BASIC ENERGY SERVICES INC BAS
August 31, 2018 - 9:48am EST by
mitc567
2018 2019
Price: 9.02 EPS -2.30 -1.40
Shares Out. (in M): 27 P/E 0 0
Market Cap (in $M): 239 P/FCF 163 9.8
Net Debt (in $M): 250 EBIT -61 7
TEV ($): 489 TEV/EBIT 0 84

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Description

Basic Energy Services Inc.

 

Basic Energy Services Inc. (“BAS” or “Basic”) is an US oil field services provider trading at a substantial discount to historical valuations based on mid-cycle cash flows for this industry group.  Oil service stocks like Haliburton (HAL), Schlumberger (SLB) and Weatherford (WFT) typically trade at around 10 times mid-cycle enterprise value to trailing twelve months EBITDA (EV/EBITDA). Assuming a 20% discount for BAS’ smaller size, if Basic traded at 8 times its mid-cycle conservatively estimated EBITDA of $200 million it would be worth $1.6 billion in enterprise value.  Subtracting out current net debt of $250 million leaves $1.35 billion of equity value to be divided by 26.4 million shares yielding a share price of $51 per share.

 

Background

Basic Energy Services Inc is an US oil service company that competes in the areas of well completion and remediation, well servicing and water logistics.  BAS built each of these businesses via internal growth and a series of acquisitions from 2006 to 2012. In 2016, BAS filed a prepackaged bankruptcy with its bondholders effectively acquiring the Company for forgiveness of the great majority of outstanding debt.  Today BAS is a lightly leveraged company with a shareholder base still largely composed of former distressed debt and equity value investors.

BAS, like all oil field service companies, goes through boom and bust cycles based on the price of crude oil in the US.  The collapse in crude oil prices in 2015 caused a shake-out in the US oil service sector with many companies “mothballing” equipment and firing teams of employees.  Today, with oil prices comfortably in the $60 to $70 per barrel price range, oil service companies are raising prices to cover increasing labor costs and improve profitability.

BAS stock is trading at distressed levels despite the beginnings of this recovery due to competitive issues in the Permian Basin for fracking services and has begun to realign assets to maximize profitability.  Analysts expect BAS to generate $117 million in EBITDA this year and $147 million in 2019. It is not a stretch to imagine that there is upside to these projections if the price of oil stays in the current price range.

Each of these verticals has different economics based on the competitive aspects of the regions covered by BAS.

 

 

Well completion and remediation

This segment is composed of Pumping, Coiled Tubing and Rental Tools used to support the fracking and maintenance of existing and new wells.  BAS has operations across the US and the following table highlights the location of these assets as of December 31, 2017.





 

 

Market Area

 
 

 

Mid-

 

Rocky

Permian

 

 

 
 

Ark-La-Tex

Continent

Gulf Coast

Mountain

Basin

Appalachia

Total

 

Pumping Units

22

150

5

59

74

310

 
 

Air/Foam Packages

19

7

10

36

 
 

Snubbing Units

6

19

11

36

 
 

Rental and Fishing Tool Stores

6

1

1

8

16

 
 

Coiled Tubing Units

2

13

3

18

 
 

 

The Company is currently shifting some of its Pumping Units from the Permian Basin to other markets due to an oversupply of horsepower in that market.  This will cause a small loss in revenues in Q3 2018 as that equipment will be non-revenue generating during the transition. As per management’s statement, this will increase margins and revenues going forward due to higher demand in the transfer markets from existing customers.

Well Services

BAS Well Services encompasses a full range of services performed with a mobile well servicing rig, also commonly referred to as a workover rig, and ancillary equipment.  As per the 10-K BAS states that:

Our rigs and personnel provide the means for hoisting equipment and tools into and out of the well bore, and our well servicing equipment and capabilities also facilitate most other services performed on a well. Our well servicing segment services, which are performed to maintain and improve production throughout the productive life of an oil and natural gas well, include:

   

maintenance work involving removal, repair and replacement of down-hole equipment and returning the well to production after these operations are completed;

 

