Today's Buy Opportunity: CGG Veritas

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In a terrible case of deja vu, just as the BP disaster in the Gulf of Mexico seemed to be under control, another oil rig explosion in the same body of water hit the newswires. Aside from the further threat to the environment, we will likely see more delays in exploration and drilling in American waters, and around the world.

New regulations are likely to make life more difficult for oil companies and anyone that feeds from that trough. But investors, and the general public, need to be realistic. The world needs oil. Our economies have grown dependent upon the slick stuff over the past century or so. As much as I would love for electric cars and bioplastics to take over tomorrow, the world isn't going to kick its addiction to oil anytime soon.

Needing more, finding less
Unfortunately, most of the easy oil has already been found, and we're having to resort more and more to what are described as unconventional sources. These include the tar sands in Canada and deepwater drilling off the exotic shores of Brazil, Israel, Nigeria, and China. As you might expect, these unconventional methods of producing oil are expensive.

As extracting oil becomes more expensive, companies like ExxonMobil (NYSE: XOM  ) and CNOOC (NYSE: CEO  ) would prefer to know what lies beneath before pouring billions of dollars down a hole. That is where CGG Veritas (NYSE: CGV  ) , my "11 O' Clock Stock," comes in.

Fast Facts on CGV Veritas

Market capitalization

$3.2 billion

Industry

Energy

Revenue (TTM)

$2.47 billion

Free Cash Flow (TTM)

$433 million

Source: Capital IQ, a division of Standard & Poor's, and company filing. TTM = trailing 12 months.

Married to the sea
CGG Veritas is one of the leading seismic mapping companies in the world (using sound waves to map underground features), second only to Schlumberger (NYSE: SLB  ) subsidiary Western GECO. In addition to doing the actual mapping, CGG Veritas' subsidiary, Sercel, is one of the leaders in designing and manufacturing seismic equipment technology.

While CGG Veritas' teams are equipped to map land and sea, its focus is on the more technically challenging marine seismic mapping where its fleet and technological expertise give it an advantage. You could say CGG Veritas rules the waves.

Unfortunately, those waves have gotten quite crowded recently. As tends to happen when you combine the volatility of commodity prices with heavy asset investment that requires long lead times, the marine seismic industry is characterized by booms and busts.

Things get rough
During the heady days of 2005, 2006, and 2007, mapping companies couldn't keep up with demand, and capital spending ramped up, including orders for new ships. However, just as these new ships were ready for their maiden voyages, the global recession of 2008 hit. With the slowdown in world economies, freezing of credit markets, and plummeting oil prices, Big Oil truncated its exploration plans.

Now, CGG Veritas faces an environment of low demand and bloated fleets, which pushes up competition for every contract, driving down the prices charged for jobs. The good news in this situation: With more ships trying to map the seafloor, CGV subsidiary Sercel has seen plenty of demand for its products, and this division has provided some much-needed buoyancy to CGG Veritas' numbers.

To address the overcapacity issue, CGG Veritas retired nine ships, shrinking and modernizing its fleet. Unfortunately, there isn't much the company can do to increase demand for its services, and the moratorium on deepwater exploration in American waters (and related delays elsewhere in the world) resulting from the back-to-back disasters in the Gulf of Mexico definitely won't help.

Because of this, CGG Veritas' management isn't expecting to see a recovery in contract prices until 2011. As you might imagine, that has hurt the stock of late.

Smoother sailing ahead
However, these stormy seas can't last forever, and a tough operating environment will cull small, inexperienced players from the industry. When we finally make it through this economic uncertainty, demand for oil and exploration budgets will recover. CGG Veritas, with its fleet decked out with the best seismic equipment Sercel has to offer, will still be around, ready to ride the rising tide. And we'll be on board.

Come back to Fool.com tomorrow for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well! To see the performance of previous recommendations, click here.

The Motley Fool will wait at least 24 hours after this publication before buying shares of CGG Veritas. To see an FAQ on "11 O'Clock Stock," click here.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Nate Weisshaar does not own any of the stocks mentioned above. Chevron is a Motley Fool Income Investor recommendation. CGG Veritas and CNOOC are Motley Fool Global Gains recommendation. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 14, 2010, at 12:27 PM, prime22 wrote:

    Hi,

    In the past, you noted the indebtedness of a company, something that the former mayhem has taught me is vital. Do you have this figure?

  • Report this Comment On September 14, 2010, at 1:27 PM, flowmotion wrote:

    Don't you have an opinion on the competition?

    Their Dutch competitor Fugro NV looks cheaper.

  • Report this Comment On September 14, 2010, at 1:28 PM, flowmotion wrote:

    *Don't = do.

