Executive Summary / Key Takeaways

• Forum Energy Technologies has undergone a significant transformation, strengthening its balance sheet, enhancing liquidity, and establishing a track record of robust free cash flow generation, including $105 million in 2024 and $7 million in Q1 2025.
• The company's "Beat the Market Strategy," centered on differentiated technology, a global footprint, and profitable market share gains, is designed to outperform industry activity levels, particularly leveraging growth in international markets and energy transition applications.
• Despite facing near-term market headwinds from commodity price volatility, geopolitical uncertainty, and tariff impacts (notably affecting the Valve Solutions product line), FET is proactively managing costs, optimizing its supply chain, and expects to bridge potential EBITDA declines with working capital unwinding.
• A fortified balance sheet, including no debt maturities until 2028 and a net leverage ratio of 1.56x as of Q1 2025, positions FET to execute its capital deployment framework, allocating 50% of free cash flow to debt reduction and 50% to strategic investments, including a compelling $75 million share repurchase program.
• Key factors for investors to monitor include the trajectory of commodity prices and global activity levels, the effectiveness of tariff mitigation strategies, and the company's continued execution on its free cash flow generation and capital return plans.

Forging a New Path: FET's Transformation and Strategic Foundation

Forum Energy Technologies, Inc. (FET) operates as a global manufacturing company providing a range of value-added solutions to the oil, natural gas, industrial, and renewable energy industries. Its business model is characterized by a mix of capital equipment and consumable products, with approximately 80% of Q1 2025 revenue derived from consumable and activity-based sales, highly correlated to drilling and completion activity levels. Over the past three years, FET has undergone a notable transformation, marked by significant growth in revenue and EBITDA, margin expansion, and a substantial reduction in net debt, fundamentally reshaping its financial profile. A pivotal moment in this journey was the acquisition of Variperm Holdings Ltd., which has contributed meaningfully to the company's scale, margins, and free cash flow generation.

At the core of FET's approach is its "Beat the Market Strategy," a multi-pillar initiative aimed at achieving profitable market share growth, developing differentiated products, leveraging its optimized global manufacturing and distribution footprint, and expanding participation in energy transition markets. This strategy is designed to enable FET to grow faster than the broader energy market by focusing on areas where its technology and operational capabilities provide a distinct advantage.

The competitive landscape for FET is populated by larger, more diversified players like Baker Hughes (BKR), Schlumberger (SLB), and Halliburton (HAL), as well as more specialized firms such as Tetra Technologies (TTI). Compared to these larger competitors, FET operates at a smaller scale, which can sometimes result in higher costs of goods sold, impacting margins. For instance, while FET's latest TTM Gross Profit Margin stands at 30.92%, competitors like SLB and HAL reported TTM Gross Profit Margins of 21% and 19% respectively (though these figures can vary by specific product lines and reporting methods, and competitive analysis suggests higher margins for SLB and HAL in certain segments). FET's TTM Operating Profit Margin of -9.87% and EBITDA Margin of -5.61% also indicate a profitability lag compared to peers like BKR (TTM EBITDA Margin -5.61%), SLB (TTM EBITDA Margin 17%), and HAL (TTM EBITDA Margin 17%), reflecting differences in scale, product mix, and operational efficiency. However, FET strategically targets niche markets where its specialized offerings can command better positioning and potentially higher margins within those specific areas.

Technological Differentiation: The Engine of the Beat the Market Strategy

FET's ability to compete and execute its strategy is significantly underpinned by its differentiated technology across its segments. In the Drilling and Completions segment, key technological differentiators include:

• Subsea Remotely Operated Vehicles (ROVs) and the Unity Operating System: FET provides ROVs and launch and recovery systems for offshore oil and gas, offshore wind, and defense applications. The company believes it holds a strong market share in ROVs. The newly developed Unity operating system is a leading-edge technology for remotely controlling ROVs, utilizing cloud-based monitoring and supporting AI tools for predictive maintenance. This technology aims to reduce personnel on vessels and ultimately enable fully remote operation from central control stations. While specific quantifiable benefits are limited, the strategic intent is clear: to improve safety and reduce costs for customers, addressing a key industry demand. The company delivered its first Unity system in late 2024 and planned four more in Q1 2025 to a single operator, indicating initial customer adoption.
• Coiled Tubing: FET is noted for its specialized coiled tubing designs, including proprietary taper designs, engineered to reach the farthest laterals in unconventional wells. This technology maximizes weight on bit, enabling customers to drill longer and more efficiently. The company's continuous quench and temper line is believed to be unique among manufacturers, supporting the production of heavy-duty coiled tubing strings required for deeper and higher-pressure applications, such as those encountered in natural gas drilling. While a non-cash impairment charge was taken on coiled tubing intangible assets in Q4 2024, management maintains it remains a valuable contributor with strong profitability and differentiated technology.
• Stimulation and Intervention Equipment: Products like FastConnect, a zipper manifold system, aim to improve safety and efficiency in multi-well pad frac operations. Powertron power ends, the drive for frac pumps, are seeing increased replacement cycles (12-18 months) due to higher service intensity, demonstrating the consumable nature and demand for durable components.

