Next Up BAS

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”.

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?

2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.

Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.

We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.

That being said, I haven’t yet seen any indication that the real economy is retracting.

Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.

This should do wonders for the economy.

With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.

A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.

Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.

Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.

Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.

Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.

Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.

I admit it; you had me pretty worried there.

What with oil prices plunging to lows not seen since last the entire planet was on the precipice of economic catastrophe. Yes, I was sweating…profusely.

But now what do we have here? In less than a business week, oil is back. My stocks are roaring back to dead life from a state of living death. It’s not much, but at least the putrefaction is under some amount of control.

For the moment, I am not putting any of my cash reserves to work. I want the dry powder in case we go Mad Max again.

But this is constructive. Greek 10 years are yielding 8% again. China will get it under control, much to the dismay of Zerohedgers. It’s not difficult to take away freedom from people who barely have any to start with.

Effective immediately, the 9th Floor shall be converting itself into a bond trading desk.

Under martial penalty, every comment made herein must contain in the least sense an oblique mention of at least one of the following terms:

1) Coupons (shopping excluded)
2) Face value (sexist remarks made in good fun will be admissible)
3) Maturity (not in the passing of the prepubescent into adulthood sense of the word)
4) Yield (no crop talk)

Effective immediately, every other post will just be a chart of US Treasuries.

Welcome to hell, boys and girls.

The markets are in full on collapse mode. 3% declines is what 2009 was made of. Even 2011 I don’t recall as being this intense – although time mutes the pain.

But will the Fed arrive to rescue us? While I deeply hope for this outcome, I’m hesitant to count on it. I see several impediments to a Fed rescue.

The first is that Yellen was very intricately involved in the first set of rescues. Yellen is a dove; but she is a dove who believes in econometrics and the ability of a central authority acting under imperfect knowledge to do good in the economy.

The trouble with that perspective is that it so frequently is revealed to be wrong. This is the central point of non-linearities in real dynamic systems, which is fundamental to the work of the Austrian economists.

Where I am afraid we are going to run into trouble is by sanctioning the first round of interventions, Yellen the dove had a buy-in on the outcomes. If she intervenes, it will cast doubt on the first round of Fed actions. Will Yellen be able to do such a thing just to protect the stock market? Or will she tell herself everything is fine, to shore up the belief that she and her peers knew what they were doing in the first round?

My second concern is that, although the market is in a state of anguish, the economy is not clearly following the path yet. A major shift in stock ownership occurred alongside the Great Recession, and so the regular citizen may be more insulated to negative stock performance than five years ago.

It might be just us out here.

Would the Fed intervene to save professionals? How much bearing does this even have on the average blue collar citizen? I am concerned that the severity of the Great Recession means the knockoff shock waves may not justify additional aid.

Of course, on the other side of things, the stock market is still heavily owned by politically connected and economically powerful persons. That has never hurt much in the past. I’d say that’s still a positive, the current and apparent political upheaval against such behavior notwithstanding.