There Is A New Gun In Town From Bolt Technology

Jul.22.14 | About: Bolt Technology (BOLT)

Summary

The market is not fully recognizing the potential for a new seismic gun system coming from Bolt Technology Corp.

BOLT stock is down about 20% in 2014 due to concerns about its Seabotix ROV segment, but the new seismic gun should outweigh any downturn in the Seabotix business.

BOLT remains strongly cash flow positive and maintains a strong balance sheet.

I last commented on Bolt Technology (NASDAQ:BOLT) in July 2011. At the time the stock was trading around $13.7/share. It has increased by about 27% over that three year period. The company has also paid dividends of 0.10 in 2012 and 0.28 in 2013 in addition to a $0.50 special dividend in 2013. The stock traded as high as $22/share before an approximate drop of 20% in 2014.

In my prior comments I noted these positive basics on the company:

  1. Dominates the niche market of seismic energy sources used in underwater oil and gas exploration. The company sells original equipment and replacement parts. This segment now makes up about 75% of total revenues. (2013)
  2. Unlike many energy services companies, BOLT has been strongly cash flow positive even during the 2008-9 recession. Management is conservative in use of capital expenditures.
  3. BOLT has a strong balance sheet with no long term debt. The company also has historically had a significant amount of cash available, now at $21.2 MM or $2.47/share.

In 2011 BOLT acquired the company SeaBotix, a maker of underwater small tethered remote operating vehicles (ROVs). The acquisition served to diversify the overall business. At the time this deal was something of an unknown risk factor. However since then it has exceeded expectations with revenues increasing from $2.575 MM in the first six months in 2011 after the deal, to about $14.7 MM in 2013. The US government has been a major customer for these ROVs using them in security operations.

In its most recent quarterly report of April 24, 2014 the company reported very strong results with revenues up 39.8% and EPS up 75% vs. the prior year. The Seabotix segment was particularly strong with sales up 98%. But the company then noted:

"The past several months have shown a weakening in new orders at our underwater robotics business, particularly with regard to U.S. government defense business; and global economic and political conditions remain uncertain. Nevertheless, we believe that fiscal year 2014 will be another strong year for our company."

This caution on the Seabotix business appears to have been a major reason for the stock price decline. However I believe that the market is paying too much attention to this and missing what may likely be a much more significant new technology development, namely the introduction of the new esource ™gun.

In 2011 BOLT and Schlumbeger (WesternGeco division) announced the joint development of the esource ™ gun. This new air gun is a bandwidth-controlled source of acoustic waves designed to reduce the potential impact of seismic signals on marine life. The new source optimizes output in the seismic band, suppressing the high-frequency components that contribute to acoustic impact, while retaining the low-frequency components that are critical to seismic exploration. More recently at the June 2014 EAGE (European Association of Geoscientists and Engineers) trade show in Amsterdam, this new product was introduced the trade. The product will be available in 2015 to all customers in the oil and gas exploration business. Schlumberger is one of BOLT's key customers, but other key customer such as Compagnie Generale de Geophysique-Veritas (CGV) and Bureau of Geophysical Perspective China will also be able to access this new technology.

To understand the possible significance of the new air gun, one can look at the response in the last few days to the possible opening up of energy exploration in US offshore areas. Environmental groups criticized the action, saying tests would pose serious risks to species including sea turtles and the right whale.

"Not only is seismic exploration a gateway drug to offshore drilling, it is a major assault on our ocean itself, with far-reaching impacts on marine mammals and fish," Michael Jasny, director of the Natural Resources Defense Council's Marine Mammal Protection Project, said in a statement.

The new esource ™ gun represent what appears to be an excellent solution addressing these concerns. On its web site BOLT notes increasing restrictions on use of seismic guns in areas such as Australia, California, Gulf or Mexico, Brazil, Canada, New Zealand and Sakhalin. BOLT also provides the following important information on the new gun system:

"Extensive testing and signature analysis carried out over the last year indicates that the new airgun has the same proven reliability as existing models. The trials also identified where design efficiencies could be realized through the optimization of some components. As a result, an eSource unit is lighter than standard BOLT sources; which will ease handling. The airgun will use the same control interface as current BOLT systems, and will be compatible with all existing airgun controllers. In addition, eSource will be compatible with existing arrays."

Company management has indicated that they believe they are ahead of competitors (e.g. Veritas and Ion Geophysical) in development of this key new technology. If the new product is adopted by much of the undersea energy exploration community, the economic benefit to BOLT would be quite significant, likely to exceed any drop off in sales from the Seabotix segment. BOLT continues to hold approximately a 70% share in the seismic gun market, something which could increase if the gun is widely adopted.

Currently BOLT stock is trading at around 17.4x trailing 12 month earnings. This is not expensive particularly considering recent growth, the cash on the balance sheet ($2.47)/share and the prospects for the new esource ™ product. I note that CEO Raymond Soto made a direct purchase on May 9 ($81,100) of BOLT stock at $16.22/share. He is currently the largest single shareholder. I recently added shares at prices just above 17 in accounts managed for Freedom Mountain Investment clients.

Disclosure: The author is long BOLT, SLB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.