2023-12-27 16:34:32 ET
Summary
- In 2023, the oilfield services providers have experienced challenging market conditions in the US but healthy activity in international markets.
- TechnipFMC is well-positioned in the oilfield services industry, benefiting from the robust growth in international offshore activities.
- TechnipFMC has secured significant contracts and expanded its backlog, providing a visible trajectory for future earnings growth.
- TechnipFMC's focus on high-quality offerings and strategic shifts has led to improved margins and continued growth amidst favorable industry trends.
This year has certainly laid out a mixed bag of fortunes for oilfield equipment and services providers. We've seen companies navigating through divergent trends, with some riding high on favorable waves, while others have been left navigating choppier waters, a trend which I have covered extensively here at Seeking Alpha. In this article, I’ll discuss TechnipFMC ( FTI ), a company that appears to be one of those fortunate few that have found themselves in the sweet spot, positioned just right amidst the industry’s ebbs and flows.
2023 Rig Counts Tell Two Tales
2023 has turned out to be a mixed year for the oilfield services industry. There has been a clear distinction in the drilling activity trends between North America and International markets. In North America, the rig count has fallen sharply, led by a steep decline in drilling activity in the US where there were 620 rigs operating by the end of last week, down from 772 rigs at the start of this year, as per data from Baker Hughes ( BKR ). This decline in rig count can be attributed to the weakness and volatility in oil and gas prices.
Despite the decrease in rigs, U.S. oil and gas production has paradoxically risen, climbing to 13.24 million barrels per day [bpd] in September from 12.57 million bpd in January, as per data from the U.S. Energy Information Administration [EIA]. This increase in production amidst a reduced rig count underscores a notable shift: shale drillers are becoming increasingly efficient at hydrocarbon extraction, yielding more output with fewer rigs. Additionally, this trend is supported by the drillers' utilization of their inventory of drilling but uncompleted wells [DUCs], which, according to the EIA, has seen a significant decrease of 17% since January, now standing at around 4,400.
This 20% decline in the rig count has profoundly impacted U.S.-focused oilfield service providers, compounding the challenges they face due to diminished demand. As I highlighted in my previous article on RPC ( RES ), an oilfield services company, such firms are grappling with strenuous market conditions that are exerting pressure on their earnings.
Contrasting with the declining trend in the U.S., the international oil and gas sector, particularly offshore activities, is showing robust growth. Vertically integrated oil giants like Exxon Mobil ( XOM ) and state-run behemoths such as Saudi Aramco are driving an upswing in drilling activities and price improvements globally. The total international rig count has risen by 9% from the beginning of 2023, as reported by Baker Hughes, with increases spread across all the major oil-producing regions. The average rig count internationally has reached 947 this year, a significant rise from 851 rigs in the previous year, highlighting a stark contrast to the U.S. scenario where the year-to-date average rig count of 695 rigs is notably lower than last year’s 721 rigs.
In the international sphere, the decision to drill for oil extends beyond mere economic considerations, intertwining significantly with national and energy security concerns, which often play a pivotal role in shaping drilling strategies.
The offshore sector, in particular, has seen a remarkable revival with increased spending on oil and gas projects globally. This resurgence is most pronounced in regions like the Middle East, Guyana, and Brazil, with uptick in activity across all major basins. The demand for offshore rigs and related services and equipment has seen a rise, with price levels following suit. Interestingly, even within the U.S., the offshore sector has remained resilient, particularly in the Gulf of Mexico where the number of operational rigs has remained stable at around 17 rigs in 2023, contrasting sharply with the onshore declines.
This global strength in drilling, especially in the offshore market, has been a boon for companies with significant international exposure. Among the major beneficiaries is the oilfield services leader SLB ( SLB ), which enjoys a dominant position across various international markets and derives the majority of its revenue from outside of North America. Alongside such industry giants, there are smaller but strategically positioned companies like TechnipFMC plc, whose substantial involvement in the thriving international offshore markets positions them well for potential earnings growth in the coming years.
Profiting from Favorable Trends
TechnipFMC provides specialized technological solutions, equipment, and services primarily catering to offshore oil operations. With expertise ranging from front-end engineering and design to the provision of subsea flexible pipes, umbilicals, risers, flowlines, robotics, and service vessels, the company has carved a niche in the offshore sector. It operates through two main segments: Subsea, which encompasses the aforementioned services, and Surface Technologies, focusing on equipment and services for onshore and shallow water oil and gas producers.
A significant portion of TechnipFMC's revenue and earnings is derived from its Subsea segment. In the first nine months of the current year, 82% of the company's total revenue and a corresponding segment EBITDA originated from Subsea operations. Historically, the company has seen over 80% of its Subsea segment revenue and a substantial portion of its Surface revenues coming from international markets, particularly outside North America.
This distribution is advantageous, especially considering the current downturn in North American shale production contrasted with the booming international offshore market. TechnipFMC's limited exposure to the struggling North American market and its significant involvement in the thriving international offshore scene position it well to capitalize on the current industry dynamics.
TechnipFMC’s third quarter results showed this strategic advantage. Despite the broader challenges in North America affecting the industry, TechnipFMC's focus and strength in the international offshore market have led to continued growth in both revenues and earnings, showcasing the benefits of its market positioning.
