8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

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

Date of report (Date of earliest event reported): July 2, 2008

Basic Energy Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware	1-32693	54-2091194
(State or Other Jurisdiction	(Commission File Number)	(IRS Employer Identification No.)
of Incorporation)

500 W. Illinois, Suite 100
Midland, Texas	79701
(Address of principal executive offices)	(Zip Code)

(432) 620-5500
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

þ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01. Other Items.

On April 20, 2008, Grey Wolf, Inc. (“Grey Wolf”), Basic Energy Services, Inc. (“Basic”) and Horsepower Holdings, Inc. (“Horsepower”) entered into an Agreement and Plan of Merger whereby Grey Wolf and Basic will simultaneously merge with and into Horsepower (the “Mergers”). Horsepower filed a registration statement on Form S-4, file no 333-150895, (the “Registration Statement”) that was declared effective on June 10, 2008. This Current Report on Form 8-K is filed to update the information about the credit facilities expected to be entered into in connection with the Mergers and to file updated pro forma financial information relating to the Mergers and related transactions. The summary unaudited pro forma condensed combined financial data and the unaudited pro forma condensed combined financial information are filed as Exhibits 99.1 and 99.2, respectively, hereto and are incorporated by reference into this Current Report on Form 8-K.

2008 CREDIT FACILITY

Horsepower expects to enter into new senior secured credit facilities (collectively, the “2008 Credit Facility”) provided by a group of lenders led by UBS AG, Stamford Branch, as administrative agent and collateral agent, and Wells Fargo Bank, N.A., as issuing bank, simultaneously with the closing of the Mergers. Horsepower will be the sole borrower and each of its existing and future wholly-owned direct and indirect domestic subsidiaries are, or will be, subsidiary guarantors. Horsepower anticipates that the 2008 Credit Facility will provide for a $325 million Term A Loan and a $325 million senior secured revolving credit facility. Proceeds from the Term Loans will be used to finance a portion of the cash consideration for the Mergers, to refinance certain existing indebtedness of Basic and to pay fees, commissions and expenses related to the transactions. The balance of the cash consideration for the Mergers is expected to be provided from the proceeds of a previously announced placement of $275.0 million aggregate principal amount of senior unsecured notes. The key terms of the 2008 Credit Facility are expected to be as described below.

The commitments under the revolving credit facility will provide for (1) the borrowing of funds, (2) the issuance of up to $100 million of letters of credit and (3) $32.5 million of swingline loans. The amounts outstanding under the Term A Loan will require annual amortization at various amounts each year, payable annually, with all amounts outstanding being due and payable in full in July 2013. All the outstanding amounts under the revolving credit facility will be due and payable in July 2013. The (1) 2008 Credit Facility, (2) Basic’s 7.125% Senior Notes due 2016, and (3) certain interest rate or commodity hedging or treasure management obligations with a lender (or its affiliate) will be equally and ratably secured by all of Horsepower’s domestic subsidiaries’ equity interests, 65% of Horsepower’s first tier foreign subsidiaries’ equity interests and substantially all of Horsepower’s and its subsidiaries’ tangible and intangible assets.

At Horsepower’s option, borrowings under the 2008 Credit Facility (except swingline borrowings which only bear interest at the Base Rate) will bear interest at either (1) the “Base Rate” (i.e., the higher of the bank’s prime rate or the federal funds rate plus 0.50% per year) plus a margin ranging from 2.00% to 2.50% or (2) the LIBOR rate plus a margin ranging from 3.00% to 3.50%. The margins will vary depending on Horsepower’s leverage ratio. Fees on the letters of credit will be due quarterly on the outstanding amount of the letters of credit at a rate ranging from 3.00% to 3.50% for participation fees and 0.25% for fronting fees. A commitment fee will be due quarterly on the available borrowings under the revolving credit facility at rates ranging from 0.375% to 0.50%.

Based on the expected terms of 2008 Credit Facility, Horsepower must apply proceeds from certain specified events to reduce principal outstanding under the Term Loans, including:

•  proceeds from asset sales (other than from ordinary course transactions) greater than $250,000 individually or $2.5 million in the aggregate on an annual basis unless such proceeds are used within one year of the date of receipt of such proceeds to purchase assets to be used in Horsepower’s business or to acquire the equity interests of persons engaged in the business;

•  proceeds from any issuance of debt or disqualified stock not permitted by the 2008 Credit Facility;

•  proceeds from all casualty and condemnation events to the extent such proceeds exceed $10 million unless Horsepower uses such proceeds to repair, replace or restore the assets in respect of which such proceeds are received or to acquire assets used in the business of Horsepower or to acquire equity interests of persons engaged in that business; and

•  50% of excess cash flow, as defined in the 2008 Credit Facility, subject to stepdowns based upon leverage ratios.

