Stonegate Capital Partners Initiates Coverage on Forum Energy Technologies, Inc. (NYSE: FET)

DALLAS, TX -- March 5th, 2024 -- Forum Energy Technologies, Inc. (NYSE: FET)  Stonegate Capital Partners initiates their coverage on Forum Energy Technologies, Inc. (NYSE: FET).

Business Overview

Forum Energy Technologies, Inc. (“FET” or “The Company) is a global oil and gas services company is headquartered in Houston, TX. FET serves the oil, natural gas, industrial, and renewable energy industries with a vast catalog of products and services. The Company was originally founded in 2010 after FOT, Global Flow, Triton, Allied, and Subsea combined into Forum Energy Technologies. In 2012 the Company began trading on the NYSE under the symbol “FET”. Since its inception FET has made numerous acquisitions, which has contributed to the Company’s growth over the last decade.

Company Update

• Quarterly Results: FET reported revenue, adj EBITDA, and adj EPS of $185.2M, $15.4M, and ($16.80), respectively. This compares to our estimates of $182.1M, $16.0M, and ($2.01). It is noted that revenues and gross profits were in-line with expectations with the operating profit miss due to expenses related to the Variperm acquisition. We expect further acquisition costs in 1Q24 of ~$7.0M. These expenses were not included in adj. EBITDA, leading to in-line modeled and actual adj. EBITDA and adj. EBITDA margins. Notably international revenues increased 23% y/y, which is twice the pace of international rig count growth.
• Drilling and Downhole: The drilling and downhole segment saw y/y revenue growth of 12.1% and EBITDA margin compression of 308bps. The revenue growth was driven by subsea technologies which grew by 67.3% in the time period. We expect this strong performance to continue as it was noted that subsea technologies have seen its backlog double over the previous year. Drilling technologies and downhole technologies revenues were both relatively flat y/y.
• Completions: The completions segment saw y/y revenue decline by 22.5% and EBITDA margin compression of 30bps. This was primarily due to a 29.0% decrease in the stimulation and intervention product line as customers idle equipment and slow purchases. In the quarter the coiled tubing product line set new world records for length and weight of two different strings, further exemplifying the Company’s ability to continue innovating.
• Production: The production segment grew 2.8% y/y with an EBITDA margin expansion of 260bps. Production posted orders worth $23.2M, which is a decrease of 50.1% compared to 4Q22. This resulted in a book-to-bill ratio of 63%. We note that the production segment is typically lumpy, giving us confidence to look through this softer quarter.
• Growth: FET completed its acquisition of Variperm Energy, a leading manufacturer of customized downhole technology solutions, providing sand and flow control products for heavy oil applications, on January 5, 2024. We note that this acquisition is highly accretive to both the top and bottom line with Variperm reporting TTM revenue of $129.0M and TTM adj. EBITDA of $53.0M, as of 3Q23. We expect this to lead to significant margin expansion and FCF growth for FET. Lastly, we note that this was not completed at the expense of the balance sheet with Pro Forma Net Debt to TTM adj. EBITDA at 3.6x. We expect FET to focus on debt repayment through FY24.
• Guidance: FET announced its adj FY24 EBITDA guidance in a range of $100.0M to $120.0M. Full year FCF guidance was set in a range of $40.0M to 60.0M. For 1Q24 the Company gave revenue guidance in a range of $200.0M to $220.0M. Given the Variperm acquisition, continued growth in international markets, and rig count outlook we believe this guidance is reasonable. We made minor changes to our model.
• Valuation: We use a DCF model and EV/EBITDA comp analysis to guide our valuation. Our DCF analysis produces a valuation range of $22.13 to $26.91 with a mid-point of $24.33. Our EV/EBITDA valuation results in a range of $20.63 to $37.21 with a mid-point of $28.92.