |
0.67 |
|
|
$ |
0.26 |
|
Earnings per common share diluted |
|
$ |
0.60 |
|
|
$ |
0.23 |
|
Basic does not believe the pro-forma effect of the remainder of the acquisitions
completed in 2005 or 2006 is material, either individually or when aggregated, to the reported
results of operations.
4. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Land |
|
$ |
2,108 |
|
|
$ |
1,902 |
|
Buildings and improvements |
|
|
10,418 |
|
|
|
8,634 |
|
Well service units and equipment |
|
|
217,086 |
|
|
|
199,070 |
|
Fluid services equipment |
|
|
72,797 |
|
|
|
59,104 |
|
Brine and fresh water stations |
|
|
7,773 |
|
|
|
7,746 |
|
Frac/test tanks |
|
|
43,425 |
|
|
|
31,475 |
|
Pressure pumping equipment |
|
|
38,479 |
|
|
|
31,101 |
|
Construction equipment |
|
|
25,013 |
|
|
|
24,224 |
|
Disposal facilities |
|
|
21,685 |
|
|
|
16,828 |
|
Vehicles |
|
|
25,382 |
|
|
|
23,329 |
|
Rental equipment |
|
|
47,906 |
|
|
|
6,519 |
|
Aircraft |
|
|
3,236 |
|
|
|
3,236 |
|
Other |
|
|
8,473 |
|
|
|
8,602 |
|
|
|
|
|
|
|
|
|
|
|
523,781 |
|
|
|
421,770 |
|
Less accumulated depreciation and amortization |
|
|
123,916 |
|
|
|
112,695 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
399,865 |
|
|
$ |
309,075 |
|
|
|
|
|
|
|
|
13
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
Basic is obligated under various capital leases for certain vehicles and equipment that
expire at various dates during the next five years. The gross amount of property and equipment and
related accumulated amortization recorded under capital leases and included above consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Light vehicles |
|
$ |
19,564 |
|
|
$ |
17,912 |
|
Fluid services equipment |
|
|
14,662 |
|
|
|
14,011 |
|
Construction equipment |
|
|
3,156 |
|
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
37,382 |
|
|
|
33,223 |
|
Less accumulated amortization |
|
|
9,535 |
|
|
|
8,474 |
|
|
|
|
|
|
|
|
|
|
$ |
27,847 |
|
|
$ |
24,749 |
|
|
|
|
|
|
|
|
Amortization of assets held under capital leases of approximately $1,060,000 and $253,000
for the three months ended March 31, 2006 and 2005, respectively, is included in depreciation and
amortization expense in the consolidated statements of operations.
5. Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Credit Facilities: |
|
|
|
|
|
|
|
|
Term B Loan |
|
$ |
89,750 |
|
|
$ |
90,000 |
|
Revolver |
|
|
96,000 |
|
|
|
16,000 |
|
Capital leases and other notes |
|
|
24,297 |
|
|
|
20,887 |
|
|
|
|
|
|
|
|
|
|
|
210,047 |
|
|
|
126,887 |
|
Less current portion |
|
|
8,559 |
|
|
|
7,646 |
|
|
|
|
|
|
|
|
|
|
$ |
201,488 |
|
|
$ |
119,241 |
|
|
|
|
|
|
|
|
2005 Credit Facility
On December 15, 2005, Basic entered into a $240 million Third Amended and Restated Credit
Agreement with a syndicate of lenders (2005 Credit
Facility), which refinanced all of its then
existing credit facilities. The 2005 Credit Facility, as amended effective March 28, 2006,
provides for a $90 million Term B Loan (2005 Term B Loan) and a $150 million revolving line of
credit (Revolver). The commitment under the Revolver allows for (a) the borrowing of funds (b)
issuance of up to $30 million of letters of credit and (c) $2.5 million of swing-line loans (next
day borrowing). The amounts outstanding under the 2005 Term B Loan require quarterly amortization
at various amounts during each quarter with all amounts outstanding on December 15, 2011 being due
and payable in full. All the outstanding amounts under the Revolver are due and payable on
December 15, 2010. The 2005 Credit Facility is secured by substantially all of Basics tangible
and intangible assets. Basic incurred approximately $1.8 million in debt issuance costs in
obtaining the 2005 Credit Facility.
At Basics option, borrowings under the 2005 Term B Loan bear interest at either the (a)
Alternative Base Rate (i.e. the higher of the banks prime rate or the federal funds rate plus .5% per annum) plus 1% or (b) the LIBOR rate plus 2.0%. At March 31, 2006 and December 31, 2005,
Basics weighted average interest rate on its Term B Loan was 7.1% and 6.4%.
14
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
At Basics option, borrowings under the 2005 Revolver bear interest at either the (a)
Alternative Base Rate (i.e. the higher of the banks prime rate or the federal funds rate plus
..5% per annum) plus a margin ranging from .50% to 1.25% or (b) the LIBOR rate plus a margin ranging
from 1.5% to 2.25%. The margins vary depending on Basics leverage ratio. At March 31, 2006,
Basics margin on Alternative Base Rates and LIBOR tranches was .75% and 1.75%, respectively. Fees
on the letters of credit are due quarterly on the outstanding amount of the letters of credit at a
rate ranging from 1.5% to 2.25% for participation fees and .125% for fronting fees. A commitment
fee is due quarterly on the available borrowings under the Revolver at rates ranging from .375% to
..5%.
At March 31, 2006 Basic, under its Revolver, had outstanding $96 million of borrowings and
$9.6 million of letters of credit and no amounts outstanding in swing-line loans. At March 31,
2006 and December 31, 2005 Basic had availability under its Revolver of $44.4 million and $124.4
million, respectively.
Pursuant to the 2005 Credit Facility, Basic must apply proceeds to reduce principal
outstanding under the 2005 Term B Revolver from (a) individual assets sales greater than $2 million
or $7.5 million in the aggregate on an annual basis, and (b) 50% of the proceeds from any equity
offering. The 2005 Credit Facility required Basic to enter into an interest rate hedge, through
May 28, 2006 on at least $65 million of Basics then outstanding indebtedness. The March 28, 2006
amendment deletes this requirement upon payoff of the Term B Loans. Paydowns on the 2005 Term B
Loan may not be reborrowed.
The 2005 Credit Facility contains various restrictive covenants and compliance requirements,
which include (a) limiting of the incurrence of additional indebtedness, (b) restrictions on
mergers, sales or transfers of assets without the lenders consent, (c) limitation on dividends and
distributions and (d) various financial covenants, including (1) a maximum leverage ratio of 3.5 to
1.0 reducing over time to 3.25 to 1.0, (2) a minimum interest coverage ratio of 3.0 to 1.0 and (e)
limitations on capital expenditures in any period of four consecutive quarters in excess of 20% of
Consolidated Net Worth unless certain criteria are met. At March 31, 2006 and December 31, 2005,
Basic was in compliance with its covenants.
Other Debt
Basic has a variety of other capital leases and notes payable outstanding that are generally
customary in its business. None of these debt instruments are material individually or in the
aggregate.
Basics interest expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Cash payments for interest |
|
$ |
1,942 |
|
|
$ |
2,723 |
|
Commitment and other fees paid |
|
|
148 |
|
|
|
|
|
Amortization of debt issuance costs |
|
|
311 |
|
|
|
263 |
|
Other |
|
|
737 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
$ |
3,138 |
|
|
$ |
3,061 |
|
|
|
|
|
|
|
|
15
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
6. Commitments and Contingencies
Environmental
Basic is subject to various federal, state and local environmental laws and regulations that
establish standards and requirements for protection of the environment. Basic cannot predict the
future impact of such standards and requirements which are subject to change and can have
retroactive effectiveness. Basic continues to monitor the status of these laws and regulations.
Management believes that the likelihood of the disposition of any of these items resulting in a
material adverse impact to Basics financial position, liquidity, capital resources or future
results of operations is remote.
Currently, Basic has not been fined, cited or notified of any environmental violations that
would have a material adverse effect upon its financial position, liquidity or capital resources.
However, management does recognize that by the very nature of its business, material costs could be
incurred in the near term to bring Basic into total compliance. The amount of such future
expenditures is not determinable due to several factors including the unknown magnitude of possible
contamination, the unknown timing and extent of the corrective actions which may be required, the
determination of Basics liability in proportion to other responsible parties and the extent to
which such expenditures are recoverable from insurance or indemnification.
Litigation
From time to time, Basic is a party to litigation or other legal proceedings that Basic
considers to be a part of the ordinary course of business. Basic is not currently involved in any
legal proceedings that it considers probable or reasonably possible, individually or in the
aggregate, to result in a material adverse effect on its financial condition, results of operations
or liquidity.
Self-Insured Risk Accruals
Basic is self-insured up to retention limits as it relates to workers compensation and
medical and dental coverage of its employees. Basic, generally, maintains no physical property
damage coverage on its workover rig fleet, with the exception of certain of its 24-hour workover
rigs and newly manufactured rigs. Basic has deductibles per occurrence for workers compensation
and medical and dental coverage of $150,000 and $125,000, respectively. Basic has lower
deductibles per occurrence for automobile liability and general liability. Basic maintains
accruals in the accompanying consolidated balance sheets related to self-insurance retentions by
using third-party data and historical claims history.
