Deep In It With Deep Down

Jul. 7.14 | About: Deep Down, (DPDW)

[Originally published on 10/01/2013.]

My micro-cap watch list has been on fire since adding Deep Down, Inc. (OTCQX:DPDW) to it. I started watching this company back in 2011, when it was $.04 per share. I was looking to find legitimate companies in the penny-stock arena and found these guys.

Deep Down, Inc. provides specialized services to the offshore energy industry to support deepwater and ultra-deepwater exploration, development and production of oil and gas, and other maritime operations. (finance.yahoo.com/q/pr)

In July '12, the company executed a 20 to 1 reverse stock split in order to attract investors with a higher stock price. Since the reverse split, the stock continues to move higher.

Deep Down Inc. had a tremendous run YTD with more than 80% up trend and counting closing at $2.60 at the time of this writing.

Tailwinds

The oil industry is in a boom era as the U.S. and developing countries explore deep water oil reserves off their continental shelves in the Gulf of Mexico, West Africa and Brazil.

On September 10, DPDW secured a major deal with some institutional investors, selling over 3 million shares at a discount at $1.80 per share. The objective of the offering is to reduce debt and expansion. While the institutional investors remain anonymous, it indicates that the market has taken notice of this company's potential.

The Company intends to use the aggregate net proceeds from the transaction primarily to reduce debt, expand the Company's production capacity and increase available working capital for future growth.

Deep Down makes and delivers products to big names such as Royal Dutch Shell (RDS.A, RDS.B) and Schlumberger (NYSE:SLB).

Headwinds

With oil coming off seasonal highs, it could affect stock price to the down side.

Political instability has caused a spike in the VIX volatility index, DPDW has a beta of 1.25 so it could demonstrate some added pressure on the price in the near term.

If the political environment continues to constrain domestic oil exploration, it could hinder expansion, although I doubt the government would deny drilling rights.

Minor Technicals

With a forward P/E of 5.78, this stock appears to be very cheap. Quarterly revenue growth has been a healthy 15% yoy, and quarterly earnings growth of 59% yoy. Operating margins are 2.38% and profit margin is-4.9%. Margins are well within the boundary of a breakout if the company continues to grow its revenue and control costs.

The balance sheet looks very healthy, as it does not show any short-term obligations due at this time. They are operating at a small negative cash flow.

Conclusion

This could be a great speculative stock based on its growth potential, and the expansion of deep water oil exploration by countries looking to become more energy independent and profit from oil exports.

Given the 77% run up in the stock, as seasonal oil prices subside, look for a pull back before pulling the trigger.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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