Goldman Sachs Downgrades Basic Energy Services (BAS) Two-Notches to Sell

Goldman Sachs downgraded Basic Energy Services (NYSE: BAS) from Buy to Sell with a price target of $12.00 (from $34.00).

Analyst Waqar Syed cited: (1) a slowdown in US land activity, where we expect customer capital spending to decline 6% next year (versus +9% before) following the cut in our 2015 WTI estimates to $74/bbl (prior: $90/bbl), (2) BAS’s strong operating and financial leverage implies that any slowdown in US land activity will drive revenues/margins sharply lower, and put pressure on its already stretched balance sheet (3Q14 net debt to capitalization ratio of 70% vs. 25% average for our coverage), (3) BAS has a high degree of exposure to the smaller public and private E&Ps, which we believe are likely to lead any capital spending cuts in the case that oil prices continue to trend lower, (4) high exposure to spot pricing poses a threat to its margins and (5) the stock is trading at a significant premium to its tangible book value of $5.99/share – if the market weakens, we believe the stock could fall closer to its tangible book value as seen in the prior down cycle during 2011/12 when it traded as low as 1.2x tangible book.

The firm lowered 2015/2016 EBITDA estimates by 36%/46%, while our 2014 estimates remain largely unchanged.

For an analyst ratings summary and ratings history on Basic Energy Services click here. For more ratings news on Basic Energy Services click here.

Shares of Basic Energy Services closed at $13.91 yesterday.

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