Basic Energy Cut At Imperial Capital

• Basic Energy Services, Inc BAS shares have plunged 50 percent year-to-date, and are trading significantly below their 52-week high of $22.81.
• Imperial Capital’s Scott Levine downgraded the rating on the company from Outperform to In-Line, while reducing the price target from $10 to $4.75.
• A prolonged industry downturn, posing risk to Basic Energy’s earnings could limit upside to the company’s shares in the near term, Levine said.

Analyst Scott Levine believes that Basic Energy is poised to eventually benefit from a recovery in US onshore E&P activity, citing the company’s “diverse service mix” and “attractive geographic footprint.”

Levine added, however, that near-term upside could be limited, given that “the industry downturn poses risk to earnings, balance sheet leverage is substantial, and the stock trades at a premium to peers.”

Commodity prices continue to decline and there has been a reversal in onshore rig count, after starting to improve in June. Given this backdrop, Levine believes that the E&P downturn could persist longer than was earlier anticipated and expects a decline in FY16 capex from the FY15 levels.

The EBITDA estimates for FY15 and FY16 have been reduced by 44 percent to $32mn and by 77 percent to $25mn, respectively. Basic Energy is scheduled to report its 3Q15 results on October 22, and Levine expects it to report its EPS at -$1.19, as compared to the Street expectation of -$1.15.

In the report Imperial Capital noted, “BAS exited 2Q15 with $208mn in liquidity, including $92mn in cash and $116mn in availability under its $250mn in asset-based revolving credit facility (ABL). We think this should be sufficient to fund the company’s business needs over the next 12-18 months.”