Bolt: Undervalued Energy Services Play

Sep.11.11 | About: Bolt Technology (BOLT)

We recommend buying shares of Bolt Technology (NASDAQ:BOLT) (herein, “BOLT” or the “Company”) at its current price of $12.00/share with upside of $20.00/share within the next 12 months.

BOLT is the market leader in the manufacture of seismic equipment and control systems used for offshore oil and gas exploration. Offshore energy and petroleum (“E&P”) companies use seismic analysis of the ocean floor to locate oil and gas deposits worthy of exploration. International customers comprise 78% of BOLT’s revenues, which make BOLT less dependent on the sensitivity of U.S. E&P spending, which is particularly attractive given the uncertainty surrounding the current lift of the Gulf of Mexico drilling moratorium. We believe BOLT will see significant growth in the near future because of

  1. a high level of offshore seismic activity around the world, given the strong drivers for offshore E&P activity
  2. geopolitical instability in energy focused countries; and
  3. energy demands from China, India, and other developing countries.

Business overview

BOLT’s business is levered to: 1) price of oil and gas; and 2) oil/gas capital expenditure spending.

Our view is that crude oil and natural gas will sustain at $90+ per barrel and $4/mcf, respectively, through 2012. More importantly, E&P companies have little choice but to increase exploration activity due to depleting global reserves and geopolitical instability, necessitating a diversification of energy sources. BOLT will benefit directly as increased seismic analysis is necessary. Also, there are only 150 seismic vessels around the globe and BOLT’s seismic solutions are used in 80% of them.

Customers

Yr. ended June 30, (in mill.)
Customer Country 2010 (%) 2009 (%) 2008 (%)
Norway $7.1 22% $13.6 28% $21.2 34%
United States $6.8 22% $7.4 15% $12.1 20%
United Arab Emirates $4.6 15% $8.5 17% $10.8 17%
China $4.5 14% $7.1 14% $4.3 7%
Singapore $2.9 9% $2.8 6% $0.9 2%
France $2.4 8% $3.6 7% $3.9 6%
Other $3.1 10% $5.9 12% $8.5 14%
TOTAL $31.5 100% $48.9 100% $61.5 100%
Click to enlarge

As can be seen above, U.S. customers make up 20% of BOLT’s business, which is a quite attractive diversification given that 80% of its business is levered to global E&P companies and suppliers. BOLT’s customer base is diversified, yet without significant volatility of revenue streams. Furthermore, its average customer relationship is 8 years.

Opportunity

BOLT is operated as a private company. Management does not participate in any road shows, set up public conference calls, and has no dedicated or acting investor relations department. Quarterly earnings are typically conveyed via press release. Management focuses on the profitability of the Company, the day to day management, and is extremely disciplined with the use of its cash. Management runs the company in a very lean way with only 123 employees. BOLT has grown through acquisitions, and has never taken any asset impairment write-downs. BOLT has no debt, and operating cash flow ($9 million normalized) finances capital expenditures and operating expenses. Because there are no analysts covering the company and BOLT’s dominance is in a niche industry, the shareholder base is primarily index-hugging mutual funds, quantitative funds, and some value-style investors. The Company’s low trading volume (25,500 shares traded per day) also puts BOLT under the radar of other speculators and traders. As a result, BOLT represents a great business at a good valuation. Furthermore, we believe that if management is more active in putting itself in front of institutional investors, its trading volume and market exposure will be beneficial for share price appreciation.

Background

On January 6, 2011, BOLT announced a $10 million acquisition of Seabotix, a manufacturer of remotely operated underwater vehicles (ROV). BOLT generated $8.6 million in revenue in 2010 and 2/3 of its revenues come from the U.S. and foreign military. From 2005 to 2009 BOLT grew 232% in revenue with 48% gross margins. Seabotix was ranked 342 out of 500 fastest growing companies by Deloitte. Synergies of the acquisition are diversity of revenue stream (i.e., military/government) and the tie-in of Seabotix to BOLT’s energy customers, specifically for marine surveillance of the seabed and BOLT underwater cables. Our view is that this acquisition will be accretive because management has a track record of acquiring private companies with 47-50% gross margins and 25-30% operating margins. BOLT’s management has steered the company to profitability every year since 2004, including 2008 and 2009, during a severe U.S. recession and energy spending falls. Management’s focus on high EBITDA margins (24%) and the Company’s dominant niche in the seismic industry are key drivers for this accomplishment, which we expect to continue as Seabotix will experience significant ramp-up in 2012.

