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Over the past couple of years, the Oil and Gas equipment service industry has been evolving rapidly. With the introduction of new fracking techniques, increased safety regulations and domestic construction demands showing no signs of slowing down, these factors have given the industry a boost. One of the companies lsituated well in the sector and looking to capitalize on this growth is TGC Industries (TGE)

TGC Industries provides seismic data acquisition services primarily to onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas in the continental U.S. and Canada. The main factors influencing demand for seismic data acquisition services in the industry are: the levels of drilling activity by oil and natural gas companies, the sizes of such companies' exploration and development budgets, which, depend largely on current and anticipated future crude oil, natural gas prices and depletion rates.

As the two of the main factors influencing the demand for TGC Industries' seismic data is the demand for oil and gas in North America, finding analysis regarding the future of these energy sources is a key factor to get an overall scope of the sector that will affect TGC Industries.

Key Factors moving forward

A growing need for Natural Gas with increased pricing

There are many more bullish arguments regarding the price and demand for natural gas in North America than there were a year ago. In a recent article published by Dr. Kent Moors titled: Five Reasons Why Natural Gas Prices Will Continue To Rise, he states that the demand for natural gas is going to increase in the foreseeable future. The reasons for this are:

  1. Broad-based industrial use has finally returned and exceeded pre-crisis levels.
  2. Natural gas is replacing oil as a feeder stock for petrochemicals
  3. We continue to witness a move to liquefied natural gas (LNG) and compressed natural gas (CNG) as a vehicle fuel.
  4. The move from coal to gas for the production of electricity
  5. An advent of LNG exports from the U.S. and Canada.

The EIA [pdf] also believes the demand is growing for natural gas. In its Annual Energy Outlook 2013 the EIA notes that exports will be a driving factor in the increased demand for natural gas over the long term. "Exports (will) continue to grow at a rate of about 17.7% per year from 2020 to 2040. Net exports in 2020 are less than 1 percent of total consumption; in 2040 they are 12 percent of consumption."

In the chart below the EIA displays five different scenarios regarding the price increase of Natural Gas. These scenarios are based on a multitude of events. They range from a shortage of natural gas where the price increases very quickly to a glut of resources where the price acceleration is much slower.

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Short-term Domestic Oil Demand

With the U.S. focusing on domestic oil and gas for its resources and becoming self-sufficient by 2020, the IEA is forecasting a steep increase in U.S. oil and gas production in the near future. The IEA is predicting the U.S. to become the world's largest oil producer by 2020. It is expecting oil production in the U.S. to increase by 14% in 2013 to 7.3 million barrels and up to 8.09 million in 2014. Oil production in the U.S. is projected to peak at 11.1 million barrels a day by 2020.

Below is a chart indicating the estimates for oil and gas production until 2030.

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From a Macro point of view, there will continue to be a strong need for oil and gas service companies in North America. As the demand for production continues, producers will be searching for ways to boost efficiency and curb costs before drill bits even hit the ground.

Up to this point companies have been acquiring assets and building a base in the anticipation of the need for the oil and gas in North America. In a recent article published by Bloomberg the company states, "We are truly at an inflection point. We have exited the capture phase and entered the harvesting phase."

Energy producers and companies in the oilfield services sector have continued to work on their techniques and equipment to increase the amount of oil and gas that can be taken from shale and other formations. As E&P companies are looking to get the most profitability, thus increasing their recycle ratio and improving their profitability, TGC Industries is well situated to capture this economic boom.

As three-dimensional modeling of subterranean formations help producers predict the nature, location and permeability of their crude-rich reservoirs, this will enable producers to save time, money and improve efficiency. As TGC Industries performs many duties, one of which includes three-dimensional imaging, this bodes well for the company.

TGE Industries

TGC Industries is divided up into three subsidiaries. They are: Tidelands Geophysical Company, Eagle Canada Inc. and Exploration Surveys Inc.

Tidelands Geophysical Company - is a seismic acquisition company that has provided clients with high-quality seismic data. Fielding the most modern equipment available, and utilizing the latest data gathering techniques in the oil and gas industry, TGC's experienced personnel have consistently provided quality data in a cost-effective manner.

