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Ben Coyne

BOLT AT A GLANCE

P/E ► 9.86 LOW EV/EBITDA ► 8.73 AVG ROA ► 14% HIGH ROE ► 15% AVG Debt to Equity ► 0.0509 VERY LOW Current Ratio ► 15.9 VERY HIGH

 

 

 

 

 

 

Bolt Technology is an oilfield services equipment producer that makes seismic exploration air guns which are used to model oil and natural gas deposits beneath the ocean's floor. This technology is used to search for oil while minimizing the amount of costly exploration wells that are drilled.The company has 3 divisions which all either make marine air guns or the parts and accessories for the guns. These products are then sold in large batches to exploration companies who tow the guns in large arrays behind ships equipped with the software to interpret the results.

• The company's sales are tied to oil prices since high prices induce increased exploration and the expansion of existing exploration fleets. Conversely, low oil prices will decrease demand for Bolt's products. During early 2008 oil prices reached record highs, but as of late October prices have retreated to 16 month lows. ^[1]
• One industry expert expects rapid growth through the end of 2008 continuing for at least a year. He also indicates that his oilfield services firm plans to expand its fleet by 30% over the next 18 months - a potential source of new demand for Bolt. ^[2] However, this optimistic estimate was made when oil prices were still over $100 per barrel, and is not likely to happen as long as oil prices remain below the $100 mark.
• The ban on drilling off the coast of the US was overturned by Congress in September of 2008. ^[3] This reversal opens up tracts of territory 50 to 100 miles off both coasts to bidding and eventual gas and oil exploration (if allowed by the coastal states). The decision is expected to open up 86 billion barrels of oil to recovery, along with an estimated 800 billion barrels of shale oil. ^[4] This type of oceanographic exploration requires the type of equipment that Bolt and its competitor's manufacture.

Business

^[5]

The process of searching for submerged oil is called marine seismic exploration. This process gathers data about the ocean's bottom by sending acoustic waves at the ocean floor and then using a computer to interpret the waves as they bounce back to the ship. This information can be used to model the earth below the ocean, and the resulting analysis is an important part of the decision to drill oil wells. Overall, seismic exploration has three goals:

• Identifying new areas where the ocean floor is good for drilling for oil and gas.
• Determining the size and structure of oil and gas fields that have already been discovered.
• Optimizing development and production of oil and gas reserves.

Since drilling an exploration well is costly, this decision is critical. Each of Bolt Technologies operating units sell different parts of this system.

Bolt

Bolt sells marine seismic air guns, the primary piece of equipment in seismic exploration. The air gun creates the acoustic waves that probe the sea bed. A seismic exploration ship may tow as many as 96 of these guns to maximize the accuracy of the information.^[6] This technology has created increased drilling success rates for the oil exploration industry which has increased demand for seismic data. ^[6]

Long Life Guns

^[7] Bolt's 1900 LLX Long Life air gun

Bolt's long life air gun is designed to operate for as long as possible without requiring repairs. These guns are used to create large 3D surveys that require large amounts of data. ^[6]. The guns are typically mounted in racks of two or three (also sold by Bolt) and towed behind the survey ship with other similar configurations, and the guns sell for about $13,000. ^{[6] [7]}

Annular Port Guns

^[8] Bolt's Annular Port Gun

Annular Port Guns (APGs) are a newer and more sophisticated product designed to maximize towing and operating efficiency while improving performance. The guns are easier to mount and deploy which makes the arrays easier to retrieve and move. ^[8] APGs also require less mounting equipment and parts, and they usually sell for $31,000. ^[6]

AG Geophysical

AG manufactures and sells sophisticated cables, connectors, and sound reception equipment for use with seismic air guns. The receptors, called hydrophones, absorb the acoustic signals sent by the air guns and transmit them through the cables back to the ship for analysis. All of this equipment can be used with Bolt's products or with seismic equipment from other manufacturers.

Real Time Services

RTS, which was aquired by Bolt in July 2007, manufactures the controllers and synchronizers for marine air guns. This equipment allows an exploration ship to tow as many 96 air guns behind the ship and to coordinate the activity of the array of guns. This equipment is also general and can also be used with Bolt air guns and guns from other manufacturers.

Business and Financial Metrics

^[6]

Bolt's sales for the year ending June 30, 2008 were $26.3 million, a 31% increase over 2007. ^[6]This growth was helped by the June 1rst acquisition of Real Time Systems, a manufacturer of controllers and synchronizers for marine air guns. The acquisition contributed $5,465,000 in sales, so most of the growth is due to increased sales from Bolt's primary business. ^[6] Sales margins remained the same for 2008

^[6]

^[6]

A Concentrated Customer Base Accounts for a Large Portion of Sales

Nearly 50% of Bolt's 2007 and 2008 sales were to 4 companies, however two of the companies were new in fiscal 2008. ^[6] Since a large portion of sales come from a few customers, loosing one customer can leave a company vulnerable in a highly competitive business. Bolt did not loose the two large 2007 customers, but their orders significantly declined in 2008.

