UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o		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.

Delaware (State or other jurisdiction of incorporation or organization)		54-2091194 (I.R.S. Employer Identification No.)
400 W. Illinois, Suite 800 Midland, Texas (Address of principal executive offices)		79701 (Zip code)

(432) 620-5500
(Registrant’s 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 þ No o

     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)

Large Accelerated Filer o  Accelerated Filer o  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

38,258,905 shares of the registrant’s Common Stock were outstanding as of November 6, 2006.

 

 

BASIC ENERGY SERVICES, INC.
Index to Form 10-Q

		Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005		4
Consolidated Statements of Operations and Comprehensive Income for the three months and nine months ended September 30, 2006 and 2005		5
Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2006		6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005		7
Notes to Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation		24
Management’s Overview		24
Recent Strategic Acquisitions and Expansions		25
Segment Overview		26
Operating Cost Overview		29
Critical Accounting Policies and Estimates		29
Results of Operations		31
Liquidity and Capital Resources		34
Other Matters		37
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		38
Part II. OTHER INFORMATION		39
Item 1. Legal Proceedings		39
Item 1A. Risk Factors		39
Item 6. Exhibits		41
Signatures
Certification of CEO Pursuant to Rule 13a-14(a) and 15d-14(a)
Certification of CFO Pursuant to Rule 13a-14(a) and 15d-14(a)
Certification of CEO Pursuant to Section 1350
Certification of CFO Pursuant to Section 1350

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:

	•		a decline in, or substantial volatility of, oil and gas prices, and any related changes in expenditures by our customers;
	•		the effects of future acquisitions on our business;
	•		changes in customer requirements in markets or industries we serve;
	•		competition within our industry;
	•		general economic and market conditions;
	•		our access to current or future financing arrangements;
	•		our ability to replace or add workers at economic rates; and
	•		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.

Basic Energy Services, Inc.

		September 30,				December 31,
		2006				2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	29,220			$	32,845
Trade accounts receivable, net of allowance of $3,767 and $2,775, respectively			127,499				86,932
Accounts receivable — related parties			158				65
Inventories			2,232				1,648
Prepaid expenses			8,743				3,112
Other current assets			3,751				2,060
Deferred tax assets			7,493				6,020
Total current assets			179,096				132,682
Property and equipment, net			462,078				309,075
Deferred debt costs, net of amortization			6,625				4,833
Goodwill			98,719				48,227
Other assets			3,113				2,140
		$	749,631			$	496,957
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	19,229			$	13,759
Accrued expenses			50,487				33,548
Income taxes payable			10,361				7,210
Current portion of long-term debt			10,654				7,646
Other current liabilities			3,263				1,124
Total current liabilities			93,994				63,287
Long-term debt			247,910				119,241
Deferred income			4				17
Deferred tax liabilities			71,833				53,770
Other long-term liabilities			3,001				2,067
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized; none designated at September 30, 2006 and December 31, 2005, respectively			—				—
Common stock; $.01 par value; 80,000,000 shares authorized; 33,931,935 shares issued; 33,882,005 shares outstanding at September 30, 2006 and 33,785,359 shares outstanding at December 31, 2005, respectively			339				339
Additional paid-in capital			237,751				239,218
Deferred compensation			—				(7,341	)
Retained earnings			96,148				28,654
Treasury stock, 49,930 shares at September 30, 2006, and 146,576 shares at December 31, 2005, respectively, at cost			(1,349	)			(2,531	)
Accumulated other comprehensive income			—				236
Total stockholders’ equity			332,889				258,575
		$	749,631			$	496,957

See accompanying notes to consolidated financial statements.