Eagle Canada Inc. - is a leading provider of seismic data acquisition services to the Canadian energy industry. Considered at the forefront of "No Footprint Seismic" in Canada, it is expert in acquiring data in technically complex, logistically difficult and environmentally-sensitive areas.

Exploration Surveys Inc. - is a digital database company providing high resolution gravity data. ESI has extensive gravity coverage throughout North America and magnetic data coverage in many areas of the domestic U.S.

Q1 2013, A soft quarter but a strengthening Balance Sheet

Q1 was a soft quarter for TGC Industries. This was no surprise to the company, as it expected a soft Q1 for 2013. The soft quarter was based on land permitting delays, mainly in the Northeast, and adverse winter weather conditions in parts of the United States. These events triggered a drop of revenues. Revenues were reported at $63,204,413 for the three months ended March 31, 2013, compared to $67,045,408 In Q1 of 2012

Currently, the company is experiencing a softening in the U.S. seismic market. The company states "clients are re-evaluating their reservoir plays and seismic funds are being diverted to drilling programs." As a result the company has idled two U.S. crews. The current soft market is reflected in the fundamentals listed below.

1. Net Income

  1. Net Income 2010 = $ (1) million.
  2. Net Income 2011 = $ 11 million.
  3. Net Income 2012 = $ 16 million
  4. Net Income 2013 TTM = 10 million

The Net income has increased from $ (1) million in 2010 to $10 million in 2013 TTM.

2. Operating Cash Flow

  1. Operating Cash Flow 2010 = $0 million.
  2. Operating Cash Flow 2011 = $18 million.
  3. Operating Cash Flow 2012 = $27 million.
  4. Operating Cash Flow 2013 TTM = $17 million.

The operating cash flow has increased from $0 in 2010 to $17 million in 2013 TTM.

3. ROA - Return On Assets = Net Income/Total Assets

Net Income growth

  1. Net Income 2010 = $ (1) million.
  2. Net Income 2011 = $ 11 million.
  3. Net Income 2012 = $ 16 million
  4. Net Income 2013 TTM = 10 million

Total asset growth

  1. Total Assets 2010 = $ 88 million.
  2. Total Assets 2011 = $ 100 million.
  3. Total Assets 2012 = $ 142 million.
  4. Total Assets 2013 TTM = $ 140 million

ROA - Return on assets

  1. Return On Assets 2010 = -1.14%.
  2. Return On Assets 2011 = 11.00%.
  3. Return On Assets 2012 = 11.27%.
  4. Return On Assets 2012 = 7.14%.

The ROA has increased from -1.14% in 2010 to 7.14% in 2013 TTM.

4. Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

Total Assets

  • Total Assets 2010 = $ 88 million.
  • Total Assets 2011 = $ 100 million.
  • Total Assets 2012 = $ 142 million.
  • Total Assets 2013 TTM = $ 140 million
  • Equals and increase of $52 million

Total Liabilities

  • Total Liabilities 2010 = $ 35 million.
  • Total Liabilities 2011= $ 36 million.
  • Total Liabilities 2012 = $ 64 million.
  • Total Liabilities 2013 TTM = $ 57 million.
  • Equals and increase of $22 million

Over the past 4 years TGC Industries has acquired more total assets than total liabilities.

5. Working Capital

Current Ratio = Current Assets/Current liabilities

Current Assets

  • Current Assets 2010 = $ 38 million.
  • Current Assets 2011 = $ 42 million.
  • Current Assets 2012 = $ 52 million.
  • Current Assets 2013 TTM = $ 57 million.

Current liabilities

  • Current liabilities 2010 = $ 24 million.
  • Current liabilities 2011 = $ 22 million.
  • Current liabilities 2012 = $ 40 million.
  • Current liabilities 2013 TTM = $ 36 million.

Current Ratio

  • Current Ratio 2010 = 1.58.
  • Current Ratio 2011 = 1.91
  • Current Ratio 2012 = 1.30
  • Current Ratio 2013 TTM = 1.58

TGC Industries current ratio has remained the same at 1.58

6. Gross Margin: Gross Income/Sales

  • Gross Margin 2010 = $ 22 million / $ 108 million = 20.37%.
  • Gross Margin 2011 = $ 47 million / $ 151 million = 31.26%.
  • Gross Margin 2012 = $ 61 million / $ 196 million = 31.12%.
  • Gross Margin 2013 TTM = $ 53 million / $ 192 million = 27.60%.

