Forbes Energy Services Ltd. (NASDAQ: FES) recently said it was exploring capital structure related strategic alternatives. The management didn’t elaborate what exactly was being pursued and when they expect a deal to be ready. But when a company says it is exploring strategic alternatives, it is almost always a sign of bad things. Could it be that FES is running out of fuel to keep its engine roaring?
The genesis of the trouble is in lower oil prices
The lower crude oil price has incinerated energy companies and Forbes Energy Services Ltd. (NASDAQ: FES) is no exception. Many of its customers have significantly cut their spending on drilling and production activities. For the businesses that remain, competition has become fierce amid unjustified pricing among rivals hungry for market share.
To survive the storms in its industry, Forbes Energy Services Ltd. (NASDAQ: FES) said it was turning to cost-cutting. Toward that end, the company has suspended certain operating yards, trimmed spending and jumped on more prudent labor costs management. According to the management of the company, the idea is to operate on the leanest budget possible by removing unessential costs until the situation in energy industry improves.
But it is not clear what the latest announcement about exploring strategic alternatives is about. However, it can be speculated that the company could be seeking fresh capital injection or even selling itself to the highest bidder. But with the lower oil prices, some energy companies have been reluctant to put themselves on the sale block because of the potentially lower bids they are likely to generate.
OPEC fails to cut production; Forbes Energy Services Ltd. (NASDAQ: FES) suffers?
There were hopes that OPEC members meeting last week would agree to lower production to help eliminate the global crude oil supply glut that has destroyed prices. But the cartel seemed to suggest that oil prices will correct without external interference.
Deteriorating financial performance
To get the picture of Forbes Energy Services Ltd. (NASDAQ: FES)’s challenges, the company generated revenue of $31.9 million in 1Q2016, a 22.9% decline from the corresponding quarter a year earlier. The company’s net loss for the quarter also widened to $1.11 a share compared to $0.88 a share in the year ago quarter.