The 2008 Credit Facility is expected to contain various restrictive covenants and compliance requirements, including the following:

•  limitations on disposition of assets and changes of business and ownership;

•  limitation on mergers and acquisitions;

•  limitations on dividends, stock repurchases and redemptions and other restricted payments;

•  limitation on indebtedness and preferred stock and prepayment, amendment and redemption thereof;

•  limitation on loans and investments;

•  limitation on liens and further negative pledges;

•  limitation on transactions with affiliates; and

•  various financial covenants, including:

—  a maximum leverage ratio of 3.50 to 1.00; and

—  a minimum fixed charge coverage ratio of 1.25 to 1.00 through June 30, 2010 and 1.50 to 1.00 thereafter.

The 2008 Credit Facility is expected to contain events of default which are subject to customary materiality levels, default triggers, and cure periods including the following:

•  non-payment of any amounts payable under the 2008 Credit Facility when due;

•  any representation or warranty made in connection with the 2008 Credit Facility being incorrect in any material respect when made or deemed made;

•  default in the observance or performance of any covenant, condition or agreement contained in the 2008 Credit Facility or related loan documents and, with respect to certain covenants, such default shall continue unremedied or shall not be waived for 30 days after written notice from the administrative agent or any lender;

•  failure to make payments on other indebtedness in excess of $50 million or the existence of other defaults that gives the holder of such indebtedness the right to accelerate such indebtedness in excess of such amount;

•  voluntary or involuntary bankruptcy, insolvency or reorganization of Horsepower or the guarantors of the indebtedness under the 2008 Credit Facility and other material subsidiaries;

•  entry of judgments, orders or decrees against Horsepower, and not effectively stayed, for payment of an amount in excess of $50 million;

•  an ERISA event which could reasonably be expected to cause a material adverse effect or the imposition of a lien on any of the assets of Horsepower;

•  any security agreement or document under the 2008 Credit Facility ceases to create a lien on any material position of the assets securing the 2008 Credit Facility;

•  any guarantee ceases to be in full force and effect;

•  any material provision of the 2008 Credit Facility ceases to be valid and binding or enforceable;

•  a change in control; and

•  any determination, ruling, decision, decree or order of any governmental authority, which prohibits or restrains Horsepower and its subsidiaries from conducting business and that could reasonably be expected to cause a material adverse effect.

Forward Looking Statements

     This filing includes statements that are “forward-looking statements” as defined by the Securities and Exchange Commission (the “SEC”). All statements, other than statements of historical fact, included herein that address activities, events or developments that Basic expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements include, but are not limited to, statements about the terms of the 2008 Credit Facility, benefits of the merger, information about the combined company, including anticipated accretion, future prospects, service offerings, cash flows, combined operating and financial data, including future financial and operating results, the combined company’s objectives, plans and expectations. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including required approvals by stockholders and regulatory agencies, the possibility that the anticipated benefits from the proposed merger with Grey Wolf cannot be fully realized, the possibility that costs or difficulties related to integration of the two companies will be greater than expected, the impact of competition and other risk factors included in the reports filed with the SEC by Grey Wolf and Basic. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. Except as required by law, neither Grey Wolf nor Basic intends to update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

Important Information for Investors and Stockholders

Additional Information and Where to Find It
In connection with the proposed mergers, a registration statement of Horsepower has been filed and declared effective by the SEC. Each of Basic and Grey Wolf has filed a definitive joint proxy statement/prospectus with the SEC. INVESTORS AND SECURITY HOLDERS ARE URGED TO CAREFULLY READ THE REGISTRATION STATEMENT AND THE JOINT PROXY STATEMENT/PROSPECTUS AND THESE OTHER MATERIALS REGARDING THE PROPOSED TRANSACTION BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT BASIC, GREY WOLF, HOLDINGS AND THE PROPOSED TRANSACTION. Investors and security holders may obtain a free copy of the registration statement and the joint proxy statement/prospectus and other documents containing information about Basic and Grey Wolf, without charge, at the SEC’s web site at www.sec.gov, Basic’s web site at www.basicenergyservices.com, and Grey Wolf’s web site at www.gwdrilling.com. Copies of the registration statement and the joint proxy statement/prospectus and the SEC filings that are incorporated by reference therein may also be obtained for free by directing a request to either Investor Relations, Basic Energy Services, Inc., (432) 620-5510 or to Investor Relations, Grey Wolf, Inc., (713) 435-6100.

