A New Way to Profit From the Natural Gas Revolution
Simon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Natural gas is changing the energy equation in America. The new, plentiful energy source is creating opportunities for companies of all different shapes and sizes.
The obvious winners include the big dogs of the industry, which are the domestic integrated oil companies such as ExxonMobil (NYSE: XOM). These companies benefit from the rise in energy demand that can now be supplied by a domestic energy source. This also minimizes their political risk, as it is much easier to operate on their home-turf than with other "less American-friendly" governments. Oilfield service companies such as Halliburton or Schlumberger will also benefit as the need for fracking increases.
The Motley Fool has done a great job in also identifying companies that are a step removed from the IOCs. These are companies that stand to benefit from the long-term adoption of natural gas into the market. One of these is Clean Energy Fuels (NASDAQ: CLNE), who is building out a natural gas transportation infrastructure that will initially target the trucking industry. Westport Innovations (NASDAQ: WPRT) is another favorite, who holds an impressive IP portfolio for the design of natural-gas engines.
I think that these are two excellent picks. But to avoid rehashing the same bullish pitches, I'd like to direct your focus to a much less-followed segment of the industry. This segment is much farther upstream in the value chain and the companies are much smaller than the IOCs or the oilfield services companies. However, the rising demand for natural gas will bring an unprecedented need for the services that it offers.
This segment is 3-D seismic imaging.
What the heck is 3-D Seismic Imaging?
In a nutshell, 3-D seismic companies develop solutions that helps service companies to 1) find where the oil and gas is, and then 2) monitor how their wells are performing. These two tasks are extremely important for service companies, as maximizing well production drops straight to the bottom line. The opportunities in this market are numerous, with a variety of technical needs fueling different technology offerings. To name a few:
- Reservoir Characterization - describe the properties of the rock formations of interest and identify potential hazards
- 3-D Interpretation Software - quickly interpret the performance of wells and integrate the results into existing performance monitoring systems
- Wireless Transmission - set up wireless units to monitor wells and manage the extreme amounts of data that are collected from it
Many times, experienced veterans from larger oil companies or service companies that specialize in certain technologies will join smaller players and then bridge their relationships formed while in the parent companies. That can result in big deals and significant sales volumes for the smaller company.
3-D Seismic is still highly fragmented, with many smaller players competing and a lack of 500-pound gorillas that are taking the lion's share of the profits. This fragmented and fast-changing segment could result in some big winners, as technologies mature and there is potential for consolidation.
The following companies are potential candidates for further research:
|Company||Ticker||Recent Price||Market Cap ($B)||YTD % Change||Forward P/E|
|CGG Veritas||CGV||$ 34.07||$ 5.2||47%||13|
|ION Geophysical||IO||$ 6.75||$ 1.0||10%||17|
|Dawson Geophysical||DWSN||$ 24.49||$ 0.2||-38%||12|
|Global Geophysical||GGS||$ 5.23||$ 0.2||-36%||4|
Source: Morningstar. Recent stock price, market cap, and YTD change are as of October 9.
CGG Veritas (NYSE: CGG) is one of the larger companies in 3-D Seismic. Incorporated in France and with a workforce of 7,000, they offer a large variety of geophysical services. The heart of their business is really in their equipment manufacturing subsidiary, known as 'Sercel'. 40% of CGV's 2011 Revenues came from Sercel and the division pulls in a healthy 33% operating margin (compared to only 1% for their services divisions). Equipment manufacturing also costs a lot of money, and CGG Veritas has been pumping cash into this segment over the past two years. The bottom line is that if 3-D seismic continues to grow, CGV will benefit through the sale of more 3D seismic equipment to service companies. But if oil exploration slows down, CGV could be stuck with a lot of unproductive assets.
ION Geophysical (NYSE: IO) is also a fairly large geophysical services provider that is all about innovation. Unlike CGV, the bulk of ION's revenues (60%) and profits (50%) come from its services division. ION's business is also cyclical in nature, but is more focused on leveraging technology and expertise to sign long-term contracts with its customers. This gives it a much more 'asset-light' model. They claim to have only 8% market penetration in their services divisions, so there is still plenty of upside potential.
Dawson Geophysical and Global Geophysical are both much smaller companies in the space, each with a market cap of roughly $200 million. They trade at lower forward P/E multiples and have seen steady top-line growth over the past few years. Smaller players are much more prone to the cyclical nature of the energy industry, but could see huge gains if they start to sign large service contracts. With added risk comes the potential for greater returns.
My personal pick of the litter is ION. 3-D Seismic is a niche industry segment that will reward those who have the best technology. ION has expertise in challenging environments (the Arctic) and in unconventional reservoirs (shale gas), and I think their asset-light focus on innovation makes them a great choice in this space.
Foolish Bottom Line
Wayne Gretsky was once quoted as saying “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
Most of the time in investing, if you are trying to cash in on the next big thing by simply following the herd, you'll be too late. The best returns are reserved for those able to think outside of the box and find opportunities that everyone doesn't already know about.
The need for 3-D Seismic imaging will directly correlate with the increase in natural gas volumes produced in the United States. Though you should always do your own research before jumping in, I think it has huge potential in the coming years.
Do you have additional insights about 3-D Seismic Imaging? Or other ideas on how to play the natural gas revolution? Feel free to sound them off in the comments section below.
TXinvestor82 owns shares of Westport Innovations. The Motley Fool owns shares of Clean Energy Fuels, Westport Innovations, and ExxonMobil. Motley Fool newsletter services recommend Clean Energy Fuels and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.