Market Opportunity

Energy exploration and production are capital intensive activities, with high cost of equipment and high cost for skilled labor. The mining, oil, & gas manufacturing sector generated $19.6B in 2011 and expected to grow 4.9% for the next five years. The Exploration and Production market is enormous. Barclays’s Capital estimated that 2011 E&P spending will be $529B, an increase of 16% over the $458B in 2010. Anadarko (NYSE:APC) alone is budgeting to spend $1.3B-$1.5BN towards exploration activities in 2011.

Value Proposition

BOLT’s technology provides high value. Exploration costs are a relatively small part of the total cost of getting gasoline to the pumps. Exploration is now approximately $3/barrel of oil (excluding production costs), which is up from the $1.18/barrel cost a decade ago due to the challenges of finding oil today in remote and extreme geographic areas. However, exploration costs are only about 3% of the price of the $100 barrel of oil today, compared to 5.1% in 2001. Even if the price of a barrel of oil falls by 25% to $75, exploration costs would only be 4%.

Valuation

BOLT trades at 1.8x EV/Revenue and 7.8x EV/EBITDA, with $3.50/share in cash and no debt, as of 8/9/2011. Last twelve months (LTM) revenues ended March 31, 2011 were $38 million, EBITDA of $8.6 million and net income of $5.8 million. With the Seabotix acquisition, my view is that full-year 2011 revenues, EBITDA, and net income will respectively reach $45m, $11m, and $8m. 2012 revenues, EBITDA, and net income are projected to reach $55m, $14m, and $10m, respectively. 2012 numbers are most appropriate due to the January 2011 acquisition of Seabotix and time needed for management to integrate the company. At 10x EBITDA multiple, BOLT’s EV is $170, or $19.70 per share (140 EV + 30 cash=170; 170/8.6 shares = $19.70). On a P/E multiple, peers trade between 20 – 50x P/E. Comparables are seismic units within bigger companies such as ION Geophysical (NYSE:IO), CGG Veritas , and Oceaneering International (NYSE:OII). BOLT’s 2012 net income of $10m or $1.16/share at a P/E of 20 represents a share price of $23.20. Although BOLT is a specialized seismic player, my view is that a P/E of 20 is a very conservative measure given its industry dominance and the oil producers urgency in diversifying their E&P activities for crude production.

BOLT Comparables

Compared to peers, BOLT’s valuation is in line and capitalization is better than peers. Median EV/EBITDA and net cash per share are 7.6x and -4%. BOLT is trading at 7.4x and 31% net cash per share. Although companies such as Schlumberger (SLB), OII, and IO produce a wider suite of E&P offerings, we believe BOLT’s niche position, solid balance sheet, and Seabotix accretion is undervalued by the market.

If management can find a way to get itself in front of more investors via conference calls, more press releases, and by attending energy conferences, trading volumes can easily rise up to to 3-4x from the current 24,000 per day average volume.

Catalysts

  1. Oil and natural gas sustained at $85+ and $4/mcf, respectively.
  2. BOLT gets in front of institutional investors, raising trading volumes from current 32,000 daily average
  3. Accretive Seabotix acquisition

Risks

The underlying risks for BOLT are:

  1. Oil and gas prices are respectively under $75/bbl and $3.50/mcf for a sustained period of time, reducing incentives for exploration and production activities.
  2. Seabotix acquisition does not provide extra synergies that management expects, reducing revenues and earnings.


Disclosure: I am long BOLT. We can buy or sell BOLT shares at any time.