Geokinetics Goes Deeper Into Seismic Acquisition Business

| About: Geokinetics, Inc. (GEOKQ)

Geokinetics (GOK) has completed the acquisition of Petroleum Geo-Services' Onshore seismic data acquisition and multi-client data library business (PGS Onshore) for ~$210M. The offer is in the form of 2.15 million shares and $184 million cash. The cash comes from a $300 million debt offer and $37 million equity offer in Dec-09.

The gain is a $190 million addition to its pre-acquisition order book of $190 million as of Dec-09 end.

The combined numbers are as given below:

$M FY08 YTD09
GOK PGS-Onshore Combine GOK PGS-Onshore Combine
Revenue 475 273 748 389 136 525
EBITDA 67 74 141 71 13 84

Source: Gridstone Research, Petroleum Geo-Services

While the PGS onshore business seems to have been more profitable in FY08, profitability and revenue stability appears to be better for Geokinetics in FY09.

The seismic business is likely to take its time to come-back as customers (Oil and gas producers) are currently more interested in getting the in-process projects to production stage and could drill based on older seismic data. Only once the cash flows start to get more comfortable (if oil and gas prices or volumes rise) and when existing development stage projects get into production, will getting fresh seismic data become a priority.

The Geokinetics' Management agrees that near-term prospects are not so bright as can be seen from the following statement by Mr. Richard F. Miles, President and Chief Executive Officer:

In the prevailing climate of general economic uncertainty, our customers are being cautious and are taking longer than normal to award projects. We have numerous bids still outstanding, especially in our high value OBC market, that were bid mid to late last year. However, bid activity is increasing and we remain optimistic that as customer confidence returns, we will see significant awards in the coming months. In January, we completed our large OBC project in Angola that we started in the fourth quarter of 2008 and are currently demobilizing that crew while awaiting follow-on work.

Order backlog for Geokinetics on a standalone basis dropped from $259 million to $190 million while that for PGS onshore remained stable($196 million at Sep-09 end).

With offshore and deepwater as the focus area for future drilling, it seems not so wise to have gone deeper into a cyclical business especially considering the additional debt burden of ~$180 and earnings dilution from ~6 million of fresh equity (4 million in December and 2.2 million for this deal on a base of 11 million shares).

A noteworthy point made by the management in the above quote - Equipment and crew getting off current assignments await fresh projects and represent a fixed cost that weighs on profitability.

Geokinetics' shareholders may need to be very patient for returns.

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