Basic Energy Services is an oilfield services business which is primarily involved in well completion and servicing, and as such is exposed for better or for worse to drilling activity. Basic’s sales were down only slightly in the third quarter versus Q3 2011, though this was a reversal from strong performance in the first half of the year (in total, revenue for the first nine months of 2012 was 21% higher from the same period a year earlier). However, all major categories of expenses came in higher last quarter than they had in the third quarter of last year, with the result being that earnings dropped 76%.
The financial community is fairly sour on the company’s prospects. The most recent data showed that 20% of the shares outstanding are held short, even with the stock having fallen so far this year. The sell-side is at least as bearish, with earnings per share for 2013 expected to come in at 33 cents (roughly double, for the whole year, what Basic earned in its most recent quarter). This places the stock’s valuation at a forward P/E of 29.
The two giants in the oilfield equipment and services industry are Schlumberger Limited. (NYSE:SLB) and Halliburton Company (NYSE:HAL). In terms of their earnings multiples there is a substantial spread between the valuations of these two peers: Halliburton’s trailing and forward P/Es are both 10, while Schlumberger trades at 17 times trailing earnings and 14 times consensus earnings for 2013. Halliburton has a considerably lower five-year PEG ratio as well, suggesting that the sell-side does not expect it to underperform the larger Schlumberger in the long term. In terms of recent performance there has been something of a difference- Schlumberger’s earnings up last quarter compared to the same period in the previous year, Halliburton’s down- and so we could see a small premium, but Halliburton looks like a better buy. Read more about why we’d avoid Schlumberger. Either of these two does look considerably safer than Basic, however.
Key Energy Services, Inc. (NYSE:KEG) and Nabors Industries Ltd. (NYSE:NBR) are two other comparable companies. Each of these stocks is down at least 30% in the last year, and their trailing earnings don’t look particularly good relative to their valuation (the trailing P/Es are 28 and 120, respectively) but in these cases Wall Street analysts expect strong rebounds. Specifically, the forward price-to-earnings multiples converge to the 10-11 range, which would normally be a reasonable price. Their revenues have been fairly stable as well. While we’d prefer Halliburton, we do think that investors should at least check to see if these companies have a reasonable path to the degree of improvement that the Street expects.
It’s possible that Basic will rally, but the company doesn’t look like a good value compared to larger industry peers. The insider purchase is something of a positive in our view, but this particular insider has been fairly consistent in buying over the course of the year and the earnings multiples seem high.
