Awesome FGII story by my pal Mavis
(please forgive me for breaking the copyright law)
Top Stories: Friede Backers Optimistic Ahead of Next Week's Earnings
By Mavis Scanlon
Staff Reporter
4/23/98 9:38 AM ET
Friede Goldman (FGII:Nasdaq) will have much to discuss
with analysts and investors on its earnings conference call
next week. Tuesday, the Jackson, Miss.-based offshore rig
design and outfitting company announced its fifth rig upgrade
contract from Noble Drilling (NE:NYSE).
Friede also recently announced the opening of North
American operations of its newly purchased subsidiary,
Brissonneau & Lotz Marine (BLM).
But participants in next Wednesday's conference call
(earnings will be released at or near next Tuesday's close)
may be more curious about another recent Friede
announcement, as well as the Mississippi Gulf Coast's tight
labor market, which caused an analyst Tuesday to
downgrade his rating on Friede. Last week, Friede confirmed
months-old rumors that it had entered into a joint venture
with a Norwegian consortium to retrofit and upgrade The
Ilion, a semisubmersible baredeck hull recently arrived in
Pascagoula, Miss. from a shipyard in Vyborg, Russia. In a
January research report, Jefferies & Co. said the joint
venture values the hull at $48 million.
As Friede's bean counters tally up a new backlog figure on
the heels of the Noble deal, analysts and investors are fully
confident Friede will have no problem meeting its numbers.
Friede, whose business primarily consists of offshore rig
conversion, retrofitting and repair work, is actually one of the
few oil service companies whose earnings have not been
affected by the crude oil price drop. Its First Call first-quarter
consensus earnings estimate, at 21 cents -- a 250% jump
from the 6 cents reported in the first quarter of 1997 -- has
not been touched. First-quarter and full-year 1998 and 1999
estimates for many companies in the sector -- from drillers
to oilfield service companies -- have been whittled by at least
2% to 5%.
The outcome of Friede's joint venture may still depend on
what happens with crude oil prices, if, as observers say,
Friede and its partner, Dyvi and Kvaerner Maritime -- a
separate joint venture between Oslo-based shipping
company Jan-Erik Dyvi and Kvaerner, Norway's biggest
privately-held industrial group -- try to sell the refurbished rig
to a drilling contractor. It's a long shot that dayrates will
decrease in the tight deepwater drilling market, but, if they
do, pressuring returns on equity, drilling contractors may
think twice before adding equipment capacity.
Friede has been more than guarded in the information it has
released on its plans for The Ilion, citing its ongoing
discussions concerning its joint venture. John Alford,
Friede's executive vice president, says only that Friede is
interested in bringing in a drilling contractor. The upgrade
and retrofitting of The Ilion is expected to be completed in
1999 and will allow the rig to drill in water depths up to 5,000
feet in the Gulf of Mexico, West Africa or South America. A
typical retrofitting job may include improvements in the rig's
technical capabilities and drilling systems, as well as
enhancements to the stability capabilities of the rig, mooring
systems and living quarters.
Observers are convinced that Friede has taken an
opportunistic step in acquiring a valuable asset in the tight
market for offshore equipment, and some see a sale in the
making to one of Friede's loyal customers, such as Noble or
Falcon Drilling (FLC:NYSE).
Since the majority of the focus in the oil drilling industry is
on deepwater, "if you have an asset like that, it's like gold in
your hand," says Mickey Brivic, an equity analyst who
covers the oil service industry for USAA Investment
Management. "These assets are very hard to come by."
"They're close enough to a contract that I think they are not
really building it on spec," says Brent Rakers, who follows
the firm at Morgan Keegan & Co. in Memphis. "They have
an opportunity to get this thing at a very attractive price --
they will start the process and negotiate a sale," he says,
given how tight the deepwater drilling market is. Morgan has
not performed underwriting for Friede.
Labor Situation of Some Concern
Rakers remains bullish on the company, saying in a
Tuesday research note that there may be some upside to
his near-term estimates (he estimates FGII will earn 22
cents in the first quarter and 28 cents in the second quarter).
But he believes the rise in Friede's stock has brought it to an
excessive valuation. He has not changed his earnings
estimates. FGII's stock, trading at 38 13/16 Wednesday, is
up about 30% year to date and about 40% in the past
month.
The downgrade is really no reflection on the company,
Rakers says. "I'm really just concerned about the tight labor
market on the Mississippi coast," he says.
Unemployment in Jackson, Harrison and Hancock counties
has not been lower in decades, according to the Mississippi
Employment Security Commission (MESC), the
equivalent of a state Department of Labor. February rates of
unemployment have dropped in Jackson and Harrison
counties to 4.0% and 3.5%, respectively, from 4.3% and
3.7% in January. The rate in Hancock county has remained
stable at 3.4%. All three counties are near the lowest rates
in the state and are well below the state average of 5.8%.
The lower rates are attributable as much to the rise of
Mississippi's casino industry as to a resurgence in the
marine construction industry, which has been such an
integral part of the Gulf Coast economy for so long, says Bill
McNeece, a labor market analyst with MESC.
This has caused an upswing in the number of contract labor
employment agencies, which employ workers on their own
payrolls and hire them out to shipyards. Friede got out of the
contract labor business in May of 1997, according to its
10-K, and now employs all employees directly, touting its
benefits, training and bonus and vacation packages, along
with the lure of steady work (in December, its backlog stood
at $324.6 million).
Friede employs over 1,100 people in its Pascagoula yard
and added nearly 1,000 more between its recent
acquisitions of the Marystown shipyards in Newfoundland
and the BLM companies. In response to TheStreet.com's
questions on the labor situation at Friede, Alford says that
on top of the 115 people the company hired in the past
seven business days, it has 112 people in its training
program. Its press release on The Illion stated 500 people
would be hired.
Joe Agular, who follows the company at Johnson & Rice in
New Orleans, is not concerned about a tight labor market,
especially as it may affect Friede's earnings. He points out
that a lot of the new hires have come from Ingalls
Shipyard, which, although still Mississippi's largest
employer with 11,000 people, has downsized tremendously
in recent years.
The upshot of hundreds of new hires in the area is higher
hourly rates for those who work on a contract basis. Several
ads placed in the online edition of The Sun Herald in
Gulfport, the daily which covers the Gulf Coast, boast pay up
to $18 and $19.50 per hour for shipfitters and welders, the
most sought-after positions.
"There are not enough people to go around," says Wayne
Davis, co-owner of one of the newer contract labor shops in
the area, B&D. "Right now, the workers go to the highest
bidder." B&D supplies workers to Halter Marine
(HLX:NYSE), which builds a variety of vessels for
government and commercial use, as well as the energy
industry. Over 2,000 of Halter's 2,720 employees are paid on
an hourly basis. Earlier this month, Halter announced a $170
million contract to build two new semisubmersible drilling
units. Ingalls, a unit of Litton Industries (LIT:NYSE), also
announced a large contract to build marine service vessels
earlier this month.
Investors Not Worried
A competitive environment for workers actually boosts
investor confidence in the strength of the oilfield service
industry.
"I'm pretty confident in management," says Brivac at USAA,
whose Aggressive Growth fund, with a one-year return of
51.2%, owns about 200,000 shares of FGII, as well as
shares in Halter. "They're not going to go out and start
paying $18 to $19 per hour and not get compensated for it
on the revenue side." He adds that although the situation
might be a short-term negative, it confirms that people are
not pulling out of plans due to a low oil price environment.
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