Will Upstream Operators’ Capexes Affect Basic Energy’s Q1 Margin?



Upstream operators’ capex cut

In the past couple of years, some major US upstream and integrated companies have reduced their capital expenditures (capex) following crude oil price’s sharp fall.

From 1Q16 to 1Q17, 17 of the most prominent names in the US upstream and integrated space slashed their capexes by a total of 28%. Lower upstream capexes resulted in lower prices for oilfield equipment and services (or OFS) companies’ services and products, reducing their operating revenues and margins.

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From 4Q16 to 1Q17, these companies’ capexes fell 20%. Many of these companies have started to increase their 2017 capex budgets, as crude oil prices have shown signs of stabilization. Read Market Realist’s Why Cabot Awaits the Atlantic and Constitution Pipeline Projects to learn more. Higher capex on energy drilling and production could lead to improved margins for OFS companies going forward.

EBITDA margin comparison

As we can see in the graph above, Basic Energy Services’ (BAS) EBITDA (earnings before interest, tax, depreciation, and amortization) margin was negatively affected as upstream companies slashed their budgets. From 1Q16 to 1Q17, BAS’s EBITDA margin improved to -2.4% from -8.6%.

The average EBITDA margin of ten of the most prominent OFS companies improved to 10.4% in 1Q17, compared to 4.8% in 4Q16. A company’s EBITDA margin is a measure of its operating earnings.

EBITDA margins of BAS’s peers

Patterson-UTI Energy’s (PTEN) EBITDA margin was 22.5% in 1Q17, and Core Laboratories’ (CLB) EBITDA margin was ~19% in the quarter. National Oilwell Varco’s (NOV) EBITDA margin was 4.5% in 1Q17. 

NOV makes up 0.92% of the Vanguard Energy ETF (VDE). The energy sector makes up 6.3% of SPX-INDEX, which has risen 6% year-to-date (or YTD) compared to the 23% fall in BAS’s stock price YTD.

Next, we’ll discuss Basic Energy Services’ capex and free cash flow.


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