Even a well-run company can look like a lousy investment if that company is in a bad market, and there aren't many markets worse off than oil-services companies that specialize in exploration activity. This is where Geospace Technologies (NASDAQ:GEOS) finds itself today. Its seismic equipment is some of the best in the business, but that doesn't really help if no one wants to do seismic-related exploration activities.
With so much of Geospace's prospects and the overall offshore market up in the air, the company's management took some time during its recent conference call to explain to investors and analysts what it's seeing today. Here are five quotes that reflect what management is thinking.
1. There are some small bright spots in a dismal market
There's no question that Geospace's overall business is taking the decline in offshore oil and gas activity particularly hard. Since much of its work is tied to the exploration and appraisal part of the business -- the first expenditures that oil producers cut when times get rough -- the pool of potential projects has been getting smaller and smaller. However, there were a couple of small notes within Geospace's results that CEO Rick Wheeler wanted to point out that show some strength in what the company is doing today:
The number of successful high data quality surveys achieved by our OBX customers is steadily growing. From this, we remain encouraged about the future of our OBX product line.
Our non-seismic businesses continued down the path of improved performance. Third-quarter revenues for this segment were $6.1 million, a 21% sequential increase over the second quarter, and an increase of $0.9 million over last year.
Geospace's OBX marine nodal system constitutes some of the most advanced wireless seismic detection systems out there, and even though the overall market is weak, the company is gaining a larger piece of the pie for the use of these devices. It's also encouraging to see that the company's non-seismic businesses are gaining momentum. This segment isn't tied to the oil and gas industry, so a larger contribution from this segment could offset the cyclical nature of its traditional business.
2. Still lots of uncertainty in the market
Considering the company's position in the market with big-spending customers, some analysts were curious about whether the company had any insight into when offshore activity would start to pick up again, which would suggest an uptick in Geospace's business. According to Wheeler, the company isn't seeing any significant changes from where things stand today:
Around the globe, we've seen demand for seismic exploration services reach historic low levels, and there is no simplistic forecast for when increased levels of demand might return. To the extent that current market conditions in the seismic industry persist, demand for our seismic equipment products is expected to remain at corresponding low levels. Until seismic exploration activity returns to more conventional norms and/or manufacturing for new PRM [permanent reservoir monitoring] contracts begins, our profits will continue to be hard hit by depreciation of unutilized rental equipment and fixed factory overhead cost left unabsorbed by our minimal manufacturing operations.
3. But the market will rebalance down the road
As bad as the market looks, though, management still sees this as a cyclical business. So as Wheeler highlighted, oil and gas producers will need to need to start spending to maintain production, and Geospace is planning on being ready when they do:
Given that seismic exploration and reservoir management are necessary components for a stable and sustainable energy market, endurance through this down cycle and a strong emergence and thereafter are our focus objectives, we believe that our strong balance sheet and continued development of industry technology are the key elements that will allow us to achieve these objectives.
4. We're keeping expenses to a minimum while we work through this market
To be ready for the market's eventual comeback, Geospace needs to control its costs and maintain some semblance of financial strength. To do so, Chief Financial Officer Tom McEntire explained that the company is keeping is cash operating expenses at an absolute minimum:
We think we can sustain at this level of averaging about $1 million a month or less. Going into next year, we expect to receive a big income tax refund. We're going to carry back a loss in our U.S. tax return and get a refund. That will supply a lot of cash in the third quarter of next year. So overall, next year we think we're fine.
5. We have enough cash to last a while
Costs may be at a minimum, but those cash costs are still greater than its ability to generate any operational profits. So on top of the company's ability to cut costs, McEntire also highlighted that the company had enough cash to keep the lights on for a while based on the current cash-burn rate.
Our inventory balance now stands at $131 million, representing a decline of $15 million since the beginning of the fiscal year. Although demand is weak, we are working diligently to bring about further reductions in our inventory levels. Purchase orders for raw materials remain at extremely low levels, and our production activities continue to be focused on essential tasks. At June 30, 2015, our balance sheet reflected $45 million of cash and short-term investments, an increase of almost $2 million since the March quarter.
If the company can maintain a cash-burn rate of around $1 million a month, it appears that there is more than enough cash to keep the company going for a quite a while. These things can change, though, so in the coming quarters, investors should keep an eye on how the company is managing its cash operating expenses and whether it's burning through that cash pile any faster.
What a Fool believes
Geospace Technologies is doing the only thing it can right now: control the things it can control. By lowering cash costs across the business and gaining some extra revenue in its non-seismic business segments, there are some small signs that the company could be much stronger as the market for seismic work comes back. As long as the market remains weak -- and there don't appear to be any signs that the current market climate will change anytime soon -- Geospace's management will need to pinch every penny it can. A new contract would go a long way in improving this company's outlook, but investors shouldn't expect much without one in the near future.
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