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Rating Action:

Moody's changes Basic Energy Services Inc. outlook to stable from negative

Global Credit Research - 01 Feb 2011

Assigns a B3 rating to proposed senior unsecured notes

New York, February 01, 2011 -- New York, February 2, 2011 -- Moody's Investors Service changed the outlook for Basic Energy Services Inc. (Basic) to stable from negative. Moody's assigned a B3 rating to Basic's proposed $250 million of senior unsecured notes and upgraded the rating of the existing 7.125% senior unsecured notes to B3 from Caa1. Moody's also affirmed Basic's B2 Corporate Family Rating (CFR) and assigned a SGL-2 Speculative Grade Liquidity Rating. The new unsecured notes will be used to tender for the existing 11.625% senior secured notes due 2014. Once the tender offer is completed and the senior secured notes are retired, Moody's will withdraw the ratings for the senior secured notes. Our ratings are based on the review of the preliminary offering memorandum for the senior unsecured notes and the proposed terms for a new senior secured credit facility, and therefore, they are subject to review of the final documentation for these debt instruments.

"In 2009, an unusually harsh down-cycle in the oilfield services business over-lapped with the disruption of the capital markets. As a result, Basic was forced to restructure its long term debt to maintain its liquidity," said Stuart Miller, Moody's Senior Analyst. "The new unsecured notes along with a new revolving credit facility represent a return to a more traditional liability structure which will provide financial flexibility to support the company's near-term business plan. With the cyclical bottom clearly behind it, we have stabilized Basic's ratings outlook."

The move to a stable outlook incorporates the improving credit metrics, which reflect the recovery in the company's financial performance from the bottom of its business cycle. Despite this improvement, Basic continues to report weak profitability and relatively high leverage. An upgrade is unlikely in the short term and will likely not occur until the company reduces leverage to less than 3.0x as measured by debt to EBITDA. Continued negative EBIT margins and debt to EBITDA remaining over 4.0x could lead to a negative outlook or a ratings downgrade as these metrics suggest that Basic would be unprepared for, and vulnerable to, the next industry down-cycle.

The B2 CFR reflects Basic's scale and potential for earnings volatility in the future. Basic's future financial performance will continue to be highly correlated to energy prices and general activity levels in the oil and gas industry. The rating is supported by Basic's position as one of the larger North American well service providers with a menu of services available to a large and diversified customer base. The portfolio of services offered and the number of producing basins served helps to reduce volatility of earnings and cash flow compared to smaller, regional competitors. In the short term, continued tightening of oilfield services capacity should lead to higher prices and higher utilization rates for Basic's equipment, especially in the oily regions where the company has a presence. These factors should allow Basic to repair its balance sheet, improve profitability, and prepare for the next down-cycle. The new unsecured notes and increased revolving credit availability will provide more flexibility to manage the business and we expect to see additional opportunistic, bolt-on acquisitions.

The B3 rating on the proposed $250 million senior unsecured notes reflects both Basic's overall probability of default, to which Moody's assigns a PDR of B3, and a loss given default of LGD 4 (63%). The senior unsecured notes are notched one rating category lower than the B2 CFR to B3 to take into account the priority of claim that the senior secured revolving credit facility is entitled to in a liquidation or bankruptcy.

The company expects to close a new $165 million senior secured revolving credit contemporaneously with the closing of the new senior note issue and the retirement of the existing 11.625% senior secured notes due 2014. The revolving credit will be unused at closing. Based on the Basic's projected cash balances at closing of approximately $36 million and the unused revolving credit, we have assigned Basic a Speculative Grade Liquidity Rating of SGL-2.

The principal methodology used in this rating was the Global Oilfield Services Industry rating methodology, published in December 2009.

Basic Energy Services, Inc. is headquartered in Midland, Texas.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Stuart Miller
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
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JOURNALISTS: 212-553-0376
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Moody's changes Basic Energy Services Inc. outlook to stable from negative
No Related Data.
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