Is the Energy Boom Over for Dynamic Materials?

Source: Dynamic Materials.

The U.S. energy boom has ignited a hotbed of activity among oil and gas producers seeking to find lucrative areas for exploration. This has also boosted the fortunes of businesses such as Dynamic Materials (BOOM -1.55%)that provide the services that exploration and production companies need. Yet as oil prices have fallen as low as $80 per barrel recently, many energy investors have started backing away not just from the energy companies, but also from Dynamic Materials and other providers of essential materials and services.

Dynamic Materials has an unusual focus in the energy industry, providing metal products designed by using explosive materials to create stronger bonds that are more resistant to corrosion, heat, pressure, and other harsh conditions than traditional methods allow. With so much activity in areas like deepwater drilling, which involves many of those factors, the need for Dynamic Materials' products is proportional to the interest in expanding energy production to hard-to-reach places. Yet even though the company serves other industries, its results are increasingly tied to energy's overall prospects -- for good or ill. Let's take an early look at what has been happening with Dynamic Materials over the past quarter and what we're likely to see in its report tomorrow.

Stats on Dynamic Materials

Source: Yahoo! Finance.

Will Dynamic Materials earnings go boom?
Dynamic Materials doesn't have investors all that optimistic about its earnings prospects, with analysts cutting their third-quarter estimates by more than 25% and making smaller reductions to their full-year 2014 and 2015 projections. The stock has performed poorly as well, giving up 20% since late July.

Dynamic Materials' second-quarter earnings report showed both sales and earnings declining from the previous year's results. Revenue fell 7% from the year-ago quarter, with a 19% decline in the company's NobelClad segment weighing down 8% growth in Dynamic Materials' oil-field products business. Net income dropped on both a generally accepted accounting principles and adjusted basis, as the DynaEnergetics oil-field segment's relative success couldn't overcome downward pressure from NobelClad. The company maintained its revenue guidance, but it narrowed the gross-margin guidance to the lower end of its previous range. Dynamic Materials also said it expects NobelClad to have another slow period in the third quarter as well.

Source: Dynamic Materials.

Yet Dynamic Materials does have some positive things going for it. CEO Kevin Longe noted the success of DynaEnergetics' research and development team, which has been introducing new products that have garnered high demand among energy-company customers. Even at NobelClad, order backlogs have picked up, suggesting that sooner or later, Dynamic Materials could have both of its big growth drivers pushing it forward.

More important, Dynamic Materials made a significant strategic move during the quarter, deciding earlier this month to sell off its AMK Technical Services business. The unit provides advanced welding services for use in the aerospace, oil and gas, and alternative energy industries, where its work finds its way into commercial and military jet engines, oil-field equipment, and power-generating turbines. The sale to Air Industries Group will bring in just $6.8 million, but given that the unit produced only 4% of Dynamic Materials' overall revenue, the transaction should help the company focus more closely on its core businesses and take maximum advantage of future opportunities there.

In the Dynamic Materials earnings report, watch closely to see whether the company sees any slowdown in future activity as a result of the recent drop in oil prices. If the company's customers pull back on their capital spending plans, then Dynamic Materials' stock could continue to languish until things pick up again in the energy industry.