Participants in the Solicitation
Basic and Grey Wolf and their respective directors, officers and certain other members of management may be deemed to be participants in the solicitation of proxies from their respective stockholders in respect of the mergers. Information about these persons can be found in Grey Wolf’s proxy statement relating to its 2008 annual meetings of stockholders as filed with the SEC on April 8, 2008. Information concerning beneficial ownership of Basic stock by its directors and certain of its executive officers is included in its Annual Report on Form 10-K/A filed April 29, 2008 and subsequent statements of changes in beneficial ownership on file with the SEC. Additional information about the interests of such persons in the solicitation of proxies in respect of the merger will be included in the registration statement and the joint proxy statement/prospectus to be filed with the SEC in connection with the proposed transaction.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits:

99.1     Summary Unaudited Pro Forma Condensed Combined Financial Data

99.2     Unaudited Pro Forma Condensed Combined Financial Information

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: July 2, 2008

Basic Energy Services, Inc.
 

/s/ Alan Krenek 

Alan Krenek
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
99.1	Summary Unaudited Pro Forma Condensed Combined Financial Data
99.2	Unaudited Pro Forma Condensed Combined Financial Information

EX-99.1

Exhibit 99.1

SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The summary unaudited pro forma statement of operations data presented below is based on the assumption that the mergers of Grey Wolf, Inc. (“Grey Wolf”) and Basic Energy Services, Inc. (“Basic”) occurred on January 1, 2007 and reflects only adjustments directly related to the transactions. The summary unaudited pro forma balance sheet data is prepared as if the mergers occurred on March 31, 2008. The pro forma adjustments are based on available information and assumptions that Basic’s and Grey Wolf’s management believes are (1) directly attributable to the mergers, (2) are factually supportable, and (3) with respect to the statements of operations, are expected to have a continuing impact on combined results. The summary unaudited pro forma condensed combined financial data are presented for illustrative purposes only and should not be read for any other purpose. This information should not be relied on as being indicative of the historical results that would have been achieved had the companies been combined for the period presented or the future results that the combined company will experience after the mergers. The summary unaudited pro forma condensed combined financial data:

Ÿ	have been derived from and should be read in conjunction with the Unaudited pro forma condensed combined financial information and the related notes filed as Exhibit 99.1 to this Current Report on Form 8-K; and
Ÿ	should be read in conjunction with the historical consolidated financial statements of Basic and Grey Wolf presented in their respective filings with the Securities and Exchange Commission.

	Twelve Months Ended		Three Months Ended		Year Ended
	March 31, 2008		March 31, 2008		December 31, 2007
	(in thousands, except per share data)
Statement of Operations Data:
Revenues	$	1,774,202	$	431,395	$	1,783,750
Operating expenses (excluding depreciation and amortization)		1,047,198		251,518		1,033,066
Depreciation and amortization		240,412		62,066		234,067
General and administrative		132,897		34,464		128,481
Interest expense(1)		80,611		20,316		81,718
Net income		182,981		41,118		205,514
EBITDA(2)		609,301		148,639		637,631
Net income per common share:
Basic	$	2.24	$	0.51	$	2.49
Diluted		1.99		0.45		2.21
Weighted average common shares outstanding:
Basic		81,794		81,355		82,584
Diluted		96,064		95,598		96,858

	As of
	March 31, 2008
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	194,527
Working capital		320,818
Total assets		3,104,573
Long-term debt, net of current portion		1,118,929
Stockholders’ equity		1,220,027

(1)

If the interest rates on each of the Term Loan A Facility and the additional indebtedness increased or decreased by 0.125% from assumed rates, the interest expense would increase or decrease by $750,000 per annum, or $187,500 per quarter.

(2)

EBITDA, a measure used by management to measure operating performance, is defined as income (loss) from continuing operations plus interest expense, income tax (benefit) expense, depreciation and amortization. EBITDA is computed using Grey Wolf’s (the accounting acquirer in the mergers) definition of EBITDA, which includes interest expense on a gross basis, whereas Basic includes interest expense net of interest income. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from continuing operations as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. The following table presents a reconciliation of pro forma EBITDA to pro forma net income, which is the most directly comparable GAAP financial performance measure, for each of the periods indicated:

	Twelve Months			Three Months
	Ended			Ended
	March 31,			March 31,			Year Ended
	2008			2008			December 31, 2007
	(in thousands)
Earnings before interest expense, income taxes, depreciation and amortization	$	609,301		$	148,639		$	637,631
Depreciation and amortization		(240,412	)		(62,066	)		(234,067	)
Interest expense		(80,611	)		(20,316	)		(81,718	)
Income tax expense		(105,297	)		(25,139	)		(116,332	)
Net income		182,981			41,118			205,514

Basic believes EBITDA is a useful supplemental financial measure used by its management and directors and by external users of its financial statements, such as investors, to assess:

• The financial performance of its assets without regard to financing methods, capital structure or historical cost basis;

• The ability of its assets to generate cash sufficient to pay interest on our indebtedness; and

• Its operating performance and return on invested capital as compared to those of other companies in the well servicing industry, without regard to financing methods and capital structure.

