Is Basic Energy Services About to Lose Its Mojo?

| About: Basic Energy (BAS)

Almost everybody seems mesmerized by Basic Energy Services (NYSE:BAS), a company that provides services to oil and gas producers. The stock has been on a tear for the past four weeks, closing Wednesday at $37.01. That’s a gain of almost +46% since June 20 – and +426% from its 52-week low of $7.03.

Analysts have been steadily raising earnings estimates since Q1, when BAS surprised everyone by trouncing estimates by 566%, announcing a profit of $0.20 a share rather than the $0.03 expected by analysts. (That was its first positive quarter since Q4 2008.) In just the past seven days, estimates for the current quarter have jumped from $0.38 to $0.48. Estimates for FY 2011 are $1.96 and for 2012, $2.71. All nine analysts rate it a Buy.

All positives, yes. But all is not positive.

With last year’s loss of -$1.14, BAS doesn’t have a current P/E ratio, but its forward P/E is 13.65, which means you’re paying 13 times 2012 projected earnings. And this assumes that the first quarter profit is a new trend that will accelerate significantly over the next 7 quarters!

Particularly worrisome is BAS’s $562 M of debt, which is nearly triple its equity. That’s almost 3 times book value. And cash flow? Not so good. Cash at last quarter's end was $13.77 M, which is $0.33/share. Operating cash flow was $70.98 M; and levered free cash flow was a negative -$44.01 M. Obviously, the company doesn’t have enough cash flow to service its debt.

It’s a little surprising to see a stock with its first positive earnings quarter following two years of losses suddenly being priced on earnings that analysts expect to materialize over the next seven quarters. The fact that the company is cash-poor and burdened with debt only adds to my concerns.

Another eyebrow-raiser is insider selling by directors and officers. Over the past three months the president / CEO has sold 145,000 shares of BAS, almost 25% of his holdings. The CFO has sold 32,000 shares, almost 20% of his. Insiders are not buying.

Three weeks ago Sabrient’s quantitative system rated BAS a Strong Sell, based on its low Value score of 5 out of a possible 100, which is one of the lowest in its industry. A low value score means the stock price is high compared to earnings, or overvalued. On June 28, influenced by BAS’s strong momentum as reflected in its Sabrient momentum score of 99, the Sabrient rating changed to a Hold.

So, are investors spellbound by BAS? Or is the company on its way to recovery?

We’ll find out when BAS releases its Q2 results, which are expected to be $0.48, more than double Q1 earnings of $0.20. The announcement is Thursday, after market close; the earnings conference call will take place on Friday morning at 9 o’clock Eastern.

Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , , , Oil & Gas Equipment & Services
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