Seitel Sector: Energy Industry: Oil and Gas Drilling

Equipment/Services Peer Group: Oil and Gas (Seismic) Ticker Symbol: SEI SIC Code: 1382

Seitel (SEI): Business Description Seismic Data (84% of revenues)

Provides seismic data and analysis services used in oil and natural gas exploration.

Owns the largest seismic data library in USA.

Markets this data to more than 400 oil and gas companies under license agreements.

Extensive data for North America, and also for the North Sea.

Oil and Gas Exploration (16% of revenues)

Basic Stock Statistics Exchange: NYSE Beta: 0.85 52-Week Range: $8.88 to 23.03 Recent price:

$8.88 Shares

outstanding: 25M Market Cap:

$294M

PE/G: 0.41 Valuation ratios:

P/E(ttm): 10.2 P/S(ttm): 1.49 P/B(mrq): 0.96 P/CF(ttm): 2.61

2000 Rev: $163.8M 2000 NI: $23.9M 2000 Assets: $578M Institutions own: 74% Officers and Directors

own: 13.4%

Recent Significant Developments

June 25, 2001 Bought back 100,000 shares

March 28, 2001 Purchases 1300 square miles of US onshore 3D

seismic data from Grant Geophysical Jan. 17, 2001

Purchases all rights to Lacey Digital Transcription software, the pre-eminent product for seismic data capture.

Sept. 2000 Announces plan to allow client access of seismic

data via the Internet.

Recent Significant Developments

August 14, 2001 Q2 2001 Revenue Up 8%, First Six Months

Revenue Up 35%, Over 2000 Results Q2 earnings were up 12% over same quarter

a year earlier. However, earnings were only 0.22/sh versus

expected 0.30/sh. Due to much lower earnings from Canadian

subsidiary. Head of that subsidiary was terminated and replaced.

Industry Outlook-Oil and Gas (Drilling and Equipment)

Got off to slow start after tremendous performance in 2000.

Has dropped sharply in 2001 due to worries about slowed economies and declining natural gas prices.

Domestic drillers should benefit due to Bush administration.

How affected by current crisis? National security concerns: domestic drilling will

get a boost? Worldwide demand for oil will plummet, so prices

will collapse? Energy demands by military at war will be huge?

Industry Outlook-Oil and Gas (Drilling and Equipment)

Energy sector: boom from 1972-81, bust from 1982-95, present boom started in 1996 with interruption by Asian economic crisis in 1997-98.

Outdated energy infrastructure that needs to be updated and expanded.

Seitel (SEI): Where Will Growth Come From?

More oil companies are starting to realize the cost savings of outsourcing their seismic work. Seitel only does seismic work and can do it better

and cheaper. Previously, big oil companies only recovered

the most economical 40% of oil from each discovery. The remaining oil is recovered by smaller drillers

when oil prices are high enough. Now, new accurate 3D seismic images have allowed

the recovery of more oil at lower cost. Accurate seismic images allow more precise and

less environmentally destructive drilling.

Seitel (SEI): Where Will Growth Come From?

DDD Energy: wholly owned exploration and production subsidiary. Cost and revenue sharing relationships with more

than 100 oil and gas companies. Seitel supplies the seismic data and other location

assistance and shares (average 31%) in revenues from any oil and gas finds.

Seitel has already provided these services to locate wells that will be drilled during the next 3 years.

From March 1993 to 2000, participated in drilling of 325 wells, 224 of which were commercially productive, a 69% success rate.

SEI vs Oil Field Equipment and Services vs S&P(3 years)

                                                                               

SEI vs Oil Field Equipment and Services vs S&P (1 year)

                                                                               

Bold black numbers are from Value Line,Red underlined numbers are estimates from Zacks, Blue italic numbers are my calculations (Graphs follow).

Seitel 1995 1996 1997 1998 1999 2000 2001E 2002E 5 Yr EstEPS ($/sh) 0.5 0.79 0.98 1.05 0.39 0.99 1.15 1.6Growth Rate (%) 58% 24% 7% -63% 154% 16% 39% 25%

Rev/sh ($/sh) 3.94 5.12 5.66 6.09 5.30 6.64 8.75 10.10Growth Rate (%) 30% 11% 8% -13% 25% 32% 15% 14%

CF/sh ($/sh) 1.96 2.68 3.16 3.96 2.84 3.82 5 5.75Growth Rate (%) 27% 15% 20% -39% 26% 24% 13% 13%

Growth Rates (%) per Share: EPS, Revenue, CF (My calculations based on Value Line numbers.)

2539

716

154

-63

24

58

-100

-50

0

50

100

150

200

Annual

Per

Shar

e G

row

th (

%)

EPSRev/ shCF/ sh

Competitors Petroleum Geo Service (PGO)

Acquiring, processing, and marketing seismic data.

Providing floating production, storage and overloading (FPSO) vessels.

Providing other services that help oil and gas companies monitor producing oil and gas reservoirs to increase ultimate recoveries.

Veritas DGC (VTS) Provider of integrated seismic and geophysical

technologies to the petroleum industry worldwide.

