Bottom of the Barrel: Don't Get Burned by Boots & Coots

Editor's Note: This special edition of Bottom of the Barrel looks at a stock that's been the focal point of a lot of daytrading conversation as a result of the Iraqi conflict.

Boots & Coots (WEL Quote), a Houston-based energy services company, has become the darling of daytraders and war-watchers alike. Along with Halliburton (HAL Quote) and Superior Energy (SPN Quote), Boots & Coots has been selected to assist in the control of Iraqi oil-well fires.

Although some opportunists suggest that this dollar stock is selling at fire-sale prices, a closer look at the company indicates that it could just as easily go up in flames.

Bad Checks

Boots & Coots has a storied history of putting out well fires and helping companies around the world with critical well-control situations. Yet, before the war in Iraq, all investors could think about was the critical nature of Boots & Coots' financing.

As late as mid-February, the company updated investors on the fact that it's in default of lending covenants with its primary financier, Checkpoint Business. Boots & Coots is working with Checkpoint to cure the default, but there's no guarantee it will be able to do so before Checkpoint acts to protect its interests.

In fact, Checkpoint offered Boots & Coots an alternative to involuntary action: voluntary bankruptcy. "Boots & Coots announced today that Checkpoint had presented a proposal to restructure the Company to its board of directors," noted a Feb. 18 press release from Boots & Coots. "This proposal would involve a voluntary Chapter 11 bankruptcy filing by Boots & Coots and the cancellation of Boots & Coots common equity as part of the bankruptcy process."

Boots & Coots (WEL:Amex)
Current Price	1.16
52-week range	$2.55-$0.06
P/E Ratio*	Def
Market Cap	$52 million
Average Daily Volume	14,596,727
Inst. Ownership	8%
Dividend Yield	None
Beta	0.68
Company Web Site	www.bncg.com
*Based on 2003 estimates; Def=Deficit, no earnings. Source: MarketGuide, Company Reports, TSC Research

Instead of working quickly to secure shareholders' interests, Boots & Coots allowed the issue to smolder. "The board of directors of Boots & Coots is considering the proposal from Checkpoint and possible alternatives to it, but has not made any decision about the proposal as of the date of this release," the company said.

In other words, as of mid-February, the management of the company was considering declaring its own stock -- then trading below a buck -- worthless. On Feb. 18, Boots & Coots shares closed at 34 cents. In fact, over the past year, the stock has traded as low as 6 cents as investors seemed convinced that all that was left was a final puff of smoke.

Saddam Rally?

Although the company continues to struggle financially, many speculators think the Iraqi war could bring Boots & Coots back to life. However, a closer look at the current situation may extinguish any hopes that this well-firefighting concern will be saved by its ability to put out oil-well fires.

Right now, there may be a few dozen fires in Iraqi oilfields. In contrast, there were nearly 700 oilfield fires in Kuwait during the first Gulf War. While Halliburton, the primary contractor for the firefighting job, is likely to assign much of the firefighting work to Boots & Coots, it isn't clear how much work there will be. Plus, although Boots & Coots provides other well-control services that could be used in Iraq, Halliburton probably won't give more work to Boots & Coots when its own Kellogg, Brown & Root subsidiary can provide many of the same services.