Is TechnipFMC Stock A Buy?

Investors looking for undervalued energy stocks with lots of upside potential will probably find TechnipFMC interesting. Its focus on renewable energy projects, the spin-off that led to the creation of Technip Energies, and a resilient backlog makes the Franco-American company well positioned to benefit from an improved market outlook in the coming months

TechnipFMC plc [NYSE: FTI] is a French-American, UK-domiciled global energy service company that provides fully integrated projects, products, and complete project life cycle services for the traditional and new energies industry.

The company operates across three business segments:

• Subsea,
• Onshore & Offshore, and
• Surface Technologies.

TechnipFMC offers the full spectrum of subsea equipment and subsea engineering and construction services, including:

• subsea processing,
• manufacturing,
• oil and gas exploration and extraction platforms,
• field architecture,
• drilling,
• subsea field infrastructure,
• subsea pipe systems,
• fabrication and installation,
• gas treatment,
• floating facilities,
• project development and
• management consultancy.

The company also provides various surface equipment used with onshore oil and gas wells.

TechnipFMC is one of the largest equipment and services providers to the global energy industry. The company is headquartered in London, UK.

It was formed by the coming together of FMC Technologies of the United States and Technip of France, which merged a top subsea engineering and construction business with a top subsea equipment manufacturer, 

Is TechnipFMC Stock A Buy?

TechnipFMC [NYSE: FTI] had an incredibly tough year because of the pandemic and the steep decline it caused in oil prices because of the plummeting demand. The CEO and chairman of the Franco-American oilfield company Doug Pferdehirt called it a year of “hardship and difficulties”.

However, dark clouds hovering over it have started to disperse with the opening up of the economy and a rebound in customer demand for its subsea equipment solutions.

The shares of TechnipFMC have rebounded close to 60% from the nadirs observed last year, supported by significant revenue growth and positive operating cash during the first nine months of FY2020.

The company’s aggressive cost-reduction plan, focus on project execution, and a sizable order backlog seems to have kept the company on track despite the global pandemic.

The company announced targeted cost savings of more than $350 million, which it achieved well before the end of the year.

To the company’s credit, its revenues, despite a slow recovery in benchmark prices and energy demand as well as the global pandemic, remained relatively flat in 2020, supported by its subsea and construction businesses.

On the earning front, Technip FMC had a decent Q4 results, with a revenue beat and narrow EPS miss.

TechnipFMC’s revenues for 2020 were $13.1bn, a small decline on the previous year’s figure of $13.4bn. The oil and gas company reported $0.05 EPS for the quarter, while the consensus estimate was EPS of $0.21.

For the full year, capital expenditure was $292 million, and full-year free cash flow was $365 million.

Analysts will be keenly watching Q1 earnings, as TechnipFMC’s results will be excluding Technip Energies. TechnipFMC also achieved its cost savings target of more than $350 million “well ahead of schedule”, as well as providing a “comprehensive overview” of its ESG efforts.

The firm has committed to cutting its Scope 1 and 2 equivalent emissions in half by 2030.

In a conference call, the CEO Doug Pferdehirt also highlighted the “noticeable achievements” that TechnipFMC delivered throughout 2020.

One of the most significant was the accomplishment of its objective of separating its engineering and construction activities from its upstream oil services business. The spin-off created two, independent, publicly traded companies, TechnipFMC and Technip Energies.

TechnipFMC is now an out-and-out technology and services company while Technip Energies, which specializes in engineering and technologies for liquefied natural gas, hydrogen and ethylene, will focus on engineering and construction activities.

Technip Energies said it aimed for 2021 revenue of between 6.5 billion euros and 7 billion euros.

TechnipFMC now retains nearly 50% ownership of the new Technip Energies shares, while the remaining 50% was distributed amongst TechnipFMC’s shareholders.

Analysts feel that the decision to split into two separate entities was a smart one as there were practically no operational synergies between TechnipFMC and Technip Energies. Moreover, breaking up a large conglomerate does often unlock value as a smaller organization is easier to manage.

The Technip Energies spin-off means TechnipFMC will now be concentrating its resources and efforts on its core strength: integrated subsea.

Technip Energies, on the other hand, possesses expertise in onshore engineering and construction business that supports various midstream and downstream customers. Technip Energies is likely to leverage its strong presence in liquefied natural gas, which is all set to register strong growth over the coming years.

Oil Prices Matter

Though TechnipFMC is not directly dependent on energy prices for their top and bottom lines, it does not mean the company is totally isolated from fluctuating oil prices.

It provides services to the energy sector, which means falling oil and natural gas prices are going to compel exploration and production companies to cut down on their capital investment plans. This, in turn, is going to depress demand for the products and services that TechnipFMC offers. 

Is TechnipFMC Stock Undervalued?

Experts feel that a leaner, more simplified TechnipFMC is currently highly undervalued.

The reason for it is not hard to decipher. The global pandemic led to a drastic fall in demand for oil, and investors are still apprehensive about an uptick in demand.

The market as such is still nervous about the prospects of deep-water oil and gas activity, which is FTI’s bread and butter, and the same is reflected in FTI’s stock price.

