I wanna dig deeper myself, but one question that came immediately to mind. Is it a mistake of a data provider, or did they indeed have negative FCFs in 6 out of 8 last years (since 2017)? And net income was negative in each of them. Do you know the reason?
So a few things, they made some pretty big acquisitions in 2017/2018 so let's start from 2019. In 2019 they were profitable on a FCF basis, however they had big impairment charges and some write downs on their income statement. These are non-cash accounting numbers.
Depreciation/Amortization expenses were ~$63M vs capex of only $15M so this will always skew the income statement showing a bigger loss but real owner earnings were much higher.
If you look at the cash flow statement before working capital changes in the 10K you'll note that FCF was positive in 2019.
2020/2021 are the two years they lost money because of the downturn in energy prices. This is when they had to restructure the debt and the new CEO came in.
They had a pretty strong year in 2022 and generated over $40M+ in FCF and about ~$25M in 2023 with the slow down in drilling. These years have the same issues as 2019 as the income statement overstates expenses mainly due to their amortization/depreciation expense.
And in 2024 they will generate roughly $45-50M in FCF with the Variperm acquisition (excluding the $11M in transaction and acquisition costs for Variperm).
Note that all my FCF numbers are before net working capital changes (nwc) which fluctuates year-to-year and quarter to quarter (but should be stable and net to zero over time) and the screeners will give you pretty big fluctuations because they likely include nwc.
I checked changes in NWC, and they really average almost exactly zero over the last 10 years.
The case is interesting, but my biggest doubt is their sensitivity to oil prices. Last time they nearly went bankrupt because of this. If they didn't have debt now... Otherwise, it can turn ugly, if oil prices start falling down.
From your hedging strategy I assume that you also consider this possible.
They are definitely sensitive to oil. But the Variperm acquisition looks a lot more steady with their exposure to oil sands. These projects have big upfront costs and then low maintenance capex with long reserve lives. I noted in the article that mgmt mentioned that 90%+ of Variperm's revenue comes from maintenance capex in the oil sand region. It is a more steady source of well production.
Big picture, oil sand projects can generate great returns even at $60, but that is not the case for US shale. So Variperm should provide cushion in case of a downturn.
But of course higher oil prices are always better. But even steady prices should be good.
Yes because I have more exposure to energy. I also added hedges to BKR, also an oil services provider, which last I checked trades at 17X FCF.
But if FET was my only energy play I wouldn't be adding as much hedges simply because I would have less exposure to the sector.
I would add puts in the XLE and BKR if yo are worried about $40-50 oil.
You can use 2020/2021 as a guide if oil crashes, except this time FET has much less debt and is in a much better position. And I talked to a Canadian producer that said even at $50 they would keep producing at maintenance levels.
Hi, thank you, I enjoyed this great write-up!
I wanna dig deeper myself, but one question that came immediately to mind. Is it a mistake of a data provider, or did they indeed have negative FCFs in 6 out of 8 last years (since 2017)? And net income was negative in each of them. Do you know the reason?
So a few things, they made some pretty big acquisitions in 2017/2018 so let's start from 2019. In 2019 they were profitable on a FCF basis, however they had big impairment charges and some write downs on their income statement. These are non-cash accounting numbers.
Depreciation/Amortization expenses were ~$63M vs capex of only $15M so this will always skew the income statement showing a bigger loss but real owner earnings were much higher.
If you look at the cash flow statement before working capital changes in the 10K you'll note that FCF was positive in 2019.
2020/2021 are the two years they lost money because of the downturn in energy prices. This is when they had to restructure the debt and the new CEO came in.
They had a pretty strong year in 2022 and generated over $40M+ in FCF and about ~$25M in 2023 with the slow down in drilling. These years have the same issues as 2019 as the income statement overstates expenses mainly due to their amortization/depreciation expense.
And in 2024 they will generate roughly $45-50M in FCF with the Variperm acquisition (excluding the $11M in transaction and acquisition costs for Variperm).
Note that all my FCF numbers are before net working capital changes (nwc) which fluctuates year-to-year and quarter to quarter (but should be stable and net to zero over time) and the screeners will give you pretty big fluctuations because they likely include nwc.
Thanks a lot for a detailed answer!! Will dig a bit deeper tomorrow.
I checked changes in NWC, and they really average almost exactly zero over the last 10 years.
The case is interesting, but my biggest doubt is their sensitivity to oil prices. Last time they nearly went bankrupt because of this. If they didn't have debt now... Otherwise, it can turn ugly, if oil prices start falling down.
From your hedging strategy I assume that you also consider this possible.
They are definitely sensitive to oil. But the Variperm acquisition looks a lot more steady with their exposure to oil sands. These projects have big upfront costs and then low maintenance capex with long reserve lives. I noted in the article that mgmt mentioned that 90%+ of Variperm's revenue comes from maintenance capex in the oil sand region. It is a more steady source of well production.
Big picture, oil sand projects can generate great returns even at $60, but that is not the case for US shale. So Variperm should provide cushion in case of a downturn.
But of course higher oil prices are always better. But even steady prices should be good.
Yes because I have more exposure to energy. I also added hedges to BKR, also an oil services provider, which last I checked trades at 17X FCF.
But if FET was my only energy play I wouldn't be adding as much hedges simply because I would have less exposure to the sector.
It's really unfortunate that we are not able to check Variperm's historical financials.
I would not worry about oil at $60, but what do you think about $40-50 case?
I would add puts in the XLE and BKR if yo are worried about $40-50 oil.
You can use 2020/2021 as a guide if oil crashes, except this time FET has much less debt and is in a much better position. And I talked to a Canadian producer that said even at $50 they would keep producing at maintenance levels.
Thank you! I'll try to reach out to IR/management, maybe they can give a bit more info.