At March 31, 2006 and December 31, 2005, self-insured risk accruals, net of related
recoveries/receivables totaled approximately $11.4 million and $9.5 million, respectively.
7. Stockholders Equity
Common Stock
In February 2002, a group of related investors purchased a total of 3,000,000 shares of
Basics common stock at a purchase price of $4 per share, for a total purchase price of $12
million. As part of the purchase, 600,000 common stock warrants were issued in connection with
this transaction, the fair value of which was approximately $1.2 million (calculated using an
option valuation model). The warrants allow the holder to purchase 600,000 shares of Basics
common stock at $4 per share. The warrants are exercisable in whole or in part after June 30, 2002
and prior to February 13, 2007.
16
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
In February 2004, Basic granted certain officers and directors 837,500 restricted shares of
common stock. The shares vest 25% per year for four years from the award date and are subject to
other vesting and forfeiture provisions. The estimated fair value of the restricted shares was
$5.8 million at the date of the grant and was recorded as deferred compensation, a component of
stockholders equity. This amount is being charged to expense over the respective vesting period
and totaled approximately $379,000 and $409,000 for the three months ended March 31, 2006 and 2005,
respectively.
In December 2005, Basic issued 5,000,000 shares of common stock during the Companys Initial
Public Offering to a group of investors for $100 million or $20 per share. After deducting fees,
this resulted in net proceeds to Basic totaling approximately $91.5 million.
In March 2006, Basic issued 148,720 shares of common stock from treasury stock for the
exercise of stock options.
8. Incentive Plan
In May 2003, Basics board of directors and stockholders approved the Basic 2003 Incentive
Plan (as amended effective April 22, 2005), (the Plan) which provides for granting of incentive
awards in the form of stock options, restricted stock, performance awards, bonus shares, phantom
shares, cash awards and other stock-based awards to officers, employees, directors and consultants
of Basic. The Plan assumed awards of the plans of Basics successors that were awarded and remained
outstanding prior to adoption of the Plan. The Plan provides for the issuance of 5,000,000 shares.
The Plan is administered by the Plan committee, and in the absence of a Plan committee, by the
Board of Directors, which determines the awards, and the associated terms of the awards and
interprets its provisions and adopts policies for implementing the Plan. The number of shares
authorized under the Plan and the number of shares subject to an award under the Plan will be
adjusted for stock splits, stock dividends, recapitalizations, mergers and other changes affecting
the capital stock of Basic.
On March 15, 2006, the board of directors granted various employees options to purchase
418,000 shares, respectively, of common stock of Basic at exercise prices of $26.84 per share,
respectively. All of the 418,000 options granted in 2006 vest over a five-year period and expire
10 years from the date they were granted. Option awards are generally granted with an exercise
price equal to the market price of the Companys stock at the date of grant.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model that uses the subjective assumptions noted in the
following table. Since the Company has only been public since December 2005, expected volatilities
are based upon a peer group. When the Company has sufficient historical data to calculate expected
volatility, the Company will use its own historical data to calculate expected volatility. The
expected term of options granted represents the period of time that options granted are expected to
be outstanding. The risk-free rate for periods within the contractual life of the options is based
on the U.S. Treasury yield curve in effect at the time of grant. The estimates involve inherent
uncertainties and the application of management judgment. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for those options expected to vest.
Compensation expense related to share-based arrangements was approximately $758,000 and $591,000
during the three months ended March 31, 2006 and 2005, respectively.
The fair value of each option award accounted for under FAS No. 123R is estimated on the date
of grant using the Black-Scholes-Merton option-pricing model that uses the assumptions noted in the
following table:
|
|
|
|
|
|
|
Three Months |
|
|
Ended March |
|
|
31, 2006 |
Risk-free interest rate |
|
|
4.7 |
% |
Expected term |
|
|
6.65 |
|
Expected volatility |
|
|
47.0 |
% |
Expected dividend yield |
|
|
|
|
17
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
Options granted under the Plan expire 10 years from the date they are granted, and
generally vest over a three to five year service period.
The following table reflects the summary of stock options outstanding for the three months
ended March 31, 2006 and the changes during the three months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
Number of |
|
|
Average |
|
|
Instrinsic |
|
|
|
Options |
|
|
Exercise |
|
|
Value |
|
|
|
Granted |
|
|
Price |
|
|
(000s) |
|
Non-statutory stock
options: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
beginning of period |
|
|
2,445,800 |
|
|
$ |
5.44 |
|
|
|
|
|
Options granted |
|
|
418,000 |
|
|
$ |
26.84 |
|
|
|
|
|
Options forfeited |
|
|
(10,000 |
) |
|
$ |
6.98 |
|
|
|
|
|
Options exercised |
|
|
(148,720 |
) |
|
$ |
4.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of
period |
|
|
2,705,080 |
|
|
$ |
8.82 |
|
|
$ |
52,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of
period |
|
|
1,277,913 |
|
|
$ |
4.16 |
|
|
$ |
32,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest,
end of period |
|
|
1,391,469 |
|
|
$ |
12.64 |
|
|
$ |
23,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about Basics stock options outstanding and
options exercisable at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
Range |
|
Number of |
|
Weighted |
|
Weighted |
|
Number of |
|
Weighted |
|
Weighted |
|
|
of |
|
Options |
|
Average |
|
Average |
|
Options |
|
Average |
|
Average |
|
|
Exercise |
|
Outstanding at |
|
Remaining |
|
Exercise |
|
Outstanding at |
|
Remaining |
|
Exercise |
|
|
Prices |
|
March 31, 2006 |
|
Contractual Life |
|
Price |
|
March 31, 2006 |
|
Contractual Life |
|
Price |
|
|
$ |
4.00 |
|
|
|
1,104,580 |
|
|
|
6.20 |
|
|
$ |
4.00 |
|
|
|
1,104,580 |
|
|
|
6.20 |
|
|
$ |
4.00 |
|
|
|
$ |
5.16 |
|
|
|
310,000 |
|
|
|
8.23 |
|
|
$ |
5.16 |
|
|
|
173,333 |
|
|
|
8.12 |
|
|
$ |
5.16 |
|
|
|
$ |
6.98 |
|
|
|
835,000 |
|
|
|
8.92 |
|
|
$ |
6.98 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
$ |
21.01 |
|
|
|
37,500 |
|
|
|
9.71 |
|
|
$ |
21.01 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
$ |
26.84 |
|
|
|
418,000 |
|
|
|
9.96 |
|
|
$ |
26.84 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,705,080 |
|
|
|
|
|
|
|
|
|
|
|
1,277,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of share options granted during the three
months ended March 31, 2006 and 2005 was $14.47 and $8.10, respectively. The total intrinsic value
of share options exercised during the three months ended March 31, 2006 and 2005 was approximately
$3.4 million and $0, respectively.
18
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
A summary of the status of the Companys non-vested share grants at March 31, 2006 and changes
during the three months ended March 31, 2006 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant Date Fair |
|
Nonvested Shares |
|
Shares |
|
|
Value Per Share |
|
Nonvested at beginning
of period |
|
|
591,875 |
|
|
$ |
6.98 |
|
Granted during period |
|
|
|
|
|
|
|
|
Vested during period |
|
|
(230,625 |
) |
|
|
6.98 |
|
Forfeited during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
361,250 |
|
|
$ |
6.98 |
|
|
|
|
|
|
|
|
|
As of March 31, 2006, there was $12.2 million of total unrecognized compensation related
to non-vested share-based compensation arrangements granted under the Plan. That cost is expected
to be recognized over a weighted-average period of 3.78 years. The total fair value of shares
vested during the three months ended March 31, 2006 and 2005 was approximately $15.4 million and
$6.2 million, respectively.
Cash received from share option exercises under the incentive plan was $0 for the three months
ended March 31, 2006 and 2005, respectively. The actual tax benefit realized for the tax
deductions from option exercise is $2.8 million and $0, respectively, for the three months ended
March 31, 2006 and 2005.
9. Related Party Transactions
Basic had receivables from employees of approximately $92,000 and $65,000 as of March 31, 2006
and December 31, 2005, respectively.
10. Earnings Per Share
Basic presents earnings per share information in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128). Under SFAS No.
128, basic earnings per common share are determined by dividing net earnings applicable to common
stock by the weighted average number of common shares actually outstanding during the year.
Diluted earnings per common share is based on the increased number of shares that would be
outstanding assuming conversion of dilutive outstanding securities using the as if converted
method. The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Numerator (both basic and diluted): |
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,681 |
|
|
$ |
5,801 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share |
|
|
33,261,539 |
|
|
|
28,186,147 |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
1,093,089 |
|
|
|
571,182 |
|
Unvested restricted stock |
|
|
256,238 |
|
|
|
603,125 |
|
Common stock warrants |
|
|
2,291,362 |
|
|
|
2,796,706 |
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share |
|
|
36,902,228 |
|
|
|
32,157,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
.59 |
|
|
$ |
.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share |
|
$ |
.53 |
|
|
$ |
.18 |
|
|
|
|
|
|
|
|
19
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
11. Business Segment Information
Basics reportable business segments are well servicing, fluid services, drilling and
completion services and well site construction services. The following is a description of the
segments:
Well Servicing: This business segment encompasses a full range of services performed with a
mobile well servicing rig, including the installation and removal of downhole equipment and
elimination of obstructions in the well bore to facilitate the flow of oil and gas. These services
are performed to establish, maintain and improve production throughout the productive life of an
oil and gas well and to plug and abandon a well at the end of its productive life. Basic well
servicing equipment and capabilities are essential to facilitate most other services performed on a
well.
