Shares of deepwater construction specialist StoltOffshore SA
As excess industry capacity has been worked off and the market for deepwater projects has improved, Stolt has been able to pay down considerable amounts of debt and posted breakeven results for 2004. While net operating revenue for 2004 was down about 16%, the company swung from a large operating loss to an operating profit of $29 million.
Stolt was also able to generate free cash flow for 2004 to the tune of $130 million. Although modest relative to the company's $1.2 billion in revenue, it was nevertheless a significant accomplishment for management.
Part of what got Stolt in trouble in the first place were undesirable contracts that were a product of global oversupply a few years back. So poor were the terms of these prior contracts that Stolt actually generated greater income off of lower revenue in nearly all of its geographical segments for 2004.
The outlook for future growth is encouraging. The company has a backlog of about $1.8 billion (more than double the year-ago level), and roughly $1 billion of that should be billed in 2005. In other words, Stolt has more than 80% of 2004's revenue already booked into 2005. Better still, new contracts continue to come, and the company is now in a position of leverage where it can refuse contracts that don't meet its desired profitability standards.
Additionally, the company remains well-positioned in key areas. Stolt has a very strong presence in Africa, and a considerable amount of the exploration and new energy production in the world is expected to occur in African deepwater regions. Similarly, the company is positioned to continue to benefit from operations in Europe, the Gulf of Mexico, and offshore Asia.
No one in their right mind should confuse Stolt with being a high-quality growth stock. The business itself is volatile and cyclical and the company is still in the midst of its turnaround. Were oil prices to drop sharply, it wouldn't be out of the question for Stolt to see difficulties in securing enough lucrative business to propel its recovery further.
That said, the stock is trading at an EV-to-FCF multiple of less than 11 and the general consensus amongst major oil producers is that more and more drilling and exploration activities will occur in deepwater locales. Consequently, Fools with a hankering for a risky turnaround story might want to take a look at Stolt shares.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
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