In the third quarter , TechnipFMC reported a slight 1.5% dip in revenues for its Surface Technologies segment to $348.6 million, sequentially, driven mainly by an 8% downturn in North American revenues. This North American market softness was partially counteracted by improved performance in international markets. On the other hand, the Subsea segment enjoyed a robust 5.6% sequential revenue increase to $1.7 billion, leading to an overall 4.3% rise in total revenues to $2.06 billion.
The Subsea segment's strong performance was pivotal in TechnipFMC's shift from a GAAP loss of $87.2 million to a profit of $90 million in this period. When factoring out one-time items, the company's adjusted earnings saw a significant increase from the second quarter, more than doubling to $93.7 million in the third quarter.
Looking forward, I believe TechnipFMC appears well-positioned for continued revenue and profit growth. The company has not only demonstrated an ability to increase its top and bottom line but has also secured substantial contracts and expanded its backlog, promising higher future revenues.
Over the years, TechnipFMC has clinched pivotal contracts from major offshore oil producers such as Exxon Mobil, Woodside Energy ( WDS ), Petrobras ( PBR ), Equinor ( EQNR ), and TotalEnergies ( TTE ) for essential subsea operations. Notably, it secured its largest-ever flexibles contract from Woodside Energy for the Trion deep-water project in Mexico and has celebrated major wins for integrated projects in Brazil and Europe. These victories include significant contracts for developing Petrobras's pre-salt fields in Brazil and Exxon Mobil's operations in Guyana’s Urau oilfield.
These wins have notably swelled TechnipFMC's subsea backlog to $12.1 billion, marking a substantial 58.8% increase from the previous year. Of this, about $1.1 billion is slated for realization in the current quarter (4Q-2023), with roughly $4.5 billion scheduled for the upcoming year and the remaining $6.5 billion earmarked for 2025 and onwards. This robust backlog provides TechnipFMC with a visible and reliable trajectory for future earnings growth.
I think what stands out about TechnipFMC is not just its ability to thrive amid improving macroeconomic conditions, but also its reputation for delivering high-quality products and services, enabling its oil and gas producer clients to complete projects on time or even ahead of schedule. This excellence has bolstered the company's reputation, making it a preferred partner in the industry.
A distinguishing factor for TechnipFMC is its acclaimed high-quality offerings, strong customer relationships, and leadership in niche markets, particularly in subsea flexible pipes, FEED, SPS, and SURF. This recognition has led to direct awards from clients Notably, over 70% of this year's subsea orders were for flagship products and services like iEPCI and Subsea 2.0, demonstrating customer trust and preference.
The demand strength is positively influencing price levels and, consequently, TechnipFMC's margins. The Subsea segment's margins have notably improved to 15.1% in the third quarter, marking a sequential increase of 70 basis points and a significant year-over-year rise of 210 basis points. A crucial factor in this improvement has been TechnipFMC's strategic shift in its operating model from engineered-to-order to configured-to-order, a part of the company's self-help initiatives. This margin enhancement, I believe, is sustainable and should continue to rise with ongoing revenue and earnings growth amidst a robust business environment.
Final Thoughts: Takeaway, Valuation, and Risk
The global oilfield services industry has shown marked division in market trends, with the US struggling with declining activities while the international and particularly offshore markets experiencing vitality. TechnipFMC, with its strategic positioning and robust backlog, is well-aligned with the positive side of this trend.
The company has successfully increased revenues, profits, and margins, primarily driven by its subsea business. Given its strong performance and market positioning, I remain bullish on TechnipFMC's stock, which has risen by around 70% this year, significantly outperforming the broader oilfield equipment and services industry ( OIH ) which went up by 5% this year. As TechnipFMC continues to leverage the robust international offshore market, grow its earnings, and expand its subsea backlog, I anticipate it will maintain this trajectory of outperformance.
TechnipFMC's valuation, with an EV/EBITDA [fwd] multiple nearing 12x, stands above the industry median of 5.42x, according to Seeking Alpha data . At first glance, this may position TechnipFMC as an expensive option in the market. However, it's crucial to contextualize this valuation within the industry dynamics. A significant number of industry players are deeply rooted in the US land market, which is currently facing downturns, while TechnipFMC boasts a predominant focus on the booming international offshore market. This strategic positioning lends some justification to its higher valuation.
When compared with industry peers like SLB and Baker Hughes, which trade around 10x-11x EV/EBITDA [fwd] multiples, TechnipFMC's valuation appears more reasonable. It's especially pertinent considering that TechnipFMC is more of a pure-play on the thriving international offshore segment than its counterparts. Thus, while its shares might not be discounted, they seem reasonably valued given the company's market positioning and growth prospects.
For those who, like me, are particularly value-conscious, waiting for a more favorable market entry point may be a prudent strategy. It's a common preference among investors to buy stocks at a discount, and a potential dip in TechnipFMC's stock price could present a more attractive buying opportunity.
However, like any company in the oilfield services sector, TechnipFMC is not immune to the broader oil market's fluctuations. This inherent risk is an essential consideration for any potential investor. The company's earnings growth and margin expansion this year have been significantly supported by sustained high oil prices, with Brent oil predominantly maintaining levels above $75 a barrel throughout 2023. A downturn in oil prices, possibly triggered by a global economic slowdown affecting oil demand, could pose a threat to TechnipFMC's continued revenue and profit growth, as well as put pressure on its backlog.
While there doesn't seem to be an immediate threat to the buoyant oil market supporting TechnipFMC's business, the volatile nature of oil prices is a risk factor that investors should weigh carefully when considering an investment in TechnipFMC shares.
For further details see:
TechnipFMC: Right Place At The Right Time