Fluid Services: This segment utilizes a fleet of trucks and related assets, including
specialized tank trucks, storage tanks, water wells, disposal facilities and related equipment.
Basic employs these assets to provide, transport, store and dispose of a variety of fluids. These
services are required in most workover, drilling and completion projects as well as part of daily
producing well operations.
Drilling and Completion Services: This segment focuses on a variety of services designed to
stimulate oil and gas production or to enable cement slurry to be placed in or circulated within a
well. These services are carried out in niche markets for jobs requiring a single truck and lower
horsepower.
Well Site Construction Services: This segment utilizes a fleet of power units, dozers,
trenchers, motor graders, backhoes and other heavy equipment. Basic employs these assets to
provide services for the construction and maintenance of oil and gas production infrastructure,
such as preparing and maintaining access roads and well locations, installation of small diameter
gathering lines and pipelines and construction of temporary foundations to support drilling rigs.
Basics management evaluates the performance of its operating segments based on operating
revenues and segment profits. Corporate expenses include general corporate expenses associated
with managing all reportable
20
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
operating segments. Corporate assets consist principally of working capital and debt financing
costs. The following table sets forth certain financial information with respect to Basics
reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling and |
|
|
Well Site |
|
|
|
|
|
|
|
|
|
Well |
|
|
Fluid |
|
|
Completion |
|
|
Construction |
|
|
Corporate |
|
|
|
|
|
|
Servicing |
|
|
Services |
|
|
Services |
|
|
Services |
|
|
and Other |
|
|
Total |
|
Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
73,465 |
|
|
$ |
43,121 |
|
|
$ |
27,455 |
|
|
$ |
10,265 |
|
|
$ |
|
|
|
$ |
154,306 |
|
Direct operating costs |
|
|
(41,610 |
) |
|
|
(26,305 |
) |
|
|
(13,854 |
) |
|
|
(7,643 |
) |
|
|
|
|
|
|
(89,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits |
|
$ |
31,855 |
|
|
$ |
16,816 |
|
|
$ |
13,601 |
|
|
$ |
2,622 |
|
|
$ |
|
|
|
$ |
64,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
$ |
5,694 |
|
|
$ |
3,520 |
|
|
$ |
2,321 |
|
|
$ |
830 |
|
|
$ |
472 |
|
|
$ |
12,837 |
|
Capital expenditures,
(excluding acquisitions) |
|
$ |
11,005 |
|
|
$ |
6,804 |
|
|
$ |
4,485 |
|
|
$ |
1,604 |
|
|
$ |
914 |
|
|
$ |
24,812 |
|
Identifiable assets |
|
$ |
185,390 |
|
|
$ |
138,969 |
|
|
$ |
106,264 |
|
|
$ |
29,747 |
|
|
$ |
156,417 |
|
|
$ |
616,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
44,798 |
|
|
$ |
29,303 |
|
|
$ |
10,764 |
|
|
$ |
8,948 |
|
|
$ |
|
|
|
$ |
93,813 |
|
Direct operating costs |
|
|
(28,191 |
) |
|
|
(19,238 |
) |
|
|
(5,860 |
) |
|
|
(7,108 |
) |
|
|
|
|
|
|
(60,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits |
|
$ |
16,607 |
|
|
$ |
10,065 |
|
|
$ |
4,904 |
|
|
$ |
1,840 |
|
|
$ |
|
|
|
$ |
33,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
$ |
4,094 |
|
|
$ |
2,332 |
|
|
$ |
531 |
|
|
$ |
653 |
|
|
$ |
437 |
|
|
$ |
8,047 |
|
Capital expenditures,
(excluding acquisitions) |
|
$ |
8,182 |
|
|
$ |
4,660 |
|
|
$ |
1,061 |
|
|
$ |
1,306 |
|
|
$ |
874 |
|
|
$ |
16,083 |
|
Identifiable assets |
|
$ |
134,569 |
|
|
$ |
90,003 |
|
|
$ |
25,400 |
|
|
$ |
24,213 |
|
|
$ |
104,283 |
|
|
$ |
378,468 |
|
The following table reconciles the segment profits reported above to the operating income
as reported in the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Segment profits |
|
$ |
64,894 |
|
|
$ |
33,416 |
|
|
General and administrative expenses |
|
|
(18,005 |
) |
|
|
(13,091 |
) |
Depreciation and amortization |
|
|
(12,837 |
) |
|
|
(8,047 |
) |
Gain (loss) on disposal of assets |
|
|
200 |
|
|
|
(102 |
) |
|
|
|
|
|
|
|
|
Operating income |
|
$ |
34,252 |
|
|
$ |
12,176 |
|
|
|
|
|
|
|
|
12. Supplemental Schedule of Cash Flow Information:
The following table reflects non-cash financing and investing activity during:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Capital leases issued for equipment |
|
$ |
5,203 |
|
|
$ |
1,032 |
|
Asset retirement obligation additions |
|
$ |
413 |
|
|
$ |
|
|
21
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
March 31, 2006
Basic paid income taxes of approximately $6.9 million and $0 during the three
months ended March 31, 2006 and 2005, respectively.
13. Subsequent Events
(a) Debt Offering
In April 2006, the Company completed a private offering for $225,000,000 aggregate principal amount
of 7.125% Senior Notes due April 15, 2016. The net proceeds from the offering were used to retire
the outstanding Term B Loan balance and to repay current borrowings under the revolving credit
facility. Any remaining proceeds will be used for general corporate purposes.
In connection with the retirement of the
Term B Loan on April 13, 2006, we will expense remaining
unamortized deferred debt issuance costs which amounted to
approximately $2.7 million, net.
22
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Managements Overview
We provide a wide range of well site services to oil and gas drilling and producing companies,
including well servicing, fluid services, drilling and completion services and well site
construction services. Our results of operations since the beginning of 2002 reflect the impact of
our acquisition strategy as a leading consolidator in the domestic land-based well services
industry during this period. Our acquisitions have increased our breadth of service offerings at
the well site and expanded our market presence. In implementing this strategy, we have purchased
businesses and assets in 11 separate acquisitions from January 1, 2005 to March 31, 2006. Our
weighted average number of well servicing rigs has increased from 291 in the first quarter of 2005
to 327 in the first quarter of 2006, and our weighted average number of fluid service trucks has
increased from 435 to 529 in the same period.
Our operating revenues from each of our segments, and their relative percentages of our total
revenues, consisted of the following (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2006 |
|
2005 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well servicing |
|
$ |
73.5 |
|
|
|
47 |
% |
|
$ |
44.8 |
|
|
|
48 |
% |
Fluid services |
|
|
43.1 |
|
|
|
28 |
% |
|
|
29.3 |
|
|
|
31 |
% |
|
Drilling and completion services |
|
|
27.4 |
|
|
|
18 |
% |
|
|
10.8 |
|
|
|
11 |
% |
Well site construction services |
|
|
10.3 |
|
|
|
7 |
% |
|
|
8.9 |
|
|
|
10 |
% |
|
|
|
|
|
Total revenues |
|
$ |
154.3 |
|
|
|
100 |
% |
|
$ |
93.8 |
|
|
|
100 |
% |
|
|
|
|
|
Our core businesses depend on our customers willingness to make expenditures to produce,
develop and explore for oil and gas in the United States. Industry conditions are influenced by
numerous factors, such as the supply of and demand for oil and gas, domestic and worldwide economic
conditions, political instability in oil producing countries and merger and divestiture activity
among oil and gas producers. The volatility of the oil and gas industry, and the consequent impact
on exploration and production activity, could 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 addition, the discovery rate of new oil and gas reserves in our market
areas also may have an impact on our business, even in an environment of stronger oil and gas
prices.
We derive a majority of our revenues from services supporting production from existing oil and
gas operations. Demand for these production-related services, including well servicing and fluid
services, tends to remain relatively stable, even in moderate oil and gas price environments, as
ongoing maintenance spending is required to sustain production. As oil and gas prices reach higher
levels, demand for all of our services generally increases as our customers engage in more well
servicing activities relating to existing wells to maintain or increase oil and gas production from
those wells. 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 gas prices increase or
decrease.
We believe that the most important performance measures for our lines of business are as
follows:
|
|
|
Well Servicing rig hours, rig utilization rate, revenue per rig hour and segment
profits as a percent of revenues; |
|
|
|
|
Fluid Services revenue per truck and segment profits as a percent of revenues; |
|
|
|
|
Drilling and Completion Services segment profits as a percent of revenues; and |
23
|
|
|
Well Site Construction Services 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 intend to continue growing our business through selective acquisitions, continuing a
newbuild program and/or upgrading our existing assets. Our capital investment decisions are
determined by an analysis of the projected return on capital employed of 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 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 managements
attention. As discussed below in - Liquidity and Capital Resources, we also must meet certain
financial covenants in order to borrow money under our existing credit agreement to fund future
acquisitions.
