Like a lot of companies that earn their living in the oil and
gas business,Forum Energy Technologies (
FET
) has been on a strong run the last couple of years.
The company provides equipment and services through two main
business segments: Drilling and subsea, and production and
infrastructure. Its customers include oilfield services firms,
assemblers of drilling and well servicing equipment and onshore
and offshore drilling contractors.
Thanks to high crude prices and heavy demand for its equipment
and services, Forum has recorded four straight quarters of
triple-digit earnings growth. Sales have risen at least 45% over
the same period.
The company sees no reason it can't continue to produce robust
growth well into the future despite the fickle nature of the oil
and gas industry.
"Forum expects to grow at a 20% annual rate over the next
several years through market fundamentals, market share gains and
acquisitions," JPMorgan analyst J. David Anderson noted in a
recent report.
The company's buyout strategy will center on companies in the
subsea, international and downhole equipment sectors, Anderson
says. He looks for deals in the $30 million to $150 million range
that are immediately accretive to earnings.
High Debt
"The company has plenty of flexibility on the balance sheet
and is willing to take debt up to as high as three times EBITDA,"
Anderson said. "Management expects to do at least one deal by
year end."
In a note following Forum's second-quarter earnings report,
Citigroup analyst Robin Shoemaker said the company should find
growth on a number of different fronts in coming quarters.
"We continue to believe that Forum will benefit from its
emphasis on consumable parts, potential expansion in Brazil,
Australia and China, and leverage to increasing service
intensity, higher well complexity and greater deepwater
development," Shoemaker noted.
Forum's ambitious growth strategy belies its status as a
relatively new operation.
The company was formed in the summer of 2010 after a five-way
merger that included Forum Oilfield Technologies, Triton Group,
Subsea Services International, Global Flow Technologies and
Allied Technology.
Forum went public April 12 at an opening price of 20. Shares
peaked at 23.86 April 30, then sagged as low as 18.60 July 27
after the company lowered its full-year guidance. But the stock
has rebounded since then and currently trades near 23.
Forum's Drilling and Subsea business supplies a variety of
services and goods, including capital equipment, products for
subsea pipelines and remotely operated underwater vehicles, or
ROVs.
ROVs are tethered and unoccupied vehicles that can be operated
by someone aboard a surface vessel.
The company's production and infrastructure business supplies
surface process and pipeline gear such as tanks, pressure
vessels, modular process plants and manifolds. It also provides
specialty pipeline construction equipment, valves and aftermarket
services.
Subsea Business
The drilling and subsea business contributed 60% of Forum's
second-quarter revenue with the production and infrastructure
segment providing the rest.
Analyst Anderson sounds especially bullish on Forum's
prospects in the subsea category.
"They are the manufacturing leader in work-class ROVs used in
the construction and installation of equipment and systems on the
seabed," he noted. "Forum is effectively operating at full
utilization right now with a 12- to 18-month lead time for new
orders compared to a typical cycle time of five to six
months."
Anderson expects an increase in offshore development activity
that will likely last the next three to five years.
"Several of Forum's customers are getting ready to place big
orders for new equipment," Anderson noted. "In addition to
customers needing ROVs for new construction vessels, older ones
also need to be replaced after about a five- to seven-year cycle
time."
Forum's drilling and subsea business pitched in Q2 revenue of
$223 million, up 17% from the prior year. All three product lines
within the drilling and subsea segment posted year-over-year
growth, with the drilling technologies product line delivering a
gain of nearly 20%.
Revenue Growth
Production and infrastructure revenue for the quarter climbed
30% to $151 million, led by a top-line gain of 40% for Forum's
production equipment product line. Its valve solutions product
line also delivered strong revenue and margin growth, thanks to
improved distribution and strong market penetration of new valve
products.
"Our revenue growth was attributable to an increase in demand
for many of our products, such as our deepwater ROVs and wellsite
production and process equipment," Forum Chief Executive Cris
Gaut said in a statement.
Overall revenue grew 45% from a year earlier to $373 million,
slightly above estimates. Earnings came in at 49 cents a share,
also beating views.
"The primary drivers of the beat were strong drilling and
subsea results, low corporate expenses and accrued contingent
benefits," Shoemaker noted.
On the downside, Forum lowered its full-year earnings
guidance, citing weakness in the U.S. land market. But JPMorgan's
Anderson downplayed the issue.
"Essentially, it was an inventory destocking issue that will
self-correct by the end of the year, even with the U.S. land rig
count expected to be flat or slightly down," he noted.
Analysts polled by Thomson Reuters expect Forum to post
full-year profit of $1.94 a share this year and $2.14 a share in
2013.