Basic Energy Services, Inc.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
		(Unaudited)								(Unaudited)
Revenues:
Well servicing		$	88,221			$	59,213			$	242,840			$	157,863
Fluid services			50,742				34,308				142,724				95,147
Drilling and completion services			42,109				15,883				110,503				40,159
Well site construction services			13,483				11,367				36,627				31,233
Total revenues			194,555				120,771				532,694				324,402
Expenses:
Well servicing			48,399				37,901				135,530				99,365
Fluid services			31,231				21,081				86,879				60,200
Drilling and completion services			20,522				8,226				53,556				20,957
Well site construction services			9,414				7,772				25,877				22,435
General and administrative, including stock-based compensation of $842 and $772 in three months ended in 2006 and 2005, and $2,475 and $2,131 in nine months ended in 2006 and 2005, respectively			20,907				13,944				59,056				40,407
Depreciation and amortization			16,706				9,387				44,665				26,205
(Gain) loss on disposal of assets			(420	)			(351	)			307				(401	)
Total expenses			146,759				97,960				405,870				269,168
Operating income			47,796				22,811				126,824				55,234
Other income (expense):
Interest expense			(4,732	)			(3,157	)			(12,519	)			(9,358	)
Interest income			603				80				1,517				279
Loss on early extinguishment of debt			—				—				(2,705	)			—
Other income			75				11				130				148
Income from continuing operations before income taxes			43,742				19,745				113,247				46,303
Income tax expense			(16,414	)			(7,410	)			(41,751	)			(17,420	)
Net income		$	27,328			$	12,335			$	71,496			$	28,883
Earnings per share of common stock:
Basic		$	0.81			$	0.44			$	2.14			$	1.02
Diluted		$	0.71			$	0.37			$	1.86			$	0.88
Comprehensive Income:
Net income		$	27,328			$	12,335			$	71,496			$	28,883
Unrealized gains (losses) on hedging activities			—				114				(236	)			374
Comprehensive Income:		$	27,328			$	12,449			$	71,260			$	29,257

See accompanying notes to consolidated financial statements.

Basic Energy Services, Inc.

																										Accumulated
										Additional																Other				Total
		Common Stock								Paid-In				Deferred				Treasury				Retained				Comprehensive				Stockholders’
		Shares				Amount				Capital				Compensation				Stock				Earnings				Income				Equity
Balance — December 31, 2005			33,931,935			$	339			$	239,218			$	(7,341	)		$	(2,531	)		$	28,654			$	236			$	258,575
Adoption of Statement of Financial Accounting Standards No. 123R			—				—				(7,341	)			7,341				—				—				—				—
Amortization of deferred compensation			—				—				2,475				—				—				—				—				2,475
Unrealized gain on interest rate swap agreement			—				—				—				—				—				—				51				51
Settlement of interest rate swap agreement			—				—				—				—				—				—				(287	)			(287	)
Offering costs			—				—				(227	)			—				—				—				—				(227	)
Purchase of treasury stock			—				—				—				—				(3,218	)			—				—				(3,218	)
Exercise of stock options			—				—				3,626				—				4,400				(4,002	)			—				4,024
Net income			—				—				—				—				—				71,496				—				71,496
Balance — September 30, 2006 (Unaudited)			33,931,935			$	339			$	237,751			$	—			$	(1,349	)		$	96,148			$	—			$	332,889

See accompanying notes to consolidated financial statements.

Basic Energy Services, Inc.

		Nine Months Ended September 30,
		2006				2005
		(Unaudited)
Cash flows from operating activities:
Net income		$	71,496			$	28,883
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			44,665				26,205
Accretion on asset retirement obligation			69				30
Change in allowance for doubtful accounts			992				825
Non-cash interest expense			589				778
Non-cash compensation			2,475				2,131
Loss on early extinguishment of debt			2,705				—
(Gain) loss on disposal of assets			307				(401	)
Deferred income taxes			2,943				13,521
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(30,611	)			(21,479	)
Inventories			(199	)			(308	)
Prepaid expenses and other current assets			(6,549	)			299
Other assets			(219	)			(846	)
Accounts payable			3,808				(879	)
Excess tax benefits from exercise of employee stock options			(3,626	)			—
Income tax payable			3,105				3,875
Deferred income and other liabilities			1,659				615
Accrued expenses			14,738				9,206
Net cash provided by operating activities			108,347				62,455
Cash flows from investing activities:
Purchase of property and equipment			(75,557	)			(57,828	)
Proceeds from sale of assets			3,548				1,981
Payments for other long-term assets			(6,006	)			(1,457	)
Payments for businesses, net of cash acquired			(132,853	)			(11,614	)
Net cash used in investing activities			(210,868	)			(68,918	)
Cash flows from financing activities:
Proceeds from debt			305,081				294
Payments of debt			(201,678	)			(9,352	)
Offering costs related to initial public offering			(227	)			—
Purchase of treasury stock			(3,218	)			—
Exercise of employee stock options			398				—
Excess tax benefits from exercise of employee stock options			3,626				—
Deferred loan costs and other financing activities			(5,086	)			(8	)
Net cash provided by (used in) financing activities			98,896				(9,066	)
Net decrease in cash and equivalents			(3,625	)			(15,529	)
Cash and cash equivalents — beginning of period			32,845				20,147
Cash and cash equivalents — end of period		$	29,220			$	4,618

