What happened
Shares of Forum Energy Technologies (FET -0.26%) were up 21.3% at 3:38 p.m. EST on Friday following the release of the company's fourth-quarter operating and financial results Thursday evening.
The big driver behind today's surge is an unexpected earnings "beat" for the company, which supplies parts and components to the oil and gas industry.
So what
In short, today is a product of beating expectations. Forum Energy Technologies reported $272.9 million in sales in the quarter, a small 2% improvement from the third quarter and a 10% gain from last year. On the bottom line, it reported a huge $383.7 million loss on a GAAP basis.
Image source: Getty Images.
You read that correctly: The company's net loss was more than $100 million higher than its total sales in the quarter. But since this net loss was almost entirely due to the downward revaluation of non-tangible assets, the company also provided its results when excluding these impairments.
And on this adjusted basis, Forum reported a profit in the quarter worth $0.08 per share. This was substantially better than what Wall Street analysts were looking for. On average, Mr. Market was predicting the company to report a $0.03 per share loss, even after making adjustments.
And when a company beats Wall Street's best estimates, it's not uncommon for its stock price to soar.
Check out the latest Forum earnings call transcript.
Now what
On one hand, the "beat" on an adjusted basis is nice, while the more important metric, quite frankly, are the positive cash flows the company generated from its operations, and the fact that it generated free cash flows.
Yet at the same time, investors should be cautious about investing in any company that takes such a substantial writedown in goodwill, which is in essence the value of its brands and product lines to generate profits over time. As CFO Pablo G. Mercado put it on the earnings call:
Due to the precipitous decline in oil prices during the fourth quarter and our stock price ending the year well below our book value, we evaluated the carrying value of goodwill in all of our product lines. As a result of that analysis, we determined that our drilling and downhole product lines were deemed to have an impaired goodwill in addition to some impaired intangible assets in the downhole product line.
Forum reduced the carrying value of these assets because they no longer reflected the long-term earnings-producing value they provided the company. So an adjusted "beat" ignores the longer-term implications of the company's financial move.
That's not to say that Forum would be a bad investment at this point. Management does seem to have it on a solid footing, and if it can continue to generate positive cash flow, its prospects are likely to be solid. But it's also operating in one of the toughest segments of the oil and gas space, as a supplier that's likely to feel the brunt of downturns first, while being one of the last to profit from upswings.
Frankly, I think there are other, better investments in oil and gas right now.
