Tuesday, January 22, 2013

Oil and Gas Service Provider Offers a Trade

Companies setting new 52-week high stock prices have been in record numbers in recent trading sessions.  The bullish sentiment prompted us to run a screen on other bullish technical indicators.  Dawson Geophysical Company (DWSN:  Nasdaq) stood out in the crowd with the 50-day moving average price crossing up above the 200-day moving average.  DWSN might offer a good long trade for the right investor.

Dawson provides seismic data acquisition services to on-shore oil and gas explorers and other clients who need accurate precise images of the ground under our feet.  The company claims over a dozen crews out roaming the lower forty eight with equipment that feeds data back to a processing center where computers spit out two or three dimensional renderings of geological formations.
Three dimensional seismic data has become a common  oil and gas exploration and production tool.  Such details do not remove all exploration risk, bit it improves success rates and reduces the number of wells drilled.  Wells are more likely to be in optimal locations, deliver better production and exhibit slightly longer life.  This leads to improved environmental stewardship.
The intelligence is much in demand by oil and gas companies keen on proving new oil or gas reserves.  So keen are customers that Dawson was able to report $319.3 million in total revenue in the twelve months ending September 2012.  Mind you, sales were down a pinch from the previous fiscal year, Dawson reported a handsome profit in stark contrast to losses in previous years.  While the company has been on a bit of a roller coaster in terms of total sales and earnings, Dawson’s track record in producing positive operating cash flow is a bit more consistent.  Over the past five years, Dawson has converted 18.2% of its total sales to cash for return reinvestment or return to investors.

Dawson does not pay a dividend.  What is more its cash flows have been more than sufficient to keep a pace with the company’s capital budget.  Cash has built up to $61.4 million or about 22% of total assets.  That may sound high to some investors.  However, keep in mind, unlike a manufacturing company, Dawson is principally a services company that earns its keep on its prowess in the field.  It is tough to capture the value of ‘knowhow’ on the balance sheet.

DWSN shares are trading closer the lower end in the 52-week price range.  What is more the stock is valued at 12.7 times the consensus estimate for fiscal year 2013.  Granted there are only four contributions so it can only be loosely considered a consensus.  Still that is well below the oil and gas services industry average.  One explanation for investors’ lack of enthusiasm for DWSN is the ups and downs in quarterly sales. 

Over the long-term it is clear that Dawson has built up a good franchise in the oil and gas fields.  It does have a notable dependence upon its customer Chesapeake Energy (CHK:  NYSE) for business  -  21% of fiscal year 2013 revenue.  However, that dependence is on the wane as Dawson adds new customers.  Also there are some competitors such as Global Geophysical Services (GGS:  NYSE) and Tesla Exploration (TXL.TO).  Global Geophysical might be slightly larger in terms of market share.  However, its balance sheet is levered and that makes little sense for a service provider.  Tesla is even less consistent in turn a profit than Dawson and its track record in cash flow generation not as impressive.  The stronger balance sheet is always the trump card in competition.

The stock appears undervalued and is trading with upward momentum.  Strong fundamentals and strong technicals make it seem like a double good news.  However, there is a dark thread of risk running through the DWSN story.  DWSN has a beta measure of near 1.90 and only trades about 100,000 shares a day.  That combination typically makes it easy to get involved with a stock at a compelling price but a bit more challenging to escape for investors with short-term time horizons or fear of volatility.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


1 comment:


I cannot believe natural gas is trading at the price its at. Not to many years ago natural gas traded at four times it current price. Companies engaged in developing natural gas are an excellent place to be the next five years. With current energy demands worldwide increasing' the demand for energy including natural gas will one day be reflected in the price of natural gas.