Distressed Bond Opportunity In Forum Energy Technology

It is Fixed Income Friday at the Raptor!

music selection:  “Evening Star” — Dragonforce

The markets are closed today for the Good Friday holiday.  I was busy yesterday in preparation however placing a limit order for a distressed bond.  I bid 90.5000 on (CUSIP: 34984VAB6).  The bond is trading near that valuation and I hope to get a fill.  Why FET?

Forum has demonstrated that it can produce sufficient amounts of free cash flow selling oilfield service equipment even when the price of oil is as low as 40 dollars a barrel.  The new normal in my opinion, and that of my old oilfield coworkers, is that domestic crude will be range bound for decades between 40 and 70 dollars a barrel.  Shale production is very easy to turn on and off and serves as the perfect swing barrel.  A lot of production becomes unprofitable below 40, placing a floor on the rig count at that level.  Prices above 60 has essentially even the weakest players minting cash and results in a rapid increase in drilling activity, thus providing a ceiling on pricing.  This relative certainty is going to lead to a slowly expanding domestic crude industry.

Forum is one of the few players in the industry that has a management that turned to focusing on free cash flow over growth early in the cycle.  They have been consistently profitable across the pricing cycle.  Management has also shifted its product mix.  Previously, they were highly dependent on equipment with a highly cyclical nature.  Today, about three fourths of revenue comes from consumable items that see good volume through down cycles, thus ensuring robust cash flow.  For the past two years management has run with negative free cash flow to build inventory.  The stock has been punished and management has seen the error of its ways and promises to return to its historical focus on positive free cash flow.

Those of you playing the home game are probably asking yourselves, can these guys pay me back if I buy their bonds.  My estimate based on projected cash flow now that the company is no longer building inventory is interest is covered about five times over.  I usually start feeling very confident at two times interest coverage.  This company is currently in really good shape.

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