Recent Strategic Acquisitions and Expansions
During 2005, we continued to direct our focus for growth more on the integration and expansion
of our existing businesses, through capital expenditures and to a lesser extent, acquisitions.
During the first quarter of 2006, we completed three additional acquisitions, one of which was
significant.
We discuss the aggregate purchase prices and related financing issues below in - Liquidity
and Capital Resources and present the pro-forma effects of certain significant acquisitions in the
historical financial statements included with this report.
Selected 2005 Acquisitions
During 2005, we made several acquisitions that complement our existing lines of business.
These included, among others:
MD Well Service, Inc.
On May 17, 2005, we completed the acquisition of MD Well Service, Inc., a well servicing
company operating in the Rocky Mountain region. This transaction was structured as an asset
purchase for a total purchase price of $6.0 million.
Oilwell Fracturing Services, Inc.
On October 10, 2005, we completed the acquisition of Oilwell Fracturing Services, Inc., a
pressure pumping services company that provides acidizing and fracturing services with operations
in central Oklahoma. This acquisition will strengthen the presence of our drilling and completion
services segment in our Mid Continent division. This transaction was structured as a stock purchase
for a total purchase price of approximately $16.1 million. The assets acquired in the acquisition
included approximately $2.3 million in cash. The cash used to acquire Oilwell Fracturing Services
was primarily from borrowings under our senior credit facility.
24
Selected 2006 Acquisitions
During 2006, we made acquisitions that complement our existing lines of business and increased
our presence in the rental tool business. These included, among others:
LeBus Oil Field Service Co.
On January 31, 2006, we acquired all of the outstanding capital stock of LeBus Oil Field
Service Co. (LeBus) for an acquisition price of $26 million, subject to adjustments. The
acquisition will operate in our fluid services line of business in the Ark-La-Tex division. The
cash used to acquire LeBus was primarily from borrowings under our senior credit facility.
G&L Tool, Ltd.
On February 28, 2006, we acquired substantially all of the operating assets of G&L Tool, Ltd.
(G&L) for total consideration of $58 million cash. This acquisition will operate in our drilling
and completion line of business. The purchase agreement also contained an earn-out agreement based
on annual EBITDA targets. The cash used to acquire G&L was primarily from borrowings under our
senior credit facility.
Segment Overview
Well Servicing
During the first three months of 2006, our well servicing segment represented 47% of our total
revenues. Revenue in our well servicing segment is derived from maintenance, workover, completion
and plugging and abandonment services. We provide maintenance-related services as part of the
normal, periodic upkeep of producing oil and 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 typically charge our 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 our activity levels by the
total number of hours worked by all of the rigs in our fleet. We monitor our fleet utilization
levels, with full utilization deemed to be 55 hours per week per rig.
The following is an analysis of our well servicing operations for each of the quarters ended
December 31, 2005 and the quarter ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
|
Average |
|
|
|
|
|
Rig |
|
|
|
|
|
Profits |
|
|
|
|
Number of |
|
Rig |
|
Utilization |
|
Revenue Per |
|
Per Rig |
|
Segment |
|
|
Rigs |
|
Hours |
|
Rate |
|
Rig Hour |
|
Hour |
|
Profits % |
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
291 |
|
|
|
175,300 |
|
|
|
84.30 |
% |
|
$ |
255 |
|
|
$ |
94 |
|
|
|
37.10 |
% |
Second Quarter |
|
|
303 |
|
|
|
192,400 |
|
|
|
88.80 |
% |
|
$ |
280 |
|
|
$ |
107 |
|
|
|
38.20 |
% |
Third Quarter |
|
|
311 |
|
|
|
198,000 |
|
|
|
89.00 |
% |
|
$ |
299 |
|
|
$ |
108 |
|
|
|
36.00 |
% |
Fourth Quarter |
|
|
316 |
|
|
|
195,000 |
|
|
|
86.30 |
% |
|
$ |
329 |
|
|
$ |
134 |
|
|
|
40.70 |
% |
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
327 |
|
|
|
209,000 |
|
|
|
89.4 |
% |
|
$ |
352 |
|
|
$ |
152 |
|
|
|
43.4 |
% |
25
We gauge activity levels in our well servicing segment based on rig utilization rate, revenue
per rig hour and segment profits per rig hour.
Improving market conditions since the first quarter of 2005 have created increased demand for
our services. Rig hours have increased due to a combination of the improved utilization of our well
servicing rigs and the expansion of our well servicing fleet as a result of our newbuild rig
program.
We have been able to increase our revenue per rig hour from $255 in the first quarter of 2005
to $352 in the first quarter of 2006 mainly as a result of this higher utilization, which has
contributed to our improved segment profits.
Fluid Services
During the first three months of 2006, our fluid services segment represented 28% 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 gas wells. 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 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 contributions. 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. 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 ended
December 31, 2005 and the quarter ended March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
|
Weighted |
|
|
|
|
|
Profits |
|
|
|
|
Average |
|
|
|
|
|
Per |
|
|
|
|
Number of |
|
Revenue Per |
|
Fluid |
|
|
|
|
Fluid Service |
|
Fluid Service |
|
Service |
|
Segment |
|
|
Trucks |
|
Truck |
|
Truck |
|
Profits % |
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
435 |
|
|
$ |
67 |
|
|
$ |
24 |
|
|
|
34.30 |
% |
Second Quarter |
|
|
447 |
|
|
$ |
71 |
|
|
$ |
26 |
|
|
|
37.00 |
% |
Third Quarter |
|
|
465 |
|
|
$ |
74 |
|
|
$ |
28 |
|
|
|
38.60 |
% |
Fourth Quarter |
|
|
472 |
|
|
$ |
79 |
|
|
$ |
31 |
|
|
|
39.80 |
% |
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
529 |
|
|
$ |
82 |
|
|
$ |
32 |
|
|
|
39.0 |
% |
We gauge activity levels in our fluid services segment based on revenue and segment profits
per fluid service truck.
The majority of the increase in revenue per fluid services truck from $67,000 in the first
quarter of 2005 to $82,000 in the first quarter of 2006 is due to the revenues derived from the
expansion of our frac tank fleet and
26
disposal facilities as well as increases in prices charged for our services. Our segment
profits per fluid services truck have increased because of these factors and increased utilization
of our equipment.
Drilling and Completion Services
During the first three months of 2006, our drilling and completion services segment
represented 18% of our revenues. Revenues from our drilling and completion services segment are
generally derived from a variety of services designed to stimulate oil and gas production or place
cement slurry within the wellbores. Our drilling and completion services segment includes pressure
pumping, cased-hole wireline services, underbalanced drilling and fishing and rental tool
operations.
Our pressure pumping operations concentrate on providing single-truck, lower horsepower
cementing, acidizing and fracturing services in selected markets. We entered the fishing and
rental tool business through our acquisition of G&L in the first quarter of 2006.
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.
The following is an analysis of our drilling and completion services for each of the quarters
ended December 31, 2005 and the quarter ended March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
Revenues |
|
Profits % |
2005 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
10,764 |
|
|
|
45.60 |
% |
Second Quarter |
|
$ |
13,512 |
|
|
|
49.10 |
% |
Third Quarter |
|
$ |
15,883 |
|
|
|
48.20 |
% |
Fourth Quarter |
|
$ |
19,673 |
|
|
|
49.50 |
% |
2006 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
27,455 |
|
|
|
49.50 |
% |
We gauge the performance of our drilling and completion services segment based on the
segments operating revenues and segment profits. Improved market conditions since the first
quarter of 2005 have enabled us to increase our pricing for these services, contributing to the
improved segment profits as a percentage of segment revenues.
Well Site Construction Services
During the first three months of 2006, our well site construction services segment represented
7% of our revenues. Revenues from our well site construction services segment 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 gas facilities. These services are independent of our other services and,
while offered to some customers utilizing other services, are not offered on a bundled basis.
Within this segment, we generally charge established hourly rates or competitive bid for
projects depending on customer specifications and equipment and personnel requirements. This
segment allows us to perform services to customers outside the oil and gas industry, since
substantially all of our power units are general purpose construction equipment. However, the
majority of our current business in this segment is with customers in the oil and gas industry. If our customer base has the demand for certain types of power units that we do not
currently own, we generally purchase or lease them without significant delay.
27
The following is an analysis of our well site construction services for each of the quarters
ended December 31, 2005 and the quarter ended March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
Revenues |
|
Profits % |
2005 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
8,948 |
|
|
|
20.6 |
% |
Second Quarter |
|
$ |
10,918 |
|
|
|
30.8 |
% |
Third Quarter |
|
$ |
11,367 |
|
|
|
31.6 |
% |
Fourth Quarter |
|
$ |
14,414 |
|
|
|
33.6 |
% |
2006 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
10,265 |
|
|
|
25.5 |
% |
We gauge the performance of our well site construction services segment based on the segments
operating revenues and segment profits. While we monitor our levels of idle equipment, we do not
focus on revenues per piece of equipment. To the extent we believe we have excess idle power units,
we may be able to divest ourselves of certain types of power units.
