S&P Raises Rating on Basic Energy Services (BAS) to 'B'; Outlook Stable

Standard & Poor's Ratings Services today lowered its corporate credit rating on Fort Worth-based Basic Energy Services Inc. (NYSE: BAS) to 'B' from 'B+'. The outlook is stable.

At the same time, we lowered our issue-level ratings on the company's senior unsecured notes to 'B' from 'B+'. The recovery rating on the unsecured notes remains '4', indicating meaningful (30% to 50%; at the upper half of the range) recovery in the case of a payment default.

"The stable outlook reflects our expectation that Basic will maintain adequate liquidity throughout the industry downturn, and that credit measures will modestly improve in 2016," said Standard & Poor's credit analyst Christine Besset.

Activity in the U.S. oil and natural gas exploration and production (E&P) industry continues to slow in light of low crude oil and natural gas prices, with many E&P companies significantly reducing 2015 capital spending plans. Consequently, we have reduced our revenue and EBITDA margin assumptions for U.S. land-focused oilfield services provider Basic Energy Services Inc., resulting in higher projected leverage. We now estimate funds from operations (FFO) to debt will fall below 12% and debt to EBITDA will exceed 5x over the next two years, which we consider too high for a 'B+' rating. As a result, we have removed a positive comparative rating analysis on Basic and lowered our corporate credit rating on Basic to 'B' from 'B+'. The outlook is stable.

Standard & Poor's views Basic's business profile as "weak." Our assessment primarily reflects its participation in the highly cyclical and competitive U.S. oilfield services industry and its relative modest size and scale compared with its largest competitors. The ratings also incorporate the company's solid-positioning in oil-prone basins and its capital spending flexibility during industry downturns. We view Basic's financial risk as "highly leveraged," reflecting our expectation that FFO to debt will fall to about 12% on average for the next three years. In our view, Basic's liquidity is "adequate."

We could consider a downgrade if Basic's operating performance is materially weaker than we project, likely due to worsening market conditions. In addition, we could revise the outlook to negative or lower ratings if Basic is unable to amend the covenants under its revolving credit facility.

We could raise the rating if market conditions in the onshore North American oil and gas industry improved such that we expect the company to sustain FFO to debt above 20% and debt leverage of less than 4x over the cycle.

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