Sector Watch: Seismic data stocks
Increased global energy demand, supply and demand imbalances, declining inventories and geopolitical instability are likely to keep crude oil prices high in 2008. The average price for for benchmark West Texas Intermediate (WTI) crude, for example, rose to $71.36 per barrel in 2007, from an average of $66.02 in 2006, and is expected to exceed $80 in 2008. WTI crude oil futures traded up to $100 per barrel in early January of this year before retreating to the current $96 to $98 per barrel area.
The rising energy prices have encouraged many oil and gas companies to step up exploration activities, thus creating demand for the seismic data services provided by Mitcham Industries, Inc. (Nasdaq: MIND) and Dawson Geophysical Company (Nasdaq: DWSN).
Drilling companies have been using seismic data since the 1920s to identify geological conditions favorable for oil and gas and to evaluate drilling potential. Seismic equipment works by sending an acoustic wave beneath the earth’s surface to bounce off underlying rock layers. The acoustic signal, enhanced by sophisticated computer software, produces a 3-D image of subsurface strata that can be used to map exploration projects.
Mitcham Industries and its subsidiaries lease and sell seismic equipment used by drilling contractors worldwide and is the world’s largest independent lessor of seismic equipment.
Mitcham’s advantages include a much larger equipment pool than competitors, consisting of some 58,000 seismic recorders and exclusive lease referral agreements with the industry’s leading equipment manufacturer, Sercel. The company’s equipment leases generally have terms ranging from three to six months and are thereafter renewable month-to-month. Mitcham plans to grow by expanding its technologically advanced seismic equipment pool, entering new international markets such as the CIS and North Africa, strengthening its supplier alliances and introducing new products and services. During this year’s September quarter, the company added 5,750 seismic recorders to its lease pool; it was to have taken delivery of another 6,500 recorders before year-end 2007. Equipment purchases have totaled $20 million in the latest year.
During the first nine months of 2007, Mitcham increased revenues 47% year-over-year to $55.6 million from $37.8 million and grew EBITDA (earnings before interest, taxes, depreciation and amortization) 57% year-over-year to $20.7 million from $13.2 million. However, net income was modestly lower at $8.1 million, or $0.79 per share, versus $8.6 million, or $0.84 per share, due to the absence of income tax benefits that enhanced prior year earnings. Analysts expect Mitcham Industries to produce 23% growth in the next year, and forecast longer-term growth of 20% annually. My $25 target for Mitcham Industries compares with the current share price of $19.80. Over the last 52 weeks, shares of Mitcham have ranged between $11.23 and $21.98.
Also dwelling in the seismic data sector is Dawson Geophysical, the leading U.S. provider of onshore seismic data acquisition services to major and independent oil and gas companies.
Dawson acquires and processes 2-D, 3-D and multi-component seismic data for its oil and gas company customers. The gathered data becomes the exclusive property of its customers; Dawson doesn’t acquire seismic data for its own use or participate as a partner in oil and gas exploration ventures. The company currently operates 15 seismic data acquisition crews in the lower 48 U.S. states and has two seismic data processing centers in Texas.
Since 2005, the company has grown to 15 crews from nine crews, to 102,000 recorders from 38,000 seismic recorders and to more than 1,300 employees from 800. During FY 2007, Dawson invested $54.6 million in fielding three additional data acquisition crews, making additional equipment available to its existing crews, and replacing and upgrading equipment. The company also expanded geographically so that it could take advantage of stepped-up drilling activities in the Appalachian Basin, the Rocky Mountains, the Fayetteville Shale in Arkansas and the Arkoma Basin.
Dawson has set a preliminary budget for FY 2008 capital spending of $30 million. Investments in more equipment and crews have paid off handsomely for the company. Its expanded capabilities have resulted in both pricing and productivity improvements.
In the fiscal year ended Sept. 30, 2007, Dawson’s revenues increased 53% year-over-year to $257.7 million from $168.6 million and net income surged 71% year-over-year to $27.2 million from $15.9 million. Per-share earnings rose 69% year-over-year to $3.57 from $2.11 and EBITDA climbed 63% to $62.7 million from $38.6 million. Bookings remain strong and Dawson expects to operate at full capacity well into calendar 2008. Analysts anticipate this company will produce 26% growth in FY 2008 and longer-term growth averaging 24% annually. My $85 price target for Dawson Geophysical (DWSN) shares compares with its closing price Tuesday of $72.09. Shares have ranged between $30.50 and $85.67 over the last 52 weeks.