  • Report this Comment On September 14, 2010, at 1:50 PM, FiveHappyDaze wrote:

    Investing in oil stocks seems like a slam dunk way to make a lot of money. After all, the trend of oil prices seems to inevitably creep upward, so the value of the related stocks must do so as well, goes the thinking of unsophisticated investors. However, not only is the perception that oil prices move inexorably upward inaccurate, there is no necessary relation between the price of oil and the price of the stocks associated with it.

    There may be no other commodity in the market place as subject to political manipulation as is oil. Given that oil is in virtually universal demand, and demand is growing as Third World countries make a push for economic growth, oil producing countries with political axes to grind, such as those in the Middle East and Venezuela, can send shudders through the oil markets on a whim. These convolutions can have an impact on the price of oil stocks in the short term. However, even politically volatile nations can't afford to turn off the tap indefinitely, so the effect on the long term prices isn't as great as one might think. Historical oil prices and historical oil stock prices have a tendency to be more stable than their short term prices.

    This would seem to indicate two things. First, there is money to be made by trading on a daily basis, as short term swings can produce very volatile changes in stock prices. Second, there is money to be made by means of long term investing, as values based on historical performance tend to even out and generate gains based on the long term strategies of particular companies.

    For those with the ability and knowledge to follow and assess the significance of short term trends in oil prices on the value of these stocks, trading in the stock of individual companies on a daily basis can create quick profits. However, this is an incredibly demanding task, and investment houses employ armies of highly trained and experienced analysts to keep up with these movements. Rare is the individual investor with such resources, although one can subscribe to services that provide real time updates of the state of the market.

    ----------------------------------

    Money without intelligence is like a car without a road.

    http://www.intelligentinvestingtips.com

  • Report this Comment On September 14, 2010, at 2:11 PM, stanton17 wrote:

    FiveHappyDaze,

    Excellent commentary... perhaps, the best I've read on TMF. Thanks for sharing.

  • Report this Comment On September 14, 2010, at 2:42 PM, Geofiz wrote:

    First, let me say that I am a geophysicist with a moderate size oil company. I have been working in deepwater exploration, appraisal, and development in many of the planet's basins for roughly 22 of those years. I speak to the folks at CGG on a weekly basis.

    Let me clear up one thing right away. CGGVeritas and its competitors are not "seismic mapping companies". They are seismic acquisition and processing companies. In other words, they shoot the seismic and process it using their considerable computing capacity. "Mapping" is an extremely small portion of their work, if they do it at all. That's the job for guys like myself - take the processed data and interpret it, hopefully leading to a new field discovery or two.

    One could argue that the above is just a matter of semantics, so why am I bothering to comment? Just this - I absolutely, positively believe that this is the wrong time to buy CGV. The drilling moratorium has left the industry in complete disarray, and not just in the US. No one has a clue at this time what future drilling in the deepwater Gulf of Mexico is going to cost, although it’s dead certain that it will be significantly more than previously. In an era where subsalt exploration wells routinely run $150 million or more, tacking additional major insurance (if insurance is to be had…an open question at this point) and rig refurbishment costs on will most certainly have a chilling effect on exploration. Some companies will simply leave deepwater exploration and concentrate on onshore resource plays. Some will go elsewhere, but the lag time in entering a new international play is considerable. Clearly, if the price of oil does not rise, or at the very least hold its own, activity will suffer, and CGV and its peers will bear a great deal of the brunt of the effect. Advanced seismic such as wide azimuth 3D is, to a degree, discretionary, especially when virtually every deepwater player already has some type of 3D depth coverage over much of the Gulf. It can be an easy target when budget cutting time rolls around. Everyone recognizes the technical advantages of the newer data, but it can be a losing battle when the bottom line is involved. It is, of course, precisely this advanced data on which CGG’s fortune depends. No seismic acquisition company can prosper off of 5 year old seismic.

    Over the years, I’ve witnessed many, many swings of the oil and gas pendulum. This is just the latest. The problem is that no one can tell at the moment how far the pendulum will swing. As Nate pointed out, the world still needs oil, and nothing will change that for the foreseeable future. CGV may well be a true bargain 6 months down the road…or 12 months…or 24. Personally, I would wait until the smoke clears and there’s at least a bit of clarity on which exploration companies are doing what. Keep an eye on announcements regarding activity in the Gulf of Mexico and elsewhere. Now is not the time.

  • Report this Comment On September 20, 2010, at 12:11 PM, ikkyu2 wrote:

    Geofiz, I think you're too close to the tree to see the forest. You see the technical side of oil well exploration. I wonder if you are not so accustomed to that, that you are ignoring the massive cultural and political forces in play that demand oil to keep the wheels turning.

    Regulations that tend to choke off the flow of oil will not stand - I've got some 'clarity' on that concept already. And by the time a stock's earnings forecasts are clear to even the most technical geophysicist, the market has already priced them in. I find your pitch compelling, but in exactly the opposite direction that you intended.

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