Omni Energy Services: Leveraged Micro-Cap Play on the U.S. Oil and Gas Services Sector

Includes: OIH, OMNI
by: James Levy
Omni Energy Services (OMNI) is an integrated oil field services company based in Carencro, Louisiana. Founded in 1987, and currently employing 850 people, the company provides seismic drilling, environmental services, equipment leasing and transportation services to oil and gas exploration and production companies throughout the Gulf of Mexico and the Rocky Mountains region.
Though well respected in its industry and led by capable and experienced management, Omni Energy Services is under the radar of nearly all investors, and won´t be turning up in the results column of many stock screening programs. This is because the market capitalization of OMNI is currently just over $32 million (a nanocap more than a microcap). Additionally, the share pays no dividend and the company lost 72 cents per share in 2008 and has lost an accumulated
one cent per share in the first three quarters of 2009 (4th quarter and year end results are expected to be released in the next several days).
Why do I recommend that aggressive growth investors take a position in this share? Firstly, for sector rotation reasons. The oil services sector is highly cyclical, and has suffered a severe and prolonged downturn during this extended recession. Nearly all companies in this sector are reporting losses for the past year. As recently as 2007, OMNI earned 40 cents a share, which was preceded by earnings of 89 cents per share in 2006. The easing of the credit crunch and the rise in oil and gas prices in recent months is benefiting this sector. For example OIH, the Oil Services HLDR, has nearly doubled in the last 12 months. Omni itself has nearly tripled during the past year from its low of only 55 cents per share.
I believe that the upturn in the oil and gas services sector has much further to run. The world economic situation is improving, particularly in some areas such as industrial production. Energy prices are likely to remain at their new higher levels as fears of global depression ease, while the emerging markets continue to generate very high growth rates for their energy hungry populations.
Finally, and most importantly for the US Oil and Gas services sector, the political tide in the United States is clearly turning in favor of domestic energy production, including environmentally responsible exploitation of the huge gas and oil reserves of the United States both on land and offshore. The anticipation of a more conservative and pro-domestic drilling Congress in Washington DC following the 2010 midterm elections may well be a catalyst to further gains for companies in this sector in coming months. A boost in capital spending in the sector is imminent, and with that increased revenues for oil and gas services companies.
If the reader accepts the sector case, read on for the company specific argument.
Firstly, the capitalization issue. All things being equal (though they never are) I prefer a low capitalization share to high capitalization share. By natural law, it is more difficult for a $100 billion capitalization company to double its capitalization (and stock price) than it is for a $100 million company to become a $200 million company. In the case of OMNI, the stock price is severely depressed by the cyclical downturn in the industry, as well as by the considerable (but not unmanageable) long term debt on the company´s balance sheet, approximately 40% of total company capitalization.
OMNI is on good terms with its creditors and is not in danger of a cash squeeze, despite the pressure that this debt has placed on the share price in the midst of a credit crisis and severe recession. The CFO is Ronald Mogel, an experienced financial professional well tutored in the sector. See for yourself on his LinkedIn profile.
What do the analysts predict for OMNI Energy Services? Well…they don´t predict anything. OMNI it too small to generate worthwhile investment banking fees, and is not followed by any of the sell-side analysts. However, despite this, OMNI has a 12% institutional ownership with over 30 institutions among its shareholders. Furthermore, 19% of the shares are held by insiders.
I consider extremely positive the fact that there has been sustained insider buying throughout the decline and recent recovery of the stock price. In fact, I don´t find any insider sales since October of 2008 when the share was over $8.
Here I would like to deal briefly with the enormous bias against microcap shares among serious individual investors who can in principle live with the low dollar value trading volume which characterizes these shares. OMNI is indeed a microcap, but it is not, and never was, a "penny stock", even when the share price reached 50 cents a year ago.
I would never invest in a penny stock, insofar as penny stocks are characterized by shady or unscrupulous management, a nonexistent or 'in development' product or service, blatant promotion of the stock based on rumors rather than facts or reasoned arguments, and most significantly, a large and increasing number of issued shares.
The only point of buying a share in a company which does not pay a dividend is to pay money today for something which you expect to be able to sell for more money in the future. That is to say, the investor anticipates that the supply and demand curve for the share will shift to a point where the equilibrium price for the shares in the stock market will be higher than the equilibrium price which existed on the date when the investor purchased the shares. If there is increased demand for the share due to improvement in the company´s earnings or profit outlook, and no additional shares have been issued, this curve will move in the investor´s favor. In contrast, if a company is frequently issuing new shares to fund ongoing operations or endless product development, the market and the supply demand curve will not shift in the investors' favor until the increased demand for the shares is so strong that is able to overcome the factor of greatly increased supply. In the case of classic penny stocks, this never occurs.
Before recommending OMNI, among my due diligence steps, I have looked at the total number of shares issued, which is not increasing, as well as at the professional reputation and work history of the current management. I found the management of OMNI to be composed of well seasoned professionals of the oil and gas service industry. Is this a guarantee? Certainly not, but it is a good sign and a necessary condition for serious investing. Can a LinkedIn profile be false? Most certainly, but not likely, as in the case of OMNI's CFO above, this is a public document open to reading by employers, clients, as well as peers and future employers and clients.
A final word on microcaps. Years ago, I worked for a publicly quoted company with a very bullish logo with a market capitalization of over $50 billion, which was highly recommended by the many prestigious Wall Street firms which followed the share. This company essentially went bankrupt, suddenly and unexpectedly, in the turbulent events of the fall of 2007. My former employer´s high capitalization did not protect its shareholders, including many loyal employees of all salary levels who had all of their retirements savings in the form of the company´s shares. High capitalization was no guarantee for investors in Enron, or Citibank (NYSE:C), or Bear Stearns, or any number of collapsed corporate behemoths during the last decade.
My point is that microcaps should not be excluded from an investor's portfolio, particularly their growth stock portfolio, simply for having a low capitalization. By all means, penny stocks should be excluded, as well as any microcap stock that fails your own due diligence concerning the quality of the management, the number of outstanding shares, the reality of the product or service offered by the company, and any other of a host of factors which can now be investigated by internet from the comfort of your own home or office, from anywhere in the world.

Taking this approach, an investor can truly Seek Alpha, rather than simply accept the Index Beta, by finding 'under the radar' jewels which are too small to attract attention from professional analysts but can be very rewarding to your portfolio over time. I believe that OMNI Energy Services is one such microcap opportunity and recommend purchasing shares at the current price.

Disclosure: Long OMNI common shares