See accompanying notes to consolidated financial statements.

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 Basic’s fleet of equipment. Basic’s 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.

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 intercompany 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 management’s 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 asset’s fair value.

     Basic had no impairment expense in the nine months ended September 30, 2006 or 2005.

     Deferred Debt Costs

     Basic capitalizes certain costs in connection with obtaining its borrowings, such as lender’s fees and related attorney’s fees. In prior periods, these costs were being amortized to interest expense using the straight line method over the terms of the related debt, which approximates the effective interest method over the terms of the related debt. In the third quarter of 2006, Basic changed from the straight line method to the effective interest method.

     Deferred debt costs of approximately $6.9 million at September 30, 2006 and $7.0 million at December 31, 2005, respectively, represent debt issuance costs and are recorded net of accumulated amortization of approximately $300,000, and $2.2 million at September 30, 2006 and December 31, 2005, respectively. Amortization of deferred debt costs totaled approximately $40,000 and $251,000 for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005, amortization of deferred debt costs totaled approximately $589,000 and $778,000, 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 unit’s goodwill is determined by allocating the unit’s 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 September 30, 2006 is $20.2 million, $38.1 million, $36.7 million and $3.7 million, respectively. The change in the carrying amount of goodwill for the nine months ended September 30, 2006 of $50.5 million relates to goodwill from acquisitions and payments pursuant to contingent earn-out agreements, with approximately $10.3 million, $17.5 million and $22.7 million of goodwill additions relating to the well servicing, 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 SFAS 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.

     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 No.

123R since they do not have the fair value information required by SFAS No. 123R. Therefore, in accordance with SFAS No. 123R, Basic will no longer include pro forma disclosures that were required by SFAS No. 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 nine months ended September 30, 2006 (in thousands):

Balance, December 31, 2005		$	569
Additional asset retirement obligations recognized through acquisitions			276
Accretion Expense			69
Increase in asset retirement obligations due to change in estimate			468
Balance, September 30, 2006 (unaudited)		$	1,382

     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 Note 2, “Stock-Based Compensation,” Basic adopted the provisions of SFAS No. 123R on January 1, 2006.

     In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken, in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties accounting in interim periods, disclosure and transition. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not determined the effects that adoption of FIN 48 will have on the Company’s financial position, cash flows and results of operations.

     In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatement in Current Year Financial Statements. The bulletin’s interpretations address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet.

The interpretation is effective for fiscal years beginning after November 15, 2006. The Company does not expect the adoption of SAB 108 to have a material impact on the Company’s financial position, cash flows, or results of operations.

