Basic Energy Services In-Depth IPO Analysis, Comparison to NBR, KEGS (BAS, KEGS, NBR)

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 |  Includes: BAS, KEGS, NBR
by: Bill Simpson

Basic Energy Services, Inc. (BAS) plans to offer 14. 4 million shares(assuming over-allotment is exercised) in a range of $18-$20. Selling shareholders will be selling 9.4 million shares in the offering with BAS selling 5 million. Goldman Sachs and CSFB are the lead underwriters of the deal. Post-offering BAS will have 33.8 million shares outstanding for a market cap of $642 million mid-range. Majority of IPO proceeds will be going to pay down debt.

Selling shareholder DLJ Merchant Banking will own just under 50% of outstanding stock post-offering. DLJ Merchant Banking is a controlled affiliate of underwriter CSFB.

BAS provides well site services to oil and gas drilling and producing companies, including well servicing, fluid services, drilling and completion services and well site construction services. With the rise in oil and natural gas prices and the resultant rise in production efforts, well site services has been a good spot to be in 2005. BAS utilization rates back that statement with 60% in 2002, 78% in 2004 and 87% for the first nine months of 2005. BAS 1,000+ oil/gas company customers are concentrated in the major United States onshore oil and gas producing regions in Texas, New Mexico, Oklahoma, Louisiana and in the Rocky Mountain states. The majority of customers are independent oil/gas production companies.

BAS receives revenue from 4 distinct operating segments:

'Well servicing' accounts for roughly 50% of BAS revenues from a fleet of over 300 well servicing rigs(workover rigs) and related equipment. BAS operates the third largest fleet of workover rigs in the United States with a 10% market share. The two largest are Nabors(NYSE:NBR) with 31% market share and Key Energy(KEGS) with 18% market share.

'Fluid services' segment accounts for 29% revenues. BAS operates a fleet of over 450 fluid services trucks and related assets, including specialized tank trucks, storage tanks, water wells, disposal facilities and related equipment. These assets provide, transport, store and dispose of a variety of fluids. Note that the Fluid Services segment is an offshoot of Well Servicing, meaning approximately 80% of BAS revenue is derived from and dependent on workover rig growth and workover rig utilization.

The remaining 20% of revenue is derived from 'drilling services' and 'well site construction services.'

Put simply the easiest measure of success for BAS going forward will be number of workover rigs in operation and the number of those being utilized. The well servicing sector has been in a consolidation phase the past decade with currently only 4 'survivors' with 50+ workover rigs in operation. Obviously BAS is one of those survivors with 50+ rigs and thus one of the consolidators - BAS has made 36 separate acquisitions over the past 4 1/2 years. With over 1,000 workover rigs still operated by small operators(under 50 rigs), expect BAS to continue on it's rapid acquisition pace.

Financials

Post-offering BAS will be in excellent shape debt-wise, especially so for a company intent on acquisitions. The $94 million in long term debt post-offering should not hinder operations, future acquisitions and puts them in slightly better shape debt-wise than competitors NBR/KEGS.

3 1/2 X's book post-offering BAS does not expect to pay a dividend.

Top-line growth has been very strong, fueled by both increased utilization rates and acquisitions. BAS increased annual revenue by 74% in 2003, 72% in 2004 and 41% in 2005 on and expected $440 million in revenue.

BAS has been profitable the past 3 years and has managed to increase net margins along with increased revenue -- as we've seen with many of these oil services companies, BAS net margins are highly dependent on utilization rates. Net margins in 2005 appear as if they will come in at 12%. Note that this takes into account folding out debt paid off on offering. Bottom line net for 2005 should come in $1.40-$1.45 to put BAS at mid-range 13 X's 2005 earnings.

Looking out to 2006 I think we can expect a continued strong production environment, meaning solid utilization rates for BAS. Oil/gas production is and has always been a cyclical business and we can expect at some future point that prices will fall and business will slow as it always has done. However as we end 2005 with oil near $60 and natural gas near $11, it's a reasonable assumption that production will remain strong into 2006.

Revenue growth has been strong here, but many of the smaller and easier to consolidate players in the sector have already been scooped up. I'd expect top-line to continue to expand in 2006, but to follow the trend of 2005 and grow at a slower pace. I'm going to be very conservative here and project 20%- 25% top-line growth in 2006. Keep in mind again this is a cyclical business in a bull phase being consolidated rapidly and I just don't think we can expect to see BAS book 40-70% top-line increase annually going forward.

I do expect continued slight margin expansion and at 20-25% top-line growth in 2006 I think BAS can book $1.85-$1.90 per share. At mid-range than BAS will be trading at roughly 10 X's '06 earnings. Keep an eye on the top-line number the first quarter or so in 2006, as there is a chance BAS can grow that number stronger than I'm projecting. If they do than earnings will also be stronger.

Looking at both NBR/KEGS is would appear as if BAS may be priced for aftermarket appreciation.

Nabors Industries Ltd (NBR) the sector leader is currently trading 3 X's book, 18 X's 2005 earnings and 13 X's expected 2006 earnings. NBR is expected to grow the top-line 20-25% in 2006.

Key Energy Services, Inc. (KEGS )which is trading at 22 X's '05 earnings, 13 X's 2006 expected earnings with 10-15% expected top-line growth.

BAS is coming 3 1/2 X's book, 13 X's '05 earnings and 10 X's a conservatively forecasted 2006 earnings with a 20-25% forecasted top-line growth rate.

Risks here are the obvious one that if oil and natural gas prices decline to a point to stunt oil/gas production, BAS rig utilization rates(and net margins) would plummet. This doesn't seem to be a near term issue, however this is a cyclical business and one can assume sometime down the line prices and production will decline. The other risk is that while currently the balance sheet is clean, continued acquisitions will lead BAS to raise more capital. Expect a dilutive secondary sometime in the first year after the ipo as BAS will look first to access equity markets to raise future monies rather than the debt markets.

Note also that an audit in 2004 discovered material weaknesses in the 2003 audit. This did not result in a restatement of earnings and is in my opinion this not nearly as much an issue as some we've seen. BAS feels that they've remedied the accounting oversight issue by increasing staff in this area.

Conclusion

Recently with Hercules Offshore, Inc. (HERO) and now here with BAS it appears the market is once again bringing energy stocks out at a multiple allowing aftermarket appreciation. Up until the summer of 2005, energy related ipos were consistently being underpriced offering excellent entries for aftermarket players. That changed a bit this summer and early fall as energy ipos began pricing even with and sometimes at a premium to the sector. BAS at $20 I equate with HERO at $20, think reasonable upside here could be to the $26 area, or 13 X's '06 expected earnings. Much like HERO at $20 if the group should turn and decline than BAS at $20 may be much better suited to maintain it's valuation. If the sector moves ahead BAS should be positioned to outperform up to that $26 area where I'd expect it to than perform overall with NBR/KEGS. Note though that the onshore services group has not performed as well as HERO's offshore niche here in 2005. NBR is up 35-40% here in 2005 though, so the sector has done well.

I like BAS in range and up $1-$2 from pricing quite a bit. Very good risk/reward set-up anywhere $22 and below and decent risk/reward set-up even on an open $23ish. For earnings per share growth coupled with solid net margins, $18-$20 looks too cheap for BAS in this oil/gas production environment.