Forum Energy Technologies (FET) is a global oilfield products company serving the subsea, drilling, completion, production, and infrastructure sectors of the oil and natural gas industry. The company designs and manufactures products, and engages in aftermarket services, parts supply, and related services that complement the company's product offerings.
Last Thursday, Forum Energy reported fourth‐quarter results in line with Street expectations. Drilling technologies revenue, which down 6%, was affected by a decrease in the North American rig count and completion activity, which more than offset Forum's international revenues. Strength in valve solutions and production equipment was offset by a continuance of significantly lower demand for flow equipment, a multi-quarter trend and in line with commentary from Forum's peers. The company expects diluted earnings per share for full year 2013 of $1.80 to $1.90, and first quarter 2013 of $0.31 to $0.35.
The 2013 guidance should be enough for investors who were concerned about significant margin compression from lower revenues, but management also set a reasonably aggressive expectation with its comments about sustained sequential improvements through the year given Forum's exposure to pressure pumping trends. Forum's near‐term results, which have not been great, continue to be generally overlooked by investors in the context of the solid long‐term opportunities, and at some point, management will need to begin delivering above expectations to sustain the stock's multiple.
The continuing strength in Forum's ROV (remotely operated vehicle) and subsea technologies business, which is primarily international, and a shift in drilling capital equipment to the international side, is expected. Those two factors should provide a higher percentage of non-North America sales in 2013 than in past years, which should in turn help drive the multiple higher over time.
In addition, the prospects for subsea valves and production equipment product lines for this year should be excellent, but the drilling and flow equipment product lines will continue to face an adverse market, where pressure pumpers have greatly reduced its spending. With that said, expectations for a return to strong growth in North America are fairly low across the group and at Forum, and this presents an opportunity for Forum to showcase its diversified product offering.
The long‐term demand trends around deepwater activity, valve intensive infrastructure projects, and completion activity in oily basins as well as increased activity in offshore and international areas should help investors look past the temporary North American setback. Management expects improvement around midyear of 2013 in terms of its flow control and fluid businesses, with the fourth quarter probably marking the bottom of orders, in management's view.
Moreover, deepwater rig deployments in 2013 and beyond continue to extend the growth runway for Forum. At present, nearly 60% of revenues come from drilling and subsea. The demand outlook for ROVs remains strong, and the fourth‐quarter deferred orders should show up in early 2013. Gulf of Mexico activity remains robust, and should be a nice tailwind in 2013.
Once Forum completes its system implementation and manufacturing process improvements to be able to scale this business for offshore and international growth, it will be well-positioned to take advantage of strong demand in 2013.
Looking forward, management expects the fourth quarter to be the bottom of the destocking process, and anticipates some improvement beginning next year. This is probably more optimistic commentary than others in the space, showcasing the wide variety of opinions about recovery in the U.S. and the only part of management's guidance, which is less positive at this point.
William Blair analysts recently initiated coverage on Forum Energy, and set an "outperform" rating on its stock. The analysts see Forum as a small version of FMC Technologies (FTI), sharing differentiated deepwater exposure, solid surface/land opportunities as rig fleets are upgraded, and an interesting and potentially quite attractive exposure to the midstream opportunity in the U.S.
Forum's diverse product offering provides a strong platform for multiple avenues of growth that are leveraged to attractive secular growth trends: deepwater, well complexity, and service intensity. In addition, the company's balanced mix of capital equipment and consumable products is the right approach to the natural cyclicality of the purchase cycle. Moreover, the short‐term weakness in the North America segment for Forum and the broader group may give investors the opportunity to own a high‐quality company at a discount to what its strong deepwater/international exposure would normally be worth.