   

hoisting tools and equipment required by the operation into and out of the well, or removing equipment from the well bore, to facilitate specialized production enhancement and well repair operations performed by other oilfield service companies; and

•                          plugging and abandonment services when a well has reached the end of its productive life.  Here is a breakdown of BAS equipment in this arena as of December 31, 2017:

   

Market Area

 
 

Rated

Permian

Gulf

 

Mid -

Rocky

 

 

 

 

 

Rig Type

Capacity

Basin

Coast

Ark-La-Tex

Continent

Mountain

California

Appalachia

Inactive

Total

 

Swab

N/A

1

2

1

4

 
 

Light Duty

< 90 tons

2

2

 
 

Medium Duty

> 90 <125 tons

63

14

13

30

32

13

2

22

189

 
 

Heavy Duty

> 125 tons

72

19

2

5

12

3

2

115

 
 

Total

 

135

33

16

37

45

15

5

24

310

 
 

 

Rig hours, utilization and operating margins are continuing to climb due to the recovery in oil prices.  BAS will consider bringing back “mothballed” units as pricing and demand continue to rise. Here is a chart from the last quarterly call highlighting this trend.

 

Segment Analysis

 

 

2Q18

1Q18

4Q17

 

Rig Hours (000s)

181.6

168.5

159.5

Utilization

82%

76%

53%

Revenue/Hour*

$348

$338

$339

Segment Margin

23%

16%

19%

*Excludes rental tool revenue as a part of larger rig packages

 

Water Logistics

This segment provides oilfield fluid supply, transportation, storage and construction services. These services are required in most workover, completion and remedial projects and are routinely used in daily producing well operations. These services include:

   

the transportation of fluids used in drilling, completion, workover, and flowback operations and of salt water produced as a by-product of oil and natural gas production either by truck or pipeline;

 

   

the sale and transportation of fresh and brine water used in drilling and workover activities;

 

   

the rental of portable fracturing tanks and test tanks used to store fluids on well sites;

 

   

the recycling and treatment of wastewater, including produced water and flowback, to be reused in the completion and production process;

 

   

the operation of company-owned fresh water and brine source wells and of non-hazardous wastewater disposal wells; and

 

   

the preparation, construction and maintenance of access roads, drilling locations, and production facilities.

 

BAS is benefitting from the shift to using pipelines from trucks to transport water to and from wells.  Pipelines carry higher margins than trucking due to less labor and capital needs once the pipeline is operational.  As per the second quarter 2018 earnings call margins are healthily in the mid 20% range (Q2 2018 margins were impacted by weather) and management has guided that price increases are sticking with customers.  Here are the figures from the call.


Segment Analysis

 

2Q18

1Q18

4Q17

Trucks (Avg.)

900

960

967

Rev/Truck (000s)

$66.00

$59.00

$57.40

Disposal Wells

85

85

85

Segment Margin

26.30%

27.60%

20.30%

 












Here is a list of the assets in this sector as of December 31, 2017:

 

 

Market Area

 

 

 

 

 

 

 

 

Rocky

 

Permian

 

 

 
 

Mountain

Ark-La-Tex

Basin

Mid-Continent

Gulf Coast

Total

Fluid Service Trucks

125

102

523

67

158

975

Salt Water Disposal Wells

5

24

31

13

12

85

Fresh/Brine Water Stations

2

42

7

51

Fluid Storage Tanks

620

750

1,154

296

398

3,218

 

Thoughts

It appears that the US oil service industry has hit an inflection point where demand is outstripping supply and providers have the ability to raise price in excess of cost increases.  While BAS had a choppy Q2 2018, it is now;

1.       utilizing 82% of its well servicing fleet and is providing full day packages for its equipment on an increasing basis.

2.       transporting 23% of water volumes through pipelines

3.       raising prices mid-single digit for Well Servicing and low single digit for Water Logistics

4.       relocating fracking assets from the Permian Basin to the Mid-Con and signaling that monthly run rate revenues exiting September should be 10% - 20% above the third quarter average

Management seems to be positively influenced by these trends as they just purchased more $170,000 in BAS stock after last week’s correction.

