Lower 48 oil and natural gas wellsite specialist Basic Energy Services Inc. plans to sell its pressure pumping services assets to bolster core production-focused well servicing and water logistics businesses.
Last month during a conference call to discuss third quarter results, CEO Roe Patterson said the quarter saw a continued decline in activity, with the impact largest on the completion-related services. He also said he didn’t expect the market to recover anytime soon.
“In order to focus our capital resources most effectively to benefit free cash flow, we made the decision to cease pumping operations and divest of all noncore equipment and real estate,” Patterson said Thursday. “Given current market conditions and appetite for pumping and ancillary equipment, we believe our plan limits execution risk and allows for greater proceeds than under a going concern valuation and sale scenario.”
Basic plans to complete all work currently in-process, after which it would cease its pumping and pumping-related services. Real estate and equipment are expected to be sold in multiple transactions through March. The company expects to recoup $30-45 million from the sales, which are being done in multiple transactions.
The coiled tubing business, which is complementary to the well servicing operations, is not expected to be impacted by the divestitures.
“The decision to exit the pumping services market in no way reflects on the employees that make up our pumping services team,” Patterson said. “This team has aggressively cut costs and continued to win business in a highly competitive market. Unfortunately, these pumping business lines currently remain in a structurally disadvantaged position, as they are our most capital-intensive businesses.”
The asset sales should reduce capital lease exposure and total debt, allowing Basic “to focus our efforts in the production-focused businesses in which we excel and generate higher returns on capital.”
Even with the repositioning and restructuring in the pumping business, however, “activity and pricing remain difficult, inhibiting the potential for positive free cash flow in the near- to medium-term.” With the sale, Basic expects to fund the projected capital expenses for 2020-2021 for Agua Libra Midstream, its rapidly growing onshore water business.
“While the overall energy service market remains highly competitive, we continue to see high value potential in our Agua Libre Midstream subsidiary; this business continues to outperform in this very challenging market,” Patterson said. “With additional disposal barrels from 2019 growth capital expenditures, we expect the midstream business to contribute significantly to incremental margins in 2020.”
Through the first half of 2020, the pumping asset sale is not expected to negatively impact gross earnings, “reflecting just how difficult the market has become,” he said. “Due to a lower-capital intensity asset base, we expect our cash balance to be approximately $5 million higher, excluding proceeds from the pumping asset sales, at the end of the second quarter of 2020.”
In conjunction with the capital redeployment plan, Basic is cutting general and administrative expenses by around $14 million on an annualized basis, with an annual total company run-rate of about $100 million by 2Q2020.
“Without a significant recovery in crude prices,” said Patterson, 2020 revenues in the Well Servicing segment and remaining Completions & Remedial Services segment should be flat year/year. The Water Logistics segment, which includes Agua Libre Midstream and fluid services, should see revenues up 5-10% year/year, “with growth accelerating as our newer midstream projects come online with enhanced contribution margins for the segment.”
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