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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: SargeK who wrote (63686)	4/10/2000 2:57:00 PM
From: SargeK	Read Replies (2) of 95453

FGH Update posted on Clear Station in Response to Questions After a review of the 10-K and the Conference Call, I came up with the following recap of current events: Problem Contracts & Merger Costs: Petrodrill: A/O 12/31/99 "There was $50m remaining in reserves for losses WHICH DO NOT include any amounts (FGH) may recover from claims asserted." The amount of claims asserted in the counter-suit against Petrodrill was $68.5m which the Company states it will aggressively pursue following the 6 months stay in the U.K. litigation. It is significant to note that Petrodrill waived all claims against FGH. If a settlement is reached comparable to the Ocean Rig dispute, I expect earnings this year and next to be VERY positively impacted. Ocean Rig: A/O 12/31/99 "$16.0 million in loss reserves for future costs exceeding contract revenues." The FACT the contract was revised upward $43.0 million in Jan '00 begs the question of how this will IMPACT 1Q/00. IMO, VERY positively! Liquidity: Questions regarding liquidity were answered to my satisfaction (there was very little added that wasn't already known with exception of the $5.4 million in net proceeds expected in the sell of the yacht division. $20.0 million (cash & remainder of credit line)a/o 12/31/99 PLUS approximately $170m, as follows: 91.0 million Sell of non-core assets ($20.0m completed, $10.5m under contract, including sell of yacht div.(w/net proceeds of $5.4m), and the remainder well underway of being disposed ). 30.0 million Tax refund - due Sep '00 20.0 million Completion of Company 'interim' financed project - due Oct '00 28.0 million Sell of Rig components on hand - due 4Q/00 PLUS: Cash Flow & Liquidity are enhanced by revenues being produced by gross profit margins of ongoing projects (including maintenance & repair business). Note: Mr. Holloway stated there were no plans for divestiture of core assets. He further stated that SG&A for FY/00 would be reduced by $20.0 million from proforma '99. Mr. Holloway applauded employees for doing a tremendous job since the merger, stating he firmly believes "Thelong term results (of the merger) would be of tremendous benefit to share holders and the company". Comments: The sell of non-core (and non-income producing) assets appears to be proceeding according to the strategic plan announced upon completion of the merger in Nov ?99. The significant reduction in SG&A (proforma) 1999 - $86.0 million ) in 2000 is an indication (to me) that anticipated synergies and efficiencies resulting from the merger are already being realized. Backlog: 4Q/99 - $689.1 million 1Q/00 - $689.1 (carried over from 4Q/99) 199.0 new contracts announced in Jan ?00 43.0 revised Ocean Rig contract announced in Jan ?00 $931.1 Sub-Total -125.0m (estimated work completed in 1Q/00) _________ $806.1 million (estimated backlog ending 3/31/00)PLUS approx. $100.0 million in maintenance & repair work) SUMMARY: It appears the decision to merge was a wise one for all concerned. I think questions of liquidity and cash flow have been laid to rest and that backlog (new business and with extensions of the Petrodrill and Ocean Rig Contracts) is being properly managed and is MORE than sufficient to generate profit margins as anticipated new orders materialize over the next few quarters. The Ocean Rig dispute has been laid to rest and the Company has asserted claims ($68.5m+) in the Petrodrill dispute which exceed current estimates of costs (in excess of the original contract prices) of approx. $60.m and reserves established for the latter of approx. $50.0 million. My understanding is that under existing 'loan'convenants, 75% of the sell of assets ($90.0m) will be applied to a reduction of debt, with the remainder available for Capital operations and expenditures. I still have questions with regard to Ocean Rig charges taken in the final quarters of 99 in light of the settlement reached in Jan '00 when FGH asserted they expected to break even or post a modest profit upon completion of these projects, this year. My own view is that the charges will be recaptured in the form of earnings, as the work progresses toward completion. If true, one might expect this years anticipated earnings to be enhanced as a result of the settlement. Since the company has asserted that loss-contracts and merger expenses have been placed in 4Q/99. I interpret that to mean that the remaining work is profitable. BOTTOM LINE: I think the stock price (in the low 6s) is lagging events and represents another buy/accumulate opportunity. FWIW SargeK clearstation.com

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