By: Michael
Reardon, AIM student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Basic Energy Services, Inc. (NYSE:BAS) is an oilfield service
company with operations across a number of shale basins in the United States.
The company’s core operations are tied to production activities, including
fluid servicing and pressure pumping.
• BAS's operating performance
has been under extreme pressure under the last 18 months as domestic rig count
and completion activity have fallen precipitously.
• For the last two quarters,
industry analysts and management teams have been forecasting a bottom in oil
prices and activity as being “right around the corner;” this has yet to materialize,
though capacity has begun to leave the industry.
• BAS management has experience
managing through multiple commodity cycles and is taking all of the steps
necessary to ensure that BAS will weather the downturn and be ready to take
market share when activity begins to grow again.
Key
points: Like most small-cap service names, Basic Energy Services has
struggled over the last year, and saw 2015 sales and EBITDA slide 45% and 94%,
respectively, relative to 2014. Recently, liquidity fears have become the
investment driver du jour.
BAS management is exceptionally
experienced – and this experience is beginning to show. The management group,
which has an average of over 20 years in the energy industry, is doing more
than just position the company to survive the downturn, which is the tact many
peers have taken through this cycle.
Management has been adamant for
the last 18 months that the key to taking market share in the next cycle will
be to match the number of frac crews with the needs of the market, as these
crews are difficult to recruit and train. Service companies with appropriate
crew capacity will be the only ones able to scoop up business when activity
recovers. Excess equipment can be rented or bought (at cheap prices at the
bottom of the cycle), but crews will be hard to come by. Management made this a
focus during the 4Q15 earnings call.
Management has also
appropriately adjusted its balance sheet and CapEx plans to match current
market conditions – all of which is very good news for equity holders.
Management is digging its heels and girding itself for the remainder of this
downturn: the company recently upped its liquidity to over $200 million via a
new $165 million term loan agreement and reduced CapEx to maintenance levels
(it appears the word “restructuring” is not in CEO Roe Patterson’s vocabulary).
This gives BAS headroom through the end of 2017, which is later than even the
most bearish oil pundits seem to believe activity will remain depressed.
Going forward, investors will
likely still keep their eyes keenly on the company’s liquidity. However, so
long as management can execute on their operational plan (and they do have an
excellent track record of meeting expectations), liquidity fears will
dissipate. This will allow operational performance to once again drive stock
performance: If and when the market finds a bottom, Basic’s frac crews will be
standing ready to capture market share, which will provide upside to stock
price.
What
has the stock done lately?
Since the beginning of the year,
shares of BAS are up nearly 18%; month-to-date they are up over 80% as the
market digested the 2015 earnings release and the debt restructuring discussed
above. The debt restructuring eased the markets concerns around BAS’s
liquidity, but further upside to the stock price will be dependent on an
improvement in the macro environment and – more importantly – management’s ability
to control operating expenses. Management has a demonstrated expertise in doing
just that, which should provide upside to the stock over the next two quarters.
Past
Year Performance: BAS has fallen 54% over the last twelve months,
which is in line with many of its independent pressure pumping peers. However,
as activity and pricing in the industry finds a bottom, Basic is set to see
gains above those of peers as the company is better positioned to win
incremental business.
Source:
FactSet
My
Takeaway
The pressure pumping market has
been in dire straits over the last 18 months and BAS has been hit as hard as
anyone – no doubt about that. But, the company is doing the right things to
shore up its balance sheet, reduce capital and operating expenses, and keep its
fleet operational. This leaves Basic better positioned than any of its
small-cap peers to take share and win business as the market slowly improves –
though its reconfigured balance sheet gives it the flexibility to stay
well-positioned even if the macro picture doesn’t improve for another 12
months. The combination of these factors makes BAS a best-in-class option in
the small-cap pressure pumping space, and the market’s recognizing those
factors should drive the stock’s performance in the future.
Source: FactSet
