What a mess the energy service sector is today. Oil and gas prices are fairly healthy, but investors looking at leading names like Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) aren't going to see a lot of market enthusiasm. That's likewise true among more specialized players like Core Laboratories (NYSE:CLB), Dawson Geophysical (Nasdaq:DWSN) or ION Geophysical (NYSE:IO). All that being said, tiny Mitcham Industries (Nasdaq:MIND) produced rather remarkable third quarter results and could continue to benefit from a rising tide of overseas exploration activity.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Thriving In Obscurity
Mitcham is barely covered, so any discussion of outperforming earnings estimates has to be considered in that context. Still, the company posted 40% revenue growth in the third quarter, with revenue from equipment leasing more than doubling. For the quarter, the company garnered about 71% of its revenue from outside the U.S.

Profitability was even more impressive as the company saw real operating leverage. Gross margin leaped from 30% last year to 51% this quarter, and operating income was up nearly 400%. Even EBITDA was exceptionally strong, as the company saw 144% growth here.

Cash flow has also been pretty strong. Year-to-date operating cash flow is up 40% from last year, though the free cash flow picture is much worse as the company has spent dramatically more on seismic equipment for its leasing business. (For related reading, see Free Cash Flow: Free, But Not Always Easy.)

A Sound Long-Term Business
Seismic analysis is critical in oil and gas exploration, and companies like CGG-Veritas, ION Geophysical and Dawson help the E&P sector by providing equipment and specialized services to identify and characterize potential reserves of oil and gas. Said differently, it's one of the earliest steps in the process by which a company like Exxon Mobil (NYSE:XOM) would ultimately drill wells and begin producing oil or gas.

Mitcham occupies a somewhat unusual spot in this industry, though. Mitcham does not run the equipment, but, rather, is the largest independent lessor of land and marine seismic equipment. Mitcham buys equipment from the likes of CCG-Veritas, ION and OYO Geospace (Nasdaq:OYOG) and then leases out that equipment - often to small independent seismic contractors.

It's a somewhat precarious position, as the company's suppliers are also potential competitors. On the other hand, Mitcham seems content to stay focused on small overseas customers - a market segment that these larger rivals don't necessarily want to entertain.

A Healthy Food chain
Ultimately Mitcham is part of the same energy services food chain as its larger suppliers, other service providers like Dawson or Core Labs, and those large energy service companies like Halliburton, Schlumberger and Baker Hughes (NYSE:BHI) that have their own seismic operations as well. When exploration budgets are flush, times are good. When oil and gas prices take a tumble and E&P companies cut back on exploration, things get tough.

There's a lot to like about Mitcham's model. Leasing can be a lucrative business as lessors are often able to charge a convenience premium for the fact that its customers generally lack the desire or capacity to own their own equipment. At the same time, depreciation expense can help shield earnings for a number of years and failure to pay is not really a problem so long as the company can reliably reclaim its equipment.

Don't forget, too, that overseas energy exploration is still very much a growth opportunity. Although natural resources are not evenly distributed across the world, the number of active rigs outside of North America and the Mideast suggests substantial future exploration growth potential. While the growth plans of companies like Halliburton and Weatherford (NYSE:WFT), as well as Mitcham's own suppliers, may some day threaten the small contractors that Mitcham targets, that day is likely far in the future.

The Bottom Line
Mitcham is not cheap by the standards of the energy services space, and the stock has had quite a run already this year. At the same time, the company is clearly posting strong financial growth, and that growth has to be worth some premium - particularly as most large service companies have been guiding the Street to expect even more overseas growth in the coming years. (For related reading, see Fueling Futures In The Energy Market.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center