Earthquake Investing

Need a little something to shake up your portfolio? Why not try some seismic stocks? Depending on the magnitude of your allocation to them, they could shake, rattle and roll your investments with a jolt of tectonic proportions.

Over the past two weeks, at least four earthquakes struck along the seam between the Pacific and American tectonic plates — two near Los Angeles, one near Panama, and one in Chile. But these are just the ones that made headline news. You would be floored to know how many earthquakes actually strike around the world on monthly, weekly, and daily bases.

According to the European-Mediterranean Seismological Centre, there have been 487 earthquakes of magnitude 4 or higher in the last 2 weeks worldwide, 312 in the last week, 54 in the last 48 hours, and 25 in the last 24 hours.

That’s pretty shocking to say the least.

Fortunately, most do not strike near populated centers. But with ever-growing populations and ever-expanding urbanization, earthquakes pose a threat to people and property that increases with each passing year. According to the authors of Earthquake Hazard Impact and Urban Planning, urban planners are not diverting enough resources to seismic studies: “In projects dealing with strategies for earthquake risk mitigation, urban planning approaches are often neglected. Today interventions are needed on a city, rather than a building, scale.”

In his paper “Correlation Between Geology, Earthquake and Urban Planning”, Professor Sule Tudes at the Department of Urban and Regional Planning at the University of Gazi in Ankara, Turkey, summarizes the importance of seismic studies:

“Geological and geotechnical investigations… before the planning and design of a city have an indispensible significance in the evaluation of suitability for settlement and land use decisions. The main stage of creating sustainable, durable and safe cities is to carry out natural structure analysis and synthesis by comprehensive investigations (geological, hydrological, engineering geology, geotechnic, seismicity, natural resource analysis, etc.) and contemporary scientific methods (GIS, Multi Criteria Decision Analysis, Multi Criteria Decision Support Systems etc.)”

The data provides a basis for formulating “policies regarding spatial distribution of the population, decisions regarding the distribution of infrastructure and settlement units, and policies for the reduction of earthquake hazards. Inadequate consideration of the geohazards… gives rise to the increase in earthquake damages.”

Governments and industries are becoming increasingly aware that a few studies now can save billions of dollars and thousands of lives later. Suggestions that recent earthquakes near major shale deposits in Oklahoma and other states are linked to fracking activity has increased the demand for such services by oil and gas companies as well, giving seismic data companies a solid foundation on which to build their businesses. Here are just four such companies to consider.

Dawson Geophysical (NASDAQ: DWSN)

Founded in 1952 and trading publicly since 2002, this Midland, Texas based $219 million micro cap provides onshore seismic data collection and analysis in the U.S. and Canada for oil and gas companies and data libraries.

It operates 14 seismic data collection crews in 48 states, and one crew in Canada. Categorized in the oil and gas equipment and services industry, DWSN is actively sought by companies engaged in the fracking boom sweeping across U.S. oil fields.

Its trailing twelve month revenues of $296.85 million represents 135% of its market cap, while its EBITDA (net income with interest, taxes, depreciation, and amortization added back to it for better comparison across unrelated industries) of $47.89 million amounts to 17.7% of revenues. Of that income, $4.59 million are passed to shareholders of common stock, some 1.5% of revenues, for a 2.2% return on assets and a 2.24% return on equity. Not high returns, but understandable given the company’s small capitalization. It is still in growth mode.

For this reason, five analysts give the company an average buy rating of 2.0, with some very aggressive price targets. Trading at around $27.50 currently, the stock’s low target of $37 gives it an upside potential of at least a 34.5%, while its mean target of $38.60 projects some 40 % upside growth over the medium term.

While the stock was hit very hard during the 2008-09 market correction, falling from $85 to $10 or some 88%, it has since rebounded 175% from its $10 low over the past five years, building a solid base at $20 which held five times throughout.

Ion Geophysical (NYSE: IO)

Also trading publicly since 2002, this Houston, Texas based $671 million small cap company in business since 1968 provides geophysical technology, services, and solutions to the oil and gas industry worldwide, offering seismic data processing services for marine and land environments, reservoir solutions, seismic data libraries, survey planning and design, data acquisition and management, subsurface marine and seabed imaging, and ice management systems. Like DWSN, IO is categorized as an oil and gas equipment and services provider.

