The nation’s energy sector is changing rapidly thanks to a slowing economy and massive reform efforts in Washington. As the industry evolves, Allis-Chalmers Energy (NYSE:ALY) is doing its best to ensure it is ready for the future.

Do not let the ticker tape fool you. Allis-Chalmers Energy (NYSE:ALY) is stronger than it looks today. The figures may show shares are deep in the red, but dig a bit deeper and it is obvious investors are far from bearish.

The name once associated chiefly with bright orange tractors is now doing its best to make a stance in the nation’s oil and natural gas industries. As a $95 million company, Allis-Chalmers is a mere speck in the mega-money sector, but for investors it offers a shot at high-dollar speculative gains.

While the mainstream media focuses on alternative energy, carbon limits and surging oil prices, the nation’s energy sector is desperately looking for ways to cut costs. With oil at $147 per barrel, producers never even had to contemplate their margins.

But when prices fell precipitously last fall and winter, production costs and efficiency became major priorities. Even at $70 per barrel, profitable production is not a given. Producers and refiners have to be more cost-conscious than ever.

As each new low-cost foreign refiner hits the market, American refiners are forced to squeeze more and more pennies out of their process.

Going “lean” and green

Fortunately, the industry has companies like Allis-Chalmers working to offer low-cost solutions and services. As the domestic industry begins to expand alongside the American economy once again, revenues will certainly climb, especially for its pre-drill services, but that is not why investors have been smiling over the past several days.

Share price has risen by nearly 50% in the last four trading days thanks to news the company is busy making positive changes to its capital structure.

If you have ever studied corporate finance, you know there are multiple theories on the subject of proper debt-versus-equity weightings. The common belief is it really does not matter unless a company is severely overweight in one area.

Too much debt and nobody will lend money. Too many shares outstanding and dilution will kill shareholder value.

Allis-Chalmers is working to maximize its capital structure and so far, shareholders are more than happy to accept a bit of extra dilution if it means lowering borrowing costs. This is not a time to be holding a large pile of debt and long-term investors know it.

By purchasing up to $125 million of the company’s outstanding 8.5% and 9% notes (with proceeds from a recent share sale), the company effectively lowers its future borrowing costs.  Even better, the 15.8 million-share offering (at $2.50 per share) helps create a new level of support for investors.

There are a lot of “signals” produced by this capital structure adjustment, some positive and some negative, but overall the future looks bullish for the company and its investors as the market strengthens over the next few quarters.

Today’s red only looks bad in relation to Friday’s closing price. Fortunately, the $3.15 closing price was a late-Friday anomaly as traders worked to clear their books before clocking out for the weekend. The late-afternoon price of $2.60 is much more indicative of Friday’s true sentiment.

Compare that figure to today’s value of $2.80 or so and it becomes obvious the market likes the company’s recent moves.

Source: Profiting as Energy Goes Green and Lean