BUY OR SELL-Can Basic Energy shrs recover lost ground?
By Arup Roychoudhury
BANGALORE, April 9 (Reuters) - The economic downturn and the resultant steep decline in oil and gas prices have meant leaner captial expenditure budgets for oil companies, hurting enterprises that depend on them for revenue.
Oil services company Basic Energy Services Inc's (BAS.N) story has been no different.
Its clients, the exploration and production companies, cut spending and cancelled projects as U.S. natural gas prices NGc1 fell more than 60 percent from highs hit in July, while crude prices CLc1 dropped as much as $110 a barrel in the same period.
With oil companies slashing capital expenditure, the drillers and oilfield service providers that help them extract hydrocarbons were forced to reduce day rates and scale back on operations.
Basic Energy, which provides well-completion and fluid services, has seen its shares drop over 77 percent since their highs in June.
The company's fourth-quarter earnings per share fell almost 80 percent sequentially. It forecast a sequential drop of 33 to 35 percent for its first-quarter earnings.
Faced with shrinking margins, Basic Energy said it was reducing operating costs and downsizing its workforce to offset falling prices and utilization.
Basic Energy reported utilization of 22 percent for February, a 44 percent decrease sequentially and a 75 percent fall year-over-year.
Eight analysts have taken a wait and watch approach on the stock, rating it "hold" and are looking for further signs of recovery in the commodity markets. Only one has a "buy" rating, while two have an "underperform/reduce" rating.
So should investors keep away from the stock, or is this the right time to buy it, despite the weak commodity markets and outlook?
BUY ON EXPECTED RECOVERY, CASH POSITION
"We do have a buy rating and that is more under the premise that at some point down the summer, activity levels start to stabilize in which case there could be a decent move off the bottom," said Jefferies and Co analyst Judson Bailey.
The analyst said although the North American rig and workover market, to which Basic Energy is highly leveraged, will get weaker before any sort of an uplift, the company had already touched a bottom and was on the way to a recovery.
"In our rating system, we see some upside... If North American activity stabilizes it should be one of the stocks that should have a decent recovery."
The company has a stable cash position and balance sheet, and the weakness in its first-quarter outlook was well known and discounted into its share price, Bailey said.
The summer could see a more stabilized exploration and production activity level, stretching over the next 12 months, in which case there could be a decent move off the bottom, Bailey added.
SELL ON SLOWING ACTIVITY
The weakness in North American markets is why Capital One Southcoast analyst Pierre Conner has a "reduce" rating on the stock.
"The pricing is coming down rapidly as activity is slowing. That this will show up in the first quarter and will also be impacting the second quarter estimates," Conner said, adding that the rate decline had been more severe and unpreendented than any other previous cycle.
Natural gas prices were expected to remain weak throughout the summer as inventory levels rise. "This will cause the customers for the oil service scene, pressure pumping and well completion services to slow more than the expectations of current market," he said.
Connor said Basic Energy might underperform on the equity market given its current enterprise value to EBITDA value levels, even if there was an upswing, adding that lower customer spending was still a major headwind.
"The positive would be that there is a tremendous amount of leverage to any upkick in activity which could occur when we see a decline in production." (Editing by Jarshad Kakkrakandy) (arup.roychoudhury@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: arup.roychoudhury.reuters.com@reuters.net))
