Small-Cap Turnarounds in Energy

10/24/2014 7:00 am EST


George Putnam

Editor, The Turnaround Letter

As contrarians, we tend to focus on the underperformers in any universe, because most mainstream investors like to chase the outperformers, explains George Putnam. Here, the editor of The Turnaround Letter looks at two small-cap energy ideas.

Small-cap stocks have lagged quite considerably; they look especially attractive now for investors who take a long-term perspective. Historically, small-cap stocks have outperformed their large-cap brethren over the long haul. 

ION Geophysical (IO) uses advanced seismic technologies to build a library of data that oil & gas exploration companies use to enhance drilling success. ION has a history of technological innovation such as multicomponent and cableless digital sensors.

Operating results are reflecting a slowdown in drilling but management is expanding the company’s reach into potentially profitable areas such as ocean-bottom exploration.  There has been some insider buying in 2014 continuing into last month.

With a fair amount of debt on the balance sheet, there is definitely risk in ION—but it also has a lot of upside potential—the characteristics of a long-term option that we discuss in the next article.

McDermott International (MDR) has for 91 years provided engineering and construction activities that currently encompass offshore oil & gas, government operations, and power generating systems.

Operational missteps and problems with deepwater projects have hurt results in recent years. But a new CEO, as of last December, appears to be making progress in working down the legacy issues while building a more profitable backlog.

In addition, the company has recapitalized its balance sheet to provide more financial flexibility.  Recent concerns about the energy sector have pushed the stock down further so that it now presents a very interesting long-term opportunity.

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