TGC Industries: Gushing With Growth

| About: TGC Industries, (TGE)

Big Oil has been gushing out profits the past few years, as the demand for crude continues to soar without a letup. Smaller oil has tagged along for the ride, including the suppliers of equipment and services to the oil and natural gas industries.

One such small cap is TGC Industries Inc. (NASDAQ:TGE), which helps small to mid-size oil and natural gas producers find the hidden pockets of underground riches that just a few years ago might not have been worth pursuing. It has the high-priced equipment, and trained crews that can conduct the 3-D seismic surveys needed to tap deep into the earth. In recent years, it has invested heavily in the latest equipment to put the cutting-edge technologies into U.S. oil patches.

Founded in 1967, TGC Industries is based outside of Dallas in Plano, Texas, with satellite offices in Houston and Oklahoma City. The company provides its services through two operating subsidiaries: Tidelands Geophysical, which gathers data through seismic testing; and Exploration Surveys, which collects and sells North American testing data. The seismic testing industry remains fairly fragmented, with many smaller, independent competitors to TGC. The one big rival is Dawson Geophysical Co. (NASDAQ:DWSN), which is more than two times the size of TGC.

When BusinessWeek recently came up with its list of the top 100 growth companies, TGC was sitting at No. 3. The Dallas Morning News compiles an annual list of the hottest stocks in that region of Texas, and TGC has been at or near the top in the past few surveys – ranking second on the newspaper’s 2006 “Fast Track” list, which it led in 2004 when its sales doubled, its profits rose 900% and its share price multiplied by 200%. The company was added to the Russell Microcap Index in June 2006.

But what has TGC done for small-cap investors lately? Its 2006 revenue more than doubled, to $67.8 million, while net income increased 31%, to $8.1 million from $6.2 million for all of 2005. Blame Mother Nature for some rough spots in the past six months or so, but it still hasn’t been coming up dry. TGC seemingly sent a shockwave through its supporters when it released its financial report for all of 2006, and for the fourth quarter on Feb. 26. The company’s shares plummeted more than 22% before recovering for a one-day loss of almost 10%.

The sell triggers were a one-time tax charge, capital expenditures on new equipment and inclement weather that kept some of its crews idle late in the year. “While our fourth-quarter revenues more than doubled from a year ago, five of our (eight) crews were significantly impacted by inclement weather during the second half of December,” according to a statement from Wayne Whitener, the company’s president and chief executive officer. Still, on a conference call with the investment community, Whitener said the company had a healthy $60 million in contract backlogs as it headed into 2007, and indicated that it expected to keep its eight crews busy throughout the year – provided the weather cooperated.

For most of 2006, it was operating with six or seven crews, scattered in Texas, Oklahoma, Louisiana and Kansas. In 2005, it had just three crews. The fickleness of investors showed when the company issued its financials for the first quarter of 2007 on April 20. Earnings fell 25% to $2.1 million, or $0.13 a share, from $2.8 million, or $0.17 a share, the year before. Just as in the fourth quarter, TGC pinned the blame on the weather, which hampered its crews during the first two months of the year.

Did the stock get drilled? Nope, the share climbed 11% on the day. On that day’s conference call, when asked if his crews were “completely” booked for the current second quarter, Whitener told analysts, “Yes,” and that TGC was scheduling work well into the second half of the year. “A lot of our clients will not allow you to book out much more than six months,” Whitener said. “So that’s a bit of limiting factor, but at least at this time we feel like the backlog is very steady and adequate to keep all of our crews in operation.”

TGC has come a long way in a fairly short time. Three years ago, its shares were trading for under a dollar; in early 2003, the stock was bottoming at $0.08. Until 2005 it was trading over-the-counter, but moved to the American Stock Exchange in April of that year. Analyst coverage is sparse.

Shares of TGC have traded in a recent 52-week range of $6.79-$11.67. Its been heading toward the top of that range just north of $10 in recent weeks. The company’s share price has closely tracked the S&P 500 (NYSEARCA:SPY), following both its dips and rises. Provided the weather cooperates, the outlook is still positive for TGC.

In addition to increasing the number of crews available, in May the company announced a contract extension for its president and CEO Whitener, who has been the driving force behind its recent growth, through 2010. In 2006, the company acquired Highland Industry, a Houston-based seismic shot-hole drilling company. But Whitener gave indications on the most recent conference call on April 20 that the company doesn’t plan to help further any industry consolidation through acquisitions. “I think on our part, there’s not really anybody out there that has equipment that is basically state of the art, that is basically compatible with us,” he said. “So a lot of the smaller companies have the older type of equipment, and wouldn’t be compatible with us.”

One word of caution: Don’t confuse TGC Industries, this company with a ticker symbol TGE, with another named Tengasco Inc., a Tennessee-based oil and gas exploration company that also trades on the American Stock Exchange with the ticker TGC. Last fall, an online earnings-tracking service mixed up the tickers, causing consternation at both companies and among investors. TGC Industries is a company that helps the oil industry find the gushers, and its solid growth in recent years just might deliver one to investors as the hunt for new sources of crude oil continues to intensify.

TGE 1-yr chart


Disclosure: none