We talk about balance sheet strength quite a lot here at the Fool, but it would probably be impossible to overstate the importance of a well-financed company.
I present to you exhibit no. 9,872 -- a company by the name of Lufkin Industries
Look no further than the past year to see what a market implosion can do to a purveyor of oil pumping equipment. The quarterly earnings just reported this week are off prior year levels by more than two thirds. Total company backlog, which includes both oilfield and power transmission equipment, is down from $310 million to $162 million.
Things are even so bad that Lufkin's service and automation revenue -- typically more of a recurring revenue stream than equipment sales -- also took a hit in the second quarter. Automation sales fell 38% in the quarter. Management characterized this as an "anomaly" -- and for their sake, I hope it proves to be!
The most staggering statistic, though, has to be the headcount reductions in Lufkin's oilfield manufacturing division. Headcount has been reduced by 38% in Canada, and 68% here in the States.
I think nothing could more starkly illustrate the tough times being faced across the oil services space, from big boys like Schlumberger
Now here's why Lufkin, while bruised, will come out of this just fine.
Some service companies have the additional burden of debt service to pay while cash flow evaporates. This is the difference between life and death during a downturn. Keeping leverage to a minimum is exactly what allows companies like Lufkin and Dawson Geophysical
Sounds simple, but it's a lesson we all need to learn, and often re-learn, if we're to survive these shakeouts.