Friday, November 27, 2015
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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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BAS Earnings Tonight

The moment of truth is at hand. BAS releases 3Q earnings after the bell.

As an act of good faith and offering, I have released some of my precious cash reserves, adding !% of my portfolio to BAS at the price of $3.68 a share.

It’s hard to tell what is going to happen here. On the one hand, BAS’ operation is in turmoil, along with…everyone else in the sector. But surely worse than expected earnings will send BAS screaming to Goldman’s $2 target, ending life as we know it.

But know this; BAS has short interest nearing 50% of float. You had better pray your fellow short sellers are trading on insider scoops, because if BAS even halves the loss we are expecting then you are going to watch yourself incinerate while the hollow screams of your compatriots sound all around you.

I am waiting for BAS to match the estimated loss just because I cannot stand more disappointment – surprise me.

BAS is working to fence their operations by concentrating around still profitable locations, suffocating competition there, and idling pretty much everything else. But that is a volatile process, not accomplished quickly.

They have two things working for them.

The first is that, although they will still be taking write downs on their equipment, BAS no longer has to replace it at that value. So much of their operation has been shuttered, which leaves that equipment in storage; extending the lifespan on what’s left. And when the time to replace field equipment does come, you can bet they will not be buying it new. There will be many, many carcasses to pick off of for years to come. BAS management is already positioning to eat their dead competition… washing it down with the tears of executives long out of a position.

My guess is that if we adjust depreciation to more accurately reflect this, then BAS lost ($0.70) per share last quarter, not ($1.20). And I have a feeling that number will surprise downward.

The second is that BAS cleaned up a revolving credit line in the first six months, which ate up tens of millions. But that is done now so their debt payments should decline back to the $33 million in base interest, with the next expiration coming in 2019.

That should be good for another ($0.20) per share.

If BAS’ operation was even remotely stable in the past 3 months, then we should have a loss of ($0.50) per share, from that. BUT…let’s not be crazy here. Nothing is stable right now.

I’m going to have accounts receivable and cash levels pegged. I cannot tolerate much real cash getting lost and if receivables implode much more then I’ll have to rethink my faith. Accounts receivable declined by $121 million over the first six months of the year as customers dried up.

A hard estimate of the resulting decline of revenue that accompanies such an accounts receivable decline would say we can expect revenues to fall another 20%-30% from where they stood in June. But, are accounts receivables falling entirely because business is cancelled, or is BAS understanding of their clients trouble and agreeing to release them to a pay as you go approach? That could mute the blow if it is going on.

Altogether I am nervous. But if there is any justice in the world, by this time tomorrow I will be taking a victory stride over the gristly remains of short sellers.

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Give A Shoutout To Our Boys At Goldman

I’d like to hand some serious props to the market manipulators at Goldman Sachs The Street*. In case you missed it, GS published their top 19 positions to beat around like a domestic disturbance call at 2 am, and BAS made the cut. In fact they gave it spot 2 on the list.

What was the reason for singling out BAS – a stock which is already down 86% from its long gone highs of 2014 – over any of its other competitors?

*The good commenters of this site have justly pointed out that although The Street is piggybacking off of Goldman’s work, the Street themselves seem to be the source of the godlessness of reason that follows. In my raw hatred I missed that – but The Street should know better too. I hope for Goldman Sach’s sake that their reasoning is better than this.

The reasons given are pretty terrible. Let’s walk through them:

1) “The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Energy Equipment & Services industry. The net income has significantly decreased by 2076.9% when compared to the same quarter one year ago, falling from $2.44 million to -$48.30 million.”

Okay, first of all, I understand that business majors are business majors primarily because they can’t do math. I sat through the mandatory business statistics classes too as an undergraduate, ironically while taking real statistics classes at the same time. It’s like comparing brands of cigarettes with cigars – it just isn’t even the same league.

Here, GS The Street’s expert analytics is at play, taking $2.44 – (-$48.3) = $50.74 million. Then we divide this magnitude by $2.44 and WOALA! 2,077% decrease! That’s huge!

No. Just no.

So here’s a hypothetical. Suppose a similar company had been making $0 million in income, and then had a $1 million loss. Using this genius formula, that company would have lost INFINITY %. Is such a company worse or better off than BAS? I’d say it looks better to me.

Next consider a similar company that had $100 million in income prior…much more money than BAS. Now, suppose they lose the exact same amount of money as BAS – $48.3 million.

This second company GS The Street would say only experienced a 148.3% loss, despite being in the exact same situation as BAS.

Yes this seems like a useful metric.

You can’t freaking divide across zero, dingbats. Division in this fashion only makes sense when all the numbers are nicely contained in the set of positive real numbers. Goldman Sach’s The Street’s math tells us nothing.

2) “Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Energy Equipment & Services industry and the overall market, BASIC ENERGY SERVICES INC’s return on equity significantly trails that of both the industry average and the S&P 500.”

Uh huh…because after your first encounter with numbers, I definitely believe that now…

3) “The gross profit margin for BASIC ENERGY SERVICES INC is rather low; currently it is at 20.98%. It has decreased significantly from the same period last year. Along with this, the net profit margin of -24.37% is significantly below that of the industry average.”

Fair enough. Now go talk to a few of their competitors who have no more clients. Period. Because I’ve seen those. I imagine they would envy a low gross profit margin.

Incidentally, net profit margins are only negative because of depreciation of equipment. In this environment, how much of that do you think they’ll be needing to buy new for the foreseeable future?

4) “Net operating cash flow has significantly decreased to $22.34 million or 65.86% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm’s growth rate is much lower.”

And yet, management has pegged outgoing cash flow so that net cash remains stable. They even made an extra debt repayment to shore up their position. Provided they don’t make another, cash levels should increase. Which is all that matters at this point. You need to have money to play the game. Not better stats…poorly calculated.

5) “Although BAS’s debt-to-equity ratio of 3.42 is very high, it is currently less than that of the industry average. Even though the debt-to-equity ratio is weak, BAS’s quick ratio is somewhat strong at 1.46, demonstrating the ability to handle short-term liquidity needs.”

Just stop there. Then put this bullet point at the top, because it’s the only one that matters.

The game is chicken, gentlemen. Nobody cares how fast you were going once you’ve gone over the cliff…

But hey I hope their shorts can close out with this 10% spike lower. Thanks a lot for that. I’m almost tempted to buy, save that I think I have more than enough skin in this game already.

Aside from Goldman Sachs The Street (glory days obviously behind it), here’s an update from BAS management that perhaps explains why the most recent numbers have been so volatile.

“Recently, in a few selected markets, stimulation pricing has fallen to levels where cash margins at the field level do not support regular maintenance capital expenditures on equipment. In these instances, we have either temporarily stacked our equipment or relocated frac spreads to other markets.”

The company is refusing to play in environments where operation is equivalent to suicide. They are moving assets to respond to weak pricing, situating around a core business, and doing all they can to toe the line between maintaining clients and making enough cash to justify keeping the doors open.

But you don’t just pack up and move instantaneously. It takes time and so yes their operation is going to gyrate. If you’re a shareholder like I am, you’d better learn to live with it.

This is the second worst environment for oil we have seen in 100 years. The worst happened just five years ago. The company is doing great all things considered. I would be much more worried if I was anybody else.

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