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Basic Energy Unstacking All Fracking Equipment, Posting Jobs

With the U.S. drilling rig count quickly catching up with available pressure pumping capacity, Basic Energy Services Inc. has unstacked nearly all of its horsepower and is looking for people to fill the ranks, the CEO said Friday.

The U.S. onshore well site services specialist was hit especially hard during the downturn and voluntarily filed for bankruptcy protection as the call for its hydraulic fracturing (fracking) and fluid services dried up. It services oil and natural gas wells in more than 100 service points in Texas, Louisiana, Oklahoma, New Mexico, Arkansas, Kansas, the Rocky Mountains and in Appalachia.

The Fort Worth, TX-based oilfield services operator emerged from its Chapter 11 bankruptcy in late December and while cautious, business is getting better, CEO Roe Patterson said Friday during a conference call. Following the bankruptcy, Basic adopted "fresh start" accounting, which resulted in the operator becoming a new entity for accounting and financial reporting purposes.

Net losses in 1Q2017 were $38.6 million (minus $1.49/share), versus income in 4Q2016 of $142 million ($3.32) and a net loss in the year-ago quarter of $83.3 million (minus $2.00). However, revenue increased 17% sequentially to $182 million, versus $130.4 million in 1Q2016, as more stable oil prices led customers to complete more wells and accelerate deferred maintenance work on existing wells.

"Our first quarter results were better than originally anticipated," Patterson said. "This is a reflection of the improvement in oil prices as compared to the end of 2016, and subsequently, a recovery in all oilfield-related services."

HHP Fully Deployed in May

At the end of March, Basic had 444,000 hydraulic hp (hhp), flat from the end of 2016. However, beginning in the second quarter, the company is adding 74,000 hhp, all of which should be fully deployed by May, Patterson said.

During the fourth quarter and through March, the company unstacked  all of its remaining horsepower and is getting ready to deploy the additional horsepower, "making up essentially two full spreads that were stacked during the downturn," he said. "Including purchase price and make-ready cost, we will have it active in the field for less than $400/hhp, or approximately 38% of average newbuild costs." The first spread is being activated this month with the second ramping up in May.

"Pricing and utilization in the pumping business has improved enough that we feel these investments are warranted," the CEO told analysts. "With a calendar that is very full through the second quarter, we expect margins to continue to improve in this business.

"It appears the general attrition rates of the overall U.S. frack fleet over the past two years have been deep enough, that the current drilling rig counts are quickly catching up with available frack capacity. This gives us comfort around these expenditures and the future financial performance of this segment."

In the near-term, Basic is "cautiously optimistic," Patterson said. "We expect a gradual improvement in pricing and utilization for the remainder of 2017. Our customers have expressed the same level of optimism as well. They have increased their levels of capital expenditure and they have expanded their budgets. However, challenges do remain.

Oil Price Fluctuations ‘Worrisome’

"Continued oil price fluctuations are worrisome and could rapidly impact our customers who haven't hedged their production. Also hiring experienced personnel is becoming more difficult and costly, as much of our field level expertise left the industry for more stable employment and less cyclical careers. As we turn to greener new hires to field expansion roles, efficiencies could suffer in the short-term. Competition for experienced personnel will continue and will drive labor rates and service the primary driver for overall pricing increases. Because of these headwinds, the recovery is likely to be even pace. So we will remain measured in our approach and ready to scale back quickly, if anything should worsen."

Because the first quarter is in the books, "I can say that this steady pace of recovery has been promising and has turned to be true. We expect first quarter revenues to be 13-15% higher sequentially...Our services are largely committed through the second quarter..." The recent trend in OFS consolidation "is very natural for this type of cycle, and I expect it's likely just beginning. Many balance sheets have been reset, paving the way for more acceptable and attractive transactions. We have and we'll continue to review potential transactions that make good sense for our shareholders."

Basic's fluid service equipment "remained generally unstacked throughout the downturn, albeit with depressed rates of utilization, but that equipment has also seen a surge in activity and we expect improved financial performance. We were fortunate to have a young fleet of equipment and has been well maintained. We've been very pleased that our reactivation cost have been fairly low across all segments."

The increased activity began in the Permian Basin and within Oklahoma's stacked plays and now "is now spreading into other nonconventional basins, strengthening our base of business. Our customers are taking advantage of the improved oil price environment to accelerate well maintenance and completion activity..."

Gradual Improvement in 2017

Improved performance in the first three months was led by the pressure pumping and coil tubing product lines, with all of the hhp operating during the quarter.

"In addition, we are starting to experience a ramp-up in activity in both our well servicing and fluid service businesses, with increased utilization in both product lines,” Patterson said “While pricing in all our markets remain competitive, the margin pressure we encountered during the fourth quarter has lessened, allowing us to deliver a sequential 300 basis point expansion in gross margin."

Basic is anticipating "a gradual improvement in pricing and utilization for the remainder of 2017," Patterson said. "Customer feedback on capital expenditures remains promising, with expected improvements in oily basins for all of our service segments. We currently anticipate additional margin expansion in the second quarter as the impact of payroll taxes fade. Longer daylight hours will benefit our utilization levels as well...

"The fact that the fourth quarter revenues were greater than the third quarter revenues, outweighing typical seasonal factors, is a very positive sign and gives us confidence in the near-term outlook.”

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