Basic Energy Services has $208 million liquidity, ‘optionality,’ eyes acquisitions, joint ventures

By Paul Deckelman

New York, Aug. 18 – Basic Energy Services, Inc. ended the 2015 second quarter with $208 million of liquidity – actually somewhat below where it had stood at the end of the first quarter, following a transaction during the quarter in which it amended its revolving credit facility, switching out of what had been a $300 million cash-flow based revolver to a $250 million asset-based revolver.

But while “we did shrink the availability some” on that facility, the Fort Worth, Texas-based oilfield services provider’s president and chief executive officer, Thomas M. “Roe” Patterson, told an investment conference on Tuesday the new revolver provided “a lot of covenant relief – we really don’t have any covenant issues.”

Patterson told participants at EnerCom’s The Oil & Gas Conference 20, a four-day event taking place in Denver, that with no debt maturities due until 2019 – the nearest is its $475 million of outstanding 7¾% senior notes – “we feel like we’ve got a lot of optionality with respect to our debt.”

Revolver deal helps covenants

Basic had ended the first quarter on March 31 with $791 million of debt, consisting of the $475 million of 2019 notes, $300 million of 7¾% senior notes due 2022 and $16 million drawn against the old $300 million revolver, which it had last amended in December of 2014. It also had $51.3 million of letters of credit outstanding, for total availability under the facility of $229.5 million.

On April 21, Basic and its lenders revised the revolver, changing it to asset-based from cash-flow based and downsizing it to a $250 million facility, although there is a $100 million accordion feature, which could maximize the revolver to $350 million. The borrowing base is comprised of eligible accounts receivable and equipment.

Existing cash-flow-based covenants were abolished.

In their place, certain secured leverage ratio and fixed-charge ratio maintenance covenants will apply if availability under the facility declines below certain thresholds – if it is less than the greater of either 25% of the aggregate commitments outstanding, or $62.5 million. In that case, Basic would be required to maintain a consolidated senior secured leverage ratio not to exceed 2.50-to-1 and a consolidated fixed charge coverage ratio not less than 1-to-1.

But Patterson said that all told, “we were fortunate enough” to revise the revolver.

Looking to lower debt ratio

Basic repaid the $16 million due under the former revolver when it made the switch-over.

As of the end of the second quarter on June 30, the company had no borrowings drawn under the new revolver, with $48.5 million of letters of credit outstanding. Pro forma availability under the facility at June 30 was $116 million. The company had $92 million in cash – down sequentially from $105 million at the end of the first quarter – for liquidity of $208 million.

As of the end of the quarter, its ratio of total debt of $897 million – the $775 million of 2019 and 2022 notes, plus another $121 million of capital leases and other debt – as a multiple of trailing 12-month adjusted EBITDA stood at 4.3 times.

With $92 million of cash and equivalents on the books, net debt was $805 million, and the leverage ratio of net debt to 12-month trailing adjusted EBITDA was 3.9 times.

The coverage ratio of adjusted EBITDA as a multiple of interest expense was 3.1 times.

Basic’s ratio of total debt as a percentage of capitalization stood at 77%.

Patterson acknowledged “we know it’s high – it’s higher than what we would like. We’d love to get that debt-to-cap number down closer to 50[%] over time. That continues to be our goal, has been our goal – but we’re happy that we have the optionality and the liquidity that we do have right now.”

Acquisitions, joint ventures

The CEO also told the investors at the conference that Basic had recently linked up with Quantum Energy Partners, a Houston-based energy-oriented private-equity firm, signing a non-binding letter of intent with them “to put together a block of money [so] that if we found something compelling that was really bigger than what our balance sheet could justify, that we could potentially tap into their capital to do some sort of joint venture with them.”

The agreement provides for capital of up to $250 million and is expandable under certain conditions.

Patterson said that “we have been, historically, very stingy with our equity, and don’t issue it very often, and we will continue to be. So doing something on-balance-sheet right now is probably not in the cards – but if we do find something large, something compelling that’s off-balance-sheet, where we could do a J-V, we’d manage it [and] run it.”

He said that under such a scenario, Quantum would provide part of the capital and Basic might invest capital as well, or, alternatively, could contribute some of its existing assets into the new entity.

“There’s a lot of ways to skin the cat there; then we might do it,” he said – while pointing out that “we’re not bound in any way.”

He said that in the past, “we’ve had a lot of flexibility with this group, and that’s why we teamed up with them. We like the way they look at the market right now and I think they like the way we’re looking at it as well.”

Since its inception in 1995, Basic has spent a total of more than $1.2 billion to acquire more than 120 other, smaller companies operating in one or more of its four major business areas – completion and remedial services, fluid services, well servicing and contract drilling. Acquisitions have accounted for fully half of the company’s growth over time, with organic growth responsible for the remainder. Much of the company’s management team consists of executives who came over to Basic after it acquired the companies they were working for.

Patterson declared that “we’re pretty good at rolling up these businesses – we’ve got a good integration process, a knack for being a buyer of choice in most cases. Our decentralized management style kind of fits most smaller companies – they like doing business with Basic and selling to Basic.”

Looking at the environment in the energy industry right now, he predicted that “there’s going to be a lot of consolidation opportunity coming down the pike” – although he added that he did not know “when that time is going to get ripe.”

With the recent renewed drop in oil prices, “it feels early right now.”

Patterson said that “we’re seeing a lot of deal flow – we’re seeing a lot of people come to the table wanting to do something to get out from under their going concern and try to sell to us, but some of their expectations are just not there. Every time these commodity prices fall, those expectations need to come down as well, but they don’t seem to always do that.”

He noted that historically, “on the back side” of previous periods of oil price troughs such as occurred in 2001 and again in 2009, Basic had gotten “pretty acquisitive – we buy a lot of deals and we can make some big changes to the company.

“So we’ll continue to look for opportunities.”

© 2015 Prospect News.
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