Here’s the summary of Basic Energy Services quarter – it was the same shitty results they had last quarter but with one key distinction:
The environment for oil companies operating in the higher cost fracking regions have declined so dramatically that BAS had to write off their entire goodwill provision in their assets. Now in some respects I had already done this internally. If, for instance, you re-read this article on BAS I posted on September 16, you’ll see I was referencing a debt/equity ratio of 5.4:
Debt for BAS is not unreasonable, and is one of the more attractive aspects of the company. Whereas many of their competitors are in real threat of default, I think BAS has repayment under control with a debt to equity ratio of 5.4.
But, in actuality, at the time BAS did not technically have a debt to equity ratio of 5.4, if you took the corporate equity at their word. They had a debt to equity ratio of 3.2.
The reason I listed then that BAS had a 5.4 debt to equity ratio is precisely because I do not take financial statements at their word.
Well, I guess that’s convenient, because as of now BAS definitely has a debt to equity ratio of 5.0. At least 5.0. Because they had to write off all $82 million in goodwill at once.
The jig is up, boys.
I hope you are ready for some serious fireworks, because BAS will not be the only ones writing off tens of millions this quarter. We are going to watch some serious shit hit the fan and it is happening right now.
I know there’s some people in The PPT keeping an eye on Debt/Equity ratios of oil & gas companies. I’ve been watching quietly. And I know BAS wasn’t even on your list, probably precisely because their official debt/equity ratio was in check until just now.
So here’s what you do. If a company like BAS can see that ratio go to 5.0 in three months, then a company that was already sitting at 5.0 will probably see that triple or quadruple (thank you exponential relationships…). In fact, at every doubling of the ratio, double the rate. So a debt / equity ratio of 5X would probably end up at about 8X (if I use BAS as a guide). 8X gets you 30X.
Cool, now all these companies are dead.
Here’s where I am frightened; somehow, BAS managed to burn $40 million this quarter. They said it was on fucking equipment, but I am super skeptical. Who buys equipment in this environment, even if the purchases are contractually obligated? These are the times when you say “fuck those contracts, take me to court”…because dead shells don’t honor contracts anyway. They have as much cash on hand now as they did in September 2014, but the market wasn’t like this in September 2014.
I have been keeping a tight eye on the old filings from 2009, because if I have to hold them to a measure, 2009 seems like a great point in time to do it. Albeit, the entire sector has twice as much debt as they did in 2009, but it’s still a great starting point to a conversation.
At this point in 2009 BAS had $137 million in cash on hand. And they had only $400 million in long term debt. Today they’ve got $56 million on hand with $800 million in long term debt. My prior optimism was based around their increasing cash to $90 million last quarter…because I had expected them to have over $100 million in the bank by now.
Instead they let their cash reserves get cut in half? Buying FUCKING EQUIPMENT?
Here are some positive takes on BAS’ quarter, I guess. Revenue barely declined, the company is holding the line in that regards. Expenses were pretty constant too, so after we get away from the egregious write down, there was only a $5 million deterioration at play. Basically another ($1.20) loss, not much worse. The company is allegedly restructuring management and workers (which ate up some extra funds), so hopefully they can drop their expenses by $5-10 million, which would at least close the Adjusted EBITA hole that opened up this quarter.
Profit margins aren’t plunging like they were either. Competition is fierce and margins are weakening, but not that badly. The weakest points were Well Servicing and Contract Drilling (obviously), but the other lines of business barely budged lower.
So it looks like this quarter BAS business actually stabilized somewhat. Unfortunately, it stabilized at a point at which BAS (or any similar company) couldn’t hope to keep the doors open.
One of my two sacred cows has just died. BAS lost cash (on the stupidest of reasons). My other (accounts receivables) haven’t been reported yet.
Regardless on what happens specifically with this company, make no mistake – these next three months are going to be the blackest of our lives. The entire US oil and gas industry is coming to a close.If you enjoy the content at iBankCoin, please follow us on Twitter
Ugly report. Nice of them reminding everyone insiders bought to try and hold off the damage. This on top of EMES is going to make for an interesting day.
Any new insights on HCLP to share? Know you liked it at one point. Thanks!
I think there is another shoe to drop when HCLP cuts their dividend. We get a washout and that becomes the bottom (I hope).
HCLP has a lot of supply contracts with 5 year lifespans, and they are in large part with more secure companies, like Halliburton. They are being nice and helping out the drillers by offering some temporary relief in exchange for more volume in the future (which may or may not materialize). But honestly, I think of all the frac sand companies, they are the least to worry about.
EMES or SLCA however I will not vouch for.
BAS president explained himself and his $40 million CAP Ex burn.