Seitel was written up in 2001 by Nish 697 and in 2003 by Stat820. Seitel has no public equity, but has $400mm of 9.75% Senior Bonds due 2/15/14 trading around $0.60 with a YTM of about 23% and current yield of 16%.
In 2007, the company was acquired by ValueAct Capital for $800mm (including $400mm of Senior Notes and $400mm of Equity). The company is a seismic data company, which provides 2D and 3D data to oil and gas (mostly natural gas)companies looking to explore in North America and has a very favorable business model (good return on capital, low capex requirements). Please review previous writeups for a better feel for the business.
The company has been expanding it's library over the past few year and the company's "cash margin", which is roughly equal to pretax cash flow before interest, capex, and working capital has been about $100mm. Clearly, given the weak economy and decline in natural gas prices (more important that oil prices to this company), we would expect cash flow to decline in the near to intermediate term. We figure that the capex required to maintain the company's library is about $20mm and interest expense (which they pay to us) is about $40mm; so the company's cash flow would have to decline to below $60mm before they would bleed (or deplete their library), which we believe even in this environment is a low probability event.
Valuation:
The company has about $40mm of net cash and investments on the balance sheet and $400mm Senior Bonds trading at $0.60 (or "equity value" of $240mm) - - so the TEV through the bonds is about $200mm. We figure that normalized cash flow after capex is about $60mm, so you are paying about 3.3x normalized cash flow with no leverage ahead of you in the capital structure and one year of interest payments in cash on the balance sheet. Importantly, we believe that the senior management team has bought some of the bonds as a personal investment at higher prices than today. It is also important to note that Warren Buffet tried to buy this company for about the same valuation as exists today through the bonds.
Catalyst
continued payment of interest; current dislocation in credit markets subsides
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