 

Risks

The risks to BAS achieving increased EBITDA and revenues are the following;

1.       a decrease in oil prices below production costs in the US.

2.       a change in US or state regulatory rules that makes it illegal or not cost effective to frack oil wells.

3.       a rapid increase in the supply of newly manufactured fracking equipment.

The main risk with investing in oil service companies is always the price of oil.  Competition has lessened over the years as smaller companies have been weeded out of the sector.  Private equity has come into the Permian and that has depressed margins in this recovery. If this were to spread to other areas, then there could be risk to EBITDA growth for the industry.  I view this as highly unlikely, but it is a risk. I view bullets 2 and 3 as unlikely over the time-frame of this investment.

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1.  Continued pricing power of oil service companies due to the rebound in oil prices in the US leads to increased earnings and cash flow. 

2.  Buyout by another oil field service provider.

    sort by    

    Description

    Basic Energy Services Inc.

     

    Basic Energy Services Inc. (“BAS” or “Basic”) is an US oil field services provider trading at a substantial discount to historical valuations based on mid-cycle cash flows for this industry group.  Oil service stocks like Haliburton (HAL), Schlumberger (SLB) and Weatherford (WFT) typically trade at around 10 times mid-cycle enterprise value to trailing twelve months EBITDA (EV/EBITDA). Assuming a 20% discount for BAS’ smaller size, if Basic traded at 8 times its mid-cycle conservatively estimated EBITDA of $200 million it would be worth $1.6 billion in enterprise value.  Subtracting out current net debt of $250 million leaves $1.35 billion of equity value to be divided by 26.4 million shares yielding a share price of $51 per share.

     

    Background

    Basic Energy Services Inc is an US oil service company that competes in the areas of well completion and remediation, well servicing and water logistics.  BAS built each of these businesses via internal growth and a series of acquisitions from 2006 to 2012. In 2016, BAS filed a prepackaged bankruptcy with its bondholders effectively acquiring the Company for forgiveness of the great majority of outstanding debt.  Today BAS is a lightly leveraged company with a shareholder base still largely composed of former distressed debt and equity value investors.

    BAS, like all oil field service companies, goes through boom and bust cycles based on the price of crude oil in the US.  The collapse in crude oil prices in 2015 caused a shake-out in the US oil service sector with many companies “mothballing” equipment and firing teams of employees.  Today, with oil prices comfortably in the $60 to $70 per barrel price range, oil service companies are raising prices to cover increasing labor costs and improve profitability.

    BAS stock is trading at distressed levels despite the beginnings of this recovery due to competitive issues in the Permian Basin for fracking services and has begun to realign assets to maximize profitability.  Analysts expect BAS to generate $117 million in EBITDA this year and $147 million in 2019. It is not a stretch to imagine that there is upside to these projections if the price of oil stays in the current price range.

    Each of these verticals has different economics based on the competitive aspects of the regions covered by BAS.

     

     

    Well completion and remediation

    This segment is composed of Pumping, Coiled Tubing and Rental Tools used to support the fracking and maintenance of existing and new wells.  BAS has operations across the US and the following table highlights the location of these assets as of December 31, 2017.





     

     

    Market Area

     
     

     

    Mid-

     

    Rocky

    Permian

     

     

     
     

    Ark-La-Tex

    Continent

    Gulf Coast

    Mountain

    Basin

    Appalachia

    Total

     

    Pumping Units

    22

    150

    5

    59

    74

    310

     
     

    Air/Foam Packages

    19

    7

    10

    36

     
     

    Snubbing Units

    6

    19

    11

    36

     
     

    Rental and Fishing Tool Stores

    6

    1

    1

    8

    16

     
     

    Coiled Tubing Units

    2

    13

    3

    18

     
     

     

    The Company is currently shifting some of its Pumping Units from the Permian Basin to other markets due to an oversupply of horsepower in that market.  This will cause a small loss in revenues in Q3 2018 as that equipment will be non-revenue generating during the transition. As per management’s statement, this will increase margins and revenues going forward due to higher demand in the transfer markets from existing customers.

