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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One of the reasons – probably the biggest – that I haven’t reshuffled my portfolio since last year is, if I were outside the oil and gas sector when this blowup happened, I’d be buying everything in view right now.

It’s always pretty rough when it’s your carcass getting chewed on, but that realization is pretty important to my overall strategy right now.

I’ve been keeping a close eye on the positions I’ve been keeping and their balance sheets.

Take HCLP:

Net cash from operations has actually increased to $58.0 million from $53.6 million. The increase has come from growth of accounts receivables, which sets up a discussion about what future business for HCLP might look like. The company is under hardship, yet they have more customer money on deposit than ever?

Yes, they are offering concessions to customers. The whole sector has to do their part to survive. But the company is clearly not going anywhere, and much of the growth they experienced in late 2013 and early 2014 is here to stay. When will the market price that in?

I also see that HCLP has quadrupled investments into property, plant, and equipment from where they were last year. Again, hardly the mark of a business readying itself for a long winter.

I’m estimating HCLP’s intrinsic value at around $2.30 a share. That puts price to book at 6.5X (admittedly a little pricey) but at current rolling 3 months of earnings, that still leaves a risk threshold of the company at about 10 years (completely reasonable absent any growth).

So we have a company which was growing like a weed up until about 6 months ago, which is seeing cash deposits for future business soar, and which is reinvesting at an attractive rate. Why would earnings continue to stagnate? Even without new drilling, HCLP sand is going to be in high demand to maintain existing wells.

So tell me, if I fled now after the fire is smoldering, where would I go that’s better?

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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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So far for 2015, it has proceeded very much like the end of 2014 in both scope and suffering endured by my person. Summer is coming to a close and it is time to make some preparations.

I wanted more cash; watching everything that is unfolding, and knowing the frequency of recessions in the United States, I have this horrible fear that we are not done going lower yet. China is teetering on the edge of ruin; a silly place that encourages a 5:4 male to female ratio, that likes to build huge train transit systems to everywhere but where they need to be, and that loves constructing entire Potemkin cities utterly devoid of people.

So I sold entirely out of ALDW. This is exactly what it looks like; selling winners and holding on to losers. I took my almost 40% gain and walked.

The trouble is that this 40% is counterbalancing some pretty ruinous action on the other half of my portfolio. HCLP has sunk lower that I ever believed HCLP could sink. BAS is a smoldering pile of ruin. VOC…don’t even talk about it.

The oil trade is dead, brought to the end in a most severe fashion. It is hardly the only tale of sorrow, but it is perhaps the worst.

And if we see Recession 2015: Welcome The Fuck Back materialize (trademark), well then…

Oil would stay down and ALDW and all fuel ventures would join them overnight. No thank you.

At this junction, betting we don’t go into a recession is equivalent to just betting on oil. I don’t need complicated hedges, thank you very much. They’re more likely to strangle me at inconvenient moments than actually help here.

If the recession fears don’t pan out, then make no mistake everything will be going much higher very soon.

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I have been very cautious but at these prices, I can’t not move. I added to HCLP for $17.00; a couple percent of my cash position.

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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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