EBITDA has limitations as an analytical tool and should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies. Limitations to using EBITDA as an analytical tool include:

• EBITDA does not reflect its current or future requirements for capital expenditures or capital commitments;

• EBITDA does not reflect changes in, or cash requirements necessary to service interest or principal payments on, its debt;

• EBITDA does not reflect income taxes;

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

• Other companies in its industry may calculate EBITDA differently than Basic does, limiting its usefulness as a comparative measure.

EX-99.2

Exhibit 99.2

Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined financial statements of Horsepower Holdings, Inc. (“Horsepower”) presented below are based on, and should be read together with, the historical information that Basic Energy Services, Inc. (“Basic”) and Grey Wolf, Inc. (“Grey Wolf”) have presented in their respective filings with the Securities and Exchange Commission. The unaudited pro forma condensed combined balance sheet as of March 31, 2008 gives effect to the proposed mergers as if they had occurred on March 31, 2008, and combines the historical balance sheets of Basic and Grey Wolf as of March 31, 2008. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2008, the year ended December 31, 2007 and the twelve months ended March 31, 2008 are presented as if the proposed mergers had occurred on January 1, 2007, and combines the historical results of Basic and Grey Wolf for the year ended December 31, 2007, the three months ended March 31, 2008 and the twelve months ended March 31, 2008. The historical financial information is adjusted to give effect to pro forma events that (1) are directly attributable to the mergers, (2) are factually supportable and (3) with respect to the statements of operations, are expected to have a continuing impact on combined results.

Immediately after the mergers, the financial statements of Grey Wolf will become the financial statements of Horsepower. The mergers will be accounted for using the purchase method of accounting. Under U.S. generally accepted accounting principles (“GAAP”), Grey Wolf has been determined to be the accounting acquirer based on the fact that its stockholders are expected to hold greater than 50% of the Horsepower common stock after the mergers. The pro forma adjustments are based on a preliminary purchase price allocation whereby the cost to acquire Basic was allocated to the assets acquired and the liabilities assumed, based upon their estimated fair values. Actual adjustments will be based on the final purchase price and analyses of fair values of identifiable tangible and intangible assets, deferred tax assets and liabilities, and estimates of the useful lives of tangible and amortizable intangible assets, which will be finalized after completion of the valuation and assessment process using all available data. The final purchase price allocation will be performed using estimated fair values as of the date of the completion of the mergers. Differences between the preliminary and final purchase price allocations could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and Horsepower’s future results of operations and financial position.

The unaudited pro forma condensed combined financial statements do not reflect the realization of potential cost savings, or any related restructuring or integration costs. Although Basic and Grey Wolf believe that certain cost savings may result from the mergers, there can be no assurance that these cost savings will be achieved.

The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations in future periods or the results that actually would have been realized if the proposed mergers had been completed as of the dates indicated.

The unaudited financial statements assume that the holders of Grey Wolf’s 3.75% Contingent Convertible Senior Notes due 2023 and Floating Rate Contingent Convertible Notes due 2024 do not exercise a special conversion privilege entitling them to convert the principal amount of their notes into Grey Wolf common stock prior to the effective time of the mergers.

Unaudited pro forma condensed combined financial information — (continued)

The estimated purchase price of $1.3 billion has been calculated as follows (in thousands, except per share data and the conversion ratio):

Basic common stock outstanding		41,252
Multiplied by the cash merger consideration per share	$	6.70
Cash merger consideration for outstanding common stock	$	276,388
Less: Cash merger consideration for restricted stock excluded from the purchase price in accordance with GAAP	$	3,298
Total cash merger consideration			$	273,090
Basic common stock outstanding		41,252
Less: Shares of Basic restricted stock outstanding		567
Estimated number of Basic shares of common stock to be converted		40,685
Multiplied by the per share exchange ratio of 0.9195		37,410
Assumed market price of a share of Horsepower common stock that will be issued	$	21.84
Estimated value of the shares of Horsepower common stock that will be issued	$	817,035
Estimated value of the shares of Horsepower restricted stock included in the purchase price in accordance with GAAP	$	1,499
Estimated value of Horsepower stock options included in the purchase price in accordance with GAAP	$	37,374
Total stock merger consideration			$	855,908
Retirement of Basic revolving credit facility				150,000
Pro forma transaction costs				18,000
Total pro forma purchase price			$	1,296,998

Immediately prior to the effective time of the mergers, each outstanding common share of Grey Wolf will be converted into the right to receive (1) 0.2500 shares of Horsepower common stock and (2) $1.82 in cash. Immediately prior to the effective time of the mergers, each outstanding common share of Basic will be converted into the right to receive (1) 0.9195 shares of Horsepower common stock and (2) $6.70 in cash.

