Description

OSCA Inc.

AS OF 5/2/01

Price: $22.6
Shares: 14.8 million


AS OF 12/31/00

Book Equity: $68.7 million
Net Debt: $30.5 million


OTHER

Great Lakes Chemical (GLK) is majority owner. Most likely will split
off shares this year in exchange to current GLK owners in exchange for
GLK shares.


OSCA is a small-cap oilfield services company. Mid cap comparables include
BJ Services, Smith International and Weatherford International. Small cap
comparables include WH Energy and Hydril.

OSCA focuses on completion services and technology: once the well is
drilled and oil/gas is discovered, the well must be completed (set, or
stabilized).

As with pretty much all oilfield service companies, business is good and
getting better. Like BJS or SII or WFT, OSCA is a service company whose
business correlates to the rig count. Unlike BJS, SII and WFT, OSCA is
somewhat smaller and followed by relatively few analysts. It is, however,
an important company with good (25%-type) market shares in its areas of
focus.

Examine the trend in earnings estimates for BJS, SII, WFT and the other
major oil service companies. Estimates have been raised dramatically over
the past year as both activity and pricing have come through much better
than expected. OSCA benefits from these same industry trends, except no
one is following them closely. Earnings estimates prior to the most recent
quarter were unchanged since the company went public almost a year ago.
The company has meaningfully exceeded estimates in the past two quarters
and most recently guided estimates higher. They are still being way too
conservative.

Current consensus estimates are $1.10 for 2001, $1.75 for 2002 and $2.25
for 2003. There is considerable operating leverage here. Incremental
margins for the three divisions range between 40% and 75%.

In addition to the obvious pricing and activity leverage, there are genuine
growth initiatives here. The company has historically operated offshore
in the Gulf of Mexico. They are now moving into the land drilling
completions business as the invitation of their customers. (There is
currently insufficient capacity on land and they are essentially being
guaranteed business if they will expand their services into that sector.)
They are moving internationally as well and have recently completed a
$5 million sale of completion fluids to Saudi Arabia (not inconsequential
given their revenue base.)

The company currently sells for less than 13x consensus 2002 estimates.
It is my belief, with considerable knowledge of the company and the
industry, that earnings could be north of $2.25 for '02, making this a
very cheap stock.

When comparing this company to others in it industry it is important to
remember the following:

1.) OSCA has significant market share in its area of focus and would be
a desired acquisition candidate by any number of companies. Both SII and
WFT have indicated the desire and logic in such an acquisition. It is
my belief that offers have already been made. GLK is not interested in
selling because they have a negligible cost basis and want to avoid the
tax consequences. They will spin/split off OSCA by the end of this year
and then it will be a desirable acquistion candidate.

2.) OSCA has significant organic growth initiatives. It is not simply a
pricing and utilization story.

3.) Unlike the asset intensive energy service companies, OSCA is not
capital intensive. It has a significant technology component (e.g.,
intelligent completions) and relatively modest maintenance cap-ex
requirements.

4.) OSCA is very underfollowed by the analysts. Estimates for comparable
companies have risen 50% to 75% over the past year. OSCA is just hitting
the sweet spot of the cycle where pricing and activity levels are both
increasing. OSCA has publicly commented on likelihood of pricing gains
(see most recent eps announcement.)

With respect to the industry, remember that

1.) The energy industry has suffered from gross underinvestment for the
last twenty years. Its time has come.

2.) Energy supplies (oil, gas, electricity) are tight. It is not so much
a question of commodity pricing, but a question of increasing supplies and
infrastructure.

3.) There are serious supply issues relating to natural gas. Just watch
out for the upcoming energy report out of the Bush administration.

Catalyst

The company guided estimates higher in its most recent eps announcement,
but not nearly as much as it could have/should have. Until consensus
expectations catch up with reality, each quarterly earnings announcement
will be a catalyst for the stock to move higher. In my opinion, earnings expectations
are woefully understated.