Technology-focused ION Geophysical Corporation (IO) provides geophysical technology, services, and solutions to the global oil and gas industry. The shares of the Houston, Tex.-based company have surged 31.4% in price over the past month to close yesterday’s trading session at $1.34. 

In June 2021, the company announced the commencement of a second, significantly larger phase of its 11,000 sq km North Sea 3D multi-client program. However, the stock has lost 34% in price over the past three months and 50.6% over the past six months.

IO also has a history of long-term share price weakness. IO has lost 91% over the past three years and 76.5% over the past five years. In addition, its revenue and total assets have declined at CAGRs of 24.2% and 11.2%, respectively, over the past three years. IO also announced on September 15 that it is considering sales of assets, private or public equity transactions, debt financing, or some combination of these to strengthen its financial position. So, its near-term prospects look bleak.

Here’s what could shape IO’s performance in the near term:

Industry Headwinds

Oil and natural gas prices have been soaring this year on  increasing demand and supply concerns. In addition, according to a CNBC report, natural gas prices are expected to be the most expensive in 13 years this winter. However, the global midstream oil & gas equipment market is expected to decline at an approximate 1.9%  CAGR between 2019 and 2027. This is due primarily to a decline in discoveries, decreased investment in more conventional output sources, and supply disruption. This is expected to impact IO negatively. Moreover, last month, the company’s management said that it expects the seismic market to remain challenging in the near term.

Unimpressive Financials

IO’s top line declined 13.3% year-over-year to $19.71 million for the second quarter, ended June 30, 2021. The company’s revenue from its  E&P Technology & Services segment decreased 23.1% year-over-year to $11.70 million. Its loss from operations increased 34.9% year-over-year to $7.38 million. Its net loss came in at $23.59 million, representing a 351.9% year-over-year rise. Also, its loss per share was $0.90, up 143.2% year-over-year.

IO’s net revenues were  $33.75 million for the six months ended June 30, 2021, versus  $79.15 million for the six months ended June 30, 2020, which is lower than expected. The company’s management said, “These lower than planned revenues will have an impact on second-half cash collections necessary to fund the company's operations and meet its debt and other obligations, therefore triggering a going concern issue for ION.”

Unfavorable Analyst Estimates

Analysts expect IO’s revenue to decrease 15.3% in the current quarter (ending September 30, 2021) and 20.6% for the quarter ending December 31, 2021. In addition, the company’s revenue is expected to decline 36.6% year-over-year to $77.81 million. Its  EPS is expected to remain negative in the coming quarters and next year.

POWR Ratings Reflect Bleak Outlook

IO has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. IO has a D grade for Quality, which is consistent with its negative values for trailing-12-month EBITDA margin and net income margin, compared to the industry averages of 23.54% and 1.05%.

The stock has a D grade for Growth and Sentiment, which is in sync with analysts’ expectation that IO’s revenue will decline in the coming quarters and its EPS will remain negative. Also, IO has an F grade for Stability, consistent with its 3.28 beta.

IO is ranked #88 of 93 stocks in the Energy - Oil & Gas industry. Also, click here to see IO’s ratings for Value and Momentum.

Bottom Line

IO’s revenues decreased in the second quarter, and its losses also widened significantly. Moreover, its revenue is expected to decline in the coming quarters, and analysts expect its EPS to remain negative. So, we think the stock is best avoided now.

How Does ION Geophysical (IO) Stack Up Against its Peers?

While it could be wise to avoid IO now, which has an overall POWR Rating of D, one might consider investing in Energy - Oil & Gas stocks SilverBow Resources, Inc. (SBOW) and Baytex Energy Corp. (BTEGF), which have an A (Strong Buy) rating.

IO shares were trading at $1.27 per share on Tuesday morning, down $0.07 (-4.93%). Year-to-date, IO has declined -47.74%, versus a 17.75% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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