In the Artificial Lift and Downhole segment, technological advancements include:

• MagnaGuard: This tool is designed to safeguard artificial lift equipment and downhole cables, specifically addressing safety concerns associated with permanent magnet motor ESPs. By providing reliable protection from potential electrical risks during sand fallback events, MagnaGuard removes a critical barrier to the wider adoption of these highly efficient pumps. Its ability to be used on all ESP brands expands FET's addressable market and could meaningfully enhance profitability by facilitating the use of more efficient production methods.
• PumpSaver Plus: Another artificial lift solution aimed at increasing oil production and reducing downtime.
• Customized Downhole Technology: Including sand and flow control products for heavy oil applications (a strength of the Variperm acquisition).

The company's JumboTron XL heat transfer units, initially prominent in the frac industry, have found new applications in the power generation sector, including AI data centers. This expands FET's addressable market into a rapidly growing area, leveraging existing technology for new demand.

The "so what" for investors is that these differentiated technologies, while not always providing a quantifiable cost or efficiency advantage over all competitor offerings across the board (especially against the scale and integrated digital solutions of majors like BKR and SLB), allow FET to carve out profitable niches, particularly in specialized applications (subsea, unconventional drilling) and emerging markets (power gen, energy transition). They support the company's goal of gaining market share even in challenging environments and provide a basis for future growth as industry demands evolve towards greater efficiency, safety, and remote operations.

Performance Amidst Headwinds: Financials and Operations

FET's recent financial performance reflects a company executing its strategy while navigating a volatile market. For the first quarter of 2025, the company reported revenue of $193.3 million, a 4.5% decrease compared to $202.4 million in Q1 2024. This decline was primarily attributed to lower global drilling and completions activity. The Drilling and Completions segment saw revenue decrease by 2.9% to $115.6 million, mainly due to softness in Drilling and Stimulation & Intervention, partially offset by strength in Coiled Tubing from specific projects. The Artificial Lift and Downhole segment's operating income decreased by 38.1% to $7.3 million (a 9.4% margin), primarily due to an unfavorable product mix. Corporate SG&A expenses also increased slightly.

Despite the revenue dip, operating income saw a significant increase, rising 175.1% from $3.2 million in Q1 2024 to $8.8 million in Q1 2025. This improvement was largely driven by the Drilling and Completions segment, where operating income more than doubled to $9.4 million (an 8.1% margin), benefiting from reduced amortization expense following the Q4 2024 intangible asset impairment. The Artificial Lift and Downhole segment's operating income decreased by 38.1% to $7.3 million (a 9.4% margin), primarily due to an unfavorable product mix. Corporate SG&A expenses also increased slightly.

Orders in Q1 2025 totaled $201 million, resulting in a book-to-bill ratio of 104%, indicating demand exceeding current revenue recognition. This included a rebound in Stimulation and Intervention orders and meaningful bookings for subsea projects, reflecting strength in the offshore market.

A key highlight of FET's recent performance is its consistent free cash flow generation. The company generated $7 million in free cash flow in Q1 2025, a three-fold increase from Q1 2024, marking the seventh consecutive quarter of positive free cash flow. This builds on a strong 2024 performance, where FET generated $105 million in free cash flow, the highest since 2015, significantly benefiting from efficient working capital management, including a $34 million reduction in inventory and an $8 million improvement in Days Sales Outstanding (DSOs).

The company's balance sheet has been substantially strengthened. As of March 31, 2025, FET had cash and cash equivalents of $31.1 million and $77.4 million available under its Credit Facility, totaling $108.5 million in liquidity. Net debt stood at $146 million, resulting in a net leverage ratio of 1.56x. A major step in this deleveraging journey was the $100 million senior secured bond offering in November 2024, which allowed the company to retire existing debt and extend maturities to 2028 and 2029, providing significant financial flexibility.

Outlook, Guidance, and Capital Deployment

Looking ahead, FET anticipates 2025 to be a transitional year for market activity due to ongoing geopolitical and macroeconomic uncertainties. Management expects global drilling and completion activity to decrease by 2% to 5% from 2024 levels, with North America forecasted to soften while international activity is anticipated to be generally flat.