Operating Cost Overview
Our operating costs are comprised primarily of labor, including workers compensation and
health insurance, repair and maintenance, fuel and insurance. A majority of our employees are paid
on an hourly basis. With a reduced pool of workers in the industry, it is possible that we will
have to raise wage rates to attract workers from other fields and retain or expand our current work
force. We believe we will be able to increase service rates to our customers to compensate for wage
rate increases. 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 is
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 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 these
policies is included in note 2 of the notes to our historical unaudited consolidated financial
statements included in this report. The following is a discussion of our critical accounting
policies and estimates.
Critical Accounting Policies
We have identified below accounting policies that are of particular importance in the
presentation of our financial position, results of operations and cash flows and which 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 expense as incurred.
Impairments. We review our assets for impairment at a minimum annually, or whenever, in
managements 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
28
estimated future cash flows, on an undiscounted basis, is less than the assets 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 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 and medical and dental coverage of $150,000 and $125,000 respectively. We have lower
deductibles per occurrence for automobile liability and general liability. We maintain accruals in
our consolidated balance sheets related to self-insurance retentions by using third-party data and
historical claims history.
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 and determinable.
Income Taxes. We account for income taxes based upon Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under SFAS No. 109, deferred tax
assets and liabilities are recognized 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 useful lives and salvage values of
these items. Our estimates may be affected by such factors as changing market conditions,
technological advances in industry or changes in regulations governing the industry.
Impairment of Property and Equipment. Our impairment of property and equipment requires us to
estimate undiscounted future cash flows. Actual impairment charges are recorded using an estimate
of discounted future cash flows. The determination of future cash flows requires us to estimate
rates and utilization in future periods and such estimates can change based on market conditions,
technological advances in industry or changes in regulations governing the industry.
Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an
analysis of historical collection activity and specific identification of overdue accounts. Factors
that may affect this estimate include (1) changes in the financial positions of significant
customers and (2) a decline in commodity prices that could affect the entire customer base.
Litigation and Self-Insured Risk Reserves. We estimate our reserves related to litigation and
self-insure risk based on the facts and circumstances specific to the litigation and self-insured
risk claims and our past experience with similar claims. The actual outcome of litigated and
insured claims could differ significantly from estimated amounts. As discussed in - Self-Insured
Risk Accruals above with respect to our critical accounting policies, we
29
maintain accruals on our balance sheet to cover self-insured retentions. These accruals are
based on certain assumptions developed using third-party data and historical data to project future
losses. Loss estimates in the calculation of these accruals are adjusted based upon actual claim
settlements and reported claims.
Fair Value of Assets Acquired and Liabilities Assumed. We estimate the fair value of assets
acquired and liabilities assumed in business combinations, which involves the use of various
assumptions. These estimates may be affected by such factors as changing market conditions,
technological advances in industry or changes in regulations governing the industry. The most
significant assumptions, and the ones requiring the most judgment, involve the estimated fair value
of property and equipment, intangible assets and the resulting amount of goodwill, if any. Our
adoption of SFAS No. 142 on January 1, 2002 requires us to test annually for impairment the
goodwill and intangible assets with indefinite useful lives recorded in business combinations. This
requires us to estimate the fair values of our own assets and liabilities at the reporting unit
level. Therefore, considerable judgment, similar to that described above in connection with our
estimation of the fair value of acquired company, is required to assess goodwill and certain
intangible assets for impairment.
Cash Flow Estimates. Our estimates of future cash flows are based on the most recent available
market and operating data for the applicable asset or reporting unit at the time the estimate is
made. Our cash flow estimates are used for asset impairment analyses.
Stock-Based Compensation.
On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R). Prior to January 1, 2006,
we accounted for share-based payments under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees (APB No.
25) which was permitted by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123).
We adopted FAS No. 123R using both the modified prospective method and the prospective method
as applicable to the specific awards granted. The modified prospective method was applied to
awards granted subsequent to the Company becoming a public company. Awards granted prior to the
Company becoming public and which were accounted for under APB No. 25 were adopted by using the
prospective method. The results of prior periods have not been restated. Compensation expense
cost of the unvested portion of awards granted as a private company and outstanding as of January
1, 2006 will continue to be based upon the intrinsic value method calculated under APB No. 25.
The fair value of common stock for options granted from July 1, 2004 through September 30,
2005 was estimated by management using an internal valuation methodology. We did not obtain
contemporaneous valuations by an unrelated valuation specialist because we were focused on internal
growth and acquisitions and because we had consistently used our internal valuation methodology for
previous stock awards.
We used a market approach to estimate our enterprise value at the dates on which options were
granted. Our market approach uses estimates of EBITDA and cash flows multiplied by relevant market
multiples. We used market multiples of publicly traded energy service companies that were supplied
by investment bankers in order to estimate our enterprise value. The assumptions underlying the
estimates are consistent with our business plan. The risks associated with achieving our forecasts
were assessed in the multiples we utilized. Had different multiples been utilized, the valuations
would have been different.
Income Taxes. The amount and availability of our loss carryforwards (and certain other tax
attributes) are subject to a variety of interpretations and restrictive tests. The utilization of
such carryforwards could be limited or lost upon certain changes in ownership and the passage of
time. Accordingly, although we believe loss carryforwards are available to us, no assurance can be
given concerning the realization of such loss carryforwards, or whether or not such loss
carryforwards will be available in the future.
30
Asset Retirement Obligations. SFAS No. 143 requires us to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets and to capitalize an equal amount as a
cost of the asset, depreciating it over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation is adjusted at the end of each
quarter to reflect the passage of time, changes in the estimated future cash flows underlying the
obligation, acquisition or construction of assets, and settlement of obligations.
Results of Operations
The results of operations between periods will not be comparable, primarily due to the
significant number of acquisitions made and their relative timing in the year acquired. See note 3
of the notes to our historical consolidated financial statements for more detail.
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Revenues. Revenues increased 64% to $154.3 million in the first three months in 2006 from
$93.8 million during the same period in 2005. This increase was primarily due to the internal
expansion of our business segments, particularly well servicing and fluid services, as well as in
part due to acquisitions. The pricing and utilization of our services, and thus related revenues,
improved due to the increase in well maintenance and drilling activity caused by higher oil and gas
prices.
Well servicing revenues increased 64% to $73.5 million in the first quarter in 2006 compared
to $44.8 million in the first quarter in 2005. This increase was due primarily to the internal
growth of this segment as well as an increase in our revenue per rig hour of approximately 38%,
from $255 per hour to $352 per hour. Our weighted average number of rigs increased to 327 in the
first quarter in 2006 compared to 291 in the same period in 2005, an increase of approximately 12%.
In addition, the utilization rate of our rig fleet increased to 89.4% in the first quarter in 2006
compared to 84.3% in the same period in 2005.
Fluid services revenues increased 47% to $43.1 million during the first quarter in 2006 as
compared to $29.3 million in the same period in 2005. The increase in revenue was due primarily to
our internal growth of this segment. Our weighted average number of fluid service trucks increased
to 529 in the first quarter in 2006 compared to 435 in the same period in 2005, an increase of
approximately 22%. The increase in weighted average number of fluid service trucks is due to
internal expansion as well as the trucks added from the LeBus acquisition. In the first quarter in
2006, our average revenue per fluid service truck was approximately $82,000 as compared to
approximately $67,000 in the same period in 2005. The increase in average revenue per fluid
service truck reflects the expansion of our frac tank fleet and saltwater disposal operations, and
increases in prices charged for our services.
Drilling and completion services revenue increased 155% to $27.5 million during the first
quarter in 2006 as compared to $10.8 million in the same period in 2005. The increase in revenue
between these periods was primarily the result of internal expansion, the acquisition of Oilwell
Fracturing Services in October 2005, the acquisition of G&L during February 2006 and improved
pricing and utilization of our services.
Well-site construction services revenue increased 15% to $10.3 million during the first
quarter in 2006 as compared to $8.9 million during the same period in 2005.
Direct Operating Expenses. Direct operating expenses, which primarily consist of labor,
including workers compensation and health insurance, and maintenance and repair costs, increased
48% to $89.4 million in the first quarter in 2006 from $60.4 million in the same period in 2005
primarily as a result of additional rigs and trucks, as well as higher utilization of our
equipment. Operating expenses decreased to 58% of revenue for the first quarter in 2006 from 64%
in the same period in 2005, as fixed operating costs such as field supervision, insurance and
vehicle expenses were spread over a higher revenue base. We also benefited from higher utilization
and increased pricing of our services.
31
Direct operating expenses for the well servicing segment increased 48% to $41.6 million in the
first quarter in 2005 compared to $28.2 million in the same period in 2005 primarily due to the
internal growth of this segment. Segment profits for this segment increased to 43.4% of revenues in
the first quarter in 2006 compared to 37.1% in the same period in 2005 primarily due to the
improved pricing and higher utilization of our equipment.
