OIH - TechnipFMC: Dividend Initiation Supports Bullish Outlook

2023-08-03 15:30:03 ET

Summary

• TechnipFMC reported its Q2 results highlighted by firming profitability and solid operating performance.
• The company has initiated a new quarterly dividend of $0.05 per share which yields approximately 1.1%.
• Strong earnings momentum can support more upside for the stock.

TechnipFMC PLC ( FTI ) has been an outperformer this year within the oil and gas services industry with shares up nearly 50%. The company recently reported its Q2 results, highlighted by impressive operating momentum and firming profitability, capturing strong demand for its deepwater subsea technologies.

Even as energy prices remain well off their highs from 2022, global majors continue to invest in exploration and new production representing a tailwind for TechnipFMC supporting a positive long-term outlook.

Indeed, that was our thesis when we last covered the stock earlier this year noting its solid fundamentals and plan to initiate a regular quarterly dividend. The update today covers not only the latest Q2 results but also the official announcement of a dividend initiation and new share buyback authorization. We remain bullish on FTI and see room for more upside going forward.

FTI Q2 Earnings Recap

The company reported Q2 adjusted EPS of $0.10, up from $0.02 in the period last year, although missing the consensus estimate by $0.06. The miss there is in the context of several non-recurring charges including a legal settlement along with an outsized FX variation.

Nevertheless, the key takeaway is the underlying financial strength with revenue of $2.0 billion, up 14% year-over-year, with the headline result $40 million above market estimates. Adjusted EBITDA at $254 million climbed from $187 million in Q2 2022. Similarly, the adjusted EBITDA margin excluding FX at 12.9% compares to 10.9% in the period last year.

The strength here has been driven by the Subsea segment where the good market response to the company's "iEPCI" and "Subsea 2.0" platform systems. Management explains that customers are recognizing the value proposition in the module designs that both saves times in project deployment and generates adds to project efficiency.

That theme is evident as inbound orders more than doubled to $4.4 billion helping to add to a record backlog that now stands a $12.1 billion for the segment alone, or $13.3 billion on a firm wide basis considering the smaller Surface Technologies groups

FTI Dividend

As mentioned, TechnipFMC announced the initiation of a quarterly dividend at $0.05 per share. The annualized rate implies a forward yield on the stock at approximately 1.1%.

Technically, this is a "re-initiation" of a regular payout considering the company had previously suspended the distribution back in 2020 at the depths of the pandemic oil price crash. By this measure, the dividend update now ushers in a new era for shareholders which we believe is backed by a firm footing of fundamentals and underlying cash flows.

The new dividend rate suggests a cash outlay of around $90 million for the full year, representing a conservative 30% payout ratio on the midpoint management guidance to generate between $225 and $375 million in free cash flow this year. Favorable, the outlook is for even stronger results into 2024.

On that point, management and the board of directors are projecting optimism toward conditions going forward by increasing a share repurchasing authorization by an additional $400 million. Considering both the dividend and pace of buybacks averaging around $50 million per quarter over the past year, we estimate a total shareholder yield approaching 3%.

The expectation here is that there is room for further payout growth in-line with trends in the adjusted EBITDA. Officially, TechnipFMC is committing to return at least 60% of annual free cash flow to shareholders through 2025.

What's Next For TechnipFMC ?

What we like about TechnipFMC is its profile as integrating more and more technology into traditionally "low tech" offshore drilling. Customers like ExxonMobil Corp ( XOM ), Shell PLC ( SHEL ), and Petrobras SA ( PBR ) are targeting ultra-deep resources and increasingly relying on the expertise of TechnipFMC with it's specialized equipment and product catalog.

The company notes a large pipeline of opportunities over the next two years and what stands out to us is the global diversification, including high-profile regions like Latin America and Northern Europe. With oil prices rebounding from cycle lows in recent months, we see the backdrop as supportive for more and more projects getting a greenlight as a tailwind for the business.

For 2023, management is guiding for total net revenue between $6.2 and $7.8 billion, with that spread depending on the timing of deliveries in the second half. More importantly is the trend in margins, seen accelerating higher, based not only on the more widespread adoption of new value-added products, but also easing cost pressures and supply chain challenges that defined 2022. That free cash flow trend underpins a strong balance sheet position where the net debt to adjusted EBITDA is settling under 1%.

According to consensus estimates, the market sees 2023 EPS at $0.45, already incorporating the solid first half of the year results. What stands out to us is the forecast for 2024 where EPS could reach $1.45, up 141% y/y. The setup implies a 1-year forward P/E of 17x which we believe is compelling in the context of a segment leader with this level of growth and operating momentum. The metric could further improve to 10.5x looking out toward 2025.

Again, the confidence here is based on the company's large order backlog and expectation for firming margins as the sales mix captures more of the latest generation Subsea systems.

FTI Stock Price Forecast

From the stock price chart, FTI is now trading at its highest level since early 2020, before the pandemic. We can make the case that since the restructuring over the past three years, the outlook may be stronger now and can support even more upside. In our view, a sustained rebound in the price of crude oil should be positive for sentiment into the broader energy sector and this segment of equipment and service providers.

We rate FTI as a buy with a price target for the year ahead at $23.00 representing a 1-year forward P/E of 22x on the current consensus 2024 EPS. The bullish case is that the company has a path to exceed expectations with the key monitoring point being key customer wins and the evolution of it's project backlog and trend in operating margin.

In terms of risks, we can keep an eye on macro conditions with the potential for deteriorating global growth to drive renewed volatility in energy prices. Weaker than expected results from FTI would force a reassessment of the outlook.

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