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What happened
Shares of Geospace Technologies (GEOS 2.64%) continued their slow recovery this year as they increased 11% in September. This puts shares up more than 40% year to date. While there was no direct news from the company that spurred the gain, rising oil prices and the announcement that OPEC had tentatively agreed to lower total production gave the whole oil industry some good vibes.
So what
Geospace's big business driver is supplying the oil and gas industry with seismic sensors used for exploration work. As you can imagine, lower oil and gas prices have resulted in a drastic decline in exploration work from producers. This is pretty much the case in any lower oil price environment as exploration budgets are typically the first ones to get cut. You can track the decline in oil prices to the revenue levels at Geospace.
As oil prices have started to rise, shares of Geospace have rallied a bit this year and in September specifically. The idea here is that once oil prices do get to a level that encourages companies to spend money on exploration again, Geospace will see a large uptick in business. After all, the company has a long list of big-name clients like BP. In particular, it will be worth watching how much exploration work BP does in the coming quarters because most of its future exploration work is going to be concentrated in offshore work, a higher-margin part of Geospace's offerings.
Now what
Before jumping into shares of Geopace simply because oil prices are on the rise, there are a couple of things to keep in mind here. Before many exploration and production companies start spending big money on seismic work, chances are that they will look to clean up their balance sheets after taking on quite a bit of debt to get through this rough patch. Then, they will likely look to start up delayed projects already waiting in the wings. There is also the conundrum of how shale oil and gas drilling has become a more economical source than offshore work, and onshore work does have lower margins than offshore for service companies like Geospace.
So, on the whole, yes, this was good news, but investors shouldn't be jumping for joy since it will likely take several quarters before we see any of this good news hit the company's bottom line.
