GEOS - Geospace Technologies: Project Flow Signals Upside Potential (Rating Upgrade)

2024-01-04 12:11:30 ET

Summary

• GEOS has a stable platform with increasing rental revenues and a near-pristine balance sheet.
• The company has received several contracts for its Mariner Ocean bottom nodes and monitoring products.
• The market for smart meters and reservoir monitoring presents key growth areas for GEOS.

GEOS Has A Stable Platform

I have been discussing Geospace Technologies ( GEOS ) in the past, and you can read my latest article here . GEOS’s rental revenues increased significantly over the past year as the outlook for the offshore industry improved. This primarily benefited its Mariner Ocean bottom nodes. However, its OBX ocean bottom nodes can face utilization issues in the near term as competition from similar products intensifies.

GEOS has received several contracts related to the shallow water seabed seismic data acquisition, Mariner Ocean bottom nodes, and monitoring products over the past few quarters. Cash flows improved significantly in 9M 2023. It has a near-pristine balance sheet with sufficient liquidity. Although the stock price strengthened over the past six months, I see room for further rally in the near-to-medium term. So, I will elevate my call to a “buy.”

Business Outlook

GEOS’s rental fleet of OBX ocean bottom nodes has continued to produce steady rentals for the past couple of quarters. OBX provides high-resolution seismic data. Over the past year, rental revenues more than doubled. The oil & gas market for the ocean bottom node is expanding , resulting in a growing marine industry. GEOS’s ocean bottom node houses an improved library and sees increased customer adoption. So, this can sometimes lead to cannibalization, as customers may prefer it over the OBX method. However, OBX has established its presence for a long time while mariner technology is relatively new. So, we must wait and see where the market moves.

The shift in customer preferences has put pressure on the utilization rates for the OBX product in Q4. Investors should note that OBX’s utilization and revenues vary in different portions of the year as those gaps occur. So, as demand improves, I expect utilization to follow suit in 2024.

Significant Projects

In January, GEOS received a $30 million contract to supply shallow water ocean bottom nodes (or Mariner), which replaced the $20 million rental contract for the Mariner contract struck in June. The rental terms for the contract will start in early 2024. Mariner also received a $3 million rental agreement related to the shallow water seabed seismic data acquisition node. It also received a $5.7 million international contract.

Emerging Markets’ Quantum business sells monitoring products related to border and perimeter security surveillance and cross-border tunneling detection. Also, in this segment, it recently announced a $1.5 million contract with the Defense Advanced Projects Research Agency (or, DARPA). Here, the company will explore a new SADAR capability (monitoring of subsurface reservoirs) to monitor acoustic energy sources.

Key Growth Areas

The market for smart meters has changed over the years as the market expands and more competition flows in. The Smart City expansion throughout the country and worldwide for smart meter initiatives and the related instruments and valves will continue. It will hold a robust market. However, the process is not free of challenges. While the electricity and gas side of the new technology is relatively easy, the actual deployment of water has not been smooth in many cases.

Reservoir monitoring in the oil & gas industry can also see a resurgence in the changing energy market. The energy market is facing challenges as the energy transition begins to manifest. Once the energy companies precisely assess their reservoirs, they can better manage them with lower carbon footprints.

Q4 Performance Analysis

In Q4 2023, GEO’s year-over-year revenues from the Oil and Gas Markets segment increased by 20%. Increased utilization and higher rentals of the OBX ocean bottom caused the sharp rise. However, the Mariner node appears to outperform OBX as it witnessed gaps in OBX utilization. The segment's operating income turned to a profit in Q4 from a loss a year ago.

Revenues in the Adjacent Markets segment remained nearly unchanged year-over-year in Q4. Operating income, on the other hand, improved. Given the demand pattern, I expect gaps in utilization in some OBX rental contracts. However, the ocean bottom node market will likely remain strong. GEOS’s revenues from the Emerging Markets segment increased in Q4, and it cut the operating losses in this segment compared to the prior year.

Cash Flows And Liquidity

In FY2023, GEOS's cash flow from operations turned mildly positive compared to the negative cash flows in the previous year, due primarily to higher revenues. Free cash flow also turned positive in FY2023. On the balance sheet side, GEOS has no debt, so it has a distinct advantage over some of its peers (FTI and SLB). Its liquidity (cash & short-term investment plus working capital) was $48 million on September 30.

What Does The Relative Valuation Imply?

GEOS's current EV/EBITDA multiple (4.9x) is much lower than its five-year average (19.8x). So, it appears to be undervalued versus its past. If the stock trades at its five-year average, it would provide a 235% upside potential. However, I do not think the stock will reach its past glory (i.e., relative valuation) in the foreseeable future.

If it trades at its peers’ average, it will have 97% upside potential. The stock price increased significantly (58% up) over the past six months. I think investors can expect healthy (30%-50%) returns in the medium term.

Why Do I Upgrade My Rating?

In my last iteration on GEOS, I discussed how the company focused on smart water products and deep and shallow water nodes. I also brought into light the company’s ties with the defense industry and receiving projects from that sector. However, I also highlighted that predicting the demand for seismic sensor products in the current environment was difficult. I wrote:

increased adoption of smart meters from various municipalities has shored up demand for its HydroConn series of AMI water meter connectors. This connection will increase demand for associated products like utility IoT control, monitoring, and data management.

Since then, the company maintained its focus on smart water products. While demand for the mariner node products should remain strong, some uncertainty looms over OBX utilization. It received a few contracts in the Emerging market segment, which should push the topline higher in 2024. Considering the company’s robust balance sheet, I will upgrade the rating to a "buy."

What's The Take On GEOS?

Increased activity in the offshore energy market has led to higher demand for deep and shallow water nodes. This primarily increased demand for GEOS’s Mariner technology products. Among the key projects, rental terms for a contract struck in June will start shortly. The other key growth opportunity emanates from the Smart City expansion, which led to increased AMI water meter connectors and related products and data services. So, the stock strongly outperformed VanEck Vectors Oil Services ETF ( OIH ) in the past year.

However, expect gaps in utilization in some OBX rental contracts as the Mariner products sometimes replace them. Plus, the demand for onshore energy and wireless products can remain steady in the short term. The company’s cash flows improved substantially over the past year. Given the stock’s undervaluation relative to the past, I think investors can consider a “Buy”.

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