What: Shares of FMC Technologies (NYSE:FTI) declined more than 17% in July. While the company's shares were somewhat affected by the general pullback in energy stocks, the lion's share of the blame can be placed on missing earnings expectations for the quarter and the annoucement that the company is cutting its labor force in its most profitable segment.
So what: Considering the mixed bag we've had for energy companies' earnings this past quarter, an earnings miss alone probably wouldn't have caused shares of FMC to move as much as they did. The bigger reason was more likely that the company was cutting its workforce in its subsea segment. This aspect of the business isn't only the largest, but it also had the most resilient earnings, as operational profits declined only 5% while the surface technologies and energy infrastructure segments declined 65% and 71%, respectively.
These cuts were made in anticipation that the subsea segment of the company's earnings could get worse in the coming quarters. The subsea segment is reliant on offshore development projects that can be on order several years in advance, whereas demand for surface equipment can change in a matter of months since the development cycle of a shale well is so short. This move is a sign that the company anticipates implementing fewer offshore development projects in the coming quarters.
Now what: There are two lenses in which you can view this sort of move: It's a sign that things are about to get worse for the company and you should get out, or it's a sign that management knows the business well and is anticipating these sorts of things to make it a better company once the oil-price storm calms down.
I tend toward the latter. By managing its costs now and preserving what profitability it can in a down market, it should be able to stay more financially flexible once prospects get better. Chances are things could get worse before they get better, but that doesn't mean you should write off FMC Technologies yet.
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