I made a large series of sales in BAS for $26.23 on average. These shares were sold for an average gain of 116% from my initial purchase price a few years ago.
This sale brings BAS back in line to a 15% position in my portfolio. It had been almost 25%. The 10% cash raise will sit on my books for now.
I ran some numbers, and from their last report, I’m thinking BAS was probably worth about $8 a share. This massive move higher has been from the company managing to stop the losses they were taking every quarter. However, the next major risk to the shares will be execution; can the company turn a profit?
I think I can see how the company could make $1.60 a year in earnings pretty easily. That puts an 11 year break even point, which is about the top end of my acceptable range. At this junction, the shares are a fair price, in my book.
But I love the company, so I’ll be keeping the 15% position I have in them. I think they don’t just turn $1.60. I think they surprise us all and make $2.50-3 per share annually, sending the shares into the $30-40 range.
I cannot justify keeping the massive ~25% of my portfolio in BAS though. That’s too much, and I do have a lot of money sitting on the table here. I’m only willing to take regular risks that Basic Energy Services makes the next step successfully, even though I’m confident they will.
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The stock could get to the $30-40 range easily, but I don’t think netting $2.50-3 a year is realistic.
They were able to make $2.50 back in 2006, but depreciation and interest expense is 4x now what is was back then. For comparison, revenue has yet to double since then, and gross margin has gone from 40 to 30%.
The $1.60 in earnings comes from the depreciation – the new equipment is getting better. Their depreciation soared because this is new technology. But it’s reasonable to expect that to come in per unit of production.
BAS is becoming a bigger company – maybe not in terms of revenue but in terms of operations. They’ve made several key acquisitions and they are pouring cash into their business, growing it. Look how far they’ve come in terms of reducing their losses.
A combination of improved lifespans of machinery, favorable pricing for natural gas, reduced competition, and more available drilling jobs will work in BAS favor. That’s where I see them getting back to record earnings potential.
But if they can’t do that, I actually don’t see the justification for a $30-40 price target.
So I guess there’s a differing opinion.