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Next Up BAS

Following up from the HCLP overview, I’m next going to print my notes on BAS.

What we’re seeing here makes much more sense in terms of the environment. HCLP is a company that is almost growing through this oil correction. BAS is collapsing, and that makes perfect sense.

Here we note first that accounts receivables have been cut in half (unlike HCLP where they were actually growing). This is exactly what I should expect of a company which is in the business of drilling wells when oil falls like this.

Total current assets have dropped by 25% and now stand a full $100 million less than they were, in a span of 6 months.

BAS is also taking this is an opportunity to write off anything they can on the books. That makes sense – might as well take advantage of the storm where you can.

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.

I’m putting the intrinsic value of BAS at about $4.00. The company trades around there today. There is no premium for these shares at this time, no risk threshold to overcome. That sort of makes sense, since the company is losing money on paper, and Wall Street has decided this entire sector is suspect. But that’s also a nice floor to be working up from.

BAS lost $1.20 per share in the most recent three months reported, and a full $2.00 per share for the past six months on record. But here I view the most important element to be where those losses stand against amortization and depreciation.

BAS has done a stellar job of idling operations and cutting staff apace of the revenue collapse. They have kept their real cost outflows below where the revenue line is at. If we look past the write down of equipment, the company has been cash neutral for the past six months – a remarkable effort on their part.

Now, obviously equipment of an oilfield services company is under some sizable strain and must be replaced. But here, BAS has three factors working in their favor.

Firstly, BAS is not using all of their equipment, because they have idled operations. Provided proper maintenance and storage, their current size operations can last twice as long as before they scaled down.

Secondly, newer generations of equipment in this industry has reported longer lifespans and cheaper costs. I would imagine having so many now distressed oilfield services companies will also do wonders to get already built equipment from manufacturers to BAS at a yet more fabulous price. This was something I had been looking for before any of this happened to boost BAS profitability. It may not help save them.

And Finally, BAS is not going to have to buy much equipment for the foreseeable future; the CEO has set down a strategy of acquiring or merging with weaker competitors and absorbing their existing equipment along with. They are specifically creating target lists based on how well these prospects have maintained their service equipment and the average age of it.

So although each double digit percentage down day roils my stomach, when I see what the company is doing I almost have no more fear.

You can see the expert management at play here in the cash flows section best. Although income has reversed from a negligible gain to an $81 million loss, the cash coming into the business is barely down at all ($88 million versus $94 million a year ago). Paper profits determines investor sentiment, but cash is going to determine who lives and dies.

BAS is religiously guarding cash, keeping it flowing into the business…current tribulations not withstanding. After repaying debts (they aren’t even trying to raise more money right now) and other financing activities, BAS still saw cash increase by more than $10 million.

BAS is a most extreme tale for me. Back in September of last year, I sat tight because I had a 75% profit margin to work with. Yet, I have somehow still lost 50% of my principle. I will be the first person to tell you, I did not see this coming.

But although my heart is scared and weak, my head says “stay put”.

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The Oil & Gas Consolidation Is Coming

We are soon to enter the next phase of the oil price collapse, which will take the form of industry wide mergers and acquisitions, stitching together failed businesses where the cash rich emerge on top.

Although I have been perhaps loyal to a fault with this industry, I have also warned of being on the wrong receiving end of just this very development from the start. Following BAS’ latest earnings report, management talked about this looming reality at some length.

The entire industry is failing and some are on the cusp of insolvency. Although the Saudi’s are failing in their alleged goal of destroying the US space, there will be no dawn for many of these highly leveraged and small players. BAS and others are preparing to pick through the carnage and buy out their assets for pennies on the dollar.

Those who have not maintained their asset rollover plans will be discarded via hard default; no savior come for them.

Prepare yourselves…

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Oil Treading Water

Another disappointing inventory report sent oil down about 1% over the past 24 hours. Despite this, the oil names are holding up okay. BAS, HCLP, and VOC were all up today, and ALDW was down if you can imagine.

We’ll see what tomorrow brings. The oil and energy patch is down from the recent top, but this is a process we are working through.

See you tomorrow.

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I Seem To Be Experiencing A Correction

Welcome back and how I did miss you all while I was away. My 9th floor office had that cold air of abandon wafting through it for the better part of forty-five minutes, before the warmth of the hearth drove it out.

The recent days have brought a correction in my positions, with BAS diving back below $10, HCLP testing $30, and some others also wallowing. It is hard for me to read too much into this, at the moment. The EURUSD is running back to test 1.10 and bonds are rallying again. At hand is the question of whether we are to retest the lows of the damage or will find support.

But for me this question is superficial in a sense. BAS in particular was up a great sum and so though we have corrected significantly, it’s nothing I wouldn’t expect from a distressed asset. My positions are derived from non-technical details mostly so while it’s difficult to watch this sort of thing play out, it’s not material.

The summer months are upon us now.

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BAS Exhibits Classic 100% Upside Reversal

In December, for like two days, I sold out of BAS. I was done.

And then I was right back in again. I think now I can finally give a small sigh of relief. I mean, my chest is still tight, but at least BAS is a +50% winner for me again (my cost average is somewhere in the $7 range).

I’m sticking around in these names for longer yet. I understand that you do not believe. But I have this strange conspiracy theory ringing in my ears.

That this is all just one big gigantic attempt to fuck retail investors and make off with their toys.

One day, we’re all going to wake up and it will be like oil was never in trouble. The Saudi’s will flip a switch, toast to their good friends in Iran (who will perhaps be sunbathing with Exxon Mobile executives) and everything will be ’90’s summer fun again.

It doesn’t make sense, I know. I don’t have any proof, or evidence, or even anything that looks like “sanity”. But it’s going to happen, mark my words.

Anyway, I’m +16% for the year, sort of 1/3rd-ish of the way out of the hole I made in 2014.

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Basic Energy Services (BAS) Didn’t Really Lose Much Money

BAS is up 12% right now following their earnings report. They lost a ton of money on paper and the market isn’t falling for it.

Basically, despite idling equipment and firing 20% of personnel, BAS wrote off more in depreciation than the same quarter a year ago. But properly stored and idle equipment isn’t really depreciating, is it? So there was about $20 million there over my fair guess for what the company’s actual depreciation probably looks like, best estimate. Then they wrote off another $5 million or so in non-cash items tucked into expenses for employee retention and such.

You pull out the write downs and the company lost may $0.19 per share, compared to a gain (after one time items) of $0.11 per share in Q4 of 2014.

Let’s look big picture here; the company saw revenues plummet 35%. I mean, Completion and Remedial Services alone plunged 45%. All of that cost me $0.19? (Cue crude jerking motion of the arm)

I don’t care. We’re fine here. Management knows what they are doing. The company just renegotiated their credit facility, lowering the issue amount by $50 million to $250 million outstanding in order to strip some undesirable covenants, but adding an accordion feature that can get them to +$50 million or $350 million total if it’s an emergency. They have headcounts under total control, and they are defending market share vigorously. They’ll get cash flows to balance in the next 6 months and we go forward from there.

I’m not worried about BAS. BAS’ competition should be panicked.

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