Oilfield Services: Seismic Exploration and Data Companies

I´ve been thinking about new investment themes for quite some time. One that I have followed for a good part of this year (see this earlier post) and I think will play out even more strongly in 2006, is seismic exploration and data service companies.   

What prompted me to write about this idea today are the simply unbelievable earnings posted by Veritas DGC (NYSE: VTS), one of the leading companies in the seismic industry. I don´t own VTS, but I do own PGS and Seitel (SELA.ob), two other companies involved in the seismic oil and gas industry.

Of course, the major problem with investing in these companies right now, is that they are all hitting multi-year highs. However, it pays to keep a watch on all these companies and to try to establish positions on any dips. The reason is because oil and gas exploration budgets will be up big in 2006 and as money moves towards exploration, big investments will be made in seismic exploration. To quote the CEO of Seitel (SELA.ob): "Our clients are acquiring more data as they move resources toward exploration, and we believe we are well positioned with one of the most comprehensive data libraries in North America to continue responding to their needs. In addition, our backlog of signed acquisition surveys already represents more acquisition revenue in 2006 than we expect to achieve in 2005." Or to quote from Vertias´s (VTS) earnings release today: "Backlog
At October 31, 2005, the Company's backlog was at a record level of $459 million compared to $302 at July 31, 2005 and $252 million at October 31, 2004."

So overall, since huge earnings growth is pretty much gauranteed in 2006, there is not much downside risk in these stocks (even if oil prices plummet, which is highly unlikely), and the upside can be 50-100% more in some of these names, as the earnings potential of these companies has not been fully reflected yet in the stock prices (these companies have massive operating leverage).

It´s never a good idea to chase stocks, but keep a close eye on PGS, VTS, SELA.ob, DWSN, TGE, MIND, and BTJ. All these companies will benefit big from a boom in seismic spending. You need to analyze each company, as each one generates cash in different ways (some are data companies, some are equipment; I´m more partial to data companies due to the better economics of the business). However, in general if seismic becomes hot (or hotter), all of these companies will continue to move up big in the stock market. There will be dips, some probably heart-wrenching, but if you keep a close eye on the fundamentals, these dips should be buying opportunities.

Also, what attracts me most to the seismic industry is that some of the bigger players (PGS, Seitel / SELA) are post-bankruptcy plays. As such, there is still a whole lot of skepticism that needs to be overcome for Wall Street to truly embrace these names. SELA.ob in particular still languishes on the bulletin board, even though it is a company that Warren Buffett himself tried to unsuccessfully pick up in bankruptcy court. Incidentally, SELA.ob, due to its still large debt balance, has the most operating leverage of the group, as far as I can tell. It also, like VTS, has one of the best business models around (i.e. reselling of data).

As mentioned in the past, I´ve done well in post-bankruptcy stocks, in post-bankrupt industries, when the companies start to show profits vs. losses. Many of the stocks in the  seismic industry fit this bill and as such this is a sector to watch in 2006. That said, the stocks have already had big moves, so you need to invest carefully here.