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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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To: Dennis Roth who wrote (51)	3/5/2008 9:04:49 AM
From: Dennis Roth	Read Replies (1) of 111

Basic Energy Services, Inc. (BAS): Well servicing is holding up slightly better than expected - Goldman Sachs - March 05, 2008 What's changed BAS reported 4Q2007 EPS of $0.47 in line with our and consensus estimate of $0.47. We are lowering our 2008/2009E EPS by -8%/-2% to $1.92/$1.92 due to higher depreciation expense, but raising our 2008/09E EBITDA by 4% and 8% respectively. We are also introducing our 2010E EPS estimate of $1.78 and raising our price target to $23 from $21 (6.0X 2008E EV/DACF). Implications (1) Basic’s core well servicing business appears to be holding up slightly better than expected. Upside may exist in 2H2008 if natural gas prices remain at high levels but we are still concerned with new capacity entering the market – albeit at a slower pace than 2007 but more front-end loaded. Newbuild well servicing rigs will continue to force the retirement of older capacity and rates are unlikely to keep pace with cost increases in our view. (2) We expect management to shift focus towards growing the land rig business through acquisitions and newbuilds. Acquisitions appear to be the focus at the moment due to the increasing number of opportunities at reasonable valuations. However, we also expect Basic to begin ordering land rig newbuilds to improve the overall fleet quality. Given our 2008 forecast for $68 million in free cash flow and Basic’s low debt levels, we expect the company to pursue a more aggressive growth strategy. Valuation On 2008/09E EV/DACF, Basic trades at 5.7X/5.4X, -27%/-20% relative to Nabors vs. -15% historically. Key risks (1) Capacity additions resulting in further rate weakness, (2) a severe correction in commodity prices, and (3) a secondary offering by BAS’ private equity investors remains an overhang risk.

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