Focus Article: Basic Energy Services, Inc. (BAS)

Basic Energy Services, Inc. (BAS) $10.32

The Company:

Founded in the Permian Basin in 1992, Basic Energy Services is a provider of well site services essential to maintaining production from the oil and gas wells within its operating area.  With over 5,700 employees, the company has more than 100 service points throughout the major oil and gas producing regions in Texas, Louisiana, Oklahoma, New Mexico, Arkansas, Kansas and the Rocky Mountain and Appalachian regions. Basic Energy Services focuses on the well count in prolific oil and gas producing regions in the country, by providing a wide range of well site services that are essential for establishing and maintaining the flow of oil and gas throughout the entire lifecycle of the well. The company’s top customers include ExxonMobil, BP America, Chesapeake Energy and Apache to name a few.

The company has a market leading presence in the Permian Basin, from where it generates 40% of its revenue. In 2011, Basic continued to redeploy equipment from dry gas areas to more active areas within its footprint. In doing so, the company derived an increase in revenue from its oil and liquid markets to more than 70% compared to 50% in 2008. As a result, low natural gas prices have not impacted the company’s prospects as much as they have impacted producers. The company continues to be the third largest servicing fleet after Nabors (NBR) and Key Energy (KEG).

Services provided by Basic Energy Services

1. Well Servicing: Well servicing is required on an on-going basis to maximize the flow of oil or gas. These services extend from wellbore maintenance, well completion and workover procedures to plugging and final abandonment.
2. Fluid Service: Specialized tank trucks and storage trucks are used for the transportation, storage and disposal of various fluids used in the different phases of drilling and production.
3. Pumping Services: These services ensure that oil and gas operators benefit from services that prepare newly drilled wells for production and maintain optimal flow for producing wells.
4. Rental / Fishing Tools: These tools are used for the recovery of wireline tools, drill pipe, packers, tubing and any other equipment left downhole or stuck during drilling, completion and production operations.
5. Contract Drilling: Basic provides services to drill the initial wellbore with a fleet of nine medium–depth drilling rigs rated 5,000 ft. to 11,000 ft.
6. Wireline: These services are conducted using single-strand, multi-strand wire or cable for intervention in oil or gas wells performed during and after the completion of the well, and periodically throughout the life of the well.
7. Snubbing Services: Snubbing services are provided to allow “live-well” completion and workover operations which are used to enhance production of oil and gas wells.

The well servicing business accounts for 27% of revenue, fluid services accounts for 27% of revenue, contract drilling represents 3% of revenue and the rest categorized as “completion & remedial services” accounts for 43% of revenue.

In the year 2011, Basic Energy Services expanded its coverage and range of services with four acquisitions. The acquisition of the Maverick Companies, that provide stimulation, coil tubing and thru-tubing service, helped increase Basic’s footprint in the Rocky Mountain market. The Lone Star Anchor Truck acquisition added 33 trucks to the company’s fluid service truck count. The purchase of the assets of Pat’s P&A added five plugging and abandonment (P&A) rigs to Basic’s South Texas well servicing rig fleet. The acquisition of CryoGas Services added five nitrogen pumping units and two nitrogen transports and also expanded the current nitrogen pumping capability within Basic’s Completion and remedial services segment.

In the first quarter of 2012, Basic Energy Services acquired two P&A workover rigs bringing the company’s total rig fleet to 34. In May 2012, the company purchased the operating assets of Surface Stac, a provider of surface well control rental equipment, for $27.9 million.

On May 24, 2012, the company announced that,  ‘its Board of Directors has reauthorized the repurchase of up to approximately $35.2 million of its common shares from time to time in open market or private transactions, at the company’s discretion, as a continuation of its prior $50.0 million program announced in 2008 (of which $14.8 million has been previously repurchased).‘

This is actually a red flag for me for a couple of reasons. The fact that the board authorized a stock repurchase and completed a small fraction of it along with the company raising additional capital through secondary offerings makes the repurchase look like window dressing instead of a way to return value to shareholders. Moreover the company is a growth stage and acquiring its stock, albeit in small quantities, may not be the best use of capital.

Business Statistics & Financials:

In the first quarter of 2012, Basic Energy Services reported net income of $19.6 million, or $0.47 per diluted share, compared to net income of $22.5 million in the fourth quarter of 2011 and a net loss of $18.5 million in the first quarter of 2011. First quarter 2012 revenue rose 5% to $370.9 million from $354.4 million in the fourth quarter of 2011, and increased 51% from the $246.1 million reported in the first quarter of 2011.

The key issue with Basic is it’s high debt load and high CapEx. The company carries $715 million in net debt on it’s balance sheet and spent $222 million on CapEx in 2011. Capital expenditures in 2012 are expected to be $250 million. The good news is that the company expects maintenance CapEx to only be 4 to 6% of revenue or roughly 30% of overall CapEx. Cash flow from operations was $279.45 million last year. The company trades for a little over 3 times EBITDA and 2 times tangible book value.

The 17 analysts that cover the stock on average expect the company to earn $1.75 per share on revenue of $1.48 billion. The average price target is $18.07.

Competitors:

Insider Buying:

Three insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Basic Energy Services, Inc. here.

Conclusion:

The heavy insider buying we noticed in the oil and gas sector and especially the oil services companies, appears to have sparked investor interest with several of them posting very strong gains last week and especially last Friday. Basic Energy Services saw its stock post a gain of nearly 13% over two trading sessions. Despite the risk of short-term reversion, the company continues to appear attractively valued after losing nearly 42% of its value over the last three months.

On account of its high debt and heavy spending on both CapEx and acquisitions, I am not very comfortable owning the company.