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Wednesday night, T-3 Energy Services (TTES) reported earnings which blew away even my wildest expectations. The company reported a 34% increase quarter over quarter in earnings and a 450% increase in earnings year-over-year. Most importantly, backlog has increased to $44.6 million at March 31, 2006, a 48% increase over December 31, 2005 backlog of $30.1 million and a 325% increase over March 31, 2005 backlog of $10.5 million. We originally estimated $1.20 per share in earnings for 2006, but this number now appears to be too low. Perhaps, something at $1.40-$1.50 per share is more in line.

First for those who are unfamiliar with the name, T-3 Energy Services, Inc. (TTES) provides a broad range of oilfield products and services primarily to customers in the drilling and completion of new oil and gas wells, the workover of existing wells and the production and transportation of oil and gas.

As regards to earnings, as noted in the company's press release:

"The Company's increase in revenues was primarily attributable to improved demand for its products and services resulting from higher price levels for oil and natural gas and correspondingly higher levels of construction of drilling rigs that require the type of equipment T-3 manufactures."

Gus D. Halas, T-3 Energy's Chairman, President and Chief Executive Officer, commented, " We believe that customer demand for our products and services will continue to be strong throughout the remainder of 2006 and into 2007. We remain focused on introducing new products being developed by our highly qualified engineering group, increasing our manufacturing capacity, improving our processes and growing through geographic expansion. Our goal is to continue to increase our domestic and international market share.''

What I find very interesting about T-3 Energy Services (TTES) and the oil and gas equipment sector in general is that when you compare the valuations of the O&G service/equipment companies to equipment companies in the tech sector, you can see how undervalued the O&G sector really is (or how overvalued tech is, depending on your viewpoint, of course). If TTES was in the tech sector, the company would be trading at $70 per share. However, since it is in the O&G sector, which is considered cyclical, the company is afforded a much lower multiple on earnings despite the huge growth.

The question, of course, is if this makes any sense. I contend that technology companies are every bit as cyclical as O&G companies. In fact, I would argue that technology companies face even greater business cycle risks than the O&G companies, because the competitive advantages of one company over another are so slim and the industry changes so rapidly.

How many of the highest growing tech companies from a decade ago are still anywhere near the share price levels they traded at in their growth years? However, despite these facts, fast-growing tech companies continue to sport obscene multiples as compared to non-tech companies growing at similar rates. Perhaps, even more to the point, how long does the oil rally have to last before it is no longer viewed as cyclical? Does anyone actually believe that we will see $20 oil again, any time soon? That's a risk, of course, but a similar one you take when you invest in any company even outside the oil industry, i.e. industry trends can change dramatically rendering the company's products obsolete.

Overall, we are very pleased with this earnings report for TTES and we will be holding onto our shares for quite awhile longer.

TTES 1-yr Chart

Please Note: I first recommended T-3 Energy (TTES) at $12.15, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Source: T-3 Energy Services Blows Past Expectations (TTES)