Geospace Technologies Corp. (GEOS): Capitulation

After several years of waiting, the towel has been thrown on Geospace Technologies Corp. (NASDAQ:GEOS). Capitulation comes after years of dogmatic conviction that the company lay on the precipice of a recovery in demand for its oil & gas products. Yet now cometh but another dismal quarter and no further progress, beyond mere “encouraging” signs and “productive” discussions, towards landing a permanent reservoir monitoring (“PRM”) contract. Meanwhile, Geospace continues to pile up quarterly losses and burn through its cash position at an alarming rate.

As the proverb says, “it is always darkest just before the Day dawneth.” Perhaps dawn is approaching, but will Geospace still be here when it arrives? Unfortunately, the company just might end up relegated to perpetual dark.

Therefore, Geospace is a Sell.

Quarterly Results

Geospace just reported Q3 FY’22 earnings and the results were brutal. Revenues in the quarter fell 10.4% y/y, coming in at $20.7m versus $23.1m in the prior-year quarter. The primary driver behind the fall was a reduction in demand for the company’s O&G wireless exploration products. Geospace also reported a 51¢/sh net loss in the quarter. The Q3 results mark the 31st consecutive quarter of losses for the company.

Elusive PRM Sales

The real draw for owning Geospace has been the possibility demand for the company’s PRM systems will eventually return. This is because revenues from a single PRM contract can generate $100m+ for the company. The last time Geospace completed a PRM sale was in 2013 and, with energy prices spiking post-pandemic, recent speculation of a sale is at full froth.

Sadly, speculation has only begotten more speculation. Management started teasing investors about potential PRM demand resurgence in FY’19:

We [] believe the climate of current discussions indicates that a tender for a PRM system is likely in the foreseeable future…

The likelihood of a PRM sale contract grew even more interesting in FY’20 when Geospace received an RFP for a PRM system:

Late in the fourth quarter of fiscal year 2020, we received a request from a major oil and gas producer to provide a proposal for the manufacture and installation of a large-scale seabed permanent reservoir monitoring or PRM system… In the event of a favored response, the potential customer is expected to award a contract in the second or third quarter of our 2021 fiscal year… Unrelated to this tender, we are also continuing our discussions with other major oil and gas producers for possible PRM systems.

Ultimately, the sale did not materialize. Fast-forward to FY’21, Geospace received another RFP from an oil major for a PRM system:

[W]e received a new request for proposal from a major oil company for a permanent reservoir monitoring or PRM system… [T]he presenting of this formal request in conjunction with the level of interest and quality discussions underway with other E&P companies, gives us great encouragement that the potential for future PRM contracts is high.

Yet again, Geospace failed to finalize the sale. Management, however, reiterated in its Q1 FY’22 conference call continued optimism of a PRM sale:

We mentioned in our last earnings release that we have received a request from a major oil company, for proposal of a permanent reservoir monitoring or PRM system. Yet, after a thorough evaluation, certain immutable terms and conditions of the offer led us to decide not to provide a proposal. However, future PRM projects with this company are still possible and our ongoing discussions in engineering work on several different PRM system opportunities with other customers also remained very encouraging.

Same story in Q2 FY’22:

Although challenges certainly remain for our oil and gas market segment increases and OBX inquiries along with our highly engaged discussions with oil and gas companies for permanent reservoir monitoring or PRM systems are encouraging.

And then again in Q3 FY’22:

[O]ur ongoing discussions with potential clients for future permanent reservoir monitoring, or PRM systems, continue to be very productive.

This perpetual optimism without delivering actual results has created an ugly situation for Geospace. At quarter-end, the company had only $9.1m in cash (cash and ST investments) and is burning through it at a rate of ~$1.7m/mo. The burn rate implies it only has enough cash to last a little over 5 months!

With that said, Geospace has assets, including unencumbered real estate, it could sell to raise liquidity, and it also has access to an additional $8.6m under its credit facility. Perhaps sales will materialize before it gets to that point as asset sales will further destroy shareholder value and only delay the inevitable.

Conclusion

Geospace’s spate of disappointing results has driven investment to a point of capitulation. Perhaps this call is premature and things are, in fact, about to pivot in the company’s favor. Unfortunately, shareholder value will continue to erode as each quarter passes without either realizing a PRM sale or creating a new path to profitability. And, currently, there are no indications that the worst is over for the company. Therefore, Geospace is a Sell.