Seitel (SEI) and 2 Largest Competitors

Market TTM TTM TTM TTM Net LTD/ 52-Wk 52-Wk RecentName Symb. Cap. Rev. EPS PE ROE Margin Cap. High Low Price

Petro GeoSvc PGO $1110M $924M -0.91 NM -6.1% -10.1% 61% $17.4 $5.4 $5.5Veritas DGC VTS $518M $472M 0.72 16.9 4.8% 4.7% 26% $39.8 $10.6 $11.9Seitel SEI $294M $188M 0.97 10.2 8.9% 13.0% 40% $23.0 $9.3 $9.9

SEI vs Two Largest Competitors vs S&P500 (3 years)

SEI vs Two Largest Competitors vs S&P500 (1 year)

Revenue vs Competitors (Quicken)

 92  93  94  95  96  97  98  99  00

 SEI 31.2  46.9  73.7  74.4  106  127.6  144.9  128.7  163.8 

 PGO ---  160  258.5  317.7  451  515.5  761.8  788.2  906.2 

 VTS 111.4  117.7  118  132.6  160.8  362.7  529  388.9  353.1 

Revenue vs competitors ($ in millions):

Net Income vs Competitors (Quicken)

Net Income vs competitors ($ in millions): 92  93  94  95  96  97  98  99  00

 SEI 4.3  5.7  9.6  10.1  16.2  31.6  24.4  9.4  20.4 

 PGO ---  17.1  42.7  36.8  50  72.4  111.6  3.7  -187.6 

 VTS 4.6  -1.3  -14.4  2.8  0.4  25.1  67  20.3  6.7 

ROE (%) vs Competitors

 92  93  94  95  96  97  98  99  00

 SEI 12.1  13.7  9.5  7.2  9.8  15.2  10.3  3.9  7.4 

 PGO ---  11.4  15.2  11.4  10  9  8  0.2  -13.4 

 VTS 10.3  -2  -24.6  4.8  0.6  11.3  23  6.4  1.7 

ROE Comparison with competitors:

Net Profit Margins (%) vs Competitors (MSN)

16.813

24.8

15.313.612.213.8

7.3

12.5

-30

-20

-10

0

10

20

30

92 93 94 95 96 97 98 99 '00

Net

Pro

fit

Mar

gin

s (%

)

SEIPGOVTS

Net Margin vs “Oil & Gas Equipment/Services” Industry (Quicken)

Ratio Comparisons (Yahoo)Industry: Oil Well Services and Equipment

1.36 0.87

2.61

0

2

4

6

8

10

12

14

P/ S (ttm) P/ B (mrq) P/ CF(ttm)

$/s

har

e SEIPGOVTSIndustry

PE Ratio Comparisons (Yahoo)Industry: Oil Well Services and Equipment. Sector: Energy.

ttm

5Yr Low

5Yr High

10.2

36.69

16.87

0

10

20

30

40

50

60

70

SEI Industry Sector

PE

High: 5yrPE (ttm)Low: 5yr

History of Crude Oil Prices

SEI: Historic P/E (Green)

 92  93  94  95  96  97  98  99  00

 SEI 14.8  20.2  19.5  42.1  27  12  11.8  17.3  21.7 

 PGO ---  17  10.7  18.1  21.9  29.7  11.9  445.3  --- 

 VTS 18  ---  ---  22.8  164.3  19.3  11.6  20.3  82.7 

PE Comparison with competitors:

2001 Intrinsic Value: P/E Valuation Method

Justified P/E*EPS1. (FY ends in December) Present PE (10.2) is at low end of 5 year range. Half the PE of seismic peers. For EPS1 estimates:

High: 1.16, Low: 1.14, Average: 1.15

Best Case (2001) = 10*1.16 = $11.6 Worst Case (2001) = 5*1.14 = $5.70 Most Likely (2001) = 7*1.15 = $8.05 Current Price = $8.88/sh

2002 Intrinsic Value:P/E Valuation Method

Justified P/E*EPS2. (FY ends in December) Present PE: 10.2 EPS2 estimates: High:1.76, Average: 1.60, Low: 1.35.

Best Case (2002) = 12*1.60 = $19.2 Worst Case (2002) = 6* 1.20 = $7.2 Most Likely (2002) = 8*1.35 = $10.8 Current Price = $8.88/sh

Risks Steep decline in energy prices would be a big

problem. Risk that world energy prices could collapse. Over last 6 months, 7 insiders have sold

3.3% of insider shares. No insider buys.

Discussion Unknown: how would US War on terrorists

affect oil and gas industry? Price up or down? All energy stocks hurt due to huge decrease in

demand? War causes higher energy prices? National security issue: domestic energy

emphasis? Bush administration support for domestic energy?

Will OPEC cut back on supply to keep prices up if world demand plunges?

Oil: A National Security Issue?

Will drilling in US increase because energy is considered to be a national security issue.

Oil embargos has been used as a weapon against USA in the past. Imported oil accounted for 35% of USA needs in 1973 and more than 50% now. And this was after the Arab oil embargo in 1973 that triggered a USA recession.

The main reason we did not try harder to take out terrorists in the past is due to fear of bad relations with our Middle East oil suppliers.

Should we continue to rely on the fragile long line of oil tankers that come from an unstable Middle East (20% of our oil imports come from the Persian Gulf).

The Bush administration’s energy plan focuses on increasing the share of our energy needs that come from the US.

New military build up will require increased amounts of oil. Previously, wars in Middle East caused oil prices to increase.

Oil Futures

Natural Gas Futures

Recommendation Wait a while and see what happens with energy

prices. I perceive more downside risk at this time. Might be

worth the risk if SEI goes below $8. Top oil analyst: when the OSX hits the 50s (now 59, down

from record high 140), the sector will be at rock-bottom and be an excellent time to buy, especially given that stocks will be out of favor with the street. These will be good 6 to 12 month bets.

Aside: silver lining for collapse in energy prices. Hurts the energy industry, helps other industries?. Would put extra money into consumer pocketbooks.