Why Basic Energy Services Fizzled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Basic Energy Services (NYS: BAS) , which provides well-site services to the oil and natural gas industry, dove as much as 12% today after it reported weaker-than-expected earnings and a dreary forecast.

So what: For the first quarter, Basic Energy reported a profit of $0.50, on a 51% jump in revenue to $370.9 million. Based on estimates from Capital IQ, the company missed on EPS by $0.08, but did manage to skate by revenue estimates of $359.9 million. The disturbing aspect of this report was when the company noted that, despite the revenue increase, its gross margin deteriorated due to weakness in the natural gas market, higher labor costs, and several non-recurring expenses. Worse, Basic Energy doesn't believe it will be able to match its revenue growth with the speed at which costs are rising. Therefore, the company expects gross margin to contract by 200 to 400 basis points over the coming quarters.

Now what: I always worry about a company that has trouble controlling its input costs, and I'm certain decade-low natural gas prices aren't helping this situation. Admittedly, the company is very inexpensive on a forward earnings basis, but that could change quickly if it can't get its expenses under control. I'm not ready to make a CAPScall either way on Basic Energy, but I will add it to My Watchlist in the meantime.

Craving more input? Start by adding Basic Energy Services to your free and personalized watchlist so you can keep up on the latest news with the company.

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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