Saturday, February 13, 2016
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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

Man on phone

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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The Other Half of the BAS Earnings Report


Now that I have the filing available, I can see that BAS saw accounts receivables basically hold unchanged from June to September. At June, BAS had account receivables of $126.4 million. By September, account receivables still held at $124.7 million. That’s nothing to worry about.

As a proximity of future business, that BAS has seen account receivables hold steady over the past three months comforts me. The last three months were a dark time in the oil industry and many people are being forced out of business.

Throw in that revenues held up at $189 million from $193 million and I am a happy Cain Hammond Thaler.

The cash issue unsettled my stomach at first, but actually their operations produced more cash in gross. Seeing how spending the ~$40 million on equipment and businesses was a willful decision (although one that gave me intense heartburn), I actually feel pretty good about this quarter.

Actually, at this point I’m more concerned about HCLP, which dropped news that their debt is tied to asinine ratio testing which could blow up in their faces next year.

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Canada-Oil Train Derailment

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.

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