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
		Closing Date		of cash acquired)
R & R Hot Oil Service		January 5, 2005		$	1,702
Premier Vacuum Service, Inc.		January 28, 2005			1,009
Spencer’s Coating Specialist		February 9, 2005			619
Mark’s 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
Globe Well Service, Inc.		May 30, 2006			11,468
Hydro-Static Tubing Testers, Inc.		July 6, 2006			1,143
Hennessey Rental Tools, Inc.		August 1, 2006			7,178
Stimulation Services, LLC		August 1, 2006			4,500
Chaparral Service, Inc.		August 15, 2006			16,747
Reddline Services, LLC		August 24, 2006			1,900
Rebel Testers, Ltd.		September 14, 2006			2,397
Total 2006				$	132,853

     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 $43.8 million to property and equipment, $14.1 million to goodwill, and $51,000 to non-compete agreements. Revisions to the fair values, which may be significant, will be recorded by the Company as further adjustments to the purchase price allocations.

     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).

		Nine Months Ended September 30,
(Unaudited)		2006				2005
Revenues		$	542,187			$	352,029
Net income		$	73,959			$	34,439
Earnings per common share — basic		$	2.21			$	1.21
Earnings per common share — diluted		$	1.93			$	1.05

     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):

		September 30,				December 31,
		2006				2005
		(Unaudited)
Land		$	1,950			$	1,902
Buildings and improvements			10,978				8,634
Well service units and equipment			263,904				199,070
Fluid services equipment			83,280				59,104
Brine and fresh water stations			8,521				7,746
Frac/test tanks			47,262				31,475
Pressure pumping equipment			66,704				31,101
Construction equipment			26,519				24,224
Disposal facilities			25,734				16,828
Vehicles			31,903				23,329
Rental equipment			34,635				6,519
Aircraft			4,053				3,236
Other			8,633				8,602
			614,076				421,770
Less accumulated depreciation and amortization			151,998				112,695
Property and equipment, net		$	462,078			$	309,075

     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):

		September 30,				December 31,
		2006				2005
		(Unaudited)
Light vehicles		$	22,810			$	17,912
Well service units and equipment			476				—
Fluid services equipment			22,750				14,011
Pressure pumping equipment			731				—
Construction equipment			3,225				1,300
			49,992				33,223
Less accumulated amortization			12,282				8,474
		$	37,710			$	24,749

     Amortization of assets held under capital leases of approximately $3,808,000 and $1,140,000 for the nine months ended September 30, 2006 and 2005 and $1,432,000 and $282,000 for the three months ended September 30, 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):

		September 30,				December 31,
		2006				2005
		(Unaudited)
Credit Facilities:
Term B Loan		$	—			$	90,000
Revolver			—				16,000
7.125% senior notes			225,000				—
Capital leases and other notes			33,564				20,887
			258,564				126,887
Less current portion			10,654				7,646
		$	247,910			$	119,241

     Senior Notes

     On April 12, 2006, the Company issued $225.0 million of 7.125% Senior Notes due April 2016 in a private placement. Proceeds from the sale of the Senior Notes were used to retire the outstanding balance on the $90.0 million Term B Loan and to pay down approximately $96.0 million under the revolving credit facility, which amounts may be reborrowed to fund future acquisitions or for general corporate purposes. Interest payments on the Senior Notes are due semi-annually, on April 15 and October 15, commencing on October 15, 2006. The Senior Notes are unsecured. Under the terms of the sale of the Senior Notes, the Company was required to take appropriate steps to offer to exchange other Senior Notes with the same terms that have been registered with the Securities and Exchange Commission for the private placement Senior Notes. The Company completed the exchange offer for all of the Senior Notes on October 16, 2006.

     The Senior Notes are redeemable at the option of the Company on or after April 15, 2011 at the specified redemption price as described in the Indenture. Prior to April 15, 2011, the Company may redeem, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed plus the Applicable Premium as defined in the Indenture. Prior to April 15, 2009, the Company may redeem up to 35% of the Senior Notes with the proceeds of certain equity offerings at a redemption price equal to 107.125% of the principal amount of the 7.125% Senior Notes, plus accrued and unpaid interest to the date of redemption. This redemption must occur less than 90 days after the date of the closing of any such equity offering.

     Following a change of control, as defined in the Indenture, the Company will be required to make an offer to repurchase all or any portion of the 7.125% Senior Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase.

