Frank's International: Taking The Right Steps? - Frank's International N.V. (NYSE:FI)

Frank's International has been a disastrous investment for several years: ¿is it about to change?

The corporate reorganization will provide much more clarity on how each business segment is really doing.

The rock solid financial position of the company positions them in a very good spot for the up movement in their industry.

Frank's International has a rock-solid financial position with $172 million in cash and ~$4 million in debt. Due to its financial strength, the company is well positioned for the up cycle in its market. After tough times, the company is showing signs of improvement (revenue growth and expanding margins) while management has "reorganized" the company's segments, which combined with high incremental margins (30-50%) can help turnaround the company.

Frank's International (FI) is an industry leading oilfield services provider. The company provides a broad range of solutions for oil and gas producers. The company went public in 2013, and hasn't stopped falling since: ¿is this going to change?

To improve transparency management decided to reorganize the way the company worked.

With this structure, the company reported with four main divisions: US services, International Services, Tubular Sales and Blackhawk (a company that was bought by FI in 2016 to expand Frank's footprint into cementation).

This kind of reporting was misleading for several reasons: corporate expenses were mainly included in US services, making margins look far weaker than they actually were. Another reason was that this reporting allowed to know how the US businesses were doing but not how TRS (Tubular Running Services) was doing, and therefore could be misleading.

The image above is how the company will start reporting earnings from now on. The main advantage from the new structure is that every segment will be able to maneuver as a "separate" business.

The new structure will also make more meaningful the sections margins, as corporate expenses will be "counted" as a section and not included in any other division (therefore not distorting division margins).

The new structure will also allow the company to focus on the most profitable businesses the company operates in (not geographically but as segments, helping improve returns on investments).

The Tubular Running Services (TRS) segment supplies "casing and tubular running services" in the United States and internationally. This segment operates in about 50 countries on six continents. It delivers standard and complex solutions in land, shelf, deepwater and ultra-deepwater scenarios.

The TRS segment is showing clear signs of improvement year over year: 24% revenue growth while improving dramatically the margins (from 6% to 18%). Even though, QoQ revenue declined by 2.8% with margins contracting. This was caused by the cost of mobilization of equipment to new offshore projects.

We have to highlight that US Onshore services revenue grew (11th consecutive quarter) even with a decline in rig counts. Management expects the segment to continue performing well.

The Tubulars division designs, fabricates and distributes "connectors and casing attachments for large outside diameter heavy wall pipes". This segment is also specialized in the building and distribution of "proprietary drilling tool solutions that focus on improving drilling productivity".

This segment saw moderate revenue growth and a little margin expansion year over year. QoQ revenue declined by $3.6 million (16%), but margins expanded from 12% to 22%. This made the Adjusted EBITDA grow 46%, offsetting the revenue decline.

The Cementing Equipment (CE) division supplies specialized equipment, services and products used in the construction, completion or abandonment of wells onshore and offshore. This segment is what the Blackhawk division was before the reorganization.

The CE segment has performed very well YoY (46% revenue growth) and QoQ (22% revenue growth). Margins have improved dramatically too, jumping to 14% from 7% in Q42018 and from 5% in Q12018.

Frank's International first quarter wasn't perfect, but the company is showing clear signs of improvement. There was a $41 million decline in cash and short-term investments, caused mainly by a $16 million increase in accounts receivable, a $17 million decrease on payables and $8 million in capex spending.

The $8 million in capex spending is the run-rate the company expects for the rest of the year. Management expects to be free cash flow neutral in Q2 and to be FCF positive in Q3 and Q4.

In the conference call, an analyst asked if FI was seeing a tightening throughout the system in the TRS offshore market:

Mike, I wanted to see if I could just ask a little bit about how the TRS market offshore is developing from a pricing standpoint given that there is, I guess, not really tightness yet, but tightening throughout the system. And where you are in your pricing cycle with regard to, I guess, maybe selective opportunities whether it's in the Gulf of Mexico, internationally if anything is happening ever, do you think that's more going to be sort of on the comp for 2020 or later?

But as you know, the postings of offshore drilling rigs have moved up quite nicely. And it always has to do whether it's what we do, what the offshore drilling contractors do with supply and demand. And they're starting -- in their segment, they're starting to see a tightening of supply of certain types of rigs, so that's starting to propel prices. So the corollary for us has to do with our competition. We've got local competitors that can put in bids against us as well as some of the larger competitors. And so in terms of a tightness of deliverability, we haven't quite seen the same degree of some of the offshore drilling contractors. So our pricing offshore, it varies quite a bit by segment -- by market, geographic market, but we've -- we're seeing a little bit of upward movement, but not anything near what some of the other offshore providers have seen. So I'll let Steve add a little color to that. Yes. Thanks, Mike. Yes. I think, Ian, first of all, I think the bottom's being found in offshore pricing, and we're on the early stages of a recovery. Like Mike said, we're using sort of opportunistically trying to put price up as tenders come through. Our sales cycle is quite long on a number of these projects and the fact that we're tied into multi-year contracts. So that will take some time to work its way through to the bottom line results. Thank you.

We have to keep in mind that TRS is the largest segment in FI (accounting for ~68% of the revenue), and therefore an improvement in this segment has a large effect on the whole company.

The other two segments (Cementing Equipment and Tubulars) are poised to continue performing strongly as they focus on international markets (124% growth YoY in international sales from Tubulars to $2 million and 212% growth YoY in international sales from CE to ~$6 million) and US E&P capex spending continues rising (at a much slower pace, with an estimated increase of about 2% YoY).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for educational and informational purposes and should not be considered investment advice.

Source: Seekingalpha.com

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