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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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From: Dennis Roth	8/13/2007 8:01:25 AM
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BAS - Lowering estimates and price target; maintain Neutral - Goldman Sachs - August 13, 2007 What's changed Basic’s 2Q2007 EPS of $0.52 was lower than our estimate of $0.58 and consensus of $0.60. EBITDA was 3% below our estimate. We are lowering our 2007E/08E/09E EPS to $2.21/$2.37/$2.26 from $2.51/$2.90/$2.87 primarily driven by lower well servicing and drilling and remediation income. We are lowering our 12-month price target to $24 (13% upside) from $27 (6.0 X 2008E EV/DACF). Implications (1) Basic’s shares have significantly underperformed the OSX over the past 3 months and have been among the most volatile. While we believe the risk/reward is improving, there is too much uncertainty in the natural gas market and we do not see near-term catalysts to drive outperformance. (2) Basic’s core well serving business has experienced a decline in natural gas related demand and has not seen a pickup in oil related activity, as would be expected given the strength in crude oil prices. Adverse weather conditions (rain) have also negatively impacted activity. On top of this, new capacity has entered the market and is displacing older well servicing rigs and causing lower utilization levels. We expect utilization to rebound somewhat in August (assuming normal weather) but remain lower than 2006 levels. On a positive note, pricing is holding up and customers have not shown signs of pushing back. (3) Land rig rates are under pressure and are expected to fall by 10-15% as rigs roll off of higher priced contracts. Valuation On 2007/8E EV/DACF, Basic trades at 5.3X/5.5X, -33%/-19% relative to Nabors vs. -15% historically. On 2007/8E EV/EBITDA, Basic trades at 4.0X/4.2X, a 38%/24% discount to Nabors vs. 21% historically. Key risks Risks include: (1) capacity additions resulting in dayrate weakness and (2) a severe correction in commodity prices. Furthermore, a secondary offering by BAS’ private equity investors remains an overhang risk.

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