The Best Small Cap for 2007: Dawson Geophysical

I don't generally consider energy-related firms long-term buy and holds because of the cyclical nature of the industry and its tendency for boom and bust cycles. For companies competing in the oil and natural gas space, the price of the underlying commodity is the key item that can make or break an operating model, especially for those trying to locate the natural resource far beneath the surface.

That's where seismic firms come in handy. These entities help oil and gas clients explore and locate reserves by collecting and analyzing underground images of the earth. In a nutshell, the process involves using sound and sonic waves and recording how they echo off of different underground or undersea surfaces.

There are two primary seismic methods. The first is referred to as 2-D, and only offers a single linear plane of data to interpret. The newer technology is called 3-D, and as you might have guessed, offers three-dimensional views, with enhanced abilities to use more sophisticated techniques and additional clarity and detail in locating proven or probable reserves.

That's about as much detail as my non-engineering mind can muster, but hopefully you get a sense of how useful such technology can be for firms trying to locate vast energy reserves. Seismic collection and interpretation costs vary depending on how deep or complex the earth's formations are, so the price of the underlying commodity definitely influences whether such endeavors are economical.

Lately, the cost of oil and natural gas has been high enough to justify additional exploration efforts, and seismic firms have benefited greatly. It's uncertain how long prices will remain high, but the long-term outlook for the space is still compelling. As we all know, most commodities are limited resources, so there will always be demand for new supply to satisfy ever increasing demand.

So, if a Fool were to invest in the space, what are the options? Good question. Below is a chart detailing the vital trading stats for the major publicly traded seismic firms:

Company

Mkt Cap
($millions)

TEV/ EBITDA

P/E

P/B

Debt/ Capital

Veritas DGC

2,860.0

6.7

37.6

3.9

18%

Input/Output

934.7

10.8

30.6

2.5

17.2%

Seitel

555.9

4.5

16.7

22.7

88.5%

OYO Geospace

285.5

22.9

50.0

3.9

12.6%

TGC Industries

124.0

6.0

14.1

3.7

21%

Petroleum Geo Services

4,460.0

7.8

17.8

13.9

54.6%

Dawson

281.6

6.9

17.3

2.3

0%

Average

1,357.4

9.4

26.3

7.6

30.3%

Source: Capital IQ, a Division of S&P.

The shares of each company listed above have outperformed the S&P 500 over the past one-, two-, and five-year periods, which is understandable, since most commodity-based industries have had strong runs. But if we were to select our top pick from the seismic field, how could we decide?

I'll leverage Motley Fool resources for a final decision. For starters, Fools already know that OYO Geospace (Nasdaq: OYOG  ) and Dawson Geophysical (Nasdaq: DWSN  ) are Motley Fool Hidden Gems picks. Additionally, all of the metrics in the above table for Dawson and TGC Industries (AMEX: TGE  ) trade below the group average. And out of all of the above firms, Dawson has the most bullish recommendations in our burgeoning CAPS community, with OYO Geospace and TGC Nos. 2 and 3, respectively. So, Dawson it is!

Do you agree that Dawson is a little company with big plans? Feel free to read up on why so many players are bullish on Dawson, and don't hesitate to weigh in with your opinion on the firm, seismic firms, or any company for that matter.

Seen our other contenders for best small cap? If not, click here.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.


Read/Post Comments (0) | Recommend This Article (20)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 518011, ~/Articles/ArticleHandler.aspx, 10/22/2014 9:02:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement