Every investor knows that the oil and gas industry has been on fire for the past
two years. Increasing global demand coupled with supply disruptions in the
Middle East and Nigeria has sent the price of crude to all time highs. Gulf
region hurricanes only served to cause additional challenges for the already
tight oil market.
At Growth Report we have viewed increasing oil and gas prices as an
outstanding growth opportunity, and one that we do not believe will be short
lived. On the contrary, we believe the oil and gas market is in the early
innings of a long term growth curve.
Rather than focusing on the higher risk oil and gas exploration companies (we
would rather go to Las Vegas and play craps), our research has focused on the
booming services sector. Accordingly, we have been buying land drilling
companies, chemical supply companies, vendors of parts and hardware, and seismic
data companies.
One of our favorite picks is TGC Industries (AMEX: TGE), the number two
seismic data acquisition company in the highly fragmented U.S. sector of the oil
and gas services business. TGC provides geophysical services to the oil and
natural gas industry by helping largely small and mid-tier oil and gas
exploration companies determine the best places to drill wells in order to limit
risk and increase the likelihood of drilling a success well. Given the large
capital expense of drilling, the cost of TGC’s services seems downright cheap
considering the potential rewards.
Companies in the seismic data business grow by adding additional crews that can
go out into the field and provide geophysical survey services. A typical crew
includes roughly 60 people. A crew is much more than just manpower: they also
include lots of expensive technical equipment, such as the $4 million ARAM Aries
recording system that TGC purchases for each new crew. The company continues to
invest in the best technology in order to assure the highest level of services
for its clients. As of early 2006, we estimated that there were 50 total crews
in the U.S. managed by 29 companies.
TGC is one of the fastest growing companies in this sector, which is what
attracted us to the company. TGC has expanded its number of crews from two in
early 2004 to five by the end of 2005 and seven by April 2006.
This impressive crew growth has resulted in sizable growth for TGC. In 2005, the
company grew revenues by 54% to $30.9 million. Net income was $6.2 million or
$0.48 per share compared with $2.9 million or $0.24 per share in 2004. During
2005 the company drove revenue growth primarily by adding new crews and raising
rates for its services in response to demand that continued to increase.
In late April the company reported an outstanding first quarter that was marked
by a 157% increase in revenue to $14.8 million, and net income of $2.8 million
or $0.18 per share compared with $1.1 million or $0.08 per share in the first
quarter of 2005.
With the launch of their seventh acquisition crew in early April, we believe TGC
stands to further increase revenues and profits in 2006. This latest crew should
add quarterly revenues of roughly $2 million, or an additional $6 million in
revenues in the balance of 2006. We expect 2006 revenue to come in at $56
million. With an expected 17% net profit margin, we forecast net income of $9.52
million, or $0.63 per share (based on an estimated 15 million shares
outstanding). Our outlook calls for revenues and EPS to grow at 81% and 31%
respectively.
TGC currently trades at $11 a share, or 17x our 2006 EPS estimate. Given the
company’s growth profile, we find shares extremely attractive at this valuation.
We believe shares could trade at $15, or 24x our 2006 EPS estimate