    Well Services

    BAS Well Services encompasses a full range of services performed with a mobile well servicing rig, also commonly referred to as a workover rig, and ancillary equipment.  As per the 10-K BAS states that:

    Our rigs and personnel provide the means for hoisting equipment and tools into and out of the well bore, and our well servicing equipment and capabilities also facilitate most other services performed on a well. Our well servicing segment services, which are performed to maintain and improve production throughout the productive life of an oil and natural gas well, include:

       

    maintenance work involving removal, repair and replacement of down-hole equipment and returning the well to production after these operations are completed;

     

       

    hoisting tools and equipment required by the operation into and out of the well, or removing equipment from the well bore, to facilitate specialized production enhancement and well repair operations performed by other oilfield service companies; and

    •                          plugging and abandonment services when a well has reached the end of its productive life.  Here is a breakdown of BAS equipment in this arena as of December 31, 2017:

       

    Market Area

     
     

    Rated

    Permian

    Gulf

     

    Mid -

    Rocky

     

     

     

     

     

    Rig Type

    Capacity

    Basin

    Coast

    Ark-La-Tex

    Continent

    Mountain

    California

    Appalachia

    Inactive

    Total

     

    Swab

    N/A

    1

    2

    1

    4

     
     

    Light Duty

    < 90 tons

    2

    2

     
     

    Medium Duty

    > 90 <125 tons

    63

    14

    13

    30

    32

    13

    2

    22

    189

     
     

    Heavy Duty

    > 125 tons

    72

    19

    2

    5

    12

    3

    2

    115

     
     

    Total

     

    135

    33

    16

    37

    45

    15

    5

    24

    310

     
     

     

    Rig hours, utilization and operating margins are continuing to climb due to the recovery in oil prices.  BAS will consider bringing back “mothballed” units as pricing and demand continue to rise. Here is a chart from the last quarterly call highlighting this trend.

     

    Segment Analysis

     

     

    2Q18

    1Q18

    4Q17

     

    Rig Hours (000s)

    181.6

    168.5

    159.5

    Utilization

    82%

    76%

    53%

    Revenue/Hour*

    $348

    $338

    $339

    Segment Margin

    23%

    16%

    19%

    *Excludes rental tool revenue as a part of larger rig packages

     

    Water Logistics

    This segment provides oilfield fluid supply, transportation, storage and construction services. These services are required in most workover, completion and remedial projects and are routinely used in daily producing well operations. These services include:

       

    the transportation of fluids used in drilling, completion, workover, and flowback operations and of salt water produced as a by-product of oil and natural gas production either by truck or pipeline;

     

       

    the sale and transportation of fresh and brine water used in drilling and workover activities;

     

       

    the rental of portable fracturing tanks and test tanks used to store fluids on well sites;

     

       

    the recycling and treatment of wastewater, including produced water and flowback, to be reused in the completion and production process;

     

       

    the operation of company-owned fresh water and brine source wells and of non-hazardous wastewater disposal wells; and

     

       

    the preparation, construction and maintenance of access roads, drilling locations, and production facilities.

     

    BAS is benefitting from the shift to using pipelines from trucks to transport water to and from wells.  Pipelines carry higher margins than trucking due to less labor and capital needs once the pipeline is operational.  As per the second quarter 2018 earnings call margins are healthily in the mid 20% range (Q2 2018 margins were impacted by weather) and management has guided that price increases are sticking with customers.  Here are the figures from the call.


    Segment Analysis

     

    2Q18

    1Q18

    4Q17

    Trucks (Avg.)

    900

    960

    967

    Rev/Truck (000s)

    $66.00

    $59.00

    $57.40

    Disposal Wells

    85

    85

    85

    Segment Margin

    26.30%

    27.60%

    20.30%

     












    Here is a list of the assets in this sector as of December 31, 2017:

     

     

    Market Area

     

     

     

     

     

     

     

     

    Rocky

     

    Permian

     

     

     
     

    Mountain

    Ark-La-Tex

    Basin

    Mid-Continent

    Gulf Coast

    Total

    Fluid Service Trucks

    125

    102

    523

    67

    158

    975

    Salt Water Disposal Wells

    5

    24

    31

    13

    12

    85

    Fresh/Brine Water Stations

    2

    42

    7

    51

    Fluid Storage Tanks

    620

    750

    1,154

    296

    398

    3,218

     

    Thoughts

    It appears that the US oil service industry has hit an inflection point where demand is outstripping supply and providers have the ability to raise price in excess of cost increases.  While BAS had a choppy Q2 2018, it is now;

    1.       utilizing 82% of its well servicing fleet and is providing full day packages for its equipment on an increasing basis.

