Seitel Proposes to Amend Indenture

No surprise here. Seitel (SELA.ob) is trying to amend the indenture governing its $189 million 11 3/4 Senior Notes due 2011.

Specifically, the company has stated that: "If adopted, the proposed amendments would exclude from the Indenture's limitation on the amount of the Company's capital expenditures during any fiscal year all monies paid or agreed to be paid by third parties to the Company and its restricted subsidiaries (as defined in the Indenture) for the purposes of funding the acquisition of new seismic data to which the Company and its restricted subsidiaries acquire ownership and to which the third party is granted a contemporaneous license with a limited exclusivity period."

Briefly, Seitel licenses seismic data to oil and gas companies. The company supposedly has the largest seismic data library in Canada, a hot bed for exploration in the coming years. What makes Seitel unique, as opposed to VTS (Vertias) or PGS (Petroleum GeoServices),  is that it doesn´t really own any of the equipment that actually take the seismic surveys. The company outsources these projects to third-parties and then retains the rights to the data. Furthermore, the vast majority of the cost of many of these outsourced surveys is borne by the clients of Seitel (SELA.ob). So, essentially Seitel is a pure data company. They can even sell the same piece of data many times to many different clients.

It´s simply an amazing business to be in when your data is in demand, as you generate huge piles of cash with limited expenses (i.e. because you or your clients have already paid for the data). For instance Seitel (SELA.ob), had about $50 million in cash on 9/30/2005, right before the start of the busy season for seismic data. It then reported $58 million in cash as of 11/7/2005. So in little over a month, the company generated $8 million in cash or $0.05 per share. I suspect they will generate at least $20 million in cash during the fourth quarter, that´s about $0.13 per share for the quarter (about 153 million shares outstanding).   And 2006 will be an even bigger year for seismic data, so the stock seems unbelievably cheap at $2.

What´s the catch? The risk here is that Seitel´s management can use the cash for stupid investments. There is a shareholder trust issue here. Clearly, with today´s annoucement management appears confident that the boom in seismic data will last thru 2007, since they have clearly signalled that they will spend a huge amout of the free cash in 2006 on acquiring new seismic data. Management claims a 40% ROE on seismic investments. If that´s the case, then surely it is better to invest in seismic data than pay back debt or buy back shares. But of course, I´m skeptical. If there is one law in finance it is this: See Cash, Spend Cash. Whenever management can get a hold of cash they generally spend it on unfruitful endeavors and silly investments.

Nobody knows how long this uptrend in the O&G exploration and seismic industries will last, so I would think management should be somewhat prudent with the growing cash pile. Why not give back some cash to shareholders? In fact, one wonders what Buffett would do with Seitel´s coming cash hoard.  Buffett actually unsuccessfully tried to buy Seitel out of  bankruptcy awhile back, probably sensing the huge amount of cash the company would generate on an uptick in the seismic industry. I imagine he would use the cash to buy back stock, pay off debt etc. The last thing he would do is start another big cap-ex program, to ensure another bankruptcy filing for Seitel (SELA) in a couple of years when the inevitable downturn in the O&G exploration occurs.

In any case, SELA.ob still remains an amazing gamble for 2006. The company is a post-bankruptcy play, will start to show profits on the income statement, vs. huge losses, may also seek an AMEX listing increasing liquidity for the shares, and the seismic sector will be hot. What´s not to like for at least a year? However, be sure to take some money off the Seitel table when the going is good. This is not a long-term play, as the company will surely will be sitting on a pile of debt come the next downturn.