     Pursuant to the Indenture, the Company is subject to covenants that limit the ability of the Company and its restricted subsidiaries to, among other things: incur additional indebtedness, pay dividends or repurchase or redeem capital stock, make certain investments, incur liens, enter into certain types of transactions with affiliates, limit dividends or other payments by restricted subsidiaries, and sell assets or consolidate or merge with or into other companies. These limitations are subject to a number of important qualifications and exceptions set forth in the Indenture. The Company is in compliance with the restrictive covenants at September 30, 2006.

     As part of the issuance of the above-mentioned Senior Notes, the Company incurred debt issuance costs of approximately $4.6 million, which are being amortized to interest expense using the effective interest method over the term of the Senior Notes.

     The Senior Notes are jointly and severally guaranteed by the Company and all of its restricted subsidiaries. Basic Energy Services, Inc., the ultimate parent company, does not have any independent operating assets or operations. Subsidiaries other than the restricted subsidiaries that are guarantors are minor.

     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 Basic’s tangible and intangible assets. Basic incurred approximately $1.8 million in debt issuance costs in obtaining the 2005 Credit Facility.

     At Basic’s option, borrowings under the 2005 Term B Loan bear interest at either the (a) “Alternative Base Rate” (i.e. the higher of the bank’s prime rate or the federal funds rate plus .5% per annum) plus 1% or (b) the LIBOR rate plus 2.0%. At September 30, 2006, Basic had paid outstanding borrowings under the Term B Loan in full; therefore, a Term B Loan weighted average interest rate was not calculated. However, at December 31, 2005, Basic’s weighted average interest rate on its Term B Loan was 6.4%.

     At Basic’s option, borrowings under the 2005 Revolver bear interest at either the (a) “Alternative Base Rate” (i.e. the higher of the bank’s 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 Basic’s leverage ratio. At September 30, 2006, Basic’s 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 September 30, 2006, Basic, under its Revolver, had no outstanding borrowings and $10.6 million of letters of credit and no amounts outstanding in swing-line loans. At September 30, 2006 and December 31, 2005 Basic had availability under its Revolver of $139.4 million and $124.4 million, respectively.

     Pursuant to the 2005 Credit Facility, Basic must apply proceeds to reduce principal outstanding under the 2005 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 Basic’s then outstanding indebtedness. The March 28, 2006 amendment deletes this requirement upon payoff of the Term B Loans. In April 2006, Basic paid off all outstanding borrowings under the Term B Loan. 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 September 30, 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.

     Basic’s interest expense consisted of the following (in thousands):

		Nine Months Ended September 30,
		2006				2005
		(Unaudited)
Cash payments for interest		$	3,561			$	8,583
Commitment and other fees paid			566				—
Amortization of debt issuance costs			589				778
Accrued interest on senior notes			7,526				—
Other			277				(3	)
		$	12,519			$	9,358

     Losses on Extinguishment of Debt

     In April of 2006, Basic recognized a loss on the early extinguishment of debt. Basic wrote off unamortized debt issuance costs of approximately $2.7 million, which related to the prepayment of the Term B Loan.

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 Basic’s 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 Basic’s 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 claims history.

     At September 30, 2006 and December 31, 2005, self-insured risk accruals totaled approximately $11.1 million, net of $240,000 receivable for medical and dental coverage, and $9.5 million, net of $127,000 receivable for medical and dental coverage, respectively.

     Regulatory

     On November 2, 2006, the Company filed for Hart-Scott-Rodino Act (“HSR”) clearance for its acquisition of substantially all the assets of G&L Tool, Ltd. with the Federal Trade Commission and the Department of Justice. The HSR filing was delinquent, as the filing was required to be made prior to the acquisition, and as such, may subject the Company to civil penalties. The Company is unable to estimate the amount, if any, that will ultimately be assessed.

7. Stockholders’ Equity

     Common Stock

     In February 2002, a group of related investors purchased a total of 3,000,000 shares of Basic’s 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 Basic’s 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 (See Note 13).

     In June of 2002 Basic granted 3,750,000 common stock warrants to acquire a total of 3,750,000 shares of common stock at a price of $4 per share, exercisable in whole or in part from June 30, 2002 through June 30, 2007 (See Note 13).

