Forum Energy Technologies: International Operations Can Provide The Relief

Summary

• FET has been strengthening its international operations to mitigate the loss from the U.S. onshore.
• Higher sales of artificial lift products & valves and lower costs can improve margin.
• A weak book-to-bill ratio suggests the challenges ahead.
• The net debt reduction would be necessary to decrease financial risks over the medium term.
• The stock can be relatively undervalued at the current level.

FET Looks To Improve Margin

Forum Energy Technologies (NYSE:FET) serves the drilling, subsea, completions, production, and infrastructure business in the energy sector. I expect the stock price to remain depressed in the short term. Its margin can improve due to an improved product mix and various cost reduction initiatives. I think it needs to improve cash flows and reduce the financial risks before investors can expect steady returns in the medium-to-long term.

Following the reduction in the upstream capex, the demand from capital equipment can continue to decelerate in the U.S. onshore. The company’s falling order in the Production segment is an indication of the challenging times. To counter this, the company will continue to increase its share of revenues from international operations. The company’s artificial lift and drilling & downhole products can stimulate growth in the international market. FET had been reducing its SG&A costs and inventory to streamline working capital management.

Strategy Changes: International Markets And Cost Minimization

Let us try to understand what FET is doing to counter the completion market slowdown in the U.S. In recent times, Saudi Aramco (ARMCO) (one of the largest integrated oil companies) approved the company’s downhole product - the packer stage collar product. Apart from that, the company has identified opportunities to increase sales in onshore gas injection lines and offshore tiebacks. The company’s management reckons that the demand for coiled tubing product - DURACOIL (coiled tubing string), and pipe handling equipment for drilling rigs will keep increasing as a result of higher onshore activity in the region. In the North Sea, too, the company will look to gain market share offshore coiled line pipe by the end of 2019.

The company also aims to increase EBITDA on a year-over-year basis. To this extent, it has undertaken various cost reduction measures. To reduce overhead

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.