Recent Buy

During last month, I bought shares in TGS-NOPEC Geophysical Company (TGS). I recently published an analysis about the company on my Swedish blog and couldn't resist initiating a position, when the price was around 150 NOK and the Norwegian krone was cheaper than the Swedish one.

For those of you that are not familiar with the stock, TGS is a Norwegian company operating in the oil and gas industry. The company is a market leader when it comes to providing seismic data (maps of the seafloor and land mass) that oil and gas companies use to determine where to drill. 

The main reason for the low valuation is that the company's earnings have and will be affected by low oil prices. I don't think the company will suffer to the same extent as other companies in the sector, since the cost of drilling by far exceeds what TGS customers pay for the company's mapping services. A deepwater well costs millions of dollars to drill, therefore oil and gas companies tend to want as accurate geological data as they can get before they make the decision to drill.

TGS business model, where the customer together with the company finance the costs connected the collecting of data, keeps TGS operating cost down and gives the company room to invest large sums in developing its core business - managing and providing geological data. The business model is also one of the cheapest from the customers point of view, and therefore better suited in a scenario where oil companies need to reduce their costs. 

Here Is a Number Of More Reasons Why I Like The Company

• The balance sheet is rock solid with no interest baring debt. 
• EPS has grown by over 600% in total over the last teen years.
• Revenue has grown over 400% in total over the last teen years
• The company has had a profit margin of about 30%.
• TGS is a market leader in it's segment with ROE of 25% on average since 2004.
• Dividends have in turn grown about 30% per year since 2009.
• TGS valuation is attractive with a P/E-ratio of below 8 and a dividend yield of about 5.3%.

I think in summary that TGS is well equipped to handle a much lower oil price by virtue of the companies margins, business model, comprehensive map library and strong balance sheet.

Valuation
The price I paid is below my Price Cap of 155 NOK. My Price Cap is based on the following assumptions:

• I estimate that TGS will have an average dividend growth rate equivalent to about 3% going forward.
• I deem sustainable EPS to be roughly 17 NOK and sustainable P/E-Ratio to be 12.

I choose to have a greater margin of safety in my assumptions than normally, since I do not know the industry well enough and can not estimate the impact of falling oil prices will have on earnings - but also since the dividend history is so short.

After the purchase our passive income is approximately 2 550 dollars on a annual basis. You can find my latest portfolio allocation in the main menu.