Inside Wall Street: A turnaround at Basic Energy

Improving oil industry outlook bodes well for provider of essential drilling rig and oilwell services.

By Gene Marcial Jul 16, 2013 9:23AM

Oil derricks (© Comstock/Corbis)Basic Energy Services (BAS) provides, as its name suggests, most everything that the oil-and-gas drillers and producers would need, including such essentials as land rigs and well-site construction services. One would think the stock would be a core holding in every oil-loving money manager's portfolio, but it isn't.


One of the reasons for that is the company's relatively modest market capitalization of $571 million. In the vast world of oil, that's puny, and most investors -- particularly the major institutional investment houses -- stick to the large-cap and high dividend-yield types when it comes to the oil patch.


But for the not so large investors seeking potentially huge rewards at modest costs, with a solid premise for strong growth in sales and earnings, Basic Energy is among the most promising long-term oil investment bet, according to some industry watchers.


True, the stock lags behind the oil-service sector and has yet to to participate in the robust bull market advance. But to the bulls, that suggests a robust upward catch-up sooner than later.


Analyst Tanjila Shafi of S&P Capital IQ, thinks it will. Shafi rates the stock, currently trading at $13 a share, as a "buy." The stock is down from a 52-week high of $16.60, but Shafi sees it rebounding to $17 a share.


"Our buy recommendation is based on what we see as an improving industry outlook for land drillers," says the analyst, who expects exploration and production companies will maintain or increase their capital expenditure budgets that should lead to increased demand for land drilling activity. Shafi also expects demand for pressure-pumping to rise.


"We believe the company will benefit from increasing drilling activity in the Permian Basin, the Bakken Shale, and the Eagle Ford play in South Texas, where it has well-established operating bases," says Shafi.


John Keller, oil-service industry analyst at investment firm Stephens, recently raised his rating on Basic Energy to "outperform" from "neutral," and also boosted his price target to $18, based on continued modest improvements in demand for its land rigs and services.


"We remain constructive on U.S. land drilling activity in light of continued crude oil price strength," Keller says. Keller expects the company to earn 58 cents a share in 2014 after an estimated loss of 18 cents in 2013.


The company has had challenging problems since the recession, which crimped demand for its rigs and services during the financial crisis that exacerbated the economic downturn. Basic Energy suffered a huge loss in 2009, posting a deficit of $6.39 a share. But after the weak operating results through 2010, Basic Energy managed to snap back into the black, reporting earnings in 2011 of $1.14 a share, and 51 cents in 2012.


For 2013, S&P Capital IQ's Shafi expects the company will post another loss, of 22 cents a share, on estimated revenue of $1.33 billion. But then the company should bounce back up in 2014 with estimated profits of 45 cents a share on projected sales of $1.44 billion.


Neal Dingmann, analyst at SunTrust Robinson Humphrey who rates Basic Energy as a "buy" with a price target of $19 a share, says his channel checks indicate the corner is about to be turned.


"Conversations with operators (particularly in the Permian Basin) indicate that spending is likely to ramp based on solid commodity prices as well as improved drilling and completion techniques," Dingmann says. He thinks the stock is overlooked and undervalued.


"Basic Energy looks quite attractive versus other oilfield service names on most 2014 metrics," says Dingmann, noting that its stock "trades at approximately a 33% discount to its peers based on enterprise value/EBITDA, and also trades at a 65% discount on a price-to-cash flow."


gene


Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

Tags: BASoil
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