Like many suppliers in the U.S. oilfield, Basic Energy Services (NYSE:BAS) has been badly beaten up. The culprit is a once-in-a-generation downturn that engulfed the entire industry, pushing Basic's latest quarterly revenues down 70% compared to their peak just 18 months earlier.
It recently culminated in the company's announcement that it will pursue a prepackaged bankruptcy and recapitalization plan.
To suggest Basic or others industry players (Key Energy Services (NYSE:KEG) made a similar announcement) should have seen the writing on the wall is probably disingenuous. Most downturns arrive like thieves in the night, providing little warning. This one was no different.
Basic's challenges were, however, exacerbated by a thin capital structure. When the downturn began in late 2014, after a period of unprecedented industry growth and profitability, its debt levels were almost four times equity. This is leverage well beyond what the large-cap integrated service companies employed at the time, including Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI) and Weatherford International (NYSE:WFT).
To remedy, Basic is undertaking what it calls a "deleveraging transaction" with holders of its secured term notes and other lenders. Essentially, the deal swaps much of its debt for equity ownership of the company. Management is targeting the end of November for deal approval. It hopes to emerge from bankruptcy by year end.
The arrangement provides valuable breathing room. Most importantly, it allows the company to meet ongoing obligations to suppliers, customers, employees and others. From what we gather, it also includes (or will lead to) a working capital line of credit to finance expected growth.
The industry needs suppliers like Basic, and EnergyPoint's customer satisfaction data indicate the company should be positioned to compete. Because of its size, it tends to go up against smaller, less capable outfits. It fills a niche and its customer satisfaction ratings reflect this.
We expect the company will effectively exit certain businesses. This includes contract drilling, which was never a very good fit in our opinion. Drilling's fundamentals now look too weak for all but the largest or most capable players.
Basic's best opportunities lie with production-related services. With WTI expected to range between $45 and $55, workovers and wellservicing (a company strength) will be in high demand. Its long-held presence in the Permian Basin - the most active play in the industry - is also reason for hope.
Of course, nothing is guaranteed in an oversupplied market where reactivation of marginal equipment could torpedo a nascent recovery. Nevertheless, it appears the storm is lifting just as Basic is set to regain its balance.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: My firm, EnergyPoint Research, does and/or seeks to provide for-fee data subscriptions to oil and gas industry participants, investors and other stakeholders, including companies covered in its posts, reports, articles and surveys.
Additional disclosure: My firm, EnergyPoint Research, does and/or seeks to provide for-fee data subscriptions to oil and gas industry participants, investors and other stakeholders, including companies covered in its posts, reports, articles and surveys.
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