Bull Run: 3-D Seismic Player Mitcham Doing Lots of Leasing
By Mavis Scanlon
Staff Reporter
12/29/97 1:08 PM ET
Its stock has slid 30% in a month. The new shares it offered a couple of weeks ago sold for less than they were priced. But Mitcham Industries' (MIND:Nasdaq) secondary offering of 1.8 million shares is actually a clue to the earnings potential of this company, which has ensconced itself in an exclusive oilfield service niche.
Mitcham specializes in leasing land-based 3-D seismic-surveying equipment, the systems that oil and gas companies use to locate hydrocarbon deposits and evaluate potential drilling success. Short-term leasing of this equipment -- a host of technologically sophisticated recorders and accouterments -- is Mitcham's main source of revenue.
The idea sounds good to some major investors -- its largest shareholders as of Sept. 30 included Wellington Management Co., the old-line Boston money management firm, and Vinik Asset Management, according to data tracker Technimetrics.
Mitcham plans to spend $26 million of the $32 million it raised from the offering -- priced at 19 but sold at about 18 a week ago Friday -- on new seismic equipment for its leasing pool. Company policy is to place orders only when firm leasing contracts are in hand. "Unless we have a contract on the equipment we won't purchase it," says Bob Rios, Mitcham's CFO. So new equipment means more contracts. And more contracts mean more revenue.
Why would a company lease this stuff? Acquiring the necessary equipment to conduct a 3-D survey can run as high as $4.5 million. Leasing makes it more economical, and Mitcham is basically the only firm that does it. Although seismic equipment manufacturers may lease equipment, they prefer to focus on selling their products. In addition, Billy Mitcham Jr., the 49-year-old founder of the company, has negotiated exclusive lease referral agreements with two of the largest seismic equipment manufacturers -- Stafford, Texas-based Input/Output (IO:NYSE), and the French company Sercel.
"It's called a golden goose, basically," says one major shareholder who asked not to be named. "You can't go anyplace but them."
And yet, though it sounds good, investors didn't exactly clamor over the new stock.
Mitcham was trading at about 22 when the company first approached Jefferies & Co. to lead the secondary offering, their second this year (the first was in March, at 7). By mid-November, the stock had shot into the $30 range, exceeding anyone's expectations. It closed at 26 3/8 on Nov. 19, the registration filing date.
The road show went well, Rios says, leading the company to think it might raise $40 million or $50 million even if the stock dropped slightly from its mid-20s trading level. But the oil service sector was already in turbulent water, with questions over oil companies' exploration and production budgets, OPEC's quota increases and the Asian situation.
By the night before the sale, the stock had plunged 30%. (It traded Monday at 18 1/4.)
The fall is not too surprising, as Mitcham is by no means immune from any macro downturns the group suffers. Mitcham has guaranteed earnings for the next two quarters from current contracts, but the nature of its business -- short-term leases -- could be a potential worry. Its revenue may dry up if oil companies slow down on doing seismic surveys.
But the fact is, that possibility isn't likely. Companies are spending more on seismic surveys as technological advances enable more information to be packed into a single survey, further increasing the potential for successful drilling.
"Over the past three years initial estimates have proven to be lower than actual" costs, says Kurt Hallead, an analyst at Cambridge Investments, a San-Francisco based hedge fund specializing in the oil and gas industries. In other words, companies ended up spending more on seismic surveys than they had initially planned. Cambridge estimates seismic data acquisition spending will increase 13% in 1998. That's on top of a 15% jump in 1997.
Seismic data "not only tells you where to drill, it tells you where not to drill," says Kim Pacanovsky, a vice president at Gaines Berland, a Long Island, N.Y.-based investment bank that was part of the underwriting team on Mitcham's offering. "If a company saves one dry hole, it might be able to pay for the survey."
Mitcham's unique position in the seismic niche of the oil service industry derives mainly from its supplier agreements. Since 1994, Input/Output has referred customers interested in leasing equipment exclusively to Mitcham. In return, Mitcham has agreed to purchase a certain amount of equipment each year from I/O. Their agreement, restricted to North and South America, runs through May 2000, and as of Oct. 31 of this year, Mitcham has already fulfilled its purchase requirements through May 1998, a total of $8.6 million.
And they need to purchase more. In the first nine months of its 1998 fiscal year, Mitcham spent $18 million on seismic equipment; it's planning to spend another $18 million in its fiscal fourth quarter alone, which ends Jan. 31.
Most of Mitcham's customers are mid-cap seismic data acquisition firms such as 3D Geophysical (TDGO:Nasdaq) and Venture Seismic (VSEIF:Nasdaq), but Rios says they also deal with some of the larger seismic firms such as Geco Prakla, Schlumberger's (SLB:NYSE) seismic unit, and Dawson Geophysical (DWSN:Nasdaq).
"It's an interesting story because of the margins they generate and the people they know," says Jim Wicklund, an analyst at Rauscher Pierce Refsnes in Dallas, whose firm also participated in the underwriting. "Billy knows everybody, and has an exceptional reputation," Wicklund adds, referring to Billy Mitcham Jr., chairman, president, and CEO of the company, which was formed in 1987.
Net income for the third quarter ended October increased 165% to $2.0 million, or 25 cents per share, compared with $745,000, or 17 cents per share, one year earlier. Wicklund estimates a four-year average growth rate of 50%, and expects the company will earn $1.99 per share in 2000.
Looking ahead, Mitcham's primary focus will be on supplying the needs of the growing seismic industry, but the company's offering prospectus specifically mentioned the prospect of a joint venture with another seismic data collector. Rios says nothing specific is in the works right now, but the company is considering some possibilities.
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