Evolution Begins At Boots & Coots (WEL)

By Jon Ogg | April 25, 2007 AAA

Boots & Coots International Well Control (AMEX: WEL), a Houston-based emergency-response operator for the energy sector, is a company that just transformed itself and has been given a round of growth capital.

Boots & Coots offers emergency response to crisis in the oil and gas sectors in multiple areas -- prevention, response, restoration and outsourced engineering capabilities in safety and restoration. By now, it is far from a one-hit-wonder.

The company exists in the shadow of renowned oil-field firefighter Red Adair and was one of the more active responders exstinguishing, capping and re-initiating many of the wells set on fire in Iraq and Kuwait in the Gulf War. The company already operates elsewhere on a global basis, and anyone who knows about refining and the just-in-time basis the world is running on for energy needs knows that accidents and outages occur regularly on almost every aspect in new and old infrastructure alike.

All of this has given the company a unique model that is less vulnerable than in the past. Boots & Coots performs services under contracts in Alaska and the rest of the United States, Canada, Algeria, Venezuela, Argentine, Kazakhstan, Libya and more.

What Has Changed?

It recently acquired Hydraulic Well Control, a unit of Oil States International, with more than 200 employees. This is its transformational deal. It is no longer only an emergency-response team like it was in the days of old.

The company sold 26 million shares of common stock at a price of $2.10 per share recently -- 13 million of these shares are being offered by Oil States Energy Services and 13 million are being sold by the company.

Boots & Coots had 59.5 million outstanding shares, and has 125 million shares of common stock authorized. So, the float is now larger and that much more liquid. "All or a portion" of its $26 million-share of the sale is tagged for the 2007 capital-budget and for general corporate purposes.

It has tapped Morgan Keegan and RBC Capital as the underwriters. Beyond the cash, this is good because the company will now likely get some additional brokerage and research coverage in five or six weeks. The company could have tried to get more underwriters, but this should at least give it a start.

After years, it seems the company has finally figured out that merely being a fire fighter and reacting to disasters is not a recipe for steady profits; in fact, it used to create major losses in many quarters. It has forecast a drop in sequential revenues and net income from its Q4 2006 (7 cents EPS and $33.7 million in revenues), but the exact numbers are not known. The general feeling is that the company will continue to post profits in the future, although the future is the only thing that can confirm that.

It also joined the Russell Microcap Index last year, which is at least one more independent group adding the company as a bogey. Over the last few months the company has been adding more executives and key individuals in certain areas to bolster its ranks. After contacting the company, it feels like Boots & Coots wants to change even more.

The upside here is that the company could be vulnerable to a predator, and it is in a niche that is underserved. It has bolstered its balance sheet, but it is still not strong enough to fight a friendly or even a hostile predator. There is sentiment that it would have already been acquired if someone was interested, so, don't assume this is automatically the next acquisition in the energy sector. Its market cap is a mere $162 million at current levels. The stock is about 25% off of recent highs because of dilution from this secondary offering. Even after the 25% drop, its shares are up more than 20% in the last five or six weeks. The business plan of the company is now stated as one of growth rather than "maintenance".

Potential Risks
This business is still fairly small and listed as a micro-cap stock. So, it will probably experience sporadic quarterly results that are less predictable than those in larger companies. It recently gave notice that a customer in Qatar ceased future orders for an operation, but said this would not impact future business in the area. Even though it has expanded and diversified, it will probably continue to see some ups and downs sequentially -- this might even be the case for a long period of time. However, the company says it is taking the proper steps to smooth out its business, allowing it to resemble a steadier company than in the past.

The Future
What makes this even more speculative is that the stock went ballistic and traded up over $4 -- and even went over $6 briefly -- back in 2003 when the United States invaded Iraq. The stock has never seen those levels since. It's now a different company that is trying to grow. It is up more than 100% from its lows just two- and three-years ago, but it may be hard to find small energy companies that are not in that category.

Since it expanded the company now has a broader degree of competitors, but it is still one of the "go-to" names for emergencies, while it continues to expand its prevention operations. Boots & Coots should continue improving its balance sheet compared to years past, which will allow it to compete against Global Industries (Nasdaq: GLBL) and Superior Energy Services (NYSE: SPN). Those companies have $2 billion market caps, and almost any firm out there could acquire this without any regulatory issues.

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