Re: FGI --- Here is a post from the Yahoo! Oil thread which may be of interest.
clubs.yahoo.com
Message 754 of 756
RE: hcp0scratch -- FGI and the Rig-Makers bjbowker
Feb 4 1999
9:12PM EST
Hi hcp0scratch, I'm sorry that you didn't like my Deere analogy, but I was just trying to make the point that in any industry, when customers are facing shrinking profits and are cutting back on spending, then they are not likely to lay out big money for new capital equipment. As I've said in many previous posts, I like FGI, it's clearly a "best-in-sector" choice, but this is the wrong time. It's in a sector -- the offshore rig capacity expansion sector -- that lags the rest of the industry in terms of sales and earnings.
Going back to 1995, first oil prices drifted up, then oil company spending increased and drilling activity picked up, then the existing rig fleet began to get fully utilized, then day-rates went up, then, as capacity became strained, day-rates went up further to the point that the rig operators could justify the huge amounts of money needed to build some new rigs, then they placed orders with FGI and the other rig makers, and then, in 1998, the sales and earnings of the rig makers finally took off.
But, by 1998, the tide had turned, and the entire process is now working in reverse -- lower oil prices, lower oil company spending, and lower drilling activity and day-rates. Earnings for the shallow drillers, with short-term contracts, turned down first, the deeper drillers will be adversely affected this year as their old long-term contracts expire, and the rig makers, who are still riding on the "wave" of construction contracts that were let in 1997, are still making money while drillers' profits are falling.
But when these contracts are completed, and the "building wave" finally passes through the company's income statement, what's comes next? The inescapable answer is lower sales and earnings than in 1999.
In this environment, described by industry leaders as a depression, very few new orders will be forthcoming this year. As you pointed out, FGI (along with the others) is also in the rig upgrading business, but according to their Q3 report, that's now only 1/3 of their backlog. That means that when the new-builds have been completed (in the next 4-5 quarters), the drillers would have to TRIPLE their spending on refurbishing and maintenabce this year just to get FGI back to today's sales and earnings levels -- a pretty unlikely scenario.
I actually ran some financial forecasts but I could find no reasonable scenario, with oil in the $12 - $15 range, that shows Earnings in 2000 that are equal to or greater than in 1999 -- the crest of the building wave. Last quarter, FGI showed sales of $93 million, and they could report $95 - $100 million this quarter. But at that rate, their backlog will be nearly gone by the end of the year. There will certainly be some new upgrade work, but $100 million per quarter would have to be called a stretch in this climate.
But what about new new-build orders? They just got one for $143 million, scheduled for completion in two years. That works out to $18 million per quarter -- still a long way from today's $100 milion. Also, their last "Millennium" class rig was a harsh environment rig, but it cost the customer $275 mm. Their other "Pacesetter" class rigs with a 5000 ft capacity went for $180-$200 mm a year ago. So, the profitability of this $143 mm Millennium order is questionable.
The bottom line is that EARNINGS GROWTH, from TODAY's peak level isn't visible now, and won't be visible until oil prices and rig capacity utilization move up a lot -- and GROWTH is the ultimate driver of stock prices. I hope you don't hate this assessment too much -- I'm really trying to help. Bob
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Any comments or counter-arguements from FGI longs?
(I have no FGI position. - diana )
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