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Thursday, February 28, 2008

Allis-Chalmers Energy starting to look good here

In tinkering with my Alert HQ software, I came across Allis-Chalmers Energy (ALY). The stock has been on a straight path downward since last July but is now starting to rally. It exhibits the characteristics that make the software identify the company as a BUY.

Chart of ALY
Background --

The following is from the company's web site:

"Allis-Chalmers Energy Inc., is a Houston based multi-faceted oilfield services company. We provide services and equipment to oil and natural gas exploration and production companies, domestically in Texas, Louisiana, New Mexico, Colorado, Oklahoma, Mississippi, Utah, Wyoming, Arkansas, Alabama, West Virginia, offshore in the Gulf of Mexico, and internationally primarily in Argentina and Mexico.

The Company operates in six sectors of the oil and natural gas service industry: rental tools; international drilling; directional drilling services; casing and tubing services; compressed air drilling services; international drilling; and production services. Providing high-quality, technologically advanced services and equipment is central to our operating strategy. As a result of our commitment to customer service, we have developed strong relationships with many of the leading oil and natural gas companies, including both independents and majors."

The company has about a $470 million market cap and a PEG ratio of only .61 (well under 1, suggesting the stock is not over-priced). The company is solidly profitable with a PE of 7.85 and earnings per share last year of $1.71 on revenue of $538 million.

Recent Developments --

Merger with Bronco Drilling

On January 24 Allis-Chalmers announced that they entered into a definitive merger agreement providing for the acquisition of Bronco Drilling Company, currently trading on the NASDAQ under the symbol BRNC.

The merger will result in a combined company with an implied enterprise value of approximately $1.4 billion. The merger agreement provides for a subsidiary of Allis-Chalmers to merge with and into Bronco Drilling, with Bronco Drilling surviving as a wholly-owned subsidiary of Allis-Chalmers.

One of the prime benefits of this merger from the point of view of ALY is that it expands their geographic footprint in domestic markets and internationally by increasing its presence in North Africa (specifically Libya) and in more Latin American markets. It is expected to facilitate relocation of newly acquired and certain underutilized drilling and workover rigs of Bronco Drilling to Latin America and North African markets and start deriving revenue from these assets.

The combination further serves to broaden the service and equipment capabilities of both companies resulting in a fully-integrated oilfield service company with diversified business lines and substantial international exposure.

Financially, management contends that the combined balance sheet will remain sound, allowing for future organic growth and strategic acquisitions. The merger is expected to be strongly accretive to earnings per share of Allis-Chalmers.

Brazilian Investment

Allis-Chalmers also announced that it has entered into an agreement with BCH Ltd., (BCH), to invest $40 million in BCH in the form of a 15% Convertible Subordinated Secured debenture. The debenture is convertible, at any time, at the option of Allis-Chalmers into 49% of the common equity of BCH. At the end of two years, Allis-Chalmers has the option to acquire the remaining 51% of BCH from its parent, BrazAlta Resources Corp., ("BrazAlta"). BrazAlta is a publicly traded Canadian-based international oil and gas corporation with operations in Brazil, Northern Ireland, and Canada (TSX.V:BRX).

BCH has contracts with Petroleo Brasileiro S.A., ("Petrobras") and its partners and with BrazAlta. Allis-Chalmers expects that these contracts have the potential to generate revenues of approximately $125 million to BCH over the next three years. This agreement has the potential to expand ALY's reach further in Latin America by getting the company into the Brazilian market.

Preliminary 2007 Earnings Results

Allis-Chalmers announced that for the full year 2007 it expects to report revenues of $574 million, operating income of $125 million and net income of approximately $50.3 million, or $1.45 per fully diluted share. Considering 2006 revenue was $307.3 million, this is a huge increase in revenue. Likewise, 2006 operating income and earnings per share in 2006 were $66.7 million and $35.6 million, respectively. On an annual basis, the company is looking good.

For the fourth quarter 2007 Allis-Chalmers expects to report revenues of approximately $147 million, operating income of $21 million and net income of approximately $5.6 million or $0.16 per fully diluted share.

There is a less pretty picture here. In the 2006 December quarter, ALY had revenue of $114 million, operating income of $23.1 million and net income of approximately $10.4 million. Looking at the quarterly numbers sequentially, in the previous quarter ALY had revenue of $147.9 million, operating income of $31.1 million and net income of approximately $13 million. This helps explain why the stock has been in a downtrend since last July.

The outlook --

The company recently provided guidance and it looks like it is starting to get back on track.

2008 Estimate for the first quarter:

Revenues: $150M to $155M
EBITDA: $39M to $40M
Adjusted EBITDA: $41M to $43M
Earnings per share: $0.21 to $0.23

2008 Estimate for the full year:

Revenues: $655M to $670M
EBITDA: $188M to $193M
Adjusted EBITDA: $195M to $201M
Earnings per share: $1.35 to $1.45

The company's moves to increase its geographical reach internationally are expected to bear fruit in the next six to nine months. There is an expectation that business in Argentina will grow based on a major new find and that Mexico and the U.S. will remain at the current levels with the Mexican outlook especially strong.

With the company's stock price beaten down to the low teens, this could be a low-risk time to begin to build a position. Oil may or may not spike to $120 a barrel but it is clear it is not going to plunge in price any time soon. A company like Allis-Chalmers can expect business to remain robust. With the recent rally in the shares, there are apparently other investors who agree.

Disclosure: author is long ALY

1 comment:

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