Direct operating expenses for the fluid services segment increased 37% to $26.3 million in the
first quarter in 2006 compared to $19.2 million in the same period in 2005 primarily due to
increased activity and expansion of our fluid services fleet. Segment profits for this segment
increased to 39.0% of revenues in the first quarter in 2006 compared to 34.3% in the same period in
2005 primarily due to the expansion of our frac tank fleet and saltwater disposal operations, and
increases in prices charged for our services.
Direct operating expenses for the drilling and completion services segment increased 136% to
$13.9 million in the first quarter in 2006 compared to $5.9 million in the same period in 2005
primarily due to the increased activity and expansion of our services and equipment, including the
G&L acquisition. Segment profits for this segment increased to 49.5% of revenues in the first
quarter in 2006 compared to 45.6% in the same period in 2005.
Direct operating expenses for the well-site construction services segment increased 8% to $7.6
million in the first quarter in 2006 compared to $7.1 million in the same period in 2005. Segment
profits for this segment increased to 25.5% of revenues in the first quarter of 2006 compared to
20.6% in the same period in 2005.
General and Administrative Expenses. General and administrative expenses increased 38% to
$18.0 million in the first quarter in 2006 from $13.1 million in the same period in 2005. The
increase primarily reflects higher salary and office expenses related to the expansion of our
business as well as additional staffing to enhance internal controls as a public company.
Depreciation and Amortization Expenses. Depreciation and amortization expenses were $12.8
million for the first quarter in 2006 and $8.0 million in the same period in 2005, reflecting the
increase in the size and investment in our asset base. We invested $87.5 million for acquisitions
and an additional $30.0 million for capital expenditures, including capital leases, in the first
quarter in 2006.
Interest Expense. Interest expense was $3.1 million in the first quarter in 2006, unchanged
from the same period in 2005.
Income Tax Expense (Benefit). Income tax expense was $11.8 million in the first quarter in
2006 compared to $3.5 million in the same period in 2005, reflecting the improvement in our
profitability. Our effective tax rate in both periods was approximately 38%.
Net Income. Our net income increased to $19.7 million in the first quarter in 2006 from $5.8
million in the same period in 2005. This improvement was due primarily to the factors described
above, including our increased asset base and related revenues, higher utilization rates and
increased revenues per rig and fluid service truck, and higher operating margins on our drilling
and completion services equipment.
Liquidity and Capital Resources
Our primary capital resources are currently net cash flows from our operations, utilization of
capital leases as allowed under our credit facility and availability under our credit facility, of
which approximately $44.4 million was available at March 31, 2006. As of March 31, 2006, we had
cash and cash equivalents of $20.0 million compared to $14.1 million as of March 31, 2005. We have
utilized, and expect to utilize in the future, bank and capital lease financing and sales of equity
to obtain capital resources. When appropriate, we will consider public or private debt and equity
offerings and non-recourse transactions to meet our liquidity needs.
32
Net Cash Provided by Operating Activities
Cash flow from operating activities was $25.9 million during the first quarter of 2006 as
compared to $16.7 million during the same period in 2005. The increase in operating cash flows in
the first quarter of 2006 over the same period in 2005 was primarily due to expansion of our fleet
and improvements in the segment profits, utilization of our equipment.
Capital Expenditures
Capital expenditures are the main component of our investing activities. Cash capital
expenditures (including for acquisitions) for the first quarter in 2006 were $112.3 million as
compared to $20.0 million for the same period in 2005. In 2006 and 2005, the majority of our
capital expenditures were for the expansion of our fleet. We also added assets through our capital
lease program of approximately $5.2 million in the first quarter in 2006 compared to $1.0 million
in the same period in 2005.
For 2006, we currently have planned approximately $93 million in cash capital expenditures,
none of which is planned for acquisitions. We do not budget acquisitions in the normal course of
business, but we completed three acquisitions for total consideration paid of $87.5 million, net of
cash acquired during the first quarter of 2006 and expect to make additional acquisitions in 2006.
The $93 million of capital expenditures planned for property and equipment is primarily for (1)
purchase of additional equipment to expand our services, (2) continued refurbishment of our well
servicing rigs and (3) replacement of existing equipment. We have taken delivery of 45 newbuild
will servicing rigs since October 2004 as part of a 102-rig newbuild commitment. The remainder of
these newbuilds is scheduled to be delivered to us prior to the end of December 2007. As of March
31, 2006, we had no executed letters of intent. However, on April 26, 2006, we signed a letter of
intent related to the acquisition of three related entities totaling approximately $10 million.
We regularly engage in discussions related to potential acquisitions related to the well
services industry. At present, we have not entered into any agreement, commitment or understanding
with respect to any significant acquisition as significant is defined under SEC rules.
Capital Resources and Financing
Our current primary capital resources are cash flow from our operations, the ability to enter
into capital leases of up to an additional $25.7 million at March 31, 2006, the availability under
our credit facility of $44.4 million at March 31, 2006 and a cash balance of $20.0 million at March
31, 2006. During the first quarter in 2006, we financed activities in excess of cash flow from
operations primarily through the use of bank debt and capital leases.
At March 31, 2006, of the $150.0 million in financial commitments under the revolving line of
credit under our senior credit facility, there was only $44.4 million of available capacity due to
the outstanding balance of $96.0 million and the $9.6 million of outstanding standby letters of
credit. In the normal course of business, we have performance obligations which are supported by
surety bonds and letters of credit. These obligations primarily cover various reclamation and
plugging obligations related to our operations, and collateral for future workers compensation and
liability retained losses.
Our ability to access additional sources of financing will be dependent on our operating cash
flows and demand for our services, which could be negatively impacted due to the extreme volatility
of commodity prices.
33
Senior Notes
In April 2006, the Company completed a private offering for $225,000,000 aggregate principal amount
of 7.125% Senior Notes due April 15, 2016 (Senior Notes). The net proceeds from the offering were
used to retire the outstanding Term B Loan balance and to pay down the outstanding balance under
the revolving credit facility. Remaining proceeds will be used for general corporate purposes,
including acquisitions. The summary description of the Senior Notes set forth in Item 2.03 of our
Form 8-K filed on April 13, 2006 is incorporated herein by reference.
2005 Credit Facility
Under our Third Amended and Restated Credit Agreement with a syndicate of lenders (the 2005
Credit Facility), as amended effective March 28, 2006, Basic Energy Services, Inc. is the sole
borrower and each of our subsidiaries is a subsidiary guarantor. The 2005 Credit Facility provided
for a $90 million Term B Loan (Term B Loan), which outstanding balance was repaid in April 2006,
and provides for a $150 million revolving line of credit (Revolver). The 2005 Credit Facility
includes provisions allowing us to request an increase in commitments of up to $75 million at any
time.
The commitment under the Revolver provides for (1) the borrowing of funds, (2) the issuance of
up to $30 million of letters of credit and (3) $2.5 million of swing-line loans. The amounts
outstanding under the Term B Loan required quarterly amortization at various amounts during each
quarter with all amounts outstanding being due and payable in full on December 15, 2011. All the
outstanding amounts under the Revolver are due and payable on December 15, 2010. The 2005 Credit
Facility is secured by substantially all of our tangible and intangible assets.
At our option, borrowings under the Term B Loan bear interest at either (1) the Alternative
Base Rate (i.e., the higher of the banks prime rate or the federal funds rate plus .50% per year)
plus 1.0% or (2) the London Interbank Offered Rate (LIBOR) rate plus 2.0%.
At our option, borrowings under the Revolver bear interest at either (1) the Alternative Base
Rate plus a margin ranging from 0.50% to 1.25% or (2) the LIBOR rate plus a margin ranging from
1.50% to 2.25%. The margins vary depending on our leverage ratio. Fees on the letters of credit are
due quarterly on the outstanding amount of the letters of credit at a rate ranging from 1.50% to
2.25% for participation fees and 0.125% for fronting fees. A commitment fee is due quarterly on the
available borrowings under the Revolver at rates ranging from 0.375% to 0.50%.
At March 31, 2006, we had outstanding $90.0 million under the Term B Loan and $96.0 million
under the Revolver. However, all the outstanding balance of the Term B Loan was retired in April
2006 with proceeds from our offering of Senior Notes.
Pursuant to the 2005 Credit Facility, we must apply proceeds from certain specified events to
reduce principal outstanding under the Term B Loan, to the extent outstanding, and then to the
Revolver, including:
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|
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assets sales greater than $2.0 million individually or $7.5 million in the aggregate on an annual basis; |
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50% of the proceeds from any equity offering; |
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proceeds of any issuance of debt not permitted by the 2005 Credit Facility; |
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proceeds of permitted unsecured indebtedness, such as the Senior Notes, without reducing
commitments under the revolver; and |
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proceeds in excess of $2.5 million from casualty events. |
34
Prior to the date on which all Term B Loans were paid in April 2006, the 2005 Credit Facility
required us to enter into an interest rate hedge, acceptable to the lenders, until May 28, 2006 on
at least $65 million of our then-outstanding indebtedness.
