Black Gold In West Texas

When money manager Alan Gaines recently visited the Permian Basin area of West Texas, what caught his eye was the increased drilling activity. In part, the pickup stemmed from the sale of properties by major integrated oil companies to the smaller independents, which have been willing to drill where the majors fear to tread.

This situation bodes well for some companies, says Gaines, president of New York securities firm Gaines Berland, which specializes in oil and gas investments. One of them, he believes, is Small's Oilfield Services, an independent equipment and tool rental company in West Texas. Its stock is one of the many oil-related issues that are ignored by the Street, but Gaines believes that Small's is undervalued, "based on the company's excellent growth prospects." The stock is trading at just about its book value of 5, and Gaines is betting that in two years, it will be worth 8 to 10 a share.

Small's services about 200 customers, including some of the big major oil companies such as Texaco and Exxon. With its expanded capital base aided by a recent securities offering, the company can now pursue bigger jobs that it couldn't bid for a year ago.

The job prospects for Small's are huge, says Gaines, who notes that there are 50,000 producing wells in the Permian Basin within a 90-mile radius of Odessa, Tex. In the year ending Aug. 30, 1993, Gaines expects Small's to earn $1.05 a share vs. last year's 92 cents; he sees cash flow rising to $1.45 a share from $1.21 a year ago. In 1994, net should jump to $1.25 and cash flow to $1.80, says Gaines. Small's is in talks to acquire another tool company much bigger than itself. That should boost earnings even more.