Strictly: Drilling and oil-field services Message Board

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

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To: VLAD who wrote (40538)	3/21/1999 9:17:00 PM
From: Razorbak	Read Replies (2) of 95453

FLC and the Altman Model <<This Altman analysis is only a model.>> True. I never represented it otherwise. Nevertheless, the Altman model has proven consistently accurate over the period of time since its development. The original samples in Altman's research displayed accuracy of 95 percent based on data from approximately one year prior to failure. The accuracy dropped to 72 percent based on two-year data. Subsequent tests on firms that have gone bankrupt since 1968 have shown a predictive accuracy level of 73 percent and greater on one-year data. <<It totally ignores the fact that in the drilling sector the price of oil is the biggest force effecting a company that is highly leveraged as is FLC.>> Correct, but research confirms that the vast majority of firms fail because of internal factors (e.g., poor management or fraud) as opposed to external factors (e.g., commodity price moves or recession). <<I don't see a lot of middle of the road here. Either FLC goes bankrupt(I don't see that happening now that the price of oil has moved up and appears to be going higher) or the brains behind FLC have probably managed the most creative leveraged financing in the history of the drilling industry.>> That's pretty common for companies that are highly leveraged. High risk, high reward. Debt only leverages the underlying fundamental operating condition of the company. If the fundamentals are healthy, then heavy debt will increase the equity returns for shareholders, and vice versa. <<FLC will shine in 99 so long as the OPEC players don't have a short memory and don't start cheating once oil starts hitting the $18.00 level. Hell we went from $10 to $15 oil in a very short time span. $18 is just around the corner. I think these countries realize the importance now not to cheat as the price of oil rises. I also think the bigger lesson is that they budget their economies on a pessimistic oil price so that they are not forced to sell cheap oil just to make ends meet.>> Well, that I can't agree to just yet. The jury's still out IMO. Thanks for your comments. Razor

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