Tuesday, December 23, 1997

Mitcham Industries Inc.
(Nasdaq: MIND)
Phone: 409-291-2277
Website: http://www.mitchamindustries.com
Price (12/22/97): $18 3/4


Mitcham has struck black gold this year. Its shares have gushed up to 450% higher thanks to a broad boom in the oil services biz.

Mitcham leases 3-D seismic equipment that allows oil companies to get more accurate survey data before they spend a lot of money drilling. Your basic mind-over-matter game plan. Strong worldwide demand for oil has made this cost-saving new technology even more valuable, pumping up Mitcham's results.

In the last few years oil companies have been looking for rapid completion of large surveys that provide high resolution seismic data. Companies that provide this data, such as Daily Double Dawson Geophysical (Nasdaq: DWSN), have moved toward greater use of advanced new 3-D systems made by companies such as Input/Output (NYSE: IO). Whereas the average 2-D survey required just 120 channel boxes to record data, 3-D surveys demand an average of 1,500 channel boxes.

Mitcham has exclusive deals with manufacturers of 90% of this 3-D seismic equipment. The firm buys it and then leases it out to seismic survey firms that would otherwise be forced to make huge up-front capital expenditures to buy it.

The company has turned its key industry position into 257% higher revenues so far this year, good for an earthshaking 81% jump in earnings per share despite 65% more shares outstanding. Due to the sales gains, selling, general and administrative (SG&A) expenses have contracted from 16% to just 8% of revenue.


Based in Huntsville, Texas, Mitcham Industries is the leading independent lessor of 3-D seismic equipment for the oil and gas industry. It also sells new and used equipment, including channel boxes, geophones, monitors, earth vibrators, and other peripheral equipment. Half of sales come from international markets, mostly Canada.

The firm has agreements with manufacturers Input/Output, Sercel, and Pelton that make Mitcham the exclusive worldwide, short-term leasing representative for certain products (the Input deal is just for the Western Hemisphere). These manufacturers refer firms to Mitcham, which can also act as their sales representative/distributor. These pacts begin to expire in 1998, though they may be extended.

Leases run for 3-9 months. Due to strong demand, the company has added over $43 million worth of leasable equipment during the last four years, up from $1 million worth in January 1994. It now has 14,538 leasable recording channels, up from just 510. Demand is strongest during the first and fourth quarters, with a maximum 75% to 80% of its equipment leased at any one time.

The company issued 2.9 million shares in March, with an additional 575,000 shares sold by insiders. Another secondary offering of 1.8 million shares was priced on December 18 at $19 a share, around the same price as insider sales in late September and early October. Insiders own about 13% of the stock, with most held by Chair/CEO Billy Mitcham, Jr.


Income Statement
12-month sales: $33.6 million
12-month income: $6 million
12-month EPS: $0.89
Profit Margin: 17.9%
Market Cap: : $180.6 million*
(*Includes 1.8 million shares from December offering)

Balance Sheet
Cash: $3.8 million*
Current Assets: $19.9 million*
Current Liabilities $17.9 million
Long-term Debt: None
(*Excludes $32 million raised in secondary.)

Price-to-earnings: 21.1
Price-to-sales: 5.4


Oil services stocks have led the market for most of the year, so finding Mitcham would have been as easy as looking for key beneficiaries of the boom. Based on FY97 earnings of $0.59 per share, the stock sported an attractive price-to-earnings ratio below 12 at the time of its secondary offering in March.


In the past two months, Mitcham has been whipsawed -- into the mid-teens during the October market panic, quickly up to a high around $33, then down again on word of the recent stock offering, the latest earnings report, and concerns that slower international economic growth and higher OPEC production might sink oil prices and pressure the oil services providers.

Money managers sitting on huge gains in the oil sector have been eager to protect them, though few believe the recent boom is over.

First Call shows analysts' earnings estimates of $1.03 for the year ending in January and $1.53 for FY99, putting the stock at just 11.8 times forward estimates. That would PEG these shares at an attractive 0.38 and give us a YPEG fair value of $29 based on the industry growth rate of 19%. Then again, the estimates haven't been adjusted for the secondary, and growth stock metrics like the PEG and YPEG don't work well with cyclicals.

It's a bit disturbing that Mitcham's growth depends on continued stock offerings, even if most of the money buys new seismic equipment that Mitcham has already leased. Accounts receivable have also soared faster than sales. As of October, it had $2.9 million in receivables that were 90 days past due. The company is also still leasing equipment to the once bankrupt Grant Geophysical, even after being forced to write off $750,000 in unpaid leases to this company.

Another concern is the industry shift toward seismic equipment purchases. For the first nine months of FY98, sales accounted for 59% of Mitcham's revenues versus just 27% in the same period of the previous year. For the third quarter, sales rose 846% to $5.8 million while leasing revenue increased just 78%. More important, gross margins on equipment sales fell to 15% from 40% for the quarter because Mitcham sold newer rather than older, fully depreciated equipment.

Mitcham still merits attention at these prices, but investors should be mindful of the risks inherent in oil booms.

-- Louis Corrigan

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