Eye on Energy: Specialized Technology Stock Picks

On March 5, The Wall Street Transcript interviewed Jeffrey Friedberg, the founder of Friedberg Investment Management, Inc. Key excerpts with his stock picks follow:

TWST: You said your background is in geophysics, correct?

Mr. Friedberg: Yes, and I think we understand the energy business more than the average investor in New York. When we look at an industry like energy, we're focusing on those companies within the industry that have some kind of specialized technology that is difficult to duplicate. For instance, if we thought the outlook for the energy industry was strong, we would never invest in a manufacturer of drill pipe or some simple commodity like that. Seismic is a very technology-intensive business. There is an awful lot of intellectual property that goes into it. It's a relatively small cost of the whole exploration process. We think that the seismic business has a very strong future, and we thought that back in 2003 when we first started investing in Veritas, because we understand this business.

Another example of an energy company we like is Helix Energy (HLX), formerly named Cal Dive, which specializes in the vessels and the equipment necessary for intervention in wells that are in deep water and the related activities that are highly specialized, very difficult and relatively expensive. Helix can do the work with their ships at much less expense than if you were hiring an offshore drilling rig at $400,000 to $500,000 a day. They're an extremely well managed, very forward-thinking company, and Helix is one of our larger investments.

Another company within the energy industry is Hydril (HYDL), which, fortunately or unfortunately, depending on how you look at it, recently received an acquisition offer. We like Hydril because they make premium connections, which are the threaded joints that connect one section of pipe to another, primarily for casing in deep or difficult drilling. The deeper you go and the more difficult the well, the greater the need for premium connections between the pipe joints. The rate of growth in that area is going to be much higher than the rate of growth of drilling in general, because we're consistently drilling deeper wells and moving farther into deeper water. It's also useful in horizontal wells where there is a lot of curvature involved in the drill pipe. The pipe connections have to be a lot stronger. Hydril's other line of business is blowout preventers for deepwater drilling. A greater percentage of drilling is going to be in deep water, and Hydril is going to benefit very nicely from that trend. Unfortunately, Hydril is going to be acquired, so we're going to lose it.

We also like a company called National Instruments (NATI), which makes laboratory equipment for engineering purposes. They also have a very widely used software language that engineers use to program their tools and experiments. There is hardly an engineer in the world who hasn't heard of National Instruments and the virtual instrumentation that they apply not only to laboratories, but more and more to work being done on the factory floor. Their instruments use vision, infrared, motion and other sensor inputs in real time to make sure manufactured products are within specs. It's a very highly technical company. For seven years now, they've been voted one of the top 100 companies in America to work for. They're very employee-friendly, very well run and have a very nice niche in a growing market.

We also like Ansys (ANSS). We've owned Ansys for a long time. They sell software that allows engineers to simulate how the products that they're designing are going to perform. It's basically simulation software, and it speeds up the process of getting a product to market, increases the performance and helps reduce the flaws. It's a technology that is being applied to more and more areas as it becomes more accessible. We look for continued growth for this technologically oriented company.

We like Tyler Technologies (TYL). They produce software for cities, counties, municipal agencies and even states to run various functions of their government, like the court systems, taxes and municipal accounting. The whole suite of software is sold to cities and counties on the local level. It's in a market that is basically too small to be addressed by Oracle (ORCL) or SAP (SAP). As a matter of fact, Tyler won a competition against Oracle in one of the Caribbean Islands. They have a very nice niche that is growing in the municipal type markets for software to manage local government functions.

We like NRG Energy (NRG), an independent energy company, because we think it's so well managed and the trends within the power industry are in its favor. There will have to be a lot of work done to supply enough power for this country's needs in a way that is efficient, non-polluting and emphasizes low carbon dioxide emissions. Those are some examples of the types of companies that we like.

TWST: You mentioned Hydril being acquired. I presume M&A activity is something that happens quite a bit when you invest in these relatively young companies. How does that impact your investment?

Mr. Friedberg: It helped our performance last year, that's for sure. We had six or seven different companies that were either acquired or bid for, and that's a relatively high number for us. We don't invest in companies because we're hoping that they get acquired - we're investing in companies because we think they can give us a number of years of sustainable growth, and it almost hurts us to see good companies acquired because then we have to find something else. But it happens, and last year it happened relatively frequently. Who knows what's going to happen this year? But our niche is small to mid-cap companies that are relatively young that have good management. Sometimes an older company with new management is interesting for us to consider. So acquisitions still happen from time to time, and they do help our performance, but we're certainly not looking for them.

Comments

[Frank Li:]

Notes from the Ira Sohn dinner in May on HLX. The notes were taken in real time, and may contain transcription errors:

<blockquote><... Einhorn- Greenlight Capital</strong>

Long- HLX-Helix Energy Solutions.

He believes HLX has suffered from investor disappointment following its acquisition of Remington Oil &amp; Gas. The company’s original investor base gave up. The acquisition originally appeared to be a bust after the first to Remington holes drilled were dry. Since then they have hit 14 successful holes in 2006-2007.

Prospects:

40% additional proved reserves to 600bcf.
Estimated $1Billion in EBITDA-for 2007, approximately$3.50 per share.
Estimated $1.4Billion in EBITDA-for 2008, approximately $5.00 per share.
Estimated $7.00 per share earnings for 2009.
While high the company’s $1billion in capex is leading to a solid IRR.
Possible but not necessary share repurchase.
No commodity hedging.
</blockquote>

2007 Jul 20 06:41 AM