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Prepare For BAS Bankruptcy

BAS beat earnings estimates last night, as they have done for 2 quarters in a row now. And they are still losing money.

Tucked into the earnings release was a little bit about the company looking to negotiate with creditors and retained the law firm Weil, Gotshal, & Mangers. This is an early due diligence announcement that Chapter 11 is on the table, executive style. Shareholder equity also probably just went negative.

Unfortunately, lads, this is a no win situation. The environment is just too bad, their competitors are all going bankrupt (ironically giving them a competitive edge) and the oil markets will not recover quickly enough. We are turning a corner but it’s not coming fast enough.

If CJES is any guide, creditors will be taking ~95% of these companies in restructuring. I am severely disappointed.

I never thought this would go as far as it did. Even after actively taking steps to lower my exposure in mid 2014, I held a position in BAS and HCLP because I thought it could be saved. Mostly because I thought this despair was obvious to everyone, and that the key players (namely OPEC and the Saudis) would make smart people moves to avoid it.

Well, I am here to tell you, Saudi Arabia is not staffed by smart people. They are staffed by lucky sperm cells surrounded by lunatics. And the oil space bankruptcies are just getting started.

The funny thing here is that these bankruptcies are going to make the US shale market stronger and have the exact opposite effect the Saudi’s were banking on. Congratulations, Saudi Arabia: your budget is in tatters and now US oil will have a cost extraction basis $10 lower from swapping credit for equity and desperation driving sector operating costs down.

Suffice to say, Saudi Arabia are real dipshits.

But I am a victim nonetheless. Now, I am not going to sell out of BAS…because I have 95% losses baked in. Seriously, I could take the CJES 6% equity swap, have the stock rally back to $10, and still be where I’m at today. The damage is done.

But I held this position from 2011. This was an investment and the difference between 93% losses or 97% losses is immaterial.

If you’re a recent buyer, or just have money on the table you can’t afford to lose, get out. The company is filing later this year, I would guess. Probably even if oil prices and drilling recover.

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BAS Has A Terrible End To 2015, But Clinches A Financing Agreement

As predicted, 2015 ended in as bad a manner as imaginable for the oil industry. Patterson had been calling for this since September or October, warning investors ahead of time that the entire oil patch was going to “take a little break.” 2015 numbers are abhorrent.

So what’s next? Well, we can expect a mild reprieve to occur when first quarter 2016 numbers come in. But competition is still bloody and someone isn’t making it out of this alive.

On that note, BAS earnings contained a little glimmer of hope. Yesterday, apparently, BAS was given a life line of $165 million in term financing. They are going to use this to escape the atrocities awaiting anyone stuck in revolving credit facilities with asset value provisions attached to them.

Term Loan Financing

On February 17, 2016, Basic entered into a Term Loan Credit Agreement with a syndicate of lenders and U.S. Bank National Association, as administrative agent for the lenders. This agreement provides for borrowings of an aggregate principal amount of $165.0 million on the closing date, and delayed draw term loan borrowings in an aggregate principal amount not to exceed $15.0 million. The obligations under the Term Loan Agreement will be secured by substantially all assets of Basic. Basic expects to borrow the initial borrowings of $165.0 million under the Term Loan Credit Agreement on February 26, 2016, subject to the satisfaction of closing conditions.

The term loan will bear interest at 13.5%. In addition, Basic will be responsible for the applicable lenders’ fees, including a closing payment equal to 7.0% of the aggregate principal amount of the commitments.

In conjunction with this financing, Basic intends to amend its existing revolving credit agreement, reducing the aggregate commitment from $250.0 million to $100.0 million.

Pro forma liquidity as of March 31, 2016, including this term loan would be approximately $220.3 million, including $23.1 million of availability under Basic’s amended $100 million revolving credit facility.

Unfortunately, BAS also burned $10 million in the fourth quarter. And I’m guessing this time Patterson wasn’t making an eccentric corporate buyout.

Your move, other companies. Let’s see who dies first.

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Nibbled On More BAS

I added another percent or two to BAS, because at $2.00 any recovery will yield 1,000% style returns and at this junction a few percent doesn’t greatly affect my risk profile. The over half of my account that’s in cash is going to sit tight until we get more clarity.

The rally in oil last week was great, but I have bad news. This run on oil companies isn’t done yet.


As an aside, this is interesting

Hi-Crush Partners LP and Liberty Oilfield Services Partner to Increase Completion Efficiencies in Colorado`s DJ Basin

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Nibbled On BAS For $2.60

I made a small addition to my BAS position this morning for $2.60. It’s experiencing a low volume relief rally today but that is irrelevant, big picture. As far as I know BAS is going to $1.00 before any sector recovery and I am prepared for that.

I couldn’t just let the $2 price range go completely un-bought, could I?

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The Drilling Hiatus Has Begun

BAS just reported utilization numbers for October, and nestled in the release was this gem:

Drilling rig days for the month were 50 producing a rig utilization of 13%, compared to 27% and 88% in September 2015 and October 2014, respectively.

In the BAS earnings call, CEO Patterson gave advanced notice that this was happening. Basically, as companies hit their 2015 budgets in this awful environment, managers are just idling drilling fleets rather than bother asking for more. We should start to see drilling collapse to 0% over the last month and a half of the year.

This should be an almost industry wide phenomenon. Then, we wait and see if they come back online in January.

Of course oil prices are now screaming to $40, testing every nerve I possess. This is the most trying market I have ever had the bad luck of being caught in. Even in 2008 I had the good sense to get out while I still could.

Yet here I am, in the most milquetoast of economic situations, watching billion dollar companies being sliced into quarters for no reason other than some foreign devils decided they’d rather gamble away their very existence.

Good grief.

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In Hindsight, Today Will Be Important For HCLP

HCLP and their bank reached a fast agreement on the compliance ratios. This is a big deal and I am very grateful for it. I almost turned tail and ran earlier this month when the threat of a breach surfaced in their earnings report. Sticking around has already proven fruitful (see the relief rally).

Hi-Crush Partners LP Announces Revolving Credit Facility Amendment

Houston, Texas, November 6, 2015 – Hi-Crush Partners LP (HCLP), “Hi-Crush” or the “Partnership”, today reported the completion of an amendment to its Revolving Credit Facility Agreement. The amendment, among other things, provides for a reduction in the commitment level from $150 million to $100 million, waives the compliance ratios through June 30, 2017 (the “Effective Period”), establishes certain minimum quarterly EBITDA covenants, allows distributions to unitholders up to 50% of quarterly distributable cash flow after quarterly debt payments on the term loan, and increases the pricing to LIBOR plus 4.50% during the Effective Period.

Accordingly, when HCLP has to take write offs early next year (they hinted at this) and they breach the old ratio limits, they will have a full two years to get back into compliance. And, as they have just suspended distribution, they should have plenty of cash to make that happen. Any recovery in oil prices over that time will obviously expedite the process, but I don’t have to count on such a hypothetical occurring in any timely manner now.

More importantly, their bank is labeling them a victor and communicating a commitment to making them work. Someone else will be getting the sharp end of the spear of destiny.

I am now all but completely confident that both of my remaining oil investments – HCLP and BAS – will experience full recoveries over the next few years.

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