Offshore And Subsea Demand Will Support Long Term Energy Equipment Upside

Catalysts

About Forum Energy Technologies

Forum Energy Technologies provides engineered equipment and technology solutions that improve efficiency and reliability across global oil, gas, and adjacent energy and defense markets.

What are the underlying business or industry changes driving this perspective?

• The sustained global need to replace declining oil production and meet incremental demand, including rising natural gas usage to power AI data centers and LNG exports, supports FET's view that its addressable markets could expand significantly over the next five years, which in turn could support durable revenue growth and operating leverage.
• Execution of the Beat the Market strategy in leadership and growth markets, evidenced by a 21 percent backlog increase to the highest level since 2015 and consistent positive free cash flow, positions FET to grow market share in a flat or modestly improving activity environment, supporting higher earnings quality and more resilient margins.
• Rapid uptake of differentiated growth products such as coiled line pipe and artificial lift solutions, where early adoption is accelerating in the Middle East, offshore and key international basins, creates a clearer path to increasing share in these markets and lifting consolidated revenue while supporting mix driven margin improvement.
• Longer cycle offshore and subsea activity, including multi year ROV and rescue submarine awards that extend revenue visibility into 2027, provides a more stable base of higher quality backlog that can help smooth cyclicality in U.S. land and support steadier EBITDA and free cash flow generation through periods of commodity price volatility.
• Structural cost reductions expected to reach roughly $15 million annually by 2026, facility consolidation, tariff mitigation via global manufacturing, and capital light operations are intended to increase incremental margins and free cash conversion, which could create capacity for continued net debt reduction, sizable buybacks and potential accretive acquisitions that may enhance earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Forum Energy Technologies's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from -14.6% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $61.6 million (and earnings per share of $6.34) by about December 2028, up from $-115.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.2x on those 2028 earnings, up from -3.2x today. This future PE is lower than the current PE for the US Energy Services industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If Forum Energy Technologies successfully executes its Plan FET 2030 by doubling revenue over the next 5 years through targeted share gains in leadership and growth markets, the share price is likely to re-rate higher as investors price in structurally higher revenue and free cash flow.
• Management expects FET's addressable markets to expand by more than 50 percent by 2030, driven by rising global oil and gas demand, LNG build out and AI related power needs. This cyclical plus secular uplift could materially boost revenue and EBITDA, supporting a higher long term earnings base.
• Consistently strong free cash flow generation, with guidance of 70 million to 80 million dollars in 2025 and a 20 percent free cash flow yield today, alongside ongoing structural cost reductions of roughly 15 million dollars annually, could expand net margins and justify a higher valuation multiple.
• Rapid growth in differentiated products such as coiled line pipe and artificial lift solutions, combined with low existing share of roughly 8 percent in 3 billion dollars of growth markets and a stated goal to double that share, creates a long runway for above industry revenue growth and improving mix driven margins.
• Large, multi year offshore and subsea awards, including ROVs and rescue submarine contracts that extend backlog visibility into 2027, diversify away from volatile U.S. land activity and may support steadier earnings and free cash flow growth than the share price currently reflects.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $33.0 for Forum Energy Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $772.5 million, earnings will come to $61.6 million, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $32.83, the analyst price target of $33.0 is 0.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.