T-3 Energy Services (TTES) Earnings Update

T-3 Energy Services (TTES) just reported excellent fourth quarter earnings. It´s hard to know how to value this company, given its exposure to the cyclical Oil and Gas industry, but the numbers sure make us optimistic about the coming year. Given the extremely low float in this stock, a modest valuation  upgrade for the shares (they currently trade at less than 12X forward estimates, even though the company is growing at triple digit rates) could send the stock up 45%. At the same time, the downside appears quite limited because of the much improved balance sheet, solid business outlook, strong earnings growth expected during 2006, and the current low valuation.

Now for the earnings. According to the press release issued by the company: "Fourth quarter 2005 income from continuing operations of $2.9 million, or $0.27 per diluted share, up 37% and 35%, respectively, from $2.1 million, or $0.20 per diluted share reported for the third quarter of 2005, and up 198% and 200%, respectively, from $1.0 million, or $0.09 per diluted share reported for the fourth quarter of 2004." More importanly, "Backlog has increased $26.7 million, or 785%, from December 31, 2004 backlog of $3.4 million to December 31, 2005 backlog of $30.1 million." As for the balance sheet, the company paid down roughly $11 million in debt during the year, and now has a mere $7 million in long-term debt.

On the qualitative side: "Gus D. Halas, T-3 Energy's Chairman, President and Chief Executive Officer commented : T-3 had an excellent year in 2005. We are at an inflection point for our products and services that will continue to carry into 2006 with full momentum. Our T-3 brand identity has now been accepted by substantially all the major drilling contractors for use throughout the world. For example, BOP and BOP control systems shipments have increased 500% and 180%, respectively, in 2005 as compared to 2004. Over the next twelve months we plan to significantly expand our manufacturing capacity through facility expansions and operational improvements, through several selected geographical expansions and the continued introduction of new products being developed by our engineering group, which has more than doubled in size since mid 2005. This should allow us to continue and improve our already rapid response time to customer demands and enable us to build market share worldwide.''

Sounds exciting to us. We estimate the company will earn $1.20 a share in 2006. So the downside appears limited at $13.75 and there is at least 50% upside should the shares garner a more favorable multiple. Industry multiples appear to be in the 12X to 16X range, which implies upside for TTES of  nearly $20 per share or about  45% above the current price. Of course, that number could be low or high depending on quarterly earnings throughout the year, as well as overall oil and gas industry conditions (though it should be noted that oil service shares have corrected quite a bit recently, so I suspect that slighly lower oil prices will not much effect the shares of oil service companies, like TTES). Bottom line is that we´re holding on.