Seitel

1. Seitel • Sector: Energy • Industry: Oil and Gas Drilling Equipment/Services • Peer Group: Oil and Gas (Seismic) • Ticker Symbol: SEI • SIC Code: 1382

2. 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)

3. 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% Basic Stock Statistics

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.

5. 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.

6. 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?

7. 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 • Outdated energy infrastructure that needs to be updated and expanded.

8. 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.

9. 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.

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

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

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

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

14. 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.

15. Seitel (SEI) and 2 Largest Competitors

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

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

18. Revenue vs Competitors(Quicken) Revenue vs competitors ($ in millions):

19. Net Income vs Competitors(Quicken) Net Income vs competitors ($ in millions):

20. ROE (%) vs Competitors ROE Comparison with competitors:

21. Net Profit Margins (%) vs Competitors(MSN)

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

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

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

25. History of Crude Oil Prices

26. SEI: Historic P/E (Green) PE Comparison with competitors:

27. 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

28. 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

29. 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.

30. 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?

31. 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.

32. Oil Futures

33. Natural Gas Futures

34. 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.