Mapping Out A Play On Oil Drilling
forbes.com
Stock Of The Week
John Dobosz, 04.06.05, 8:35 AM ET
NEW YORK - Jack Adamo, editor of Jack Adamo's Insiders Plus, recommends buying shares of Dawson Geophysical. The Midland, Tex.-based business provides seismic data services to oil and gas companies (for both majors as well as independent oil and gas exploration and production outfits). Clients rely on Dawson's data to determine where to drill for oil and natural gas.
A smaller company with a market capitalization of $135 million, Dawson's (nasdaq: DWSN) revenue grew 34.4% to $75.4 million for the 12 months ended Dec. 30, 2004. Net income for the period totaled $9.7 million, and the company produced $13.7 million in cash flow from operations, although free cash flow was negative $9.1 million due to $22.7 million of capital expenditures.
Based on Tuesday's close of $23.92, shares of Dawson are up 87% over the past year, and traded as high as $27.66 on Oct. 13, 2004. Since June of 2004, Dawson shares have traded in a range approximately between $18 and $25. Analysts expect the company to earn $1.46 per share for fiscal 2005 (ending Sept. 30), giving DWSN a price-to-earnings (P/E) ratio of 16.4. The company has no debt.
Furthermore, Adamo says that sustained high prices for crude will make land-based exploration economically viable again, increasing the prospects for Dawson's growth. Currently, onshore exploration is small compared to sea-based exploration.
One caveat about buying Dawson is that the stock has a very small float of just 5.1 million shares (and 5.6 million total outstanding shares), even after a recent secondary stock offering to finance the purchase of more equipment and to hire more crews to fill its nine-month backlog of orders for service. "I suspect the underwriters will be selling their small additional over-allotment shares into the market for the next few weeks, which might keep the stock down for a while, but that's good for us," says Adamo. "With micro-caps like these, any extra shares on the market increase liquidity, enabling us to get a better price."
Adamo is emphatic that prospective buyers only use limit orders when buying Dawson, ideally placing them within pennies of the most recent quote. There could be a big discrepancy between bid and ask prices. He calls Dawson a "speculative buy" up to $27.50. |
