Summary
- FTI reported Q4 earnings highlighted by strong guidance from management for the year ahead.
- Firming margins and earnings momentum support a positive outlook.
- The company expects to initiate a dividend in the second half of this year.
TechnipFMC Plc ( FTI ) has been a big winner, with shares up more than 135% over the past year, outperforming the broader energy sector. The story here is an accelerating financial turnaround compared to the challenging period during the depths of the pandemic.
Following a record year for energy producers benefiting from strong pricing, FTI is capturing a tailwind in the oil & gas Capex cycle through its market-leading subsea and surface technologies, and project services.
This is a stock we covered last September with a bullish note citing an improved outlook. In many ways, the updates from the latest quarterly report have exceeded our expectations, particularly with impressive forward guidance. While FTI is currently trading at a 52-week high, we see more upside ahead with 2023 poised to be a breakout year for profitability.
FTI Q4 Earnings Recap
FTI reported Q4 non-GAAP EPS of -$0.05, which missed the consensus estimate by $0.09. Management explains that operating income was impacted based on the combination of seasonality and the timing of some subsea project realizations reflected in the prior quarter.
Q4 revenue of $1.7 billion increased by 11.2% year-over-year and was ahead of the consensus by $20 million. In this case, the climb was driven by the smaller surface technologies segment, with sales up 22% y/y, while the subsea group delivered a 9% increase.
The bigger picture here is the underlying financial strength expected to continue going forward. Full-year 2022 adjusted EBITDA on a constant currency basis climbed by 19% to reach $647 million, with firming margins from both operating segments.
source: company IR
Operationally, a major theme has been the market adoption of the company's differentiated solutions that incorporate more and more "high-tech" digital controls through automation and robotics. In the Subsea segment, the systems help offshore oil producers operate more efficiently, shortening project development times and often lowering the cash cost breakeven as part of the value proposition.
TechnipFMC explains that it has a leading share in many specialized categories and is often the only product that addresses certain niche applications. The market response has been positive, evidenced by the strong trend in inbound orders, pushing the backlog up 22% y/y to $9.4 billion across both Subsea and Surface Technologies. This metric provides good visibility for the business over the next few years as the contracts get fulfilled.
source: company IR
During the quarter, TechnipFMC sold off its remaining stake in Technip Energies ( OTCPK:THNPY ), as part of a legacy engineering arm. The $1.2 billion in cash proceeds, alongside more than $503 million in free cash flow generated over the past year, has allowed the company to reduce its net debt position to just $309 million compared to nearly $700 million last year.
Separately, the company repurchased $100 million in shares over the year. Notably, management has reiterated an intention to initiate a regular quarterly dividend by the second half of this year.
Strong FTI Management Guidance
In terms of guidance, the update was positive. Management is targeting the full year 2023 revenue growth of around 12% toward $7.5 billion. Even better is the forecast for adjusted EBITDA to reach $870 million, representing a 34% increase from 2022.
This would be driven by both the Subsea and Surface segments as executing on the backlog in addition to new business. The company expects margins to also benefit from easing supply chain disruptions and lower inflationary cost pressures.
The second part of the management commentary presented during the earnings conference call updated an "intermediate-term outlook". TechnipFMC now sees a path for upward of 650 basis point expansion in the adjusted EBITDA margin to 18% and adjusted EBITDA of approaching $1.4 billion by 2025, more than 100% higher from the 2022 level. Free cash flow conversion is also expected to accelerate over the period.
source: company IR
Those comments help provide some context to the current consensus estimates over the period, with the market forecasting top-line sales growth to average 12% over the next three years. From a full-year EPS loss of -$0.03 in 2022, the expectation is for that figure to turn positive and reach $0.50 in 2023 and triple to $1.52 by 2025.
Putting it all together, the combination of the balance sheet deleveraging, positive operating trends, and the strong financial outlook help explain the ongoing bullish momentum in the stock.
Seeking Alpha
What's Next For FTI?
We mentioned FTI is trading at a 52-week high. In fact, shares are at the highest level going back to early 2020, before the pandemic crash that year. What we've seen in recent months is a multi-year breakout from that was a relatively tight trading range over the past two years.
Seeking Alpha
The strong point here is TechnipFMC's relationships with global majors on the E&P side as core customers. Names like Exxon Mobil Corp ( XOM ), Shell Plc ( SHEL ), and Petrobras SA ( PBR ) are cited as developing billions of dollars in announced Subsea project opportunities over the next two years that can translate directly into TechnipFMC business.
The attraction for the broader equipment and services industry is that the long-term contracts generate steady cash flows while the oil companies that bear the commodity pricing risks.
source: company IR
Even as the market price of oil and gas has been more volatile, and lower from the highs of last year, the understanding is that the effort in place is to expand production capacity in fields that are increasingly more technically challenged. Overall, it's a good backdrop for FTI.
In terms of valuation, the metric we're focusing on is the EPS estimate for next year in 2024 of $0.94, which should be in an environment where FTI is hitting its financial stride. Trading at a 1-year forward P/E of 16x, the multiple is at a premium to its industry peer group, although we would make a case that the spread compared to Baker Hughes Co. ( BKR ) and Schlumberger ( SLB ) at 15x is justified based on the stronger earnings momentum, and the tilt- towards more tech solutions with higher potential margins.
Is FTI Stock A Buy, Sell, or Hold?
We rate FTI as a buy with a price target for the year ahead at $18.50, representing a 37.5x multiple on the current 2023 consensus EPS or a 20x into the 2024 earnings estimate. Our thinking here is that the financial momentum including the trend in free cash flow should be strong enough over the near term that FTI benefits from its quality component. Investors can look forward to finalized dividend initiation details and a string of positive quarterly reports this year.
At the same time, the only hesitation considers what has already been a breathtaking rally in the stock in recent months. We're looking for a modest 20% upside this year, which would be great, but hardly a repeat of the gains from 2022. Some consolidation and renewed volatility can be expected over the near term.
The bullish case for FTI and the broader industry would consider the possibility that the pricing environment in oil & gas rebounds creating a new wave of momentum for even stronger activity in the sector. This would likely open the door for FTI to outperform expectations.
On the downside, the risk would be of a more concerning deterioration to the macro outlook with a deeper drop in oil and gas prices. While FTI cash flow and earnings would still be resilient based on the current business, we'd expect sentiment towards the stock to take a hit, opening the door for a leg lower. Monitoring points over the next few quarters include the evolution of the order book and the EBITDA margin.
For further details see:
TechnipFMC: Is The Stock Attractive At A 52-Week High?