I have been (and will continue to be) extremely long term bullish on the "energy" sector, but much like the "technology" sector, it is not a monolith, although talking heads like to portray it as such.
For example, natural gas has been a pretty pathetic investment (and highly cyclical) due to its difficulty of transport - therefore it is tied to the US economy, whereas crude oil is a global commodity. You can see this in the lagging performance of natural gas drilling stocks (focusing on land assets in the US or natural gas assets) versus the deep sea oil drilling stocks (focusing on international waters or a global theme). This is one of many examples.
I've been trying to find less cyclical companies and hence my earlier comments about sticking to specific service companies to shield the portfolio from the ups and downs that could ensue if crude oil gyrates from $71 or $81 or $91 to $61. One area of the energy complex I have not touched on are the seismic data companies.
What is that? Sounds a bit intimidating but in it's most simplistic terms it is essentially 'mapping' to help energy companies find more oil/gas. For all you ever wanted to know about the process go here and click on start tour. There are very few of these companies publicly traded in the world, but the two I have isolated on are having tremendous runs this year.
Both are smaller cap type of companies so if global trends continue should show continue outsized growth for many years, and interestingly one is very focused on the domestic market and the other on the global market. At this point that difference has not hurt the domestic company's prospects (share price) one iota. So let's take a closer look.
Dawson Geophysical Company is the leading provider of onshore seismic data acquisition services in the United States. Founded in 1952, we acquire and process 2-D, 3-D and multi-component seismic data for our clients, ranging from major oil and gas companies to independent oil and gas operators as well as providers of multi-client data libraries. Our clients rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of hydrocarbons, as well as to optimize the development and production of hydrocarbon reservoirs.We operate 3-D seismic data acquisition crews in the lower 48 states of the United States, and a seismic data processing center. We market and supplement our services from our headquarters in Midland, Texas and from additional offices in Houston, Denver, and Oklahoma City."
Dawson just added its 15th crew as business expands, and the stock is a star, rising from $27 at the beginning of this year to a recent high of $85; a 215% gain. The stock has settled a bit, falling to $80 in recent trading. The most recent earnings report is here.
It's larger international peer is CGSVeritas (CGV), a company born out of the merger of a US and French company in January of this year. CGSVeritas does what Dawson does but with larger scope and international focus. To see the latest press release on earnings click here and for a nice pdf full of fancy charts and graphs click here. My one concern is the lack of year-over-year growth in the land-oriented business, but I am going to dig deeper into that, in the future.
CGSVeritas' stock has been no slouch this year either, rising from a low of $29 in January to a peak of $65 (+124%), before a small pullback to $62. In fact these 2 companies' charts basically look like mirror images. So obviously the word is out. This is what happens when business is booming and there is confidence that a cyclical play is turning into more of a secular play - PE expansion, and heavy buying.
Is it too late to get in? Judging from growth prospects I doubt it, but I am going to hold off until the next market 'pullback' to try to get these at lower prices.
Let's see what the analysts are thinking for estimates:.
Dawson2007 est: $3.54 (up from $3.02 90 days ago)
Dawson2008 est: $4.77 (up from $3.60 90 days ago)
This implies a 35% earnings growth rate next year Revenue growth rate is projected @ 30% (5 analysts weighing in)
CGSVeritas2007 est: $2.83 (up from $2.49 90 days ago)
CGSVeritas 2008 est: $3.46 (up from 3.34 90 days ago) This implies a 22% growth rate next year Revenue growth rate is projected @ 14% (3-4 analysts weighing in)
So we see while analysts realize they have been very wrong on 2007 estimates, they have not increased 2008 estimates very much. So a bit of a conundrum as a famous economist once said; the domestic company is actually projected to grow quicker, whereas the international company is projected to grow slower.
Somehow I think they are going to be wrong again, so the 22% earnings growth rate is going to be more in line with Dawson's. CGSVeritas reports on November 15th so let's see if we see some guidance update for 2008. All I know is both companies customers have pockets bulging with cash and need to find more resources.
Both companies are valued roughly at 22x 2007 estimates and 17-18x 2008 estimates. Personally when given a choice I want to the company who is going to be the direct beneficiary of Middle East petrodollars, with some exposure to the Far East. That sounds like CGSVeritas, but with its smaller size, Dawson will have the easier time showing year-over-year growth.
Either would be a nice fit into the portfolio based on long term sector trends. I will be putting these on the radar and see if I can enter one on a pullback - both trade about 10% above their 50 day moving average.