The 2005 Credit Facility contains various restrictive covenants and compliance requirements,
including the following:
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limitations on the incurrence of additional indebtedness; |
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restrictions on mergers, sales or transfer of assets without the lenders consent; |
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limitation on dividends and distributions; |
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limitations on capital expenditures; and |
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various financial covenants, including: |
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a maximum leverage ratio of 3.50 to 1.00 reducing to 3.25 to 1.00, and |
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a minimum interest coverage ratio of 3.00 to 1.00. |
The 2005 Credit Facility contains customary events of default, which are subject to customary grace periods and materiality standards, including, among others, events of default upon the occurrence of:
(1) non-payment of any amounts payable under the 2005 Credit Facility when due;
(2) any representation or warranty made in connection with the 2005 Credit Facility being incorrect in any material respect when made or deemed made;
(3) default in the observance or performance of any covenant, condition or agreement contained in the 2005 Credit Facility or related loan documents and such default shall continue unremedied or shall not be waived for 30 days;
(4) failure to make payments on other indebtedness involving in excess of $1.0 million;
(5) voluntary or involuntary bankruptcy, insolvency or reorganization of us or any of our subsidiaries;
(6) entry of fines or judgments against us for payment of an amount in excess of $2.5 million;
(7) an ERISA event which could reasonably be expected to cause a material adverse effect or the imposition of a lien on any of our assets;
(8) any security agreement or document under the 2005 Credit Facility ceases to create a lien on any assets securing the 2005 Credit Facility;
(9) any guarantee ceases to be in full force and effect;
(10) any material provision of the 2005 Credit Facility ceases to be valid and binding or enforceable;
(11) a change of control as defined in the 2005 Credit Agreement; of
(12) any determination, ruling, decision, decree or order of any governmental authority, which prohibits or restrains Basic and its subsidiaries from conducting business and that could reasonably be expected to cause a material adverse effect.
Other Debt
We have a variety of other capital leases and notes payable outstanding that is generally
customary in our business. None of these debt instruments are material individually or in the
aggregate. As of March 31, 2006, we had total capital leases of approximately $24.3 million.
Credit Rating Agencies
Effective November 22, 2005, we received credit ratings of Ba3 from Moodys and B+ from
Standard & Poors for the 2005 Credit Facility.
We received initial credit ratings of B1 from Moodys and B from Standard & Poors for the
Senior Notes issued in April 2006.
None of our debt or other instruments is dependent upon our credit ratings. However, the
credit ratings may affect our ability to obtain financing in the future.
Other Matters
Net Operating Losses
We used all of our then-available net operating losses for federal income tax purposes when we
completed a recapitalization in December 2000, which included a significant amount of debt
forgiveness. In 2002, our profitability suffered and, when combined with a significant level of
capital expenditures, we ended 2002 with a net operating loss, or NOL, of $30.4 million. In 2003,
we returned to profitability, but we again made significant investments in existing equipment,
additional equipment and acquisitions. Due to these events, we again reported a tax loss in 2003
and ended the year with a $50.7 million NOL, including $7.0 million that was included in the
purchase of FESCO. As of December 31, 2005, we had approximately $4.9 million of NOL carryforwards
related to the pre-acquisition period of FESCO, which is subject to an annual limitation of
approximately $900,000. The carryforwards begin to expire in 2017.
35
Recent Accounting Pronouncements
See discussion above in Critical Accounting Estimates and note 2 of the notes to the
unaudited consolidated financial statements included under Item 1 of this quarterly report
regarding Statement of Financial Accounting Standard 123 (revised 2004) Share-based Payment.
Impact of Inflation on Operations
Management is of the opinion that inflation has not had a significant impact on our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates as a result of our credit facility. We had a total
of $106 million of indebtedness outstanding under our credit facility at December 31, 2005. The
impact of a 1% increase in interest rates on this amount of debt would result in increased interest
expense (excluding effects of our interest rate hedges) of approximately $1.1 million annually, or
a decrease in net income of approximately $687,000.
We do not hold or issue derivative instruments for trading purposes. We do, however, have an
interest rate derivate instrument that has been formally designated as a cash flow hedge
instrument. This instrument effectively converts the variable interest payments on $65 million of
our 2005 Term B Loan into fixed interest payments.
The table below provides scheduled principle payments and fair value information about our
market-risk sensitive instruments as of December 31, 2005 (dollars in thousands):
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Expected Year of Maturity |
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2006 |
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2007 |
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2008 |
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2009 |
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2010 |
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Thereafter |
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Total |
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Fair Value |
Debt |
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Variable rate |
|
$ |
1,000 |
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|
$ |
1,000 |
|
|
$ |
1,000 |
|
|
$ |
1,000 |
|
|
$ |
17,000 |
|
|
$ |
85,000 |
|
|
$ |
106,000 |
|
|
$ |
106,000 |
|
Average interest rate(1) |
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Average Notional Amounts Outstanding (2) |
|
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2006 |
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2007 |
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2008 |
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2009 |
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2010 |
|
Thereafter |
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Total |
|
Fair Value |
Interest Rate Derivatives |
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Variable to Fixed |
|
$ |
26,356 |
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|
|
|
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|
$ |
26,356 |
|
|
$ |
422 |
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Average pay rate |
|
|
3.03 |
% |
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3.03 |
% |
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N/A |
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Average received
rate |
|
|
4.83 |
% |
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4.83 |
% |
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N/A |
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(1) |
|
At our option, borrowings under the 2005 Revolver bear interest at either (a) the
Alternative Base Rate (i.e. the higher of the banks prime rate or the federal funds rate
plus .5% per annum) plus a margin ranging from .50% to 1.25% or (b) the LIBOR rate plus a
margin ranging from 1.5% to 2.25%. The margins vary depending on our leverage ratio. At
December 31, 2005, our margin on Alternative Base Rates and LIBOR tranches was .75% and 1.75%,
respectively. |
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(2) |
|
The notional amounts of interest rate instruments do not represent amounts exchanged by the
parties and, thus, are not a measure of our exposure to credit loss. The amounts exchanged are
determined by reference to the notional amount and the other terms of the contract. The
variable component of the interest rate derivative is based on the LIBOR rate using the
forward yield curve as of March 6, 2006. |
36
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation as of the end of the three months ended March 31, 2006, our
principal executive officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are
effective to ensure that information required to be
disclosed in reports that we file or submit under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms.
Internal Control Over Financial Reporting
During the most recent fiscal quarter, there have been no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
37
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 3, 2004, David Hudson, Jr. et al commenced a civil action against us in the
District Court of Panola County, Texas, 123rd Judicial District, David Hudson, Jr., et al v. Basic
Energy Services Company, Cause No. 2004-A-137. The complaint alleged that our operation of a
saltwater disposal well has contaminated both the groundwater and the soil in the surrounding area.
The relief requested in the complaint was monetary damages, injunctive relief, environmental
remediation and a court order requiring us to provide drinking water to the community. This matter
was settled in April 2006 for an immaterial amount.
On October 18, 2005, Clifford Golden et al. commenced a civil action against us in the 123rd
Judicial District Court of Panola County, Texas, Clifford Golden et al. v. Basic Energy Services,
LP. The factual basis for this complaint and relief are similar to the Hudson litigation, including
claims that our operation of a saltwater disposal well has contaminated both the groundwater and
the soil in the surrounding area. In addition, this complaint alleges a wrongful death and personal
injuries to unspecified persons. In response to this complaint, we have retained counsel and intend
to defend ourselves vigorously in this action.
On December 6, 2004, Karon Smith, et al commenced a civil action against us in the District
Court of Hidalgo County, Texas, 206th Judicial District, Karon Smith, et al v. Basic Energy
Services GP L.L.C., Cause No. C-42767-04-D. The complaint alleged that (i) one of our fluid
services truck drivers disposed of oil-based waste at the plaintiffs waste disposal facility,
which was not equipped to accept oil-based waste, and (ii) the disposal of such oil-based waste
resulted in plaintiffs facility losing contracts to accept waste. On July 25, 2005, the jury in
this case returned a verdict in favor of the plaintiff and awarded damages in the amount of $1.2
million. Our insurance company to date has denied coverage of liability in this lawsuit. In March
2006, we reached a settlement of this matter in mediation for $1.0 million, which we had previously
accrued in accrued liabilities as of December 31, 2005.
We are subject to other claims in the ordinary course of business. However, we believe that
the ultimate dispositions of the above mentioned and other current legal proceedings will not have
a material adverse effect on our financial condition or results of operations.
Neither Basic, nor any entity required to be consolidated with Basic for purposes of this
report, has been required to pay a penalty to the Internal Revenue Service for failing to make
disclosures required with respect to certain transactions that have been identified by the Internal
Revenue Service as abusive or that have a significant tax avoidance.
