Undervalued Oil Exploration Services Survivor Looks Like A Solid Bet
(Thomson Reuters ONE via COMTEX) --
By A.J. Deniken,
Equity Brief Contributor
In February of 2012, ERF Wireless, Inc. (OTCBB: ERFB) began marketing its wireless and broadband services for oil exploration and drilling sites for the first time in three years.
Three years prior, ERFB entered into an exclusive, 3-year resale agreement with Schlumberger Limited (NYSE: SLB) for Schlumberger to sell ERFB's products and services to oil exploration and production companies. The result of that contract was that no new sales occurred for three years. How could this be
ERFB's saving grace was management had carved out their existing customer base, which included Apache Corp. (NYSE: APA). This carve-out, along with some timely cash infusions by the CEO and his family, allowed the Company to survive this period. Since February the company has been increasing their marketing efforts and their sales, yet the stock price has come down from a year high of $3.03/share to a recent low of $0.52/share.
ERF Wireless owns and operates Wireless Internet Service Providers (WISP's) in targeted rural areas covering 450,000 square miles across Texas, Oklahoma, Arkansas, Colorado, Kansas, North Dakota, Louisiana, New Mexico and the Canadian Province of Alberta, Canada. ERFB sells it broadband wireless services to residential and commercial customers in their service areas, and then overlay that traditional customer base with customers in specialized vertical markets such as Oil and Gas, Healthcare, Regional Banks and Education.
The market with the fastest growth potential and ERFB's primary focus is the Oil and Gas market, as drilling on private lands in the U.S. is expected to continue growing for many years. The broadband needs for oil exploration and production companies are significant, as the software utilized needs large amounts of high-speed bandwidth to operate correctly. This industry was using satellite based internet broadband, but the lag time that exists can cause disruptions in the software and cause issues for both the exploration and drilling programs. ERFB's terrestrial wireless broadband Internet's fast speeds eliminate this lag and allow proper communication between the site and the servers to run the software efficiently. ERFB is now seeing growing, strong demand for their services from the oil and gas markets.
ERF Wireless's service for the oil and gas market consists of a fleet of over 150 erectable Mobile Broadband Towers (MBT's) that can be delivered directly to the drilling site. ERFB's technicians then establish wireless connections with fixed towers that may be up to 25 miles away from the MBT's site. The MBT's can be up and running in 4 hours and remain on site from seismic exploration through drilling, fracking and well completion. When the drilling rigs move to a new site, ERFB's technicians move the MBT's to the new site and establish connectivity anew.
ERFB's management does not publically discuss their current customers, as the customer base does not want their competition to have details on their drilling plans. We do know based on announcements from several years ago that ERFB had Apache Corp. as a customer and we have not found any announcements or change in revenues that would suggest a change in status for Apache Corp. The other hint we found that Apache is still a customer of ERFB is in the September 19, 2012 press release regarding a new Master Services Agreement (MSA) with a new Fortune 200 customer for the Terrestrial Wireless Services stated the contract was with "an additional Fortune 200 Oil & Gas Company."
To us, this not only indicates that Apache is still a customer, but that management has brought in still another large customer that they expect will continue to add rigs for several quarters. According to ERFB's 3rd Quarter filing the new customer is drilling in the Wattenberg Field of the Niobrara Basin north of Denver. According to a Denver based industry expert there are two companies matching this Fortune 200 description operating in the Wattenberg Field: Noble Energy, Inc. (NYSE: NBL) and Anadarko Petroleum Corporation (NYSE: APC). In either case, this hints to us that ERFB's story of survival is turning into reality the promise that early investors saw in the firm.
ERFB is Growing Revenues
In the 3rd Quarter 2012 ERFB increased their Revenues 51% year over year to $2,008,000 and their Gross Profits by 228% to $977,000. The CEO, Dr. H. Dean Cubley stated the revenue growth was "driven by the expansion of the drilling activities of our major oil and gas customers." Furthermore, management is preparing the company for more growth having, "recently opened warehouse and operating facilities and is in the process of designing and building a new terrestrial broadband network in the Bakken Shale area of North Dakota. The Company also expanded its existing networks in Texas, New Mexico and Oklahoma." With this type of preparation and the additional large customer, ERFB is poised for further strong growth as the Company enters 2013.
Potential Additional Value
As for the agreement with Schlumberger, the exclusive sales contract was initiated in January of 2009 and expired in January of 2012. On a 2009 call with shareholders the CEO of ERFB stated the contract was worth $120 million in guaranteed revenues over the life of the contract, but the actual result was no new sales. There are not many details available about what happened here, but going through the Q's and K's there is some information on the fact that ERF Wireless has initiated the binding arbitration process seeking remedies for Schlumberger's non-performance in the exclusive contract. There is the real possibility that ERF Wireless could get a judgement in their favor in the form of cash to make up for years of lost sales and revenues. Investors should realize that anything can occur in this process, but there is real value in the possibility of a favorable ruling in ERFB's favor. If the company gets a ruling for $25 million, it could add as much as $1.50/share to the stock price. It is possible the Company could get nothing or considerably more than $25 million. One thing is for sure, with the stock price around $0.80/share, the potential of a positive outcome is not priced into the stock.
Undervalued on Fundamentals
On a fundamental basis ERF Wireless looks to be undervalued. The company is on tract to make $6-7 million for 2012, and grew at 51% year over year last quarter. The quarter also saw the Gross Margin expand quarter over quarter from 44% to 51%, and should see further expansion as revenues continue to grow. The management has brought in new large customers and is expanding the Company's facilities and networks to accommodate rapid growth in the future. Coming off a complete stop of marketing efforts for three years the Company has established a new, effective marketing and sales plan, investors should look for continued growth acceleration into next year. The stock has a low outstanding share count and float, which may facilitate a rapid share increase when investors begin to realize the strong fundamentals and low valuation of this company at these price levels. Investors looking to play the growth of the U.S. oil patch in other ways than the exploration and production companies can find real value in ERF Wireless.
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Source: Equity Brief via Thomson Reuters ONE
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