     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 $272,000 and $393,000 for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005, the amount charged to expense over the respective vesting period totaled approximately $966,000 and $1,211,000, respectively.

     In December 2005, Basic issued 5,000,000 shares of common stock during the Company’s 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.

     During the first nine months of 2006, Basic issued 243,420 shares of common stock from treasury stock for the exercise of stock options.

     Preferred Stock

     At September 30, 2006 and December 31, 2005, Basic had 5,000,000 shares of $.01 par value preferred stock authorized, of which none is designated.

8. Incentive Plan

     In May 2003, Basic’s 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 Basic’s 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 of common stock of Basic at an exercise price of $26.84 per share. 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 Company’s 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 $842,000 and $772,000 during the three months ended September 30, 2006 and 2005, respectively. For compensation expense recognized during the three months ended September 30, 2006 and 2005, Basic recognized a tax benefit of approximately $316,000 and $290,000, respectively. During the nine months ended September 30, 2006 and 2005, compensation expense related to share-based arrangements was approximately $2,475,000 and $2,131,000, respectively. For compensation expense recognized during the nine months ended September 30, 2006 and 2005, Basic recognized a tax benefit of approximately $912,000 and $802,000, respectively.

     The fair value of each option award accounted for under SFAS 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:

		Nine Months
		Ended
		September 30,
		2006
Risk-free interest rate			4.7	%
Expected term			6.65
Expected volatility			47.0	%
Expected dividend yield			—

     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 nine months ended September 30, 2006 and the changes during the nine months then ended:

						Weighted				Aggregate
		Number of				Average				Instrinsic
		Options				Exercise				Value
		Granted				Price				(000’s)
Non-statutory stock options:
Outstanding, beginning of period			2,445,800			$	5.44				—
Options granted			418,000			$	26.84				—
Options forfeited			(97,000	)		$	10.46				—
Options exercised			(243,420	)		$	4.08				—
Outstanding, end of period			2,523,380			$	8.92			$	40,039
Exercisable, end of period			1,183,213			$	4.15			$	23,956
Expected to vest, end of period			1,321,469			$	12.94			$	16,083

     The following table summarizes information about Basic’s stock options outstanding and options exercisable at September 30, 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		September 30, 2006				Contractual Life				Price				September 30, 2006				Contractual Life				Price
$   4.00			1,026,480				5.70			$	4.00				1,026,480				5.70			$	4.00
$   5.16			293,400				7.72			$	5.16				156,733				7.59			$	5.16
$   6.98			765,000				8.42			$	6.98				—				—			$	—
$  21.01			37,500				9.21			$	21.01				—				—			$	—
$  26.84			401,000				9.45			$	26.84				—				—			$	—
			2,523,380												1,183,213

     The weighted-average grant date fair value of share options granted during the nine months ended September 30, 2006 and 2005 was $14.47 and $8.12, respectively. The total intrinsic value of share options exercised during the nine months ended September 30, 2006 and 2005 was approximately $5.8 million and $0, respectively.

     A summary of the status of the Company’s non-vested share grants at September 30, 2006 and changes during the nine months ended September 30, 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			(21,250	)			6.98
Nonvested at end of period			340,000			$	6.98

     As of September 30, 2006, there was $9.7 million of total unrecognized compensation related to non-vested share-based compensation grant date arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.27 years. The total grant date fair value of share-based awards vested during the nine months ended September 30, 2006 and 2005 was approximately $3.2 million and $2.9 million, respectively.

     Cash received from share option exercises under the incentive plan was approximately $398,000 and $0 for the nine months ended September 30, 2006 and 2005, respectively. The actual tax benefit realized for the tax deductions from option exercise is $3.6 million and $0, respectively, for the nine months ended September 30, 2006 and 2005.

     The Company has a history of issuing Treasury shares to satisfy share option exercises.