An independent appraisal firm has been engaged to assist in finalizing the allocation of the purchase price. The preliminary purchase price allocations are subject to change based on finalization of the fair values of the tangible and intangible assets acquired and liabilities assumed as described above. The estimated purchase price has been preliminarily assigned to the net tangible and intangible assets acquired and liabilities assumed as follows (in thousands):

	Preliminary
	Fair Value
Current assets	$	284,393
Property, plant and equipment		1,008,635
Goodwill		518,365
Other intangible assets		194,068
Other assets		6,495
Current liabilities		(107,165	)
Long-term debt		(260,179	)
Deferred income taxes		(343,811	)
Other liabilities		(3,803	)
Total pro forma purchase price	$	1,296,998

2

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2008

	Historical				Pro forma
								Horsepower
	Grey Wolf		Basic		Adjustments			Combined
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	286,569	$	100,174	$	(617,091	)(a)	$	194,527
						600,000	(b)
						(25,125	)(c)
						(150,000	)(d)
Accounts receivable, net		168,804		148,828		—			317,632
Other current assets		11,703		24,984		—			36,687
Deferred tax assets		5,351		10,407		—			15,758
Total current assets		472,427		284,393		(192,216	)		564,604
Property and equipment, net		755,472		649,987		358,649	(f)		1,764,108
Goodwill		10,377		218,430		299,935	(g)		528,742
Other intangible assets, net of amortization		—		26,431		167,637	(e)		194,068
Other assets, net		21,431		8,136		25,125	(c)		53,051
						(1,641	)(d)
TOTAL ASSETS	$	1,259,707	$	1,187,377	$	657,489		$	3,104,573
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	—	$	18,886	$	16,250	(b)	$	35,136
Trade accounts payable		65,242		20,629		—			85,871
Other current liabilities		55,129		67,650		—			122,779
Total current liabilities		120,371		107,165		16,250			243,786
Long-term debt, net of current portion		275,000		410,179		583,750	(b)		1,118,929
						(150,000	)(d)
Other long term liabilities		17,064		3,803		—			20,867
Deferred income tax		157,153		120,479		223,332	(h)		500,964
Stockholders’ equity:		690,119		545,751		(326,000	)(a)		1,220,027
						855,908	(i)
						(545,751	)(j)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,259,707	$	1,187,377	$	657,489		$	3,104,573

3

Unaudited Pro Forma Condensed Combined Statement of Operations

For the three months ended March 31, 2008

	Historical						Pro forma
										Horsepower
	Grey Wolf			Basic			Adjustments			Combined
	(in thousands, except per share data)
Revenues	$	201,522		$	229,873		$	—		$	431,395
Costs and expenses:
Operating expenses, excluding depreciation and amortization		113,546			137,972			—			251,518
Depreciation and amortization		27,759			28,032			3,481	(k)		62,066
								2,794	(o)
General and administrative		8,612			25,852			—			34,464
		149,917			191,856			6,275			348,048
Operating income		51,605			38,017			(6,275	)		83,347
Other income (expense):
Interest income		2,487			701			—			3,188
Interest expense		(3,337	)		(7,349	)		(10,542	)(l)		(20,316	)
								(1,343	)(m)
								2,255	(n)
Other income (expense)		—			38			—			38
Income before income taxes		50,755			31,407			(15,905	)		66,257
Income tax provision (benefit)		19,432			11,751			(6,044	)(p)		25,139
Net income	$	31,323		$	19,656		$	(9,861	)	$	41,118
Basic income per common share	$	0.18		$	0.48					$	0.51
Diluted income per common share	$	0.15		$	0.47					$	0.45
Weighted average common shares outstanding:
Basic		175,771			40,577			37,412	(q)		81,355
Diluted		219,332			41,464			40,765	(q)		95,598
Basic income per common share, restated for reverse stock-split	$	0.71	(r)
Diluted income per common share, restated for reverse stock-split	$	0.61	(r)
Weighted average common shares outstanding, restated for reverse stock-split:
Basic		43,943	(r)
Diluted		54,833	(r)