Trends and Forces

Oil Prices Drive Demand for Exploration Equipment

Since the beginning of 2008, Oil Prices have reached record highs of $150 per barrel and have since returned to about $70 as of late October 2008. ^[9] The rapid appreciation in oil prices is partially due to steady demand growth from emerging markets that is outpacing supply growth, but other factors such as excessive speculation have also played a role. ^[10] This highly volatile commodity has a large impact on Bolt's future sales, and as oil prices retreat near term oil exploration and extraction investments will be reconsidered. Some experts had estimated that the number of exploration vessels would be increasing rapidly through the second half of 2008 and all of 2009; one company cited a planned 30% increase over the next 18 months. (as of August 2008) ^[11] However, this forecast anticipated the continuation of record highs in oil prices and this estimate is now likely to be overly optimistic.

Ban On Offshore Drilling Lifted

The United State's Outer Continental shelf has long been a protected area shielded from exploration for environmental concerns. However, record oil price increases continuing through July 2008 and concerns about supply shortages have prompted Congress to vote down renewing this provision. The 27-year-old law that prevents drilling off the coast of the United States expired at the end of September 2008. ^[3] This opens up underwater areas for bidding and eventual drilling estimated to contain 86 billion barrels of oil and 800 billion barrels of oil equivalent in oil shale. ^[4] Exploration of these areas will create an increased need for seismic exploration vessels to assess the oil formations in these uncharted waters. This law could be repealed by the upcoming president and the tracts still need to be tested, but it's likely the areas will go up for competitive auction for development.

Capital Structure

One unusual financial advantage that Bolt has in the current credit crunch is a capital structure that relies entirely on equity financing. ^[6]. A company's capital structure is the way in which it finances, or pays for, the continued growth of the business.^[12] There are two main ways to do this, equity and debt financing. A company financed through equity, like Bolt, sells shares of the company (stock) to the public. A firm financed with debt, or loans, can have higher returns on its equity, since it is borrowing more money to expand. Continued tightening in credit standards since the credit crunch, however, have driven up the price of borrowing for some companies and completely blocked other firms from borrowing at all. Bolt is in a good situation during this crisis since it does not rely on debt at all, which is unusual. The lack of credit use will provide an advantage to Bolt as other firms might run out of money for operations or expansion.

One caveat to this is that potential sales could be reduced if buyers also have a hard time finding money to borrow, since sales are typically large in this industry and buyers must use debt to finance purchases. Furthermore, if Bolt needs more money and can't find creditors, it will have to issue more common stock which will dilute expected earnings for current shares outstanding and the lower the price.

Competition

Bolt has three major competitors; one is another specialty manufacturer (ION) and the other two are slightly larger companies with a range of operating units that include manufacturing survey equipment (Sercel) and exploration services (Schlumberger ). Bolt is smaller than both companies, but its innovative products and focused business makes it competitive.

• ION Geophysical Corporation (IO) is a manufacturer of marine seismic exploration equipment and accessories similar to Bolt. The company competes closely with Bolt in the market for cables and connectors. ^[6] ION also manufactures air guns that are similar to Bolt's, but their product lineup is not as sophisticated. ^[13]
• Sercel (part of Compagnie Generale de Geophysique-Veritas (CGV) ) is a French company that also has a number of business in the oilfield services industry. In addition to manufacturing survey equipment like Bolt, they also have a data processing business and an onshore seismic exploration business. According to the company's annual report, they are looking to expand their information processing business. ^[14]
• WesternGeco, a unit Schlumberger N.V. (SLB) is a larger company that provides a wider range of services, including seismic data, exploration analysis, and oil reservoir monitoring. ^[15] WesternGeco is a competitor in the sense that it is involved in the seismic imaging sector of the oilfield services industry, but it is more of a customer of Bolt's. In 2006 and 2007 WesternGeco sales accounted for 22% and 10% of sales (respectively). ^[6]

Inventory turnover is a metric used to determine how many times a company sells all inventory over the year. ^[17] Bolt sells its inventory 2.26 times a year, which is right between the numbers for their two competitors. High turnover of inventory indicates efficient production management and strong sales.

Bolt also has a much higher Operating Margin, so they have a higher portion of their revenue left over after all the costs that went into production have been subtracted out. High operating margin typically indicates premium pricing on a product, and this is the case with Bolt. The new Annular port gun that Bolt has developed offers significantly improved performance in both operating life and mantance scheduling over the competition. ^{[6] [16] [14]}

References

1. ↑ | WSJ "Crude Oil Drops to 16-Month Low" (10/22/2008)
2. ↑ | Wall Street Journal Interview Transcript with Neal Digmann.
3. ↑ ^{3.0 3.1} CBS News "Bill to End Offshore Drilling Passes" (9/27/2008)
4. ↑ ^{4.0 4.1} Environmental News Service "Congress Allows Offshore Oil Drilling Ban to Expire" (9/30/2008)
5. ↑ |University of Rhode Island
6. ↑ ^{6.00 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15} Bolt 10K 2008
7. ↑ ^{7.0 7.1} Bolt Website - LL Gun
8. ↑ ^{8.0 8.1} Bolt Website - AP Gun
9. ↑ | Live Charts Oil Prices
10. ↑ |Department of Commerce Witness Testimony
11. ↑ | Wall Street Journal Interview Transcript with Neal Digmann.
12. ↑ | Investopedia : Capital Structure
13. ↑ | ION's Website
14. ↑ ^{14.0 14.1 14.2} | Compagnie Générale de Géophysique-Veritas 6k (Exclusive Owner of Sercel)
15. ↑ | Schlumberger 10K (12/30/2007)
16. ↑ ^{16.0 16.1} IO Geophysical 10k
17. ↑ | Investopedia : Inventory Turnover