While its trailing twelve month revenues of $549.17 million represents just 82 % of its market cap and thus a little poorer than DWSN, IO’s EBITDA of $154.82 million amounts to 28.2 % of revenues, far better than DWSN’s. Yet it hasn’t delivered any of that profit to shareholders, recording -$251 million of income out of common stock for a return on equity of -64.8 %.

But three analysts surveyed still give the company an average buy rating of 2.4, with some modest price targets.

Trading at around $4 currently, the stock’s low target of $3.60 gives it very little downside risk from here, especially given its recent tumble from $7.80 at the beginning of 2013, representing a loss of some 47 % in about a year. A base has been forming at the $3 area over the past six months. Analysts’ mean target of $5.03 give it upside potential of some 23 % going forward.

Mitcham Industries (NASDAQ: MIND)

Publicly traded since 2002 as well, this Huntsville, Texas based $168 million micro cap founded in 1986 falls into the scientific and technical instruments category, as it leases, sells, and services geophysical equipment primarily to the seismic and oil industries worldwide, but also to the hydrographic, oceanographic, environmental and defence industries.

On revenues of $92.11 million, some 54.5 % of its market cap, MIND manages an EBITDA of $7.43 million, or some 8 % of revenues. Of that income, $4.77 million was passed to shareholders of common stock over the past 12 months — more than DWSN on a dollar basis despite being one third its size. That represents shareholder gains of some 5.2% of revenues, for a 1.83% return on assets and a 2.75% return on equity.

The two analysts surveyed give the company an average buy rating of 2.0, with aggressive price targets comparable to DWSN’s. Trading at around $13.20 currently, the stock’s low target of $17.00 gives it an upside potential of at least a 28.8%, while its mean target of $18.50 projects some 40% upside growth.

While MIND’s stock was likewise hit hard in 2008, falling from $22 to $2 or some 91%, it had rebounded to new all-time highs of $26 by early 2012, and has recently built a base in the $12 to $14 area.

Global Geophysical (NYSE: GGS)

One stock in this space you might want to avoid for a while is Global Geophysical, which is being taken to court on a class action law suit for falsifying financial data going back to 2009. On March 17, 2014, the Company announced that its financial statements and related auditors’ reports from 2009 to Q3 of 2013 “should no longer be relied upon because of accounting errors resulting from material weaknesses in the Company’s internal controls”.

The class action suit, however, paints a darker picture, one of “false and/or misleading statements, and [failure] to disclose material adverse facts about the Company’s business, operations, prospects and performance”.
GGS announced plans to restate its reports going back to 2011, expecting to show revenue adjustments of a decrease of $4.8 million in 2011, an increase of $4.7 million in 2012, and a decrease of $5.3 million in the first three quarters of 2013 — totaling a net decrease of $5.4 million.

When the news broke on March 18, 2014, GGS shares fell from $0.71 to $0.46, or more than 60.68 %, on unusually heavy trading volume. The stock had already lost 27.33 % in 2014, and 58.95% the year prior.

Yet the company’s Q4 2013 revenue was strong at $81 million, beating the Capital IQ consensus estimate of $75.6 million, and reaching $292.5 million in 2013, following 2012 revenues of $343.7 million.

Accounting revisions of some $5.4 million amount to just 0.8 % of total revenues over the past two years — hardly something that will bankrupt the business. Once the company gets this scandal behind it, its stock just might rebound significantly from less than four-bits today.

Even so, the company has a rather hefty $330.2 million in consolidated long-term debt, with just $16.8 million of total available liquidity. “We expect investors to pay more attention to the highlighted liquidity issues,” Raymond James analysts cautioned Reuters.

When it comes to planning our portfolios, we might take a cue from city planners and devote some time to inspecting our investments’ foundations for any cracks or fault lines that could ultimately tear our portfolios apart.

Source: BigCharts.com

Joseph Cafariello