Based on this market outlook and the expected benefits of its "Beat the Market Strategy," FET has provided full-year 2025 Adjusted EBITDA guidance in the range of $85 million to $105 million. The lower end of this range ($85 million) is specifically tied to a scenario where current low commodity prices persist, leading to a potential reduction in global rig count in the second half of the year. For the second quarter of 2025, the company expects relatively flat sequential results, with revenue guided between $180 million and $200 million and EBITDA between $18 million and $22 million. This guidance includes estimated corporate costs of $7 million, depreciation and amortization of $8 million, interest expense of $5 million, and income tax expense of $3 million.

Despite the potential for market softness impacting EBITDA, FET remains confident in its ability to generate strong free cash flow. The full-year 2025 Free Cash Flow guidance is maintained at $40 million to $60 million. Management expects that if market activity declines and EBITDA is closer to the lower end of the guidance range, the unwinding of working capital will help bridge the potential decrease in EBITDA, demonstrating the operational improvements made to enhance cash conversion. This guidance assumes approximately $10 million in capital expenditures for 2025, primarily for maintenance.

The company's strengthened balance sheet and expected free cash flow generation underpin its capital deployment framework. FET plans to allocate 50% of its free cash flow to further reduce net debt and the remaining 50% to strategic investments, including share repurchases and potential M&A. The board authorized a $75 million share repurchase program in December 2024, signaling a commitment to returning value to shareholders. While the ability to repurchase shares is subject to maintaining a net leverage ratio below 1.5x pro-forma, management believes their forecasted free cash flow supports both debt reduction and continued share repurchases this year.

Risks and Challenges

While FET has demonstrated resilience and strategic execution, several risks and challenges could impact its performance and outlook. The most significant near-term risks stem from the volatile macroeconomic and geopolitical environment.

• Commodity Price Volatility: Fluctuations in oil and natural gas prices directly influence customer capital and operating budgets. A sustained period of low prices, particularly oil hovering near four-year lows as observed in Q1 2025, could lead to reduced drilling and completion activity, impacting FET's revenue, especially given the historical lag of three to six months between price changes and rig count adjustments.
• Trade Policies and Tariffs: Recent upheaval in U.S. trade and tariff policies has created significant economic uncertainty. Tariffs, particularly those levied on Chinese imports, have already impacted demand for FET's Valve Solutions product line, leading to a customer "buyer strike" and delayed deliveries. While FET is implementing mitigation strategies like price increases and supply chain optimization (leveraging global facilities in Saudi Arabia and Canada), the duration and impact of these disruptions remain uncertain and could continue for several quarters. Tariffs also contribute to broader price inflation on raw materials, which FET must pass on to customers.
• Market Activity Decline: The expectation of a 2-5% decrease in global D&C activity in 2025, with potential for further declines in the second half if commodity prices remain low, poses a direct challenge to revenue growth. While FET's "Beat the Market Strategy" aims to offset this, execution risk exists.
• E&P Consolidation: Ongoing consolidation among U.S. E&P companies can lead to reduced overall spending as combined portfolios are evaluated, contributing to the softness in the U.S. market.
• Execution Risk: Successfully implementing cost reduction initiatives ($10 million annualized target), optimizing supply chains, and effectively managing inventory to bridge potential EBITDA declines requires diligent operational execution.

These risks highlight the importance of FET's flexible cost structure (80-85% variable), proactive management actions, and diversified global footprint in mitigating potential negative impacts on its financial performance and cash flow generation.

Conclusion

Forum Energy Technologies has demonstrably transformed its financial and operational standing over the past few years, culminating in a fortified balance sheet and a proven ability to generate substantial free cash flow. The company's "Beat the Market Strategy," underpinned by differentiated technology in niche areas like subsea robotics, advanced coiled tubing, and specialized artificial lift solutions, provides a foundation for profitable market share gains, particularly as it expands its reach in international markets and capitalizes on opportunities in energy transition applications like power generation for AI data centers.

While the near-term market outlook is clouded by commodity price volatility, tariff impacts, and anticipated declines in global activity, FET is proactively addressing these challenges through cost management, supply chain optimization, and leveraging its global manufacturing capabilities. The company's confidence in its 2025 free cash flow guidance, even in a potentially lower EBITDA scenario, underscores the operational improvements made to enhance cash conversion and working capital efficiency. With no significant debt maturities until 2028 and a clear capital deployment framework focused on both debt reduction and shareholder returns via share buybacks, FET is positioned to create value for investors. The core investment thesis rests on the company's ability to continue executing its strategy, leveraging its technological edge and operational discipline to outperform the market and translate profitability into sustainable free cash flow, even as it navigates external uncertainties. Investors should closely monitor commodity price trends, the effectiveness of tariff mitigation efforts, and the company's progress in executing its share repurchase program as key indicators of future performance.