2023-03-28 01:54:54 ET
Summary
- Technip Energies is a Paris-based project engineer specializing in the design and delivery of energy mega-projects.
- Originally specialized in offshore and onshore hydrocarbon processing facilities, the firm has tilted its offering to higher margin technology, products & services.
- But the wager on the energy transition relies on state subsidization that may be increasingly difficult with a global economy in decline.
Company Overview
Technip Energies ( OTCPK:THNPY ) is a world-leading engineering and technology company formed & spun-off following the takeover of Technip by TechnipFMC ( FTI ). With historical roots in Technip’s old onshore-offshore engineering division, the firm’s previous iteration was responsible for engineering and delivering oil & gas platforms, petrochemicals plants, and complex hydrocarbon processing facilities.
Technip Energies expertise includes a full range of design and project development services from front end engineering and design all the way to project delivery. Interestingly, FMC’s subsea asset grab engineered with the help of former Technip CEO Thierry Pilenko generated meaningful French public outcry. The American oil & gas equipment manufacturer elected to retain the more profitable subsea business (margins of 12%-16%) and spin-off the more capital intensive, lower margin business (4%-6%) – Technip’s old onshore/ offshore division that would become Technip Energies.
The newly created Paris-based firm operates two divisions – the Project Delivery business line & Technology, Products & Services business line. Trading at 11x forward, the €3.34B French listed engineer has recently been on a tear, returning 25.8% over the past 3 months.
The company has smartly rebranded itself as a sustainable energy project specialist.
Technip Energies is transitioning its legacy brand which historically focused on oil & gas platforms, fixed platforms, FPSOs and large oil structures to one of “green energy”. The emphasis remains on engineering a sustainable future with the company selectively distancing itself from its more oil tarnished past while spinning a narrative about clean LNG, biofuels & renewables.
So far, it has worked as sovereign states look to drive the energy transition by sponsoring and subsidizing decarbonization. That is why we remain bullish about Technip Energies – the company has successfully unraveled itself from its historical Technip roots, rightsized, rebranded, and continues to deliver profitable growth with balanced conservatism and state sponsored tailwinds facilitating the sanctioning of green mega-projects. Buy.
Projects & Order Book
The Project Delivery business line – the company’s legacy business line - experienced a slight drop in sales generated by lowered ALNG2 revenues. The company became indirectly embroiled in Russia sanctions on a range of Russian artic liquified natural gas projects such as Yamal, impacting the top-line and forcing it into a strategic U-turn. This has been offset by Qatar’s North Field Expansion project ((NFE)) which includes 6 mega liquified natural gas trains boosting production capacity from 77Mt per annum to 126Mt by 2027.
A close-out of Yamal LNG warranty phase as Technip Energies looked to distance itself from its sanction-prone Russian project work helped juice margins. Backlog has dropped and the absence of Russian mega-projects coupled with extended geo-political tensions means the firm may have a sizable hole in its order book beyond 2024.
Liquified natural gas, petrochemicals, and process industries have been central to Technip Energies’ 2022 order book.
The Technology, Products & Services business line has allowed the company to somewhat de-risk its capital intensive, mega-project order book. Much smaller in size, it has provided a strategic counterweight with revenue growth driven by engineering services, sustainable chemistry, and process technology. Margins are slightly larger, and backlog has recently been boosted by €2.2B in project awards covering ethylene and renewable fuels.
Technip Energies has tried to de-risk itself by adding short cycle technology products & services to the more traditional long-lead time, capital intensive mega-projects.
Technip Energies aims to bolster its short cycle, capital light, higher margin technology business to offset risks linked to more traditional engineering business lines. In its relative infancy, the division focused on proprietary technologies fueled by R&D spend. In 2022, Technip Energies spent €50M in R&D, predominantly on the energy transition, a little less than 1% of total sales and marginally more than in 2021.
Financials
Technip Energies recent results saw EPS growth of circa 30% year-over-year bolstered by exceptional items linked to the firm’s Russian exit. Margins have increased accordingly and backlog for the more lucrative Technology, Products & Services business line is growing. Technip Energies booked about €1B in new awards linked to the energy transition demonstrating leadership in carbon capture, clean hydrogen, sustainable chemistry, and floating offshore wind technologies.
The French engineer announced a recent dividend increase of 16% underpinning confidence in business outlook. Revenues were slightly down year-over-year at €6.4B, impacted by lower activity on Arctic LNG 2. Order intake was significantly lower for the Project Delivery business line at €3.8B given the absence of major project awards. Oppositely, the Technology, Products & Services division achieved its strongest order intake, accounting for about 55% of all orders (€2.2B)
Cashflow bridge - Technip Energies
Free cash flow for 2022 was €86M, including a €330M capital outflow reflecting a lack of major awards during the year. Due to the complexities of milestone payments and the timing of awards, working capital forecasts are critical with the company holding €3.8B in deployable capital to manage accordingly. The preferred metric for Technip Energies is free cash flow, net of working capital which was at €420M in 2022. The company expects similarly strong cash flows during 2023.
Forecasts remain positive – Project delivery is expected to delivery sales of €5B-€6B on a maturing pipeline of larger LNG and energy transition projects. EBIT is expected to be between 6.5%-7.5% for the business line during the year. Technology, Products and Services is expected to deliver €2B in sales on a strengthened backlog with EBIT margins North of 10%. 1% of sales will be dedicated to research and development spend, critical for the development of the firm’s Technology, Products and Services business line.
The lion’s share of company backlog remains in 2023 (€5.4B) with diminishing visibility beyond 2025. This is important as the likelihood a recession hits the US and Europe is high, implying perhaps a curtailment of government spend. Green energy remains highly subsidized by State actors and appetite for large scale oil projects is diminishing as oil majors become increasingly demonized.
Finally, it is worth highlighting the massive amount of goodwill heaped on Technip Energies’ balance sheet (€2B), a product of the spin-off from FMC Technologies. Any reappraisal and consequent impairment would have a direct negative impact on the value of equity.
Backlog for the French project engineer declines markedly from 2025.
Risk
Any evaluation of a stake-holding in equity needs to be accompanied with a comprehensive risk register. For Technip Energies, there are many – it works in a cyclical capital-intensive business currently under rapid change with a customer base that is a mix of state-owned national oil companies and integrated supermajors.
Its Technology Products and Services line is extremely exposed to state spending, government subsidies and social appetite for environmental change while its traditional business line caters to multi-year giant energy projects oil firms are less likely to invest in.
Any decline in macro-economic data would possibly lead to less government investment and changes in administration priorities may result in spending allocated elsewhere. Russia was historically one of the company’s biggest customers so the impact of the war in Ukraine and eventual outcome has been a net negative for the French engineer.
Key Takeaways
Investor excitement and a stock price under strong momentum may be somewhat misleading regarding Technip Energies’ mid-term prospects. While we remain upbeat regarding the equity, investors need to be aware of the risks linked to capital-intensive projects in old energy and state sponsored green projects in new energy, particularly as the global economy comes under pressure.
It's likely the company delivers sound risk adjusted returns, particularly given the company trades at a cheap multiple (11.1x) compared to the likes of TechnipFMC 25.5x, Saipem ( OTCPK:SAPMF ) 31.6x, and John Wood Group ( OTCPK:WDGJF ) 20.4x.
For further details see:
Technip Energies: Wagering On The Future Of Green Energy