TGC Industries gross margin has increased from 20.37% to 27.60%.

7. Asset Turnover

Revenue growth

  • Revenue 2010 = $108 million.
  • Revenue 2011 = $151 million.
  • Revenue 2012 = $196 million.
  • Revenue 2013 TTM = $192 million
  • Equals an increase of 77.78%.

Total Asset Growth

  • Total Assets 2010 = $ 88 million.
  • Total Assets 2011 = $ 100 million.
  • Total Assets 2012 = $ 142 million.
  • Total Assets 2013 TTM = $ 140 million
  • Equals an increase of 59.09%.

As the revenue growth exceeded the asset growth on a percentage basis, this indicates that the company is making money on its assets.

Even though Q1 was a slow quarter for TGC Industrues the company's fundamentals are very strong and indicate strength moving forward. All aspects of the fundamental analysis above indicate a strengthening of the balance sheet. TGC Industries stated in its Q1 Earning Transcript "the softening is temporary but may last into the third quarter. However, we believe demand for our services will improve during the latter part of the year. Our backlog at the end of the first quarter was approximately $40 million consisting primarily of U.S. work."

Catalysts moving forward

Currently TGC industries has many catalysts going for it. They are:

  • Growth in energy demand requires continued oil and gas exploration and seismic spending
  • Favorable outlook on oil and gas demand and pricing
  • Demand for higher-resolution images that drives larger and more complex seismic surveys, requiring higher density and higher channel counts.
  • Increased demand for TGC's wireless recording equipment

Dividend

On April 19, 2013, the company declared a 5% stock dividend on its outstanding common shares. The company paid its first cash dividend in December 2012, but may not pay cash dividends on our common stock in the foreseeable future. While there are currently no restrictions prohibiting the company from paying dividends to their shareholders, it is at the discretion of the board of directors whether the company pays any cash dividends on our common stock in the foreseeable future and will depend on the company's financial condition, results of operations, capital and legal requirements, and other factors deemed relevant by the board of directors. Earnings are expected to be retained to fund future operations.

Valuation

B. Annual growth rate

  1. EPS 2011 = $ 0.51
  2. EPS 2012 = $ 0.72
  3. EPS 2013 = $ 0.61 (Estimate Bloomberg Businessweek)
  4. EPS 2014 = $ 0.92 (Estimate Bloomberg Businessweek)

(A / P) ^ (1 / T) - 1 = R

(0.92 / 0.51) ^ (1 / 4) - 1 = R

R = 15.89%

Earnings per share average growth rate over the 2 past years and estimated 2 years forward = 50.70%

Forward PE Ratio = 8.51 (MSN Money)

8.51 / 15.89 = 0.53

PEG Ratio = 0.53

A current PEG ratio of 0.53 based on an EPS average growth rate from 2010 to 2014 indicates that based on the next few years estimates the stock is currently at undervalued.

Analysts Estimates and Price Targets

Analysts at Bloomberg Businessweek are estimating the growth to continue for TGC Industries. They are estimating TGC Industries to have an EPS at $0.61 for FY 2013 and $0.92 in FY 2014.

  • Currently, Nasdaq has a target one year target of $13.11.
  • Yahoo has a target of $13.00

Over the past three years TGE Industries has averaged a P/E ratio of 14.21. As analysts are estimating an EPS of $0.92 in FY 2014, this would give the stock a target of $13.07. A $13.07 stock price represents a 59.78% upside from the stock's current price of $8.18.

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Based on the information above, TGC Industries is in a sector that is poised for growth over next few years. TGC Industries has an excellent balance sheet and strong catalysts for growth. Based on the PEG ratio of 0.53, TGC Industries looks to be undervalued at this point. Currently, there is a softening in the U.S. seismic market as companies are re-evaluating their reservoir plays. This softening in the market should provide an excellent opportunity to buy as demand is estimated to pick up in Q4 of 2013. Even at these levels, TGC Industries looks to be an excellent value as a $13.07 target price represents a 59.78% increase from this point. Based on the information above, this looks to be an excellent opportunity to invest in a company with a strong balance sheet and excellent growth opportunities.

Source: TGC Industries: An Undervalued Small-Cap Stock With Significant Upside