    2.       transporting 23% of water volumes through pipelines

    3.       raising prices mid-single digit for Well Servicing and low single digit for Water Logistics

    4.       relocating fracking assets from the Permian Basin to the Mid-Con and signaling that monthly run rate revenues exiting September should be 10% - 20% above the third quarter average

    Management seems to be positively influenced by these trends as they just purchased more $170,000 in BAS stock after last week’s correction.

     

    Risks

    The risks to BAS achieving increased EBITDA and revenues are the following;

    1.       a decrease in oil prices below production costs in the US.

    2.       a change in US or state regulatory rules that makes it illegal or not cost effective to frack oil wells.

    3.       a rapid increase in the supply of newly manufactured fracking equipment.

    The main risk with investing in oil service companies is always the price of oil.  Competition has lessened over the years as smaller companies have been weeded out of the sector.  Private equity has come into the Permian and that has depressed margins in this recovery. If this were to spread to other areas, then there could be risk to EBITDA growth for the industry.  I view this as highly unlikely, but it is a risk. I view bullets 2 and 3 as unlikely over the time-frame of this investment.

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    1.  Continued pricing power of oil service companies due to the rebound in oil prices in the US leads to increased earnings and cash flow. 

    2.  Buyout by another oil field service provider.

    Messages


    Subjectprevious mid-cycle valuations
    Entry08/31/2018 11:49 AM
    Memberspike945

    thanks for the idea.  definitely seems to be cheap and have upside if things go right.

    however, has BAS historically traded at 8x mid-cycle valuations?  this seems higher than what i would expect.  BAS is a much worse business than say HAL in my opinion and should trade at a big discount.   i would argue that BAS is not even as good as a business as NOA (canadian oil sands company with heavy asset mix) that is trading at approximately 4x 2019 ev/ebitda and does not have the same liquidity concerns as BAS.  NOA also has a much better market structure as they have 45% market share and generates cash.  So i'd expect a much lower multiple for BAS - but as rasputin says catching this cycle will definitely lead to good returns if they can survive.   (although maybe i should just hope for a 8x multiple on NOA!)

    any thoughts on sector consolidation?  i know there was talk of this a while back but not sure if anything came of it.


    SubjectSome pushback
    Entry08/31/2018 12:09 PM
    Membersnarfy

    This will probably come across as an attack but I don't mean it that way.  You have been a contributing member since 2001 and I have a lot of respect for that history.

    As far as I'm concerned these guys are in the "uninvestable" box along with Tony Petrello from NBR, Gary Evans from Magnum Hunter, and a number of other oil patch zombies that never seem to go away in spite of their history of value destruction.  Part of my framework for looking at OFS companies is there is an ongoing bifurcation amongst the herd.  They are either part of the "solution" or they are not.  They either partner with their E&P customers to drive down well costs and drive up recoveries, or they do not.  To my mind BAS does not.  They exist for one reason and one reason alone - to capture overflow work that Tier 1 service providers can't handle when activity levels heat up.  These guys are straight up terrible.  I would say that evaluating the business on the basis of ongoing cash generation assumptions and applying a multiple is probably flawed, and 8x is way too high in any event.  4x might be more like it.  Probably a better way is to look at liquidation values of the equipment.

    To that point, the stock has obviously been smoked and maybe there is upside to a highly risked NAV?  I don't know.  There is compelling industrial logic to consolidation amongst the well service players too.  I don't know if a merger between BAS and KEG could harden the market enough to change the dynamics.  That would be an interesting angle to explore, assuming Roe Patterson could be sidelined.  I don't know why it hasn't happened.  I sort of assumed it was because these guys are stubborn ding dongs who didn't want to subordinate themselves to the guys at Key like Robert Drummond with his fancy Schlumberger pedigree.  Maybe with Rob Saltiel coming in at Key the dynamic can change.  Rob likes to DO things (for better or worse!).

