Global Geophysical Just Went "All In", Should You Follow?
Markets are closed today, but that doesn’t mean we can’t hunt for bargains in America’s energy patch.
North American energy is running full-tilt. Drill rigs are spinning more efficient than ever and oil is flowing to the surface at an increasing rate in places like North Dakota and Texas. It’s no flash in the pan, either.
Meanwhile, the rest of the world, minus a few budding energy plays, is having a tough time finding low-risk oil prospects.
That’s a win/win for the U.S. – and it also leads us to our next round of profit opportunities. Including one oft-overlooked industry – and in particular one beaten down energy player that just went “all in”…
Let’s begin with a simple question: what do the oil shale boom and the natural gas shale boom both have in common?
Simply put, you have to know where to drill!
Thousands of wells have been drilled over the past few years here in the states. Each well had its own drill plan. And each drill plan had a geologist or engineer point to an exact spot on a map and say “this is where we drill.”
You can’t get to that point without seismic data. Improved seismic data is one of the overlooked heroes of America’s shale boom. Indeed, unlike the 1960s you can’t just drill anywhere and expect to hit a gusher. Instead teams of geologists, geo-physical experts, engineers and others analyze seismic data to find “sweetspots” in a shale formation.
Without seismic data, which provides an underground map of a shale play, many of the wells drilled over the past few years would have been worthless. That’s the same as throwing $10 million out the window.
But it’s rarely the case nowadays – instead these $10M wells are hitting oil and gas and able to produce anywhere, on average, from $30-40 million in energy production.
Kudos can go to horizontal drilling and “fracking” – but one of the unsung heroes is surely the seismic revolution.
Today I want to share one bargain in the seismic industry.
But first, it’s important to realize that much of the seismic work is done by the big guys. Oil service companies like Schlumberger have divisions dedicated to providing seismic. They’ve got some cool tech, too. Every time I speak with a service company about seismic or geophysics they always have something new up their sleeve. It’s a fast-moving industry indeed.
Also important to today’s timely discussion is the fact that after wallowing in sideways trade, many of the big service companies are enjoying a solid rally since November 2012. Up anywhere from 15-40%.
But what’s great for the big guys can be even better for the small players. Sure, a lot of the market is occupied by the big service players, but the smaller, pure plays have a lot of upside as well.
And boy has one of the small, pure-play, seismic guys been beaten down!
I’m talking about Global Geophysical Services Inc. (GGS.) Since mid-2011 it’s been a rocky road for this company. Excessive spending and an “all in” mentality has eaten away at their bottom line turning a $15 company into a $4 company.
But that’s what bargain hunting is all about my friend. And today with the seismic industry still looking strong, a player like Global offers you a lot of bang for your four bucks. After all, there’s a high probability that the “all in” spending on enhancing their seismic library could soon pay off.
Here’s the rundown. Global has nine data acquisition field crews. Four of these crews are still working in the North American (onshore) to enhance Global’s multi-client data library. Currently their seismic library includes data in the Bakken, Eagle Ford, Niobrara, Haynesville, Permian, Marcellus and other shale plays. So while drill rigs keep spinning in these shale hotspots, each drill plan is another opportunity for Global to cash in.
Better yet, as I noted above most of the world’s oil growth is coming from North America. But there are, however, other budding energy plays that Global has field crews working. Brazil, Colombia to name a few.
The kicker for me is Global’s more recent focus in Iraq. “Iraq!?!” you may say. Yes. Iraq. Other than North America, resurgence in Iraq’s oil production is one of the only other major new supplies of oil.
Seismic is a great way to play this budding trend. After all, would you rather invest in a big oil company that brings millions of dollars-worth of equipment/personnel to Iraq. Or a company that has the potential to sit back and collect a payment each time a new drill plan is drawn up?
Remember, though, this is a speculative play (as is the case with a lot of bargains.)
That said, I wanted to get another opinion on Global’s financial position and it’s potential for a turnaround. So I asked our in-house value analyst, Dan Amoss. Here’s what Dan has to say:
There’s no question this is a very high risk/high reward stock. Global has grown their asset base – seismic library – way too fast, and funded it with debt. Now, they’re in a desperate spot to sell the heck out of it, or run into a liquidity crunch and bankruptcy.
The market clearly sees bankruptcy as a high possibility. The entire market cap equals just what GGS spent on shooting seismic and capex in just the past three quarters!
The stock could rebound dramatically (multi-bagger) if management can slow down capex sharply, increase seismic sales, and use free cash flow to pay down debt.
Their bankers look flexible, having granted several amendments to their credit agreement (if I were the banker, I’d keep rolling the credit line, because the loss given default on this loan – not backed by easily-value hard assets, but a seismic library – would be very high).
It’s an interesting speculation, but it’s very high risk.
Thanks for your input Dan.
Looking at the chart for Global, on a weekly basis the bloodletting looks to be over. A few months of higher highs for the stock signal an end to the stock’s weakness and potentially a bottom. From here we could be looking at an easy triple digit winner.
Global is in a profitable niche industry and the company has gone “all in” on its seismic library. If you’re the betting type, now’s the time to put in your chips on this bargain.
Keep your boots muddy,
Original article posted on Daily Resource Hunter