Finding new sources of crude oil and natural gas is essential in today’s energy climate. According to some long-term industry analysis, it will be difficult to meet the higher level of demand anticipated in the natural gas market.

One diversified small-cap could be greatly rewarded by capitalizing on the deeper, more costly wells oil and gas exploration companies will be drilling over the next several years, especially in its primary Gulf Coast market.

That company is Newpark Resources (NR: NYSE). Newpark provides drilling fluids, technical services and disposal of exploration and production (E&P) waste to drilling sites in the U.S. Gulf Coast, West Texas, the Rocky Mountains, Canada, Mexico and areas of Europe and North Africa surrounding the Mediterranean Sea.

The business can be broken up into three main services. The first is drilling fluids. While Newpark management says its biggest competition from major firms falls in this category, the company holds several patents on fluid technology that help keep it in the mix.

Second are composite mat products. The company manufactures and delivers interlocking composite mats to E&P sites that allow the oil company’s heavy machinery to have access. Essentially, these mats form a temporary highway and work station in remote, environmentally difficult locations. These mats are patented by the company as well, and are used as an alternative to traditional wooden mats.

Then there’s waste disposal. The company hauls E&P waste from offshore rigs in a fleet of 48 double-skinned barges. It also operates injection wells in Texas, where waste is forced into the ground. 25-30% of the waste the company removes is recycled as road base or construction fill. Increasingly strict environmental regulations help grow this side of Newpark’s business, where the company says that the scope of services required by oil and gas companies has increased.

On top of this, 39% of Newpark’s revenues were derived from 20 major customers, and no one customer accounted for more than 10% of its consolidated revenues. Because Newpark does not rely on one or two major customers for the bulk of its revenue, losing a customer would not significantly affect the company’s bottom line.

So why is Newpark Resources a gamble? The company is making money, its operating margins are better every year and it’s in a high-demand, growing industry. There’s nothing here not to like…

Despite its promise, Newpark has gotten itself into trouble this year over stock option backdating. An internal investigation was launched and earnings were recently restated all the way back to 1998.

While the earnings restatements did not significantly impact the company’s progress over the past few years, the investigation has left investors in the dark almost all year. That’s where the gamble comes in, and where you could capitalize on Newpark while its share price is depressed.

You see, we haven’t heard from Newpark for almost a year. The company has delayed filing its quarterly reports, and now expects to announce first, second and third quarter earnings all on November 9. And because the company has stayed mum during its investigation, its share price has taken a beating:

So Newpark’s performance this year has been a bit of a mystery. The company has, however, announced that it had shut down its water operations in August. In early 2005, the company formed Newpark Environmental Water Solutions. This part of the business used sonochemistry to remove dissolved solids from wastewater.

However, the announcement in August said that executives believe the technology is not ready and that they were shutting down the operation to avoid more losses. According to its last annual report, the company invested $13.8 million up to that point in its now-defunct water treatment branch. And in connection with the shut down operations, Newpark expects to record a $20.0 million impairment charge for Q-3 2006.

Despite all its trouble, Newpark could record substantial profits from hurricane rebuilding efforts in the Gulf. The company lost $7.9 million due to Hurricane Katrina in 2005, and mentioned in its annual report that rebuilding offshore rigs in the Gulf will provide some more business for Newpark, and it is expanding even more in other areas of the world and with other product lines.

And while Newpark’s long-term profit potential looks bright, the next few weeks are a solid gamble until we’re all brought up to speed on its progress.

Best,

Greg Guenthner
October 16, 2006

P.S.: Some companies can succeed when it comes to the water business, while others just seem to fall apart. Here’s your chance to learn about five amazing water stocks that could show you triple-digit gains — or more.

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they’re discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite. Special Report: Imagine Getting Rich as Ignored Stocks Soar - You could turn $200 into $1.2 million!

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