This Cheap Oil Play Could Be A Big Winner

A couple of days ago we made the case for energy stocks, and noted that in a down market oil services companies might be a great place to be, especially considering the valuations afforded the stocks in the group. In keeping with that theme, we have unearthed TGC Industries Inc. (NYSE – TGE - $4.74), another play that might be even more attractive than Enservco (NASDAQ – ENSV), the stock profiled earlier this week. 

In my view, TGC Industries offers an outstanding opportunity to have exposure to the oil and gas industry by buying a small-cap stock that has a lower valuation and bigger upside than its larger brethren.  The company is a key service provider and supplier to exploration and discovery firms offering geophysical services to companies in the United States and Canada.  TGC conducts three-dimensional surveys; sells gravity data; and provides seismic data acquisition services primarily to onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas, as well as to potash mining industry. 

Although the stock has been nearly cut in half over the last year, due in large part to a one-third reduction in EPS estimates for the year, the current valuation remains compelling. The Street projects EPS of $0.29 for this year compared with a $0.48 loss per share in 2013. Revenue is estimated to arrive at the $163 million mark, a 21% rise from last year. Moreover, next year’s EPS estimate is forecast to be substantially higher than those in 2014. Analysts project EPS of $0.53, which is nearly double the 2014 estimate.

The continued solid growth of the natural gas exploration industry combined with the steady environment for oil creates a strong reason to invest or trade in the sector.  TCG Industries is scheduled to announce  2Q14 financial results on July 28.   Look for good news to serve as a catalyst for a solid rest of the year. 

At current levels, the stock trades at a reasonable 16x the 2014 EPS estimate, but under 10x next year’s forecast. As we approach the end of the year, stocks’ P/E multiples tend to be measured based upon the following year’s prospects. With that in mind, I expect TGC Industries to trade well north of the $6 mark later this year, and I would not be surprised to see it trade near $8 a year from now. 

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