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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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To: Dennis Roth who wrote (23)	11/12/2007 2:04:06 PM
From: Dennis Roth	Read Replies (1) of 111

Basic Energy Services, Inc. (BAS): Competition likely to remain high - lowering estimates and target - Goldman Sachs - 11/12/07 What's changed Basic’s 3Q2007 EPS of $0.59 was above our estimate of $0.55 and consensus of $0.57. EBITDA was inline with our estimate. We are lowering our 2007E/08E/09E EPS to $2.14/$2.09/$1.95 from $2.20/$2.37/$2.26 due to lower operating assumptions for all divisions but primary due to weakness in well servicing. We are lowering our 12-month price target to $22 (9% upside) from $24 (6.25 X 2008E EV/DACF). Basic expects 4Q2007 revenue to be down 4-6% sequentially – our estimate assumes -4.2%. Implications We remain Neutral rated on BAS shares. We expect BAS’s core business, well servicing, to remain highly competitive due to low barriers to entry and as such, do not see potential for positive EPS revisions in the near-term (outside of acquisitions). Management expects roughly 300 newbuilds (~10% of capacity) to displace 250 existing rigs (25 of BAS’s) over the next 12-months and that pricing has declined for the first time this up-cycle. While BAS is optimistic that the newbuild orderbook will not increase due to declining industry utilization, we believe current margins are supportive of newbuild economics and that newbuilds will displace existing rigs making lower utilization less of a concern. With that said, we also see limited downside for BAS shares due to the relatively low multiple currently assigned to earnings. We expect BAS shares to trade in an $18-$22 range over the next six months (based on historic multiples). Valuation On 2008/09E EV/DACF, Basic trades at 5.8X/5.1X, -22%/-19% relative to Nabors vs. -15% historically. On 2007/8E EV/EBITDA, Basic trades at 4.5X/4.0X, a 27%/22% discount to Nabors vs. 21% 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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