Basic Energy bond deal offers double-digit yield as free cash flow remains elusive – Deal Preview

Basic Energy is expected to press forward with its second attempt at refinancing its debt stack despite the double-digit yield investors are demanding, said seven buysiders tracking the situation. The oilfield servicer does not generate cash even with rising oil prices and has to contend with increased competition for its services.

The company is in the market with a B3-rated USD 300m senior secured notes alongside a new USD 150m ABL facility. Proceeds will take out prepetition USD 161.7m 13.5% first lien term loan due 2021 – as well as a USD 17.5m repayment penalty – pay down the USD 90m outstanding on its ABL, and add cash to its balance sheet.

Whispers on the BofA Merrill Lynch-led five-year non-call two notes are circulating in the 11% area, sources said. That is wider than 9.25%-9.5% whispers when Basic and BofA attempted to refinance its debt in March with a similar USD 300m first lien offering.

The company held an investor call Thursday (20 September) and expects to wrap up the roadshow by Monday (24 September), with pricing expected thereafter.

The deal brings pro forma liquidity to USD 252m, split between USD 102m of cash on hand and availability on its undrawn ABL. Pro forma leverage ticks up roughly half a turn to 3.4x based on LTM USD 112m adjusted EBITDA as of 30 June and USD 385m of pro forma debt – including USD 85m of capital leases.

That figure is well below the 6.7x of pro forma leverage it marketed back in March, said the sources.

Oil prices have trended higher since March, with WTI crude trading today at USD 71.14 per barrel, up roughly 14% compared to prices in early March at USD 62.60 per barrel.

For 1H18 ended 30 June, Basic reported a 134% increase in year-over-year adjusted EBITDA to USD 50.26m compared to USD 21.5m a year earlier on improved oil prices and an increase in well activity. Revenue for 1H18 ended 30 June also increased 23% year-over-year to USD 488m from USD 395m a year earlier, according to company documents.

“They’ve been cleaning up the balance sheet [and] their credit stats are a lot stronger for them to do a deal,” one buysider said.

Nevertheless, the company’s shares have been hammered, in part because several of its competitors have merged and are now viewed as better operators, said the sources. Basic’s stock traded most recently at USD 9.16 for a market cap of USD 245m, down 48% from the deal’s launch in March and down 74% from post-bankruptcy emergence.

Better than Basic

While earnings have improved, investors note the company has underinvested in its assets and may not be suited to operate in the event of another energy downturn.

By comparison, industry peers have consolidated in the Permian Basin, and are now better capitalized, said the sources. The region is viewed as Basin’s core operating area and the company could struggle to gain pricing power, given its small size relative to peers.

Just this month, EagleClaw Midstream and Transocean announced acquisitions; Southwestern Energy announced an asset sale; and Ares acquired Paradigm Energy Partners.

“When the industry catches a cold, this one [Basic] catches black death. It’s more product limited [and] it’s not broadly diversified,” one sellsider said.

Basic’s service offerings can be divided into four segments: completion and remedial services, which focuses mostly on pumping, cementing, and fracturing (51% of LTM revenue), well servicing (24% of LTM revenue), water logistics (23% of LTM revenue) and contract drilling (1% of LTM revenue), deal documents show.

The company is expected to burn USD 13m of cash in 2018, based on adjusted EBITDA projections of USD 100m, pro forma interest expense of USD 33m, and capex of USD 80m. Meanwhile, 2019 estimates imply continued cash burn given flat EBITDA projections and similar interest and capex projections, according to two buysiders.

“The oil business has been robust over last six months and they’ve shown an inability to make as much money as they can, and that’s because of their assets,” a buysider said.

Also working against the company’s ability to throw off cash is the rising cost of labor for Basic and other service companies, two buysiders said.

Basic’s direct operating expenses, which primarily consist of labor, fuel and insurance, increased 18% year-over-year for 1H18 compared to 1H17, mostly in its completion and remedial services and well servicing segments, according to company documents.

“They [Basic] don’t have the manpower to contend with those labor requirements and they’re not big enough to withstand the consolidation trend there,” one buysider said.

Buysiders expect Basic to price wider than larger servicers 3.6x levered Calfrac and 14.1x levered Weatherford, said the sources. Both companies are viewed as more competitive in the Permian basin, they said.

Calfrac’s USD 650m 8.5% senior unsecured notes due 2026 last traded at 93 to yield 9.807%, according to MarketAxess. Weatherford’s USD 750m 8.25% senior unsecured notes due 2023 last traded today at 93.25 to yield 10.075%, according to MarketAxess.

Basic raised the initial USD 165m term loan in 2016 from Riverstone Energy and West Street Capital and filed for Chapter 11 later that year, handing equity to holders of its pre-petition USD 775m of unsecured notes and reinstating the term loan.

The company did not respond to a request for comment. The bank declined to comment.

2018 Debtwire

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