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Stock of the Day
Jan 20, 2000
Seitel: A Boost from Big Oil?
Senior Analyst: Glenn S. Curtis (1/20/00)
What?s with Seitel Inc. (NYSE:SEI - news) ?
Here?s a firm that provides the oil industry with seismic data and other proprietary information. But while oil prices have surged in the last 12 months, its stock has been a dry well.
The shares peaked at $18.13 last May, but since then they?ve been on the way down. On Wednesday, the stock gained $0.13 to close at $8.50.
Prudential Securities analyst Jeffrey Freedman says "General delays in the recovery in the seismic business" are to blame for the stock?s failure to rally. It takes time for budgets to free up and large oil companies to again ramp up production efforts.
This is really no surprise. Prolonged pricing pressures often dictate that oil companies use caution when considering the resumption of aggressive exploration practices.
But the result is that companies like Seitel often have to wait for some of that slack to be taken up and for the business to again accelerate.
Indeed, for the nine months ended September 30, 1999, revenue fell 9% to $96.6 million while net income fell 63% to $6.4 million.
However, the company's seismic business gives it substantial potential for upside.
But another potential catalyst is the pending initial public offering (IPO) of 90% of its Vision Energy subsidiary, which until recently was called DDD. Vision Energy is an oil and gas exploration entity that Seitel developed to exploit its seismic data capabilities.
Why would the company sell most of Vision? Obviously because management thinks it can unlock shareholder value. Moreover, granting Vision Energy its autonomy will clearly define Seitel as a provider of seismic data.
The IPO, which is expected to be completed during the first quarter of 2000 could be worth between "$150 million to $200 million, or $6 to $8 per share," according to Freedman.
The value of the Vision stake could propel Seitel back to the neighborhood of its 52-week high of $18.13.
The proceeds of the deal are likely to go toward debt reduction and funding further growth. Management has openly stated that as the result of savings on the selling, general and administrative line and the elimination of Vision?s $27 million in expenses from the income statement, cash flow could grow to $4 to share.
Although the company has failed in its efforts thus far to attract widespread attention from the Street, insiders see the stock as a bargain.
Eight purchases have been made by insiders in the open market since November at an average price of $6.19 per share, including chairman Herbert Pearlman, who purchased more than 116,000 shares over the last 14 months and now holds more than 418,000 shares in all.
The company itself has repurchased 500,000 shares in the open market between $6 and $7 per share.
While the IPO could be the single biggest catalyst behind the stock this year, other factors could also drive the shares higher.
Seitel's three-dimensional method of shooting seismic data gives it a leg up on some competitors, many of which only supply two-dimensional data. The three-dimensional technology is designed to help oil and gas companies reduce the risk of drilling a dry hole and will more accurately gage commodity contents under the ground.
To make things cheaper for purchasing oil companies, Seitel offers "group shoots." This is simply a method whereby several oil companies will pool their money for seismic surveys. The data is then licensed to the company that intends to use that data. In essence, this gives exploration companies more bang for the buck.
Kicking in during the March quarter is a joint survey being conducted in the Gulf of Mexico. The survey is part of an alliance Seitel has with Schlumberger (NYSE:SLB - news) . Under the terms of the agreement, work is to begin at 35 sites in the Gulf.
Schlumberger's seismic subsidiary, Geco-Prakla, will provide the personnel, and Seitel is to arrange for funding. Ultimately the alliance could shoot up to 444 blocks in the Gulf region.
Freedman has called the deal as being, "potentially very large." However, at this time, the potential value of this alliance is not yet quantifiable. But the deal does suggest that the bigger players are beginning to become more aggressive as oil prices rise. We would expect other, similar deals to be announced.
As a result of the Schlumberger alliance and a planned upturn in the industry, consensus estimates have the company earning $0.58 per share in 1999 and $1.03 per share in 2000. As a result, the stock is trading at roughly eight times 2000 earnings estimates.
Meanwhile, the company's book value is $10.07 per share, meaning that Seitel trades at a 20% discount to book value.
According to Market Guide, other companies in the industry trade at an average of 3.3 times book value. This is cheap considering the five-year annual compounded revenue and earnings growth rate at the company is 27.2% and 20.3% respectively.
So, even before the benefits of the Vision Energy IPO are factored in, earnings growth and multiple expansion could well drive the shares higher.
Bottom Line:
With oil stocks booming, this undervalued services provider remains an excellent opportunity to capitalize on the continuing upturn in the price of crude. The stock is likely to appear on many radar screens once the IPO of Vision Energy is completed. |
