A Veritable Value in Oil

With oil prices rising and oil companies finding it hard to replace reserves, sales have been strong at petroleum services companies like Veritas DGC (NYSE: VTS), which offers everything from seismic surveying to reservoir characterization. That's fancy talk for saying the company provides the high-tech tools that help oil exploration companies manage their risk and allow oil drillers and producers to boost their success.

The stock has been strong, too -- up 28.5% over the past 52 weeks and up about 12% today with the announcement of preliminary second-quarter results.

Results for the latest quarter are not final because the company has yet to decide how to apply a noncash $3.7 million restatement (24.7% of 2004 net income) that it announced last October. That figure includes $1.2 million in depreciation expenses (affecting only net income; there will be no reported effect on cash flow) and a $2.5 million loss associated with foreign-currency losses.

The current quarter's results beat analyst expectations by $0.08 a share and revenue set an all-time record on a quarterly basis. The backlog sits at a healthy 46.5% of expected 2005 sales of $645.6 million, and the profit margin is at 8.8%, comparable to the industry average of 11%. (Go to the table at the end of this article to see the positive trend in Q2 numbers over the past three years. This year's numbers are not yet adjusted for the impact of the restatement.)

Meriting special attention is the company's move from a net debt (debt minus cash) of $131.5 million in 2003 to net cash (cash minus debt) of $50 million in 2005. That's a big balance sheet transformation, and it puts the company in a healthy position for future growth and capital reinvestment.

There's no question that current oil prices have provided the cash for oil companies to aggressively seek reserve expansion. With word of companies' depletion of reserves, coupled with voracious demand from the Asia Pacific region, one might expect the company to continue its current top-line growth. That's good long-term news for Veritas DGC, and even better news for SUVs.

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see the Motley Fool's disclosure policy.