This week at Singular Research, we initiated a buy rating on TGC Industries (TGE), leading supplier of seismic data acquisition services throughout the continental U.S. and Canada to companies engaged in the exploration and development of oil and natural gas. Some of the drivers for TGC include:
- Energy exploration activity is expanding in North America as a result of high oil prices, and in the case of natural gas, advanced extraction methods that are opening up the shale fields for development.
- Technological progress in seismic equipment is improving the discovery of hydrocarbons, which spurs seismic survey activity.
- Not only is the number of seismic surveys increasing as a result of more exploration activity, but seismic surveys are growing in size and complexity.
- TGC Industries has structured its business to respond quickly to changes in demand and has established a reputation as one of the leading seismic survey companies in North America.
- The company is in a strong position financially.
- Growth in both revenues and EPS will be strong this year.
The company’s survey crews obtain geophysical data using modern 3D survey methods. The process begins by generating acoustic energy under the ground by using either vibration equipment or dynamite detonation. The reflected and refracted energy is captured by geophones, converted into digital signals at multi-channel recording units, and then passed on to a central recording vehicle. These huge volumes of seismic data are interpreted in order to produce accurate images of the earth’s subsurface. The company’s customers are then able to identify locations where subsurface conditions are positive for the accumulation of obtainable hydrocarbons, to optimize the extraction of hydrocarbon reservoirs, and to improve reservoir management.
- U.S. operating unit is Tidelands Geophysical Company. The company has operated in the U.S. since 1967 as Tidelands Geophysical Company (TGC). As of the first quarter of 2012, the company operated eight seismic data acquisition crews in the U.S.
- Eagle Canada subsidiary in Canada acquired in late 2009. Eagle Canada provides seismic data acquisition services to the oil and gas industry throughout Canada, including work in the oil sands, as well as to the potash mining industry. With a focus on “No Footprint Seismic”, Eagle Canada has particular expertise in the acquisition of seismic data in technically difficult, logistically complex, and environmentally sensitive areas. One aspect of this is the company’s extensive use of helicopters to serve extremely sensitive locations. Eagle Canada operated seven crews during the first quarter of 2012, but has the capacity to add more crews by leasing additional equipment. The Canadian market is seasonal due to the thawing season, so the company will experience lower activity during the second and third quarters of 2012 as it does every year.
- Seismic data acquisition process.The seismic process starts when an exploration and production (E&P) company establishes a land position and requests bids from one to three geophysical contractors for a 3D seismic survey. If TGC Industries is the winning bidder, the company then deploys a small survey team to identify hazards and the locations for source and receiver points over the E&P company’s land position. Once that phase is complete, the company then deploys a 3D seismic data acquisition crew made up of 45 to 60 people. That crew will either have ARAM ARIES equipment or the GSR cableless system equipment, both of which are described in more detail below.Sound waves are generated by an energy source. Surface terrain and subsurface requirements determine the appropriate selection of energy source, either vibration equipment (vibroseis) or dynamite detonation. Dynamite detonation is also called shot-hole, because the explosive charges are placed between 20 feet to 250 feet below ground in a hole that is created with dedicated drilling equipment. The company does not use third-party contractors for their shot-hole work and instead uses its own crews and equipment to reduce costs. Vibroseis is more sophisticated than shot-hole in that is can produce single pulses or continuous sweeps of energy. In 2011, the mix of TCG Industries’ energy sources was 87% vibroseis and 13% shot-hole.
Singular research analyst Keith Maher has a $20 12-month price target for TGC, which represents a potential to double based on the current trading price of shares.