BAS is off 4% this morning on earnings which were, in my opinion, both very bad and very well known. After reviewing the case, I broke my own rule and increased the position by 25% around $10.80, slipping into the old habit of borrowing money to bet on prosperity.
But just a few percent so not too badly…
This isn’t some kind of shock here, like with Apple. We’ve known the entire gas well service sector was sucking wind for 8 months now.
BAS took the hits and issued more bad guidance, but that’s no reason to take them at their word and sell – because the stock is dirt cheap.
Please, come in further and I’ll get out of this chair and show you.
You see, the troubles in BAS have been industry wide. The management of BAS admits personally that they were suckered into the surge in demand for gas drilling. And at that time, so were dozens of new competitors who entered the market trying to get a slice of the pie.
And right around that same time, natural gas prices went into a total tail spin, forcing well owners to curtail spending and leaving all these new business out to dry.
The results have been predictable, really. The companies all slammed into a barrier as hard as these stone walls you see around you.
Thus, utilization rates for the services firms have been plunging, and in order to try and stay in business, margins have come under intensive pressure.
The company has planned for more of this sort of action in guidance, for the fourth quarter of 2012, and the first quarter of 2013.
But, here’s where I’m intrigued in continuing to buy and hold BAS.
For starters, I think that the energy revolution here in the US is just getting started. I think politicians on both sides of the aisle are going to foster this growth for a myriad of reasons, and I think alternative energy sources, like nuclear or oil, are pricey enough to keep the natural gas revolution humming.
So the trend and development is intact.
And, when I was looking through the space, what I noticed was that BAS’ peers are really total garbage. I had to LOOK to find a company that had any cash on their books. BAS has enough to run their operations on no revenue for a third of a year. So BAS has the chickenpox, but these new competitors aren’t quite up with their antibody game, if you follow 14th century disease proliferation references.
So lots of BAS’ competition, which has really been putting the stress on their profit margins, is about to go away, in my opinion.
Which brings us finally to natural gas prices. They’ve been going up.
Now, I don’t know if the natural gas pricing recovery is legitimate, or if it’s merely a product of some speculators who haven’t been respectful of the storage issues that were causing the problems. But I do know higher natural gas prices can’t hurt to coax some money back into well exploration and development.
So, I see a situation where BAS has caught a cold, and for that the markets are pricing in $0.16 quarters for eternity.
As I look out this window, I can see clear skies on the horizon. I think this ship turns back around sometime next year – maybe the year after that.
And in the meantime, BAS will just have to bide their time by buying out some key competition and watching the others go under.
If BAS can manage to average $0.25 a quarter over the next year or so, the immediate issues notwithstanding, this company is going to $18. I think that’s reasonable. They’ve already made more than that in the first 9 months of 2012. This is a rut, not a canyon.
Now get the door while I put on my coat. I’m out for the day.
3 Responses to Dipped Into Margin, Averaged Down In BAS
Cain, I suggested PSN.TO on your blog when you asked for water service companies related to fracking. Thanks so much for posting your analysis of PSN.TO.
Do you have any thoughts between BAS and FRC.TO (Canyon), another fracking service company? While Canyon doesn’t look as cheap as BAS, it also has a much lighter debt load (at least according to Yahoo finance). Canyon hasn’t reported yet (Nov. 6), but had an ugly down day Friday after BAS announced their earnings. Canyon purportedly has $23 million in cash, but less than $6 million in debt, as opposed to BAS having $103 million in cash but over $700 million in debt. Canyon has a return on equity of 35% compared to BAS of 17%. While BAS looks cheaper, how would you weight the comparative debt loads of the two companies? If the near term looks bad, wouldn’t the lower debt load help Canyon wait out for better natural gas prices? If you don’t have time or interest in Canyon, no problem. Thanks again for the analysis on PSN.TO.
I’ll see if I can get around to it.
I know nothing about this Canyon group you are referring to. But if one company carries less debt and still has an ROE 2x the debt-laden company the choice should be obvious.
That said, all the big boys (SLB, BHI, HAL) believe activity in Canada is going to be weak as fuck going forward. You will still see signs of the normal winter ramp in activity but it’s not going to be nearly as pronounced as normal years.