4

Unaudited Pro Forma Condensed Combined Statement of Operations

For the year ended December 31, 2007

	Historical						Pro forma
										Horsepower
	Grey Wolf			Basic			Adjustments			Combined
	(in thousands, except per share data)
Revenues	$	906,577		$	877,173		$	—		$	1,783,750
Costs and expenses:
Operating expenses, excluding depreciation and amortization		513,672			519,394			—			1,033,066
Depreciation and amortization		97,361			93,048			32,482	(s)		234,067
								11,176	(w)
General and administrative		29,439			99,042			—			128,481
		640,472			711,484			43,658			1,395,614
Operating income		266,105			165,689			(43,658	)		388,136
Other income (expense):
Interest income		13,202			2,280			—			15,482
Interest expense		(13,910	)		(27,416	)		(42,811	)(t)		(81,718	)
								(5,376	)(u)
								7,795	(v)
Loss on early extinguishment of debt		—			(230	)		—			(230	)
Other income (expense)		—			176			—			176
Income before income taxes		265,397			140,499			(84,050	)		321,846
Income tax provision (benefit)		95,505			52,766			(31,939	)(x)		116,332
Net income	$	169,892		$	87,733		$	(52,111	)	$	205,514
Basic income per common share	$	0.93		$	2.19					$	2.49
Diluted income per common share	$	0.79		$	2.13					$	2.21
Weighted average common shares outstanding:
Basic		182,006			40,013			37,083	(y)		82,584
Diluted		225,649			41,112			40,446	(y)		96,858
Basic income per common share, restated for reverse stock-split	$	3.73	(z)
Diluted income per common share, restated for reverse stock-split	$	3.16	(z)
Weighted average common shares outstanding, restated for reverse stock-split:
Basic		45,502	(z)
Diluted		56,412	(z)

5

Unaudited Pro Forma Condensed Combined Statement of Operations

For the twelve months ended March 31, 2008

							Pro Forma
	Historical									Horsepower
	Grey Wolf			Basic			Adjustments			Combined
	(In thousands, except per share data)
Revenues	$	866,086		$	908,116		$	—		$	1,774,202
Costs and expenses:
Operating expenses, excluding depreciation and amortization		506,318			540,880			—			1,047,198
Depreciation and amortization		103,706			101,855			23,675	(aa)		240,412
								11,176	(ee)
General and administrative		30,652			102,245			—			132,897
Total costs and expenses		640,676			744,980			34,851			1,420,507
Operating income		225,410			163,136			(34,851	)		353,695
Other income (expense):
Interest income		12,530			2,511			—			15,041
Interest expense		(13,755	)		(29,171	)		(42,554	)(bb)		(80,611	)
								(5,376	)(cc)
								10,245	(dd)
Other income (expense)		—			153			—			153
Income before income taxes		224,185			136,629			(72,536	)		288,278
Income tax provision (benefit)		81,548			51,313			(27,564	)(ff)		105,297
Net income	$	142,637		$	85,316		$	(44,972	)	$	182,981
Basic income per common share	$	0.79		$	2.11					$	2.24
Diluted income per common share	$	0.67		$	2.06					$	1.99
Weighted average common shares outstanding:
Basic		180,206			40,522			36,742	(gg)		81,794
Diluted		223,850			41,501			40,101	(gg)		96,064
Basic income per common share, restated for reverse stock-split	$	3.17	(hh)
Diluted income per common share, restated for reverse stock-split	$	2.69	(hh)
Weighted average common shares outstanding, restated for reverse stock-split:
Basic		45,052	(hh)
Diluted		55,963	(hh)

6

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

The historical condensed combined balance sheet and statements of income of Grey Wolf and Basic have been prepared in accordance with accounting principles generally accepted in the United States of America. Transactions between Grey Wolf and Basic were not material individually or in the aggregate. The following notes set forth the assumptions used in preparing the unaudited pro forma condensed combined financial statements. The pro forma adjustments are based on estimates made by Grey Wolf’s and Basic’s management that are preliminary and subject to change based upon the final purchase price allocation.

The adjustments to the accompanying unaudited pro forma condensed combined balance sheet as of March 31, 2008 are described below:

(a)  To record the payment of estimated cash consideration to Basic stockholders of $273.1 million, estimated cash to Grey Wolf stockholders of $326.0 million, and an estimate of Grey Wolf’s out-of-pocket transaction costs associated with the acquisition totaling $18.0 million.

