When investors clamor for exposure to a hot sector of the economy, it's a pretty safe bet that someone's making good money off of those speculative IPOs. It's the folks selling those shares to the public, of course. It's hard not to view the recent explosion of solar IPOs in this light.
Occasionally, however, just the reverse occurs. A sector or sub-sector becomes so neglected that no one wants to own the shares. Think Cisco (Nasdaq: CSCO) in 2002. Or Yahoo! (Nasdaq: YHOO) in 2002. Or any Internet or telecom company in 2002, for that matter. That toxic time is exactly when opportunistic buyers swoop in, with noses plugged and eyes wide open, to pick up attractive assets on the cheap.
The Internet and telecom bubble stories are well known, but a similar window of opportunity opened for the seismic sector a few years ago. Even today, with oil prices in record territory, investor enthusiasm for the sector remains uneven at best.
Feel the tremors
The acquisition and processing of seismic data, also referred to as geophysical services, is a key ingredient to the successful exploration for oil and gas. Essentially, these companies map out underground terrain, increasing an explorer's confidence in drilling a producing well. Due to a decrease in exploration activity, a fair amount of these companies went bankrupt in the days of $1 to $1.50 gasoline. One company, Seitel, even managed to go bankrupt after gas prices had turned up dramatically in 2003.
Investors didn't want anything to do with these sagging seismic companies. As usual, Warren Buffett spotted the opportunity here earlier than most. He bought up all the fire sale-priced bonds of Seitel, and got paid out at face value when the company emerged from Chapter 11. Buffett would have done even better had he taken an equity stake in the reorganized firm -- Seitel's stock pumped out multibagger returns quicker than you could say "great galloping geophysics!"
Enthusiasm for this post-bankruptcy, bulletin board-listed company eventually sputtered out, and ValueAct Capital bought the company last year for no discernable premium. Seitel hasn't been the only seismic player to get scooped up since seismic profits started rocking and rolling again. Schlumberger (NYSE: SLB) bought the piece of WesternGeco from Baker Hughes (NYSE: BHI) that it didn't already own, and CGG bought out rival Veritas DGC to form CGG Veritas (NYSE: CGV).
In a sense, the field is now narrowing even further. Petroleum Geo-Services (NYSE: PGS), one of the three largest stand-alone seismic businesses, has chosen to delist its shares from the New York Stock Exchange. The reason cited? A lack of significant trading volume compared to the company's main listing in native Norway, making the costs of compliance not worthwhile.
This is rather astonishing, given the company's tremendous performance since it emerged from Chapter 11 in late 2003. PGS is roughly 10 times the size of Motley Fool Hidden Gems selection Dawson Geophysical (Nasdaq: DWSN), but sees a third less trading volume in the U.S. Which one of these is hidden, anyway? Once again, it looks like the whiff of bankruptcy kept a lot of people out of this exciting turnaround story. (Dawson, which solely operates in the onshore North American market, has been a huge hit since Bill Mann singled it out for subscribers in late 2005.)
Quiet seismic shifting
I find it a bit odd just how quiet the resurgence of the seismic players has been. It's not as if these firms are being left to languish, however. Financial buyers have demonstrated a consistent eagerness to snatch away just about any operator in the space that the broader investing public hasn't embraced. That's not to say that any given seismic company is necessarily a buy today. There's only so much consolidation that can occur in this not particularly fragmented market.
The recent history of the seismic sector may be of limited value for those hunting for an investment theme that's one step ahead of the market. The seismic story is already out there, and the easy money was made 500% ago. Then again, keeping this example in mind while seeking future sizzle from unloved sectors just might help you sniff out the next seismic story.
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Fool contributor Toby Shute doesn't own shares in any company mentioned. The Motley Fool's disclosure policy never goes out of favor.
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