Description

Investment Recommendation:  MagSeis Fairfield is the dominant player in the fast-growing cottage industry that is ocean bottom seismic (OBS).   As part of MagSeis’ transformational merger in December with the Seismic Technologies business from within Fairfield Geotechnologies (to create what’s now known as MagSeis Fairfield), the company recently doubled its share count via an equity raise at NOK 16.95 (about $2, and slightly below today’s price).  From the Norway-based MagSeis side we get: 1) technological leadership; 2) a strong reputation for excellence in equipment deployments; as well as, 3) a capable management team.  From the Houston-based Fairfield side we get: 1) the sales organization and deep customer relationships that MagSeis lacked historically; 2) Chuck Davison, the CEO of remaining Fairfield Geo, as Chairman; and 3) a main shareholder in the form of the Sugahara Family, the founding family and main owner of Fairfield Geo.  While shares of MSEIS did trade prior to the December combination, I view the recent equity raise as the company’s true IPO, or at the very least, its coming out party. 

So what is OBS?  I am not a petroleum geologist, but so far as I understand it, OBS is simply a better seismic mousetrap for certain applications both within exploration and production.  Specifically, the company manufactures and sells nodes (and their associated automated delivery systems) designed to sit at the ocean floor during collection of seismic data, rather than the conventional streamer method of being dragged behind a vessel.  I recommend watching YouTube videos to get a feel for what OBS is all about.  Increasingly, offshore E&P companies are shifting seismic budgets toward OBS as it provides for fuller pictures of underground formations and quicker paybacks when compared to conventional seismic shoots in certain cases.  Specifically it’s a “full”, rather than a “wide”, azimuth picture. I’ve heard estimates of OBS being 10-15% of the market today, moving up toward 40% over the next few years.

On the company’s recent deal roadshow, the Chairman recounted a story from an oil major CEO who lamented the fact that Fairfield’s OBS technology would have saved the company from wasting tens of millions (I might have heard “hundreds”, but want to remain conservative) of dollars drilling dry holes had he only known the technology would work.  Since that roadshow MSEIS was awarded a 2-month contract in the North Sea and signed an MoU with SLB for join OBS services.  And in early January, BP, with oil already having plunged into the end of the year, committed to “plans for significant growth in deepwater Gulf of Mexico.”  Specifically it highlighted the $1.3B Atlantis Phase 3 development coming only “after recent BP breakthroughs in advanced seismic imaging and reservoir characterization revealed an additional 400 million barrels of oil in place at the Atlantis field”.   I am convinced that Fairfield has been and continues to be BP’s partner here.

What’s it worth?  The company has a combined EV of about $400mm, with 185mm shares and a clean balance sheet.  At the time of the roadshow in early November, the company had a combined backlog of $330mm, and had put forth revenue guidance of $500mm for 2019.  EBITDA margins run in the low-to-mid 20% range, but management expects this to move up (and become more consistent) over time as the business scales.

Peers TGS and PGS trade at 4.5 and 3.3x this year’s EBITDA respectively, according to Bloomberg consensus.  I think MSEIS will do $150mm+ in EBITDA in 2019 (Arctic is at $190mm, SpareBank 1’s at $188mm), and should trade at least a turn higher than TGS given its defacto monopolistic position (for now) in a growing market.  That’d be more than a double in share price. 

Given the size of the 17,000 node BGP award which will primarily be a 2019 event ($100mm in FCF, as described by the CEO), perhaps 2019 is an “overearning” year.   Using $120mm, the midpoint of Arctic and Sparebank’s 2020 EBITDA estimates, and 1 turn above TGS’ 2020 EV/EBITDA multiple (of 3.81x), but adding the $100mm in FCF the company should generate from the BGP contract, yields nearly a double as well.

I certainly don’t think MSEIS will be the only real OBS player of scale forever.  But this is more-than-priced-into today’s entry multiple, and the industry is growing such that it shouldn’t be a winner-takes-all situation.  Further, this is a fledgling technology where reputation for success and relationships matter, given the small service price as compared to what’s at stake and the high cost of technical downtime to clients.  If you're going to go with a fairly new technology, price probably isn't the most important part of the equation... you go with IBM. 

Main risks include: other players moving from vaporware to actual products (e.g. InApril), and oil prices moving below deep water GoM / North Sea breakevens for sustained periods of time.

Catalyst

• OBS taking share
• Cash flows