38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None during the three months ended March 31, 2006.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes stock repurchase activity for the three months ended March 31,
2006:
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Issuer Purchases of Equity Securities |
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Total |
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Average |
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Maximum number of |
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number of |
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price |
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Total number of shares |
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shares that may yet be |
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shares |
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paid per |
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purchased as part of |
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purchased under the |
Period |
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purchased |
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share |
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publicly announced plan |
|
plan |
January 1 January 31. |
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February 1 February 28 (1) |
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|
78,656 |
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$ |
24.94 |
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|
78,656 |
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March 1 March 31 (2) |
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|
68,118 |
|
|
$ |
27.18 |
|
|
|
|
|
|
|
|
|
Total |
|
|
146,774 |
|
|
$ |
25.98 |
|
|
|
78,656 |
|
|
|
|
|
|
|
|
(1) |
|
Prior to our initial public offering, we entered into Share Tender and Repurchase
Agreements with ten of our officers in which we agreed to repurchase, and nine of the
officers agreed to sell, shares of our common stock at the initial public offering price,
less underwriting discounts and commissions, on the closing date of our initial public
offering. These shares were repurchased to provide such officers the cash amounts necessary
to pay certain tax liabilities associated with the vesting of restricted shares owned by
them. Under the Share Tender and Repurchase Agreements, we also agreed to repurchase, and
nine of the officers irrevocably agreed to sell, an aggregate of 78,656 shares of our
common stock on February 24, 2006 at the closing price per share of common stock on that
date. These shares were also purchased to provide such officers the cash amounts necessary
to pay certain tax liabilities associated with the vesting of restricted shares owned by
them. The Share Tender and Repurchase Agreements expired upon the consummation of the
February 24, 2006 repurchase. |
|
(2) |
|
Represents shares surrendered by James J. Carter to us on March 21, 2006 in connection
with his announced retirement and exercise of all of his vested options in a cashless
exercise approved by our Compensation Committee in accordance with our 2003 Incentive Plan. |
39
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description |
3.1*
|
|
Amended and Restated Certificate of Incorporation of the Basic
Energy Services, Inc. (the Company), dated September 22,
2005. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement on Form S-1 (SEC File No.
333-127517), filed on September 28, 2005) |
|
|
|
3.2*
|
|
Amended and Restated Bylaws of the Company, dated December 14,
2005. (Incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K (SEC File No. 001-32693),
filed on December 14, 2005) |
|
|
|
4.1*
|
|
Specimen Stock Certificate representing common stock of the
Company. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement on Form S-1 (SEC File No.
333-127517), filed on November 4, 2005) |
|
|
|
4.2*
|
|
Indenture dated April 12, 2006, among Basic Energy Services,
Inc., the guarantors party thereto, and The Bank of New York
Trust Company, N.A., as trustee. (Incorporated by reference
to Exhibit 4.1 of the Companys Current Report on Form 8-K
(SEC File No. 001-32693), filed on April 13, 2006) |
|
|
|
4.3*
|
|
Form of 7.125% Senior Note due 2016. (Incorporated by
reference to Exhibit 4.2 of the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on April 13, 2006) |
|
|
|
10.1*
|
|
Asset Purchase Agreement dated as of February 21, 2006 among
Basic Energy Services, LP, Basic Energy Services GP, LLC, G&L
Tool, Ltd., DLH Management, LLC and LJH, Ltd. (Incorporated by
reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on March 2, 2006) |
|
|
|
10.2*
|
|
Contingent Earn Out Agreement dated as of February 28, 2006
among Basic Energy Services, LP and G&L Tool, Ltd.
(Incorporated by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K (SEC File No. 001-32693), filed on
March 2, 2006) |
|
|
|
10.3*
|
|
Amendment No. 1 to Third Amended and Restated Credit
Agreement, dated March 28, 2006, by and among the Company, the
subsidiary guarantors party thereto, and UBS Loan Finance LLC,
Bank of America, N.A., Hibernia National Bank, BNP Paribas,
UBS AG, Stamford Branch, as administrative agent, and the
lenders party thereto. (Incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K (SEC File No.
001-32693), filed on April 3, 2006) |
|
|
|
10.4*
|
|
Purchase Agreement dated April 7, 2006, among the Company, the
guarantors party thereto and the initial purchasers party
thereto. (Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K (SEC File No. 001-32693),
filed on April 13, 2006) |
|
|
|
10.5*
|
|
Registration Rights Agreement dated April 12, 2006, among the
Company, the guarantors party thereto and the initial
purchasers party thereto. (Incorporated by reference to
Exhibit 10.2 of the Companys Current Report on Form 8-K (SEC
File No. 001-32693), filed on April 13, 2006) |
|
|
|
10.6*
|
|
Summary of 2006 salaries and other compensation for named
executive officers and certain employees (Incorporated by
reference to Item 1.01 of the Companys Form 8-K filed on
March 8, 2006). |
|
|
|
10.7
|
|
Form of Nonqualified Stock Option Agreement (Director form effective
March 2006)
|
|
|
|
10.8
|
|
Form of Nonqualified Stock Option Agreement (Employee form effective
March 2006)
|
|
|
|
31.1
|
|
Certification by Chief Executive Officer required by Rule
13a-14(a) and 15d-14(a) under the Exchange Act |
|
|
|
31.2
|
|
Certification by Chief Financial Officer required by Rule
13a-14(a) and 15d-14(a) under the Exchange Act |
|
|
|
32.1
|
|
Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
40
|
|
|
* |
|
Incorporated by reference |
|
|
|
Management contract or compensatory plan or arrangement |
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
BASIC ENERGY SERVICES, INC. |
|
|
|
|
|
|
|
By:
|
|
/s/ Kenneth V. Huseman |
|
|
|
|
|
|
|
Name:
|
|
Kenneth V. Huseman |
|
|
Title:
|
|
President, Chief Executive |
|
|
|
|
Officer and Director |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
By:
|
|
/s/ Alan Krenek |
|
|
|
|
|
|
|
Name:
|
|
Alan Krenek |
|
|
Title:
|
|
Senior Vice President, Chief Financial |
|
|
|
|
Officer and Treasurer |
|
|
|
|
(Principal Financial Officer and |
|
|
|
|
Principal Accounting Officer) |
|
|
|
|
|
|
|
Date: May 12, 2006 |
42
Exhibit Index
|
|
|
Exhibit |
|
|
No. |
|
Description |
3.1*
|
|
Amended and Restated Certificate of Incorporation of the Basic
Energy Services, Inc. (the Company), dated September 22,
2005. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement on Form S-1 (SEC File No.
333-127517), filed on September 28, 2005) |
|
|
|
3.2*
|
|
Amended and Restated Bylaws of the Company, dated December 14,
2005. (Incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K (SEC File No. 001-32693),
filed on December 14, 2005) |
|
|
|
4.1*
|
|
Specimen Stock Certificate representing common stock of the
Company. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement on Form S-1 (SEC File No.
333-127517), filed on November 4, 2005) |
|
|
|
4.2*
|
|
Indenture dated April 12, 2006, among Basic Energy Services,
Inc., the guarantors party thereto, and The Bank of New York
Trust Company, N.A., as trustee. (Incorporated by reference
to Exhibit 4.1 of the Companys Current Report on Form 8-K
(SEC File No. 001-32693), filed on April 13, 2006) |
|
|
|
4.3*
|
|
Form of 7.125% Senior Note due 2016. (Incorporated by
reference to Exhibit 4.2 of the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on April 13, 2006) |
|
|
|
10.1*
|
|
Asset Purchase Agreement dated as of February 21, 2006 among
Basic Energy Services, LP, Basic Energy Services GP, LLC, G&L
Tool, Ltd., DLH Management, LLC and LJH, Ltd. (Incorporated by
reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on March 2, 2006) |
|
|
|
10.2*
|
|
Contingent Earn Out Agreement dated as of February 28, 2006
among Basic Energy Services, LP and G&L Tool, Ltd.
(Incorporated by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K (SEC File No. 001-32693), filed on
March 2, 2006) |
|
|
|
10.3*
|
|
Amendment No. 1 to Third Amended and Restated Credit
Agreement, dated March 28, 2006, by and among the Company, the
subsidiary guarantors party thereto, and UBS Loan Finance LLC,
Bank of America, N.A., Hibernia National Bank, BNP Paribas,
UBS AG, Stamford Branch, as administrative agent, and the
lenders party thereto. (Incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K (SEC File No.
001-32693), filed on April 3, 2006) |
|
|
|
10.4*
|
|
Purchase Agreement dated April 7, 2006, among the Company, the
guarantors party thereto and the initial purchasers party
thereto. (Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K (SEC File No. 001-32693),
filed on April 13, 2006) |
|
|
|
10.5*
|
|
Registration Rights Agreement dated April 12, 2006, among the
Company, the guarantors party thereto and the initial
purchasers party thereto. (Incorporated by reference to
Exhibit 10.2 of the Companys Current Report on Form 8-K (SEC
File No. 001-32693), filed on April 13, 2006) |
|
|
|
10.6*
|
|
Summary of 2006 salaries and other compensation for named
executive officers and certain employees (Incorporated by
reference to Item 1.01 of the Companys Form 8-K filed on
March 8, 2006) |
|
|
|
10.7
|
|
Form of Nonqualified Stock Option
Agreement (Director form effective March 2006) |
|
|
|
10.8
|
|
Form of Nonqualified Stock Option
Agreement (Employee form effective March 2006) |
|
|
|
31.1
|
|
Certification by Chief Executive Officer required by Rule
13a-14(a) and 15d-14(a) under the Exchange Act |
|
|
|
31.2
|
|
Certification by Chief Financial Officer required by Rule
13a-14(a) and 15d-14(a) under the Exchange Act |
|
|
|
32.1
|
|
Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Incorporated by reference |
|
|
|
Management contract or compensatory plan or arrangement |