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Basic Rebuffs Unsolicited All-Stock Merger with Key Energy

Basic Energy Services Inc. said it’s not interested in an offer by Key Energy Services Inc. to combine their Lower 48 oilfield prowess in an all-stock transaction.

Houston-based Key sent two unsolicited offers this month to Fort Worth, TX-based Basic, recommending they merge to create a production-focused oilfield services giant with limited customer overlap.

According to Key, the pro forma combined company would have estimated 2019 revenue of $1.8 billion and bolster existing service capabilities with little customer overlap that would be centered around the core components: well services and fluid management.

Late Monday Basic Chairman Tim Day said the board had unanimously rejected the offer following a careful review in consultation with advisers.

In a letter to Key CEO Robert J. Saltiel, Day said Basic would “continue to pursue its independent strategy to maximize stockholder value and is not interested in pursuing the proposed transaction.”

Key is considered the largest onshore, rig-based well servicing contractor, based on the number of rigs owned. It provides a range of well intervention services and has operations in all major onshore oil and gas producing regions in the Lower 48 states.

Saltiel, who came aboard last month, previously ran Atwood Oceanics. Earlier this month, Key booted COO David Brunnert for undisclosed reasons, according to a Securities and Exchange Commission Form 8-K filing.

Saltiel had said in a letter to Basic executives the proposed combination was attractive “strategically and financially for both companies given the highly complementary nature of their respective businesses and significant cost synergies that could be realized in the combination.”
Under terms of the proposed merger, Key shareholders would own 51% of the combined company and Basic shareholders would own 49%.

“We have tremendous respect for the board, management and employees of Basic,” Saltiel said. “We believe that we will be able to capitalize on the strengths of each organization to create a stronger combined company better able to invest in people and assets to serve the needs of our customers.”

For the second quarter, Key reported a net loss of $16.9 million (minus 84 cents), compared with a year-ago net loss of $13.2 million (minus 66 cents) and a net loss in 1Q2018 of $25 million (minus $1.23).

One of Basic’s biggest well services markets is the Permian. The operator employs 4,100-plus people in the U.S. onshore and provides well site services in more than 100 service points, led by Texas and followed by Louisiana, Oklahoma, New Mexico, Arkansas, Kansas, the Rockies and Appalachia.

For 2Q2018, Basic reported a net loss of $40.1 million (minus $1.51/share), versus a year-ago net loss of $23.9 million (minus 92 cents). It also reported a net loss in 1Q2018 of $30.5 million (minus $1.16/share). Revenue in 2Q2018 increased to $253.4 million from $234.7 million in 1Q2018 and from year-ago revenue of $213.3 million.

Basic CEO Roe Patterson during the 2Q2018 conference call said the company was undertaking a “realignment initiative” to relocate assets to the most attractive operating areas with its “busiest customers and in markets where we possess the most scale” to accelerate profits and free cash flow.

"Some regions and business lines in which we operate have not made the type of recovery we had hoped for thus far in 2018,” Patterson told analysts during a conference call in July. “Either business lines have suffered from a saturation of newbuild assets, or the markets themselves have not reached the anticipated levels of recovery demand that we were expecting.”

Basic was planning to relocate some of its hydraulic fracture assets to the Midcontinent from the Permian Basin and Niobrara formation. It also was in the process of relocating other assets including rental tools, water trucks and well servicing rigs from regions that had not recovered as anticipated to core markets like the Permian, Eagle Ford Shale and in Oklahoma.

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