Please ensure Javascript is enabled for purposes of website accessibility

Life in the Fast Layne

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 2:06PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This water and mineral drilling company has an interesting play on coalbed methane.

If I say "drilling," you probably think of oil, gas, or maybe even teeth. You might not think about water or minerals -- but Layne Christensen (NASDAQ:LAYN) does. The company has expanded from a solid base in the water and mineral exploration business into an interesting natural-gas sideline.

Results for the fiscal first quarter were pretty solid. Revenue climbed nearly 27%, and the company reported a slight improvement in the gross margin. With operating margins also improving by a meaningful clip, Layne Christensen experienced 59% growth in operating income and 87% growth in net income.

The company's core water business reported revenue growth of almost 23%, with pre-tax income climbing 14%. Despite some issues early in the quarter, Layne Christensen seems to be on track; it's now looking to expand into water treatment to become a more complete vendor of water-industry services.

The mineral exploration and geoconstruction businesses were both solid, as well, reporting 26.9% and 32.3%, respectively, in revenue growth. In the mineral exploration business, year-ago comparisons were tough, but the high prices for gold and other metals have led to robust exploration budgets.

Perhaps the most interesting bit of Layne Christensen is its coalbed methane natural gas business. The same natural process that creates coal also produces large deposits of methane-rich natural gas. Although these gas sources are often tough to exploit, in part because of the frequent presence of large amounts of water, the company has considerable relevant experience here.

At present, this is a small business -- the company has sunk about 130 wells, and this business contributed all of about $1.8 million in revenue for the quarter -- but small businesses can grow large over time. Assuming that the natural gas market stays robust, coalbed methane could be a meaningful contributor to Layne Christensen as soon as this year.

Over the longer term, who knows what could happen? If the company can demonstrate profitable expertise in coalbed methane drilling, there is ample opportunity for growth and expansion.

Of course, there are risks. The natural gas market could slide, the company has a spotty record of sales and earnings growth, and there is a fair bit of debt, as well. Finally, there is a proxy issue: A major shareholder is pushing the company to abandon its antiquated practice of staggering director elections over three years in favor of bringing all directors up for a vote every year.

On the basis of the company's more traditional businesses, the stock seems reasonably valued. But that coalbed methane business is intriguing and could offer a definite pop to results if natural gas prices stay high. In either case, investors need to drill into the company for themselves to see whether it all makes sense.

For more on the drilling and gas sectors:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.