(b)  To reflect borrowings of approximately $600.0 million to satisfy the cash purchase price obligation to Basic stockholders and Grey Wolf stockholders consisting of (i) a $325.0 million term loan A facility under a proposed six-year, senior secured term loan facility, of which $16.3 million is expected to be paid within one year of issuance (the “Term Loan A Facility”) and (ii) the $275 million of additional indebtedness. Horsepower will have a senior secured revolving credit facility in an aggregate principal amount of up to $325.0 million (the “Revolving Credit Facility”), which is expected to be undrawn at the closing of the mergers.

(c)  Reflects the adjustment to record debt issuance costs of $8.1 million incurred under the Term Loan A Facility, $8.1 million incurred under a Revolving Credit Facility and $8.9 million incurred in connection with the additional indebtedness.

(d)  To reflect the repayment of Basic’s outstanding balances associated with its existing revolving credit facility that will terminate upon consummation of the acquisition totaling $150.0 million and to write-off Basic’s remaining long-term deferred debt issuance costs related to the facility in the amount of $1.6 million.

(e)  To record a preliminary estimate of separately identifiable intangible assets related primarily to customer relationships with an expected useful life of approximately 15 years.

(f)  Reflects the adjustment to record the difference between the preliminary estimate of the fair value and the historical amount of Basic’s property, plant and equipment.

(g)  To record the excess purchase price over the estimated fair value of Basic’s net assets.

(h)  To reflect the adjustment of approximately $223.3 million required under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” to record the estimated incremental deferred income taxes. The adjustment reflects the difference between the preliminary fair value of Basic’s assets, other than goodwill, and liabilities recorded under purchase accounting and the carryover tax basis of those assets and liabilities. A combined statutory federal and blended state income tax rate of 38.0% was used for these adjustments.

(i)  To record the issuance of approximately 37.4 million shares of Horsepower common stock, par value $0.01 per share, at an assumed price of $21.84 per share, which was based on the average closing price of Grey Wolf common stock for the two trading days before through the two trading days after the announcement of the mergers on April 21, 2008. In addition to the common stock issuance, approximately $37.4 million and $1.5 million was recorded to additional paid-in capital related to the conversion of certain of Basic’s stock options and restricted stock awards, respectively.

(j)  Reflects the adjustment to eliminate Basic’s historical equity accounts.

The adjustments to the accompanying unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2008 are described below:

7

Notes to Unaudited Pro Forma Condensed Combined Financial Statements — (continued)

(k)  To reflect the additional depreciation expense of $3.5 million for the increase in estimated fair value of the acquired assets. For purposes of this adjustment, Basic’s historical carrying values of its fixed assets were analyzed and these historical carrying values were adjusted to estimated fair value.

(l)  To reflect interest expense of $4.9 million related to the $325.0 million Term Loan A Facility estimated at 6.31% per annum and interest expense of $5.7 million related to the $275.0 million of additional indebtedness, estimated at 8.25% per annum, to satisfy approximately $600.0 million of cash obligations associated with the mergers. If the interest rates on each of the Term Loan A Facility and the additional indebtedness increased or decreased by 0.125%, the interest expense would increase or decrease by $187,500.

(m)  To reflect the increase to interest expense associated with the amortization, over a six-year term, of the anticipated debt issuance costs incurred with the Term Loan A Facility; the amortization, over a five-year term, of the anticipated debt issuance costs incurred with the Revolving Credit Facility; the amortization, over a 10-year term, of the anticipated debt issuance costs associated with the additional indebtedness; and letter of credit fees and commitment fees associated with the Revolving Credit Facility.

(n)  Reflects the adjustment to eliminate $2.3 million of Basic’s historical interest expense, letter of credit fees, and amortization of debt issuance costs associated with Basic’s existing revolving credit facility that were assumed to be repaid at the beginning of the period presented.

(o)  To record amortization expense over an estimated useful life of 15 years for the estimated intangible assets separately identified primarily related to customer relationships.

(p)  To record the income tax benefit related to the effect of the pro forma adjustments at a combined statutory federal and blended state income tax rate of 38.0%.

(q)  Pro forma weighted average shares outstanding have been adjusted to reflect the conversion of Basic’s outstanding common stock, stock options and restricted stock to shares of Horsepower common stock and reflect the Grey Wolf exchange ratio, which is deemed to be a reverse stock split, associated with the acquisition assuming the transaction was consummated at the beginning of the period presented.

(r)  Historical shares outstanding and earnings per share are restated to reflect the deemed reverse stock split resulting from the transaction. Restated shares outstanding are calculated based on the ratio of 0.2500 for each share outstanding in accordance with the merger agreement.

The adjustments to the accompanying unaudited pro forma condensed combined statement of operations for the year ended December 31, 2007 are described below:

(s)  To reflect additional depreciation expense of $32.5 million for the increase in estimated fair value of the acquired assets. For purposes of this adjustment, Basic’s historical carrying values of its fixed assets were analyzed and these historical carrying values were adjusted to estimated fair value.

