Geophysical-service company executives are highlighting improvements in their part of the oil-service business but oil-service equity analysts are much less optimistic. They consider geophysical services the weakest performer within oil services. "Consolidation seems inevitable. But it's difficult when you're carrying a lot of debt," says Jeffrey P. Wiegand of Roboti & Co. Inc., New York. "Petroleum Geo-Services has a lot to do before [merger partner] Veritas-DGC becomes involved, which is understandable. There certainly will be survivors. But there also will be overcapacity to deal with." Joe R. Agular of Johnson Rice & Co., New Orleans, adds, "The problem has been the sale of Atlantis, which has taken a lot longer than PGS thought it would. That has made the merger difficult to conclude. I think Veritas is committed to the merger and sees the benefits it would bring. It believes the industry needs to consolidate. PGS has a lot of debt associated with it and assets that could be sold. It seems to me that Veritas' management is looking at all options, but still wants to see the merger take place." Publicly traded geophysical services suppliers also must compete with larger competitors that have become subsidiaries of the largest oil-service companies. Schlumberger Ltd., Baker Hughes Inc. and Halliburton Co. all have significant geophysical operations. "If you believe the industry is recovering and producers are going to spend more money to replace declining production, this is an industry segment that should bounce back. But it will take some time," says Poe Fratt of A.G. Edwards & Sons Inc., St. Louis. That's a significant contrast to just five years ago, when geophysical service companies seemed to be riding high. "It was mainly because of lease sales," says Fratt. "Producers were trying to acquire as much land as they could because the geology seemed fairly attractive. Then the deepwater markets proved more difficult to develop than anticipated. Five years ago, most people considered the Gulf of Mexico the most attractive offshore area. They weren't even thinking of West Africa or Brazil, which are hotter now. Geophysical companies are benefiting, but not to the extent they did in the Gulf, where there were more producers per lease and heavier turnover. Their customer base also has consolidated. There are fewer companies that want data." Agular suggested the business itself also has changed. "In the last five years, it has moved from being largely a contract business to one that's more speculative, where companies shoot data and try to sell it to multiple customers. The old model was to be hired, shoot data and sell it. Now, there's been a build-up of capacity when demand started to shrink. There was a lot of data being shot in the late 1990s as oil companies moved farther offshore. Then came the downturn in 1999 and 2000. "The seismic business really hasn't picked up that much since. Eventually, it will. But it's an industry that's very hard to pinpoint when demand will materialize. Oil companies still have a lot of data to digest." The longer oil and gas prices stay relatively high, the better the prospects for a geophysical services recovery, the analysts agree. "Consolidation of more companies should help," Fratt maintained. "It also would help if some vessels were retired. Onshore should become more attractive the longer gas prices hold up. From what we can tell talking to production experts, some E&P companies are having trouble generating prospects. That should help the onshore market. But prospects there are limited because it's harder to sell data to numerous customers, unlike in the Gulf of Mexico." Agular concurs that some North American producers say their lists of prospects have shrunk. "That's somewhat of a ray of hope because it suggests they might have to acquire more data. But it hasn't turned into a rush to shoot seismic. I expect the business to come back. The question is timing, which is hard to pinpoint with any degree of accuracy."