    As I write this I realize I probably sound like I am lecturing.  I have probably been doing too much of that lately so it may mean I'm about to get smoked on some of my key positions so I guess you should take all this with a grain of salt.


    SubjectRe: Some pushback
    Entry08/31/2018 12:38 PM
    MemberAlfredJones!

    Thanks for your comments snarfy. Interesting to hear your thoughts. I have always been very underwhelmed by the qualitity of businesses in the OFS space and have wondered why I see so many bad companies in this space vs. other spaces. 

    I have a few thesis; one of which includes the fact that the industry is so volatile that few companies (SLB, CLB, some privates) have found it worth it to really invest back into the business with R&D and other organic capital investment. 

    Another thesis might be that when you exclude the "overflow" companies you will see a normal distrubition of high quality businesses that help customers and build moats around themselves. Anyway I'm sure I'm rambling but any other thoughts on why the industry includes so few high quality companies would be interesting for us. 

     


    SubjectRe: Re: Some pushback
    Entry08/31/2018 01:20 PM
    Membersnarfy

    I think the explanation starts with the basic fact that it's so easy for new entrants to get in the game.  I also think many entrants get in the game in order to play offense but what they don't understand is that the service game is about managing risk and playing defense.  You give an E&P a job quote and it's good for 30 days or some amount of time.  You have to know your costs, not just your marginal costs, but all of your costs including variable overhead, fixed overhead, depreciation, and capital costs.  Many players don't have a good handle on their cost structure except the pure marginal costs associated with the next job on the calendar.

     


    SubjectRe: Re: Re: Some pushback
    Entry08/31/2018 01:34 PM
    Membersnarfy

    To expand on that a little bit, it takes a lot of discipline to play a game like OFS with all the different layers of costs, the capital intensity and the cyclical volatility.  So many moving pieces.  Historically it wasn't hard to make money when the cycle was going up, but when a downturn starts a lot of guys start to panic and discipline goes out the window.  Maybe they overbuilt at the peak.  They probably succumbed to the pressure to chase growth.  That pressure is real.  Now they've got too much debt.  They fall into the trap of taking any job they can get as long as the price is enough to generate positive gross margin.  They feel like they don't have the luxury of trying to cover their all fixed costs.  As soon as the cost discipline gets relaxed the whole financial return profile falls apart.  


    SubjectRe: Re: Some other considerations
    Entry09/09/2018 04:55 PM
    Membersnarfy

    Could you elaborate on your view that the Permian’s slowdown is structural and not temporary?  Seismicity?  Water disposal?  Parent child interference?


    SubjectRe: Re: Re: Some other considerations
    Entry09/09/2018 08:51 PM
    Membermitc567

    Hi.  Rates have been rising across most oil service areas.  I believe that there is still room to grow, but I will defer to others who may have more integral knowledge of the sector if they disagree.  Mgt seems to agree as they have recently been buyers of the stock.  I think oil prices will stay in this range and I have made money before buying this sector when it isn't profitable.  That said, I believe BAS has enough capital to avoid bankruptcy.  I was an investor in the bonds before the prepack and valued the business at $25 coming out.  I was fortunate it ran much higher before I sold.  If we can start to see a turn in the next two quarters then I think my case will work out.  I don't see a lot of downside over that time period.


    SubjectBuffett owned company (Pilot Flying J) looking to consolidate water and sand trucking market
    Entry09/12/2018 02:25 PM
    Membermitc567

    In a Bloomberg article https://www.bloomberg.com/news/articles/2018-09-12/truck-stop-king-looks-to-corner-crude-hauling-in-chaotic-permian it states that Pilot Flying J is looking to buy frac water hauling and storage assets in the Permian Basin and other locations.  This can be viewed positively if BAS is willing to sell assets or if it reduces competion.  The buying entitity is called PWT LLC is a joint venture that is majority owned by Pilot.

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