Thursday, November 26, 2015
Stock advice in actual English.
Joined Sep 2, 2009
1,211 Blog Posts

Week Is Almost Done


Today was not the follow through I had hoped for. Following yesterday’s rally, in both stocks and commodities, I had wanted today to run but it was cut short. Oil retreated, reaffirming that markets are quite content to keep oil range bound in the mid $40’s so that the sector stays on a path of imminent destruction.

As the saying goes, “The beatings will continue until morale improves.”

Gasoline inventory numbers showed a big drawdown, which sparked yesterday’s rally. Stocks at Cushing also declined by 748,000 barrels, although overall stocks grew by 4.1 million barrels. I am expecting to see the US inventory growth slow dramatically going into the holidays, with word that companies who have hit their operating budget are going to take a recess for the last month of the year.

Big news out of China today that they are increasing their child “rations” to 2 per couple. This is such commie nonsense, it’s hard to take it seriously. Such rules are written by megalomaniacs; so much arrogance goes into trying and restrict population the way China has done. It is a blessing that the outcome has been so terrifying for China’s ruling party; their culture values boys, so they have way too few girls. A sea of 20 year old men without the main thing that keeps young men from dabbling in revolution – family.

You don’t just switch off and fix that problem over night.

Finally, American politics is as awful as ever. The GOP debate last night was a debacle for CNBC, which has managed to disgrace itself in two separate journalistic professions now.

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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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Uncle Sam, Pissing In The Wind

Canada-Oil Train Derailment

Even the government of the United States of America now openly plots against me. The announcement this morning that the Strategic Petroleum Reserve would be sold down – during the most obvious buying opportunity in a century – is nothing short of a flagrant insult.

If there were any doubt remaining, then let there be none more; the world is conspiring against me in unison.

There is no reason to sell off the STRATEGIC Petroleum Reserve to raise fucking money. This is all about spitting in my eye while I am at my worst.

So help me, spirits of the stock market. Grant me Revenge! Or if not, then TO HELL VITH YOU!

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HCLP Misses On Earnings, Suspends Distribution


She moves through the darkness, one leg in front of the other, silently across the floor. The cool air wafts around her legs as she begins to climb the stairs. One, two, three… the stone makes hardly a sound; the clattering of footsteps cannot be heard.

The wood does not creak as she steps onto the landing. A light at the end of the hall peaks out of a doorway. She passes through it.

The foot rests in front of her, beneath the desk. Softly, she passes next to it, at the last moment letting her body rest against the flesh, rubbing slowly.

She purrs – a deep loud sound – then soundlessly arrives in Cain’s lap, flexing her claws one of the next before letting his hand stroke her head and long body.

I pass my fingertips through her long hair, ending by twirling the lynx shaped tufts with my forefinger and thumb. Then I turn back to what I was reading.

4:26 pm Hi-Crush Partners misses by $0.04, reports revs in-line; announces temporary distribution suspension (HCLP) :

Reports Q3 (Sep) earnings of $0.15 per share, excluding non-recurring items, $0.04 worse than the Capital IQ Consensus of $0.19; revenues fell 20.3% year/year to $81.5 mln vs the $80.9 mln Capital IQ Consensus.
The Partnership reiterated the guidance for capital expenditures in the range of $50-$55 million for 2015 of which $48 million was spent in the first nine months of the year.
Capital expenditures for 2016 are expected to be in the range of $15-$25 million for the continued development of new terminal facilities.
Since August 1, 2015, Hi-Crush has reduced operational and administrative staffing levels by ~16%, including the most recent reductions at the Augusta facility.

Distribution Temporarily Suspended

The Partnership announced a temporary suspension of its quarterly distribution due to challenging market conditions.
Co paid distributions of $2.40 per unit on all common and subordinated units for 2014, $0.675 per unit for the first quarter 2015, and $0.475 per unit for the second quarter 2015.

I had expected something like this, particularly after EMES withdrew guidance. While I had hoped they would only reduce to a more normal percentage, suspending the entire distribution until fairer weather is perfectly acceptable. SLCA and EMES are going to do the same.

The most recent HCLP filing is out and it shows the story: accounts receivables have declined by 35% as business dries up. But the business is hardly over leveraged with Debt/Equity still holding below 2X. Cash levels increased by over 8% and now with the distribution halt, they are staking out the long winter.

HCLP has moved to shrink the business aggressively, cutting staff by 16%. Admittedly this is nothing like one of the services companies or some of the smaller oil drillers. But then again…they don’t have that kind of problem, now do they?

HCLP took a loss this quarter of ($0.49) a share, which was entirely driven by one time write downs. The company is in a similar (though less dire) process as other companies in this industry, cutting dead weight operations and consolidating around profit centers. They are also writing down and taking losses where applicable. In this case, HCLP wrote down some of their long term supply contracts (presumably because the customers aren’t going to live long enough to fill them).

Cash from HCLP’s operations only declined by about 11%. HCLP already spent about $48 million this year on investments in equipment and facilities, but they are looking to pair that back next year to $15-25 million.

Without the distribution and with the lower capital expenditures, HCLP will have expenses of inside $30 million per year. Cash flow is $67 million which even if we continue to impair, should more than cover the costs of doing business.

If HCLP was forced to go the BAS route and write off all goodwill and intangible asset value, they’d still have about $2 per share of equity to work with. That leaves another $69 million of equity as a buffer.

This line in the filing does concern me:

Under the terms of the Revolving Credit Agreement, our leverage ratio (total debt to trailing four quarter EBITDA) may not exceed 3.50. While our leverage ratio as of September 30, 2015, is below this threshold, if current market conditions persist, our leverage ratio will likely exceed this threshold during 2016, which could result in a breach of covenant event and an event of default under the Revolving Credit Agreement. If such a default were to occur, and resulted in a cross default of the Term Loan Credit Agreement, all of our outstanding debt obligations could be accelerated. The Partnership is currently in discussions with the lenders to amend the Revolving Credit Agreement to, among other things, waive the leverage and other compliance ratios. The Partnership makes no assurance that an amendment will be obtained.

So the question becomes, how willing are lenders to play ball? Promise of money is better than no money, no? It’s not as if bankers could run HCLP better than HCLP is. But these things always get messy.

In principle, there’s plenty of time here to ride out the storm. But we need oil markets to stabilize. BAS’ CEO Patterson says he sees signs of oil production going offline and was talking about operations idling after Thanksgiving. It sounds like companies have spent their budget this year and aren’t going to bother asking for more money.

Patterson also said he’s seen competition spike in his local markets, with thirty or more competitors entering to submit bids. In his anecdote, he said about twenty of them are left now.

Although it may not feel like it, the weak are being driven out. The industry is getting their cost to drop and they are learning to compete with the cheaper oil levels. This hurts but the survivors will probably be built to last. Provided, of course, that you are a survivor.

Budgets are being frozen in December. The oil producers are going to take a little recess. We’ll see what oil prices do in response.

Then things will get started again in January.

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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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TIS Had A Decent Quarter

I’m sitting here waiting for the main event. In the meantime, yesterday Orchids Paper Products Company (TIS) reported and beat estimates. TIS is back to trading just below $30 a share.

Sales jumped 5% but earnings per share fell 7%. The company is highlighting that total earnings also rose, but they are sort of glossing over that the increase wasn’t enough to compensate for new shares outstanding. Still, TIS is growing so I will reserve judgment until I have a good look at the filing.

Anyway the market reaction is positive so the stock is up and that really matters most.

I bought TIS earlier this year.

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