Steven Webster, a member of the board of directors at Basic Energy Services (BAS), directly acquired close to 16,000 shares of the company's stock on July 30 at an average price of $11.33 per share, according to a Form 4 filed with the Securities and Exchange Commission.
Insider purchases are sometimes taken as bullish signals by investors, since insiders generally have to be confident in the company in order to buy rather than diversify their wealth, as might be expected according to economic theory. Studies on the subject generally show a small outperformance effect for stocks bought by insiders, and so purchases can serve as an effective screen for initial investment ideas.
Basic's stock dropped below $12 after the company reported disappointing results for the second quarter of 2013. Webster likely believed that the market had overreacted. We'd note that the stock has already recovered a bit, rising about a dollar from where he was buying.
Specifically, adjusted losses per share for the quarter were $0.16, against consensus forecasts of $0.09. Basic's revenue declined by 10% from the second quarter of 2012, led by a decrease in the well completion and remedial services business. Operating income shrank to only about $1 million as a result, leading to the net loss; a year ago, the company had earned $0.36 per share. It should be noted that Basic lost money in the first quarter of the year as well.
The company is cash-flow positive, since it has significant depreciation expenses, but cash flow from operations was down by more than 50% in the first six months of 2013 from its levels a year ago and fell short of capital expenditures.
Basic has a market capitalization of about $490 million, and on average over 600,000 shares are traded per day, so at a current price of over $12 there is plenty of daily dollar volume. It trades at 60x forward earnings estimates, as Wall Street analysts expect only $0.21 per share in profits for 2014. There is a wide range around this forecast: The low estimate is for net losses per share of $0.85. While there has been a rise in oil and gas exploration and production activity in the onshore U.S., which is the focus of Basic's operations, the company has apparently not been able to capitalize on this trend at this point. Many market players consider this valuation high, and according to the most recent data, 17% of the float is held short.
It does appear that EBITDA year to date is about $100 million. If we annualize that figure, then at the current enterprise value of less than $500 million, the stock does look cheap in cash-flow terms, with an enterprise-value-to-EBITDA multiple of less than 3x. With a beta of 2.8, Basic is not an ideal buyout candidate (buyout firms, or, more accurately, the lenders they depend on to finance deals, tend to prefer more stable companies), and certainly recent performance has not been strong. Still, despite the high valuation in earnings terms, we believe that shorts should pay attention to the low EV/EBITDA multiple as well.
It's easy to see why investors who are focused on earnings punished Basic for its second-quarter results. Even in what one would think would be a favorable business environment, the company has been unprofitable, and analysts are generally forecasting poor results next year as well. However, valuing the company on a cash-flow basis actually makes it look quite cheap, and so it's possible that the market is being a bit too bearish on the stock. A buyout, strategic acquisition, or leveraged recapitalization is not outside the realm of possibility (though the insider purchase indicates that no significant situation is in development at this time), and so we'd certainly recommend against being short.