Basic Energy Services Inc. revealed a plan on Dec. 12 to divest of its pumping services assets (not inclusive of coiled tubing) in multiple transactions with expected proceeds of approximately $30 million to $45 million.

Despite the recent repositioning and restructuring in the pumping business, activity and pricing remain difficult, inhibiting the potential for positive free cash flow in the near- to medium-term. This divestiture is designed to bolster the company’s core remaining production-focused businesses of well servicing and water logistics. Furthermore, this noncore divestiture will fund the projected 2020 and 2021 capital budget of Agua Libre Midstream, the company’s rapidly growing, high return-on-assets business.

RELATED:

Basic Energy Services Establishes Permian Basin-Focused Water Subsidiary

Given current market conditions, the company believes it is appropriate to pivot away from completion-centric pumping services and toward its core production businesses. Basic plans to complete all work currently in-process, after which the company will cease its pumping and pumping-related services. Real estate and equipment are expected to be sold in multiple transactions during fourth-quarter 2019 and first-quarter 2020. Basic’s coiled tubing business remains highly complementary to its well servicing operations and is not expected to be impacted by these divestitures.

“The decision to exit the pumping services market in no way reflects on the employees that make up our pumping services team. This team has aggressively cut costs and continued to win business in a highly competitive market. Unfortunately, these pumping business lines currently remain in a structurally-disadvantaged position, as they are our most capital-intensive businesses. These divestitures will also reduce our capital lease exposure and the company’s total debt. The transaction will allow us to focus our efforts in the production-focused businesses in which we excel and generate higher returns on capital,” said Roe Patterson, president and CEO.

“Looking ahead to the first half of 2020, we do not expect the sale of our pumping assets to negatively impact EBITDA, reflecting just how difficult the market has become. Due to a lower-capital intensity asset base, we expect our cash balance to be approximately $5 million higher, excluding proceeds from the pumping asset sales, at the end of the second quarter of 2020. Furthermore, in conjunction with this capital redeployment plan, we expect to immediately cut general and administrative expenses by approximately $14 million on an annualized basis, reaching an annual total company run-rate of approximately $100 million by the second quarter of 2020,” he added.

Also commenting on the announcement, Capital One Securities Inc.’s senior oilfield analyst Luke M. Lemoine said, “Positive to see the disposal of a business that's been burning cash and was likely a distraction from other business lines that have been performing better.”

“As announced yesterday morning, [Basic Energy Services] is selling its 479,000 HHP [including real estate] in a series of transactions for $30 million to $45 million [about 6%-10% of newbuild prices] over the next two quarters. In third-quarter, pumping only generated $800,000 of EBITDA, but FCF (free cash flow) was -$600,000. The proceeds from the transactions will be used to fund Aqua Libre's capital budget, and G&A will be cut by about $14 million per year,” Lemoine said.

Onshore