All the media and focus is turned to BP at the moment, and rightly so. The mess of the oil spill has sent shivers throughout the entire oil industry and virtually every oil related company has seen its stock price fall.
Quick Thoughts on BP
Whitney Tilson is calling his long position in BP (BP: 27.02 0.00%) a contrarian bet, but at this point in time, there is too much uncertainty and risk. There is a clear distinction between uncertainty and risk. In other words, uncertainty does not equal risk. Pabrai spoke of capitalizing on uncertain situations in The Dhando Investor.
Whitney Tilson has bought BP in the belief that the depressed stock price is due to uncertainty, but I believe there is much more risk involved.
The risk with BP doesn’t just lie within the company itself, there are far too many external variables that BP cannot control. A controlling US government, political motives, oil spill directly affecting the US coast and population, all these factors add to risk rather than uncertainty.
In the whole process, my position in Bolt Technologies (BOLT) has been hammered lately as well. Discussions have been going on regarding BOLT in the forum but I wanted to address a few questions here.
Deepwater Drilling Moratorium
I’m not really into politics because it never really is for the people, usually just for the people running, so I was very pleased to hear that Judge Martin Feldman overthrew the six month ban on deepwater drilling, which was just another knee jerk political decision without reasoning.
Although BOLT is not a deepwater driller, and is not directly affected by the ban, the seismic equipment the company sells certainly aids in the discovery of deepwater wells, so the ban lift is welcome news.
Are any of Bolt’s major customers affected by the ban? Yes, but see below.
BOLT Major Customers
If BOLT is not affected by the ban, then what about its customers?
A quick look at the annual report reveals that a majority of its sales are to foreign companies.
During fiscal 2009, 2008, 2007 and 2006, approximately 85%, 80%, 78% and 78% of sales were from shipments to customers outside the United States or to foreign locations of United States customers.
Here is a list of the major customers from the 2008 fiscal year.
- Compagnie Generale de Geophysique-Veritas (CGV)– 17%
- Schlumberger Limited (SLB)– 15%
- Petroleum Geo-Services (PGS)- 10%
- Wavefield Inseis – 7%
- SeaBird Exploration [SBDXF.PK]– 6%
In fiscal 2009, the major customers were
- Schlumberger Limited – 16%
- Compagnie Generale de Geophysique-Veritas – 15%
- Petroleum Geo-Services – 9%
Schlumberger Limited do have operations in the Gulf of Mexico. In fiscal 2009, oilfield services from the Gulf of Mexico attributed to 3.5% of revenues. WesternGeco is a geophysical segment of Schlumberger and saw 1.8% of total 2009 revenue from the Gulf of Mexico. BOLT most likely does business with WesternGeco by providing them with the required equipment.
As you can see, operations in the Gulf do not materially affect the overall results of Schlumberger or the business potential of BOLT.
Compagnie Generale de Geophysique-Veritas is a French-based geophysical services company and so the company is not affected by the events of the Gulf oil spill.
Petroleum Geo is a Norwegian geophysical services company. I think it is safe to say that a Norwegian firm performing seismic data analysis in the Gulf of Mexico is unrealistic.
It wouldn’t be a surprise if the government introduces new laws and safety standards on how oil wells are drilled. But after going through the products, BOLT doesn’t offer any products that could capitalize on this potential.
BOLT Intrinsic Value
I’ve been tempted to try and put a price tag on BOLT based on short term events but realize it doesn’t serve much purpose. At less than $9 a share, the company remains too cheap to sell.
There is plenty of fear but the balance sheet and FCF numbers show that BOLT is perfectly healthy.
The TTM Piotroski score is 6, MRQ Altman score is 27.93 and Beneish model gives -3.53. All three measures clearly indicate that BOLT is not in any difficult condition. It makes it easier to sleep at night knowing that the company’s balance sheet is very strong.
In 2009, FCF (not owner earnings) came out to $9.3m. As of 3rd quarter 2010, FCF is currently already at $9.7m. This is despite the big 50% decline in earnings from previous comparable quarters. Another reason why it’s important to refer to FCF as the true profitability of a company.
I’m expecting FCF in the range of $11m-$12m for the full fiscal year.
- The low case scenario of 0% growth with a 15% discount rate yields an intrinsic value of $14.39
- Normal case of 10% growth with 15% discount rate results in an intrinsic value of $19.59
With declining revenues and negative short term catalysts, looks like the short term 0% growth intrinsic value is $14.
BOLT Stock Valuation PDFs
Below are several pdfs of BOLT stock valuation.
- BOLT Dashboard June 27 2010
- BOLT DCF Valuation
- BOLT Earings Power Value EPV
- BOLT Graham Formula Valuation
- BOLT Competitors
- BOLT Piotroski Altman Beneish
Disclosure: Long BOLT at time of writing.