With the North American rig count now starting to stabilize, investors in the oil and gas space should consider starting to scour the landscape of beaten up servicing companies to look for bargains. There are several attractive options out there right now from Weatherford to nearly all of the major construction contractors, but one of the best investments is a little known company that has largely flown under the radar of most investors.
Frank's International (FI) is a mid-cap provider of engineered tubing and casing to exploration and production companies both onshore and offshore. The company went public in mid-2013 and spent the first year flailing about, trying to figure out how to make the transition from a very successful family owned company with a long history to a publicly traded company. While Frank's has been around since 1938 and operates in dozens of countries all over the world, the firm really lacked the right people in their finance department to help run a smooth operation as a public company beholden to shareholders on a quarter-by-quarter basis.
After some initial struggles including earnings misses, the firm ultimately made some management changes -- just in time to see the global oil markets start to tank last fall. Frank's relies heavily on the offshore side of the E&P field with about 75% of revenues coming from that area. That's both a blessing and a curse. Offshore E&P is a more stable field than onshore, and there are fewer fly-by-night operators in the space. On the other hand, the offshore field is suffering exactly the same issues as onshore, so Frank's has not been insulated from the downturn to any great extent.
At this point, all of these issues are reflected in the company's stock price though. Frank's is trading at around $20 a share currently and the firm earned about $1 a share over the last year. That price-to-earnings multiple (P/E) may seem a little rich, but it's worth considering two important points: 1) Frank's is a technology leader in the space and part of a global duopoly in the tubular market (alongside Weatherford) and 2) at this stage, the company is really experiencing trough pricing and demand. The firm also has no debt, meaning that no matter how long the downturn lasts, or how slow the market is to recover, Frank's is in no trouble whatsoever financially.
As part of a global duopoly, Frank's has outstanding margins -- on the order of 35% to 40% and just as importantly, the firm is a technology leader in the space. Ever since the Gulf of Mexico incident a few years ago, a critical imperative for all offshore companies is making sure that accidents do not happen. As BP (BP), Haliburton (HAL), and Transocean (RIG) all discovered, one bad incident can hobble a company and tie management's hands for years.
To that end, Frank's can play a role in helping drillers reduce the likelihood of an accident by putting the highest quality, most technologically advanced product in place for clients -- and charging a premium for the reassurance that their products provide. Essentially, very few companies are going to scrimp on costs for a solid foundation on which to place their very expensive assets.
Just as importantly, Frank's, like the rest of the sector is also earning at trough levels right now. The company has had to make some price concessions, just like all other service companies in the sector, but those concessions have been pretty minimal. Based on the management calls, it looks like concessions for Frank's have been around 5% to 10% versus an average across the space of perhaps 20%. Frank's pricing is holding up well, and as demand recovers, EPS should ramp up markedly.
Further, within a couple of years, Frank's internal cost cutting efforts should yield an extra $100 million or so in Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The company currently pulls in roughly $400 million annually in EBITDA. At these levels, Frank's International should have considerable upside over the current price -- a fair price in a year or two might well be double the current stock price.
By Michael McDonald of Oilprice.com
