Netherlands-domiciled geological engineering company Fugro (XAMS:FUR) was the largest detractor from performance for the calendar year due to continued declines in oil prices, which led to further postponements/cancellations of off-shore projects. During the fourth quarter Fugro announced another significant downgrade to its earnings outlook as well as a host of restructuring/impairment charges, which put into question its ability to comply with financial covenants. As the quarter progressed, Fugro’s balance sheet improved as Royal Boskalis Westminster acquired nearly a 15% stake in the company and Fugro secured amendments to its financial covenants. However, falling oil prices could make the operating environment in 2015 even more challenging than it was in 2014.
Fugro is a highly operationally-geared business, and our original investment thesis assumed a continuation of high single-digit growth in off-shore exploration and production capital expenditures (E&P CAPEX), which has proven to be inaccurate. Because we miscalculated the operating environment for Fugro, over the past six months we have significantly reduced our estimate of Fugro’s intrinsic value. However, even with the challenges Fugro faces, we believe that off-shore E&P CAPEX trends will eventually improve and that Fugro’s market positions are strong, Thus, we remain invested in the name.
From David Herro (Trades, Portfolio)'s Oakmark Intl Small Cap (Trades, Portfolio) Fund 4Q 2014 Letter.