9. Related Party Transactions

     Basic had receivables from employees of approximately $158,000 and $65,000 as of September 30, 2006 and December 31, 2005, respectively. During the year 2006, Basic entered into a lease agreement with Darle Vuelta Cattle Co., LLC, an affiliate of the Chief Executive Officer, for approximately $69,000. The term of the lease is five years and will continue on a year-to-year basis unless terminated by either party.

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 September 30,								Nine Months Ended September 30,
		2006				2005				2006				2005
(in thousands, except share data):		(Unaudited)								(Unaudited)
Numerator (both basic and diluted):
Net income		$	27,328			$	12,335			$	71,496			$	28,883
Denominator:
Denominator for basic earnings per share			33,537,355				28,317,560				33,394,202				28,406,935
Stock options			990,044				869,004				1,050,764				716,741
Unvested restricted stock			211,800				603,125				225,660				525,000
Common stock warrants			3,703,160				3,294,623				3,727,237				3,093,184
Denominator for diluted earnings per share			38,442,359				33,084,312				38,397,863				32,741,860
Basic earnings per common share:		$	0.81			$	0.44			$	2.14			$	1.02
Diluted earnings per common share:		$	0.71			$	0.37			$	1.86			$	0.88

11. Business Segment Information

     Basic’s 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.

     Basic’s 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 operating segments. Corporate assets consist principally of working capital and debt financing costs.

										Drilling and				Well Site
		Well				Fluid				Completion				Construction				Corporate
		Servicing				Services				Services				Services				and Other				Total
Three Months Ended September 30, 2006 (Unaudited)
Operating revenues		$	88,221			$	50,742			$	42,109			$	13,483			$	—			$	194,555
Direct operating costs			(48,399	)			(31,231	)			(20,522	)			(9,414	)			—				(109,566	)
Segment profits		$	39,822			$	19,511			$	21,587			$	4,069			$	—			$	84,989
Depreciation and amortization		$	7,539			$	4,335			$	3,246			$	1,013			$	573			$	16,706
Capital expenditures, (excluding acquisitions)		$	12,063			$	6,936			$	5,193			$	1,621			$	917			$	26,730
Three Months Ended September 30, 2005 (Unaudited)
Operating revenues		$	59,213			$	34,308			$	15,883			$	11,367			$	—			$	120,771
Direct operating costs			(37,901	)			(21,081	)			(8,226	)			(7,772	)			—				(74,980	)
Segment profits		$	21,312			$	13,227			$	7,657			$	3,595			$	—			$	45,791
Depreciation and amortization		$	4,875			$	2,534			$	727			$	783			$	468			$	9,387
Capital expenditures, (excluding acquisitions)		$	11,603			$	6,031			$	1,730			$	1,863			$	1,113			$	22,340
Nine Months Ended September 30, 2006 (Unaudited)
Operating revenues		$	242,840			$	142,724			$	110,503			$	36,627			$	—			$	532,694
Direct operating costs			(135,530	)			(86,879	)			(53,556	)			(25,877	)			—				(301,842	)
Segment profits		$	107,310			$	55,845			$	56,947			$	10,750			$	—			$	230,852
Depreciation and amortization		$	20,157			$	11,590			$	8,677			$	2,709			$	1,532			$	44,665
Capital expenditures, (excluding acquisitions)		$	34,099			$	19,607			$	14,679			$	4,581			$	2,591			$	75,557
Identifiable assets		$	229,026			$	158,015			$	127,502			$	32,640			$	202,448			$	749,631
Nine Months Ended September 30, 2005 (Unaudited)
Operating revenues		$	157,863			$	95,147			$	40,159			$	31,233			$	—			$	324,402
Direct operating costs			(99,365	)			(60,200	)			(20,957	)			(22,435	)			—				(202,957	)
Segment profits		$	58,498			$	34,947			$	19,202			$	8,798			$	—			$	121,445
Depreciation and amortization		$	13,236			$	6,880			$	1,974			$	2,125			$	1,990			$	26,205
Capital expenditures, (excluding acquisitions)		$	30,034			$	15,611			$	4,479			$	4,823			$	2,881			$	57,828
Identifiable assets		$	156,246			$	96,328			$	31,671			$	27,808			$	114,499			$	426,552

