ION Geophysical Corporation (IO) provides geophysical expertise to the oil and gas industry. The company was founded in 1968 as Input/Output. It was ahead of its time, as the software was a great idea. But computers were unable to unlock its true value. ION sells itself as a software and hardware provider that can solve the most difficult seismic problems. The company does this without an extensive field crew or equipment, which helps keep costs down and margins up.
Following ION Geophysical the last few years, I would describe it as a roller coaster. ION began trading on the Nasdaq in 1991. In 1996, the company traded as high as $40 per share on very high expectations. But then Input/Output's segment was unable to meet those expectations. Over the years, ION Geophysical has made several acquisitions:
1995-Western Geophysicals Exploration Products Group
1997-Green Mountain Geophysics
2004-GX Technology Inc.
2008-ARAM Systems Ltd.
By 2005, ION Geophysical traded down to the $5 range, where it traded in a range between $3 to $15 until the company experienced a significant drop in stock price to a low of around $1 in February of 2009. Since then, the stock has been on a tear. ION hasn't traded below its 50 day moving average since September of 2010. After a strong earnings report in February, ION won a key lawsuit against Sercel. The lawsuit awarded damages, but more importantly, protected patents owned by ION.
In 2010, it is estimated that oil and gas exploration and production companies spent $440 billion dollars, divided by the following three categories:
In 2010, total geophysics spending was $15 to $17 billion and can be broken down into five parts:
40% Marine Acquisition Services
25%-30% Land Acquisition Services
15%-20% Land and Marine Equipment
12% Data Library Sales
8% Data Processing
Of the previous $15 to $17 billion in geophysics spending, ION's business platforms cover three different sets of services:
38% Land and Marine Equipment
37% Library Sales
25% Data Processing
These three sections of ION's business hold significant market share:
15% Land and Marine Equipment
7% Library Sales
8% Data Processing
Of the $286 million in ION's revenue over the first nine months of 2010, systems made $72 million. Systems saw a year over year decline in revenues by 24%. Software made $27 million and saw an increase in revenues by 13%. The legacy land portion of the business had revenues of $17 million.
The biggest part of ION's business was solutions. This area saw an increase in revenue year over year of 27%. Total revenue for this segment was $170 million. Solutions is broken into other, more defined areas of ION's business:
Data Processing $80 million and an increase yoy of 37%
New Venture $62 million and an increase yoy of 3%
Data Library $28 million and an increase yoy of 85%.
ION has made some recent, significant changes. Its new joint venture with the Chinese company BGP will allow manufacturing to move to China to save money. ION will use this JV to help grow the company into the current land drilling market. ION believes it can increase its land equipment market share from 20% to 50% or 60%. ION estimates the land drilling market can recover $800 million to $1 billion per year. ION's JV is very important as ION believes it will begin to get contracts from Chinese oil and gas companies; most of them have a working relationship with BGP.
Important themes for ION
One important theme for ION's business this year is increased oil prices. The company states this is due to increased Asian demand, decreased drilling in the Gulf of Mexico, a very healthy deep water environment, and new plays such as the arctic and shales. All of this is bullish for higher oil prices, which is good for the seismic business.
ION is assuming several situations will play out for 2011. The first is increased Asian demand for oil. The second is oil prices between $70-$90/barrel; it is important to remember that ION's business will indirectly grow for every $1 over this estimated oil pricing. The third is no double dip to the recession. The fourth is 2010 being a healing period for seismic. This means last year's pick up was a leveling of the seismic market, leading to increases in 2011 and beyond. Shale plays will continue to dominate the energy story.
ION believes there will be five themes that will drive future growth in its businesses. Equipment and technology will make it possible to drill very difficult areas, such as deep ocean and shale plays. It should be noted that shale plays in many countries of the world were recently thought of as undrillable. This is just starting to change. BGP's partnership with ION will allow access to customers that would otherwise be unattainable. ION expects large growth with new customers. ION's new marine technology will also help grow the business based on new locales. Global expansion of shale plays will need seismic technologies to help find the toe of the shale. Overall market expansion will naturally provide increased work for ION.
The Arctic is a new potential area for obtaining oil. It is believed that 25% of remaining undiscovered reserves are there. Total world undiscovered oil and gas resources are believed to be 1634 billion Boe. ION is well placed for this, with its integrated arctic solution. This is specifically engineered to extract oil from the arctic circle. It provides:
Integrated Seismic Solutions
GXT Imaging Solutions
Marine Imaging Systems
Analysts see this company doing quite well over the next couple of years. 2010 saw a swing to profitability. In 2011, the average of four analyst forecasts show ION earning at $.48 per share. These analysts also believe ION will make $.69 per share in 2012.
In summary, ION has made radical changes to its company since 2004. This metamorphosis has built the company with one bolt-on acquisition after another. Now that ION has survived the 2008-2009 market collapse, it has a restructured balance sheet, strategic JV, and has continued to invest in data library projects. This specialized business is not only improved, but it has better prospects after the patent victory in court this month. ION sees the current oil environment as a second up-cycle driven by long term growth in energy.
In my opinion these stocks are all well positioned, but ION seems to have more upside as a technology play. All of this is why ION has returned to profitability.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Sources: USGS, World Petroleum assessmentBarclays Capital 2010 E&P Spending Forcast, ION Analysis