However, despite the short-term jitters, it is highly unlikely that the pandemic is going to have a long-lasting impact on oil demand.

Brent prices are already above $67 per barrel, whereas WTI Crude Oil has crossed $64 per barrel, with predictions of prices crossing $75 per barrel by summer.

Don’t forget the fact that, with higher oil prices, comes greater upstream oil and gas capital expenditures, which, in turn, is likely to boost TechnipFMC’s revenues and profitability.

Also, rising demand for oil will translate into rebounding customer demand for its subsea equipment solutions.

Risks Of Buying TechnipFMC Shares

TechnipFMC is an energy services provider and, as such, reliant on capital investment budgets of exploration and production and oil refining and gas processing businesses for its revenue. The company, therefore, is sensitive to energy prices, as falling oil demand and prices can force the company’s customers to pull back their spending plans.

Oil prices have started to move north after being devastated due to travel restrictions, but the real opportunity for firms like TechnipFMC lies in the peaking demand for gas as it is seen as the “bridge” fuel to a low carbon economy.

More importantly, the company faces near-term risks through its use of fixed-price contracts at the subsea segment.

What it means is that the customer pays a fixed price to TechnipFMC, and then the company has to bear the entire risk associated with engineering, construction, and project execution.

It can cut both ways though, as going beyond the budget eats into TechnipFMC’s margins, but better than expected performance enhances its profit margins.

Also, it is not uncommon for large operators like TechnipFMC to outsource work to subcontractors, which means sometimes they have limited influence on how the actual project execution takes place. For example, in 2015, the company’s onshore/offshore segment had to bear the brunt of cost overruns.

The company, in order to alleviate such risks, sometimes uses “cost plus fee” contracts, to lock in margins. However, such contracts, to an extent, depend upon its customers and the negotiating position of TechnipFMC when bidding for new business.

TechnipFMC owns 50% stock of the newly formed Technip Energies. A final material risk as such is that the stock value of Technip Energies may go downhill if TechnipFMC decides to completely do away with its Technip Energies stake.

The company is the single largest shareholder in Technip Energies, and its decision to sell could make it difficult to realize the full value of the stock.

A little bit of uncertainty also remains over the commission of some of the Greenfield projects, which could hamper the company’s near-term revenue potential.

Will TechnipFMC Competitors Erode Market Share?

TechnipFMC enjoys market leading positions in several lines of business within the sectors it operates in. In the subsea equipment unit, the company derives its competitive advantages mainly from its intangible assets, including engineering knowledge, technical know-how, patents and trade secrets.

In the subsea engineering and construction market, which is dominated by a limited number of important players, TechnipFMC earns its strength from its scale of operation, operating know-how, resources, expertise and a long and successful track record of superior project execution.

In the surface business unit, where TechnipFMC offers many surface equipment solutions for E&P companies, including surface wellheads and trees, mission-critical pieces of equipment used for onshore oil and gas drilling and production, the energy services company boasts of several strong intangible assets.

TechnipFMC’s primary competitors are Cameron, and Baker Hughes [BKR]. Houston, Texas-based Cameron, a Schlumberger (SLB) company since 2016, is a leading manufacturer, provider, and servicer of oil and gas industry equipment. It manufactures flow control equipment that controls pressure at oil and gas wells.

Baker Hughes, one of the largest oil field services companies in the world, provides services for oil and gas exploration, drilling and production.

The three companies control about 75% market share collectively, which means the entry barrier for new entrants is incredibly tough to surmount.

TechnipFMC has a tight grip on the market because of its intangible assets, which gives it a competitive advantage and some level of moat status, thus aiding the company in generating good returns for its investors.

Is TechnipFMC Stock A Buy? The Bottom Line

An EPC (engineering, procurement, and construction) heavyweight, Technip is a tier-one player with strong project management capabilities and competitive advantages across several lines of business.

This is the reason the management is confident the energy services giant is “well-positioned” to benefit from the “improved market outlook” in the coming months.

“We are well-positioned to benefit from the improved market outlook and remain focused on progressing our business transformation and ESG commitments to help our customers meet the world’s demand for energy,” stated the CEO Douglas Pferdehirt.

The company is diversifying into servicing multiple renewable energy projects, which allowed it to hold onto its backlog despite bad market conditions. In view of a “resilient” backlog of $21.4bn and relatively flat long-term debt obligations during the pandemic, analysts believe that the currently ‘undervalued’ stock has plenty of room for growth. 

TechnipFMC has a good balance sheet with comfortably manageable debt burden, despite the spin-off of Technip Energies (it had substantial cash balances). Also, the $350 million that the company managed to save by undertaking various cost-cutting measures and dividend reduction can add to its margin.

Moreover, analysts and experts remain bullish about CEO Douglas Pferdehirt’s business acumen, given his impressive record of successfully executing the company’s new initiatives, such as the integrated project offerings, and the Technip Energies spin-off.

Despite the short-term headwinds, FTI has the ability and resources to muddle through the current downturn, just as it has done in the past. 

Lucrative stock valuation, rising oil prices, and the upswing it is likely to cause in oil & gas capital expenditure, makes this Oil & Gas Equipment and Services titan a fascinating pick for investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.