     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 September 30,								Nine Months Ended September 30,
		2006				2005				2006				2005
Segment profits		$	84,989			$	45,791			$	230,852			$	121,445
General and administrative expenses			(20,907	)			(13,944	)			(59,056	)			(40,407	)
Depreciation and amortization			(16,706	)			(9,387	)			(44,665	)			(26,205	)
Gain (loss) on disposal of assets			420				351				(307	)			401
Operating income		$	47,796			$	22,811			$	126,824			$	55,234

12. Supplemental Schedule of Cash Flow Information:

     The following table reflects non-cash financing and investing activity during:

		Nine Months Ended September 30,
(In thousands)		2006				2005
Capital leases issued for equipment		$	19,286			$	6,404
Asset retirement obligation additions		$	744			$	74
Exercise of stock options		$	4,002			$	—
Contingent earnout accrual		$	1,449			$	—

     Basic paid income taxes of approximately $33.5 million and $0 during the nine months ended September 30, 2006 and 2005, respectively.

13. Subsequent Events

     On October 5, 2006, certain Holders of outstanding Warrants to purchase an aggregate of 4,350,000 shares of Basic’s common stock exercised the Warrants in full. The Warrants were originally issued to DLJ Merchant Banking Partners III, L.P. and its affiliates on February 13, 2002 and June 25, 2002. On October 5, 2006, in connection with the exercise of the Warrants, Basic received an aggregate of $17,400,000 from the Holders in satisfaction of the exercise price of the Warrants (representing an exercise price of $4.00 per share of Basic’s common stock acquired) and Basic issued an aggregate of 4,350,000 shares of Basic’s common stock to the Holders. The shares of Basic’s common stock issued by Basic were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Management’s 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 18 separate acquisitions from January 1, 2005 to September 30, 2006. Our weighted average number of well servicing rigs has increased from 311 in the third quarter of 2005 to 353 in the third quarter of 2006, and our weighted average number of fluid service trucks has increased from 465 to 614 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):

		Nine Months Ended September 30,
		2006								2005
Revenues:
Well servicing		$	242.9				46	%		$	157.9				49	%
Fluid services			142.7				27	%			95.1				29	%
Drilling and completion services			110.5				21	%			40.2				12	%
Well site construction services			36.6				6	%			31.2				10	%
Total revenues		$	532.7				100	%		$	324.4				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
	•		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 management’s 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 nine months of 2006, we completed ten 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 proforma effects of the material acquisition in the 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.

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. 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. 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 nine months of 2006, our well servicing segment represented 46% 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 quarters ended March 31, 2006, June 30, 2006 and September 30, 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				84.3	%		$	255			$	94				37.1	%
Second Quarter			303				192,400				88.8	%		$	280			$	107				38.2	%
Third Quarter			311				198,000				89.0	%		$	299			$	108				36.0	%
Fourth Quarter			316				195,000				86.3	%		$	329			$	134				40.7	%
2006:
First Quarter			327				209,000				89.4	%		$	352			$	152				43.4	%
Second Quarter			341				221,800				91.0	%		$	366			$	161				43.9	%
Third Quarter			353				230,100				91.2	%		$	383			$	173				45.1	%

     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 $299 in the third quarter of 2005 to $383 in the third quarter of 2006 mainly as a result of this higher utilization, which has contributed to our improved segment profits.

Fluid Services

     During the first nine months of 2006, our fluid services segment represented 27% 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 quarters ended March 31, 2006, June 30, 2006 and September 30, 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				34.3	%
Second Quarter			447			$	71			$	26				37.0	%
Third Quarter			465			$	74			$	28				38.6	%
Fourth Quarter			472			$	79			$	31				39.8	%
2006:
First Quarter			529			$	82			$	32				39.0	%
Second Quarter			568			$	86			$	34				39.9	%
Third Quarter			614			$	83			$	32				38.5	%