(t)  To reflect interest expense of $20.1 million related to the $325.0 million Term Loan A Facility estimated at 6.31% per annum and interest expense of $22.7 million related to the additional indebtedness, estimated at 8.25% per annum, to satisfy approximately $600.0 million of cash obligations associated with the mergers. If the interest rates on each of the Term Loan A Facility and the additional indebtedness increased or decreased by 0.125%, the interest expense would increase or decrease by $750,000.

(u)  To reflect the increase to interest expense associated with the amortization, over a six-year term, of the anticipated debt issuance costs incurred with the Term Loan A Facility; the amortization, over a five-year term, of the anticipated debt issuance costs incurred with the Revolving Credit Facility; the amortization, over a 10-year term, of the anticipated debt issuance costs associated with the additional indebtedness; and letter of credit fees and commitment fees associated with the Revolving Credit Facility.

(v)  Reflects the adjustment to eliminate $7.8 million of Basic’s historical interest expense, letter of credit fees, and amortization of debt issuance costs associated with Basic’s existing revolving credit facility that were assumed to be repaid at the beginning of the period presented.

8

Notes to Unaudited Pro Forma Condensed Combined Financial Statements — (continued)

(w)  To record amortization expense over an estimated useful life of 15 years for the estimated intangible assets separately identified primarily related to customer relationships.

(x)  To record the income tax benefit related to the effect of the pro forma adjustments at a combined statutory federal and blended state income tax rate of 38.0%.

(y)  Pro forma weighted average shares outstanding have been adjusted to reflect the conversion of Basic’s outstanding common stock, stock options and restricted stock to shares of Horsepower common stock and reflect the Grey Wolf exchange ratio, which is deemed to be a reverse stock split, associated with the acquisition assuming the transaction was consummated at the beginning of the period presented.

(z)  Historical Grey Wolf shares outstanding and earnings per share are restated to reflect the deemed reverse stock split resulting from the transaction. Restated shares outstanding are calculated based on the Grey Wolf exchange ratio of 0.2500 for each Grey Wolf share outstanding in accordance with the merger agreement.

The adjustments to the accompanying unaudited pro forma condensed combined statement of operations for the twelve months ended March 31, 2008 are described below:

(aa)  To reflect additional depreciation expense of $23.7 million for the increase in estimated fair value of the acquired assets. For purposes of this adjustment, Basic’s historical carrying values of its fixed assets were analyzed and these historical carrying values were adjusted to estimated fair value.

(bb)  To reflect interest expense of $19.9 million related to the $325.0 million Term Loan A Facility estimated at 6.31% per annum and interest expense of $22.7 million related to the additional indebtedness, estimated at 8.25% per annum, to satisfy approximately $600.0 million of cash obligations associated with the mergers. If the interest rates on each of the Term Loan A Facility and the additional indebtedness increased or decreased by 0.125%, the interest expense would increase or decrease by $750,000.

(cc)  To reflect the increase to interest expense associated with the amortization, over a six-year term, of the anticipated debt issuance costs incurred with the Term Loan A Facility; the amortization, over a five-year term, of the anticipated debt issuance costs incurred with the Revolving Credit Facility; the amortization, over a 10-year term, of the anticipated debt issuance costs associated with the additional indebtedness; and letter of credit fees and commitment fees associated with the Revolving Credit Facility.

(dd)  Reflects the adjustment to eliminate $10.2 million of Basic’s historical interest expense, letter of credit fees, and amortization of debt issuance costs associated with Basic’s existing revolving credit facility that were assumed to be repaid at the beginning of the period presented.

(ee)  To record amortization expense over an estimated useful life of 15 years for the estimated intangible assets separately identified primarily related to customer relationships.

(ff)  To record the income tax benefit related to the effect of the pro forma adjustments at a combined statutory federal and blended state income tax rate of 38.0%.

(gg)  Pro forma weighted average shares outstanding have been adjusted to reflect the conversion of Basic’s outstanding common stock, stock options and restricted stock to shares of Horsepower common stock and reflect the Grey Wolf exchange ratio, which is deemed to be a reverse stock split, associated with the acquisition assuming the transaction was consummated at the beginning of the period presented.

(hh)  Historical Grey Wolf shares outstanding and earnings per share are restated to reflect the deemed reverse stock split resulting from the transaction. Restated shares outstanding are calculated based on the Grey Wolf exchange ratio of 0.2500 for each Grey Wolf share outstanding in accordance with the merger agreement.

9