OK, I've shot my mouth off on the theory and on others' picks; here's a summary of the research I've done on one that I like. Feel free to pick it apart, if anyone is still out there...
Steve
The industry is oil services. As we all know, this is dead unfashionable: oil prices are low and falling, and the sector gets little or no attention from the market. The conventional wisdom is that the glut will continue, as the rate of increase Asian demand flattens out; the possible lifting of sanctions in Iraq could exert further downward pressure. I think there are elements that are not being considered. The low price of oil has created very severe economic tension, and has contributed to substantial unrest, in several major producers, principally Saudi Arabia, Mexico, Indonesia, and Russia. In Saudi Arabia in particular, and to a lesser extent in the others, declining revenue has forced governments to trim spending, reducing services and entitlements that were major factors in generating popular support for governments that in many cases are inefficient and archaic. Traditional response has been to pump more oil, exacerbating the glut and exerting further downward price pressure. My belief is that further slippage in oil prices would force these governments to a deciding point, at which either they would apply effective restraints on production or one or more major producers would be struck by significant social unrest, interrupting or threatening to interrupt the supply of oil. Either way, oil prices would go up. The time horizon here is obviously flexible, as there are numerous interacting factors, but the price will go up.
The company is FGI, Friede Goldman International, Inc. In their own words, they are:
…providers of offshore drilling services, including conversion, retrofit, repair and modification of offshore drilling rigs. The Company also has the capability to design, build and equip new construction offshore drilling rigs. The Company was formed in February 1997 to hold the combined assets of HAM Marine, Inc. and Friede & Goldman, Ltd. ("F&G Ltd.") and completed an initial public offering in July of 1997. Through HAM Marine, now a subsidiary, the Company has been continuously engaged in the business of converting, retrofitting and repairing offshore drilling rigs since 1982; through F&G Ltd., also now a subsidiary, the Company has been continuously engaged in the business of offshore rig design for more than 50 years. The Company's customers consist primarily of drilling contractors that drill offshore exploratory and development wells for oil and gas companies throughout the world, particularly in the Gulf of Mexico, the North Sea and areas offshore of West Africa and South America.
The basics:
Outstanding: 24.5M
Float: 12.3M
P/Book: 3.26
P/E: 8.79
P/Sales: .87
ROA: 13.17%
ROE:40.52%
Stock is now selling at $10, just off 52-week low.
Revenue / Net
1993 / $10.4M / $1.8M
1994 / 23.9 / 4.1
1995 / 19.9 / 4.9
1996 / 21.8 / 2.8
1997 / 113.2 / 23.3
1998 (3/4) / 250.0 / 23.4
(I cannot get that to format properly, but it can be figured out.)
Due to increased demand for its services, the Company's backlog has increased from $132 million at September 30, 1997 to $456 million at October 4, 1998
Lower rate of increase in net is due to a somewhat lower-margin job mix and substantial investment in facilities that will be required to address the large backlog.
During the nine months ended October 4, 1998, the Company adopted a stock repurchase plan under which the Company, as of October 4, 1998, has repurchased 1,065,100 shares of its Common Stock for an aggregate of approximately $14.4 million.
The Company has two primary domestic competitors for conversion, retrofit and repair projects for drilling rigs that operate in the Gulf of Mexico. In international markets, the Company competes primarily with two additional companies. Personal interviews with individuals well placed in major oil service companies (Halliburton, Brown & Root) indicate that FGI's competitive position is strong, and that the Company has an excellent reputation for quality and prompt completion of jobs.
The downside: an extended period of very low oil prices could leave a significant decline in projects and reduce revenues and earnings. It is highly unlikely that a decline severe and sustained enough to drive the Company out of business will occur, due to self-limiting features cited in opening paragraph.
The upside: A significant increase in oil prices would greatly increase demand for the company's services, as rigs now shut down would need to be brought back into service. Oil price increases, or any interruption or threatened interruption of supply from any major supplier, will be well publicized and would likely serve to bring the sector, and the company, back into the radar of the market.
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