TechnipFMC (FTI)’s new business is mainly from the subsea sector, where it has made significant investments over the past few years.Recently, some of its large customers have started implementing Subsea 2.0 and iEPCI technology.I expect higher installation and service activity and generally higher margins to continue to benefit it in the near term.Sensing a recovery, the company’s management recently raised its fiscal 2021 revenue and operating income guidance.It has partnered with other companies to optimize its renewable energy capacity and to develop standardized solutions for large-scale hydrogen production from renewable wind resources.
FTI still faces some challenges: the uncertainty inherent in the current environment, which has delayed the mass adoption of its technology, and the recurrence of coronavirus attacks that could reduce energy demand.Nonetheless, growth factors will dominate, which should lead to improved free cash flow in fiscal 2021.Additionally, the company wants to deleverage its balance sheet.At this level, the stock’s valuation is reasonable.I think mid-term investors may be looking to buy this stock for solid returns.
Therefore, the main trend to study FTI’s main business in 2021 is the company’s focus on iEPCI (Integrated Engineering, Procurement, Construction and Installation) projects, mainly in the subsea sector.In my previous article, I discussed that much of the company’s 2019 order growth came from increased adoption of iEPCI and the continued strength of sanctions on LNG and downstream projects.After the second quarter of 2021, about 81% of the company’s inbound orders ($1.6 billion) came from this segment.This quarter, it performed its first iEPCI in Brazil.It also announced Equinor’s award for the Kristin Sør field.The project involves a deep Arctic fleet and will reduce greenhouse gas emissions.It also received awards for production equipment, installation services and intervention support provided by Petrobras (PBR).In fiscal 2021, the company expects Subsea orders to reach $4 billion, meaning it expects to see a $1.2 billion increase in inbound orders for the segment in the second quarter of 2021.
In Surface technology, inbound orders rose 32% in the second quarter.Growth in international markets was higher as completion activity began to pick up in 2021, led by Saudi Arabia, the United Arab Emirates, Bahrain and Qatar.Even the North Sea, the Americas and China saw improvements.Overall completions in the U.S. increased 19% in the second quarter compared to the previous quarter.The company expects orders to grow further in the second quarter of 2021 compared to the first half of 2021.Increased market activity, market penetration of new technologies, and expansion of its manufacturing capacity in Saudi Arabia are likely to lead to higher order growth in the coming quarters.
FTI has been adjusting its business mix by selling and acquiring business or ownership stakes.After selling a majority stake in one of its key divisions, Technip Energies, in April 2021, it sold a further 9% stake in the company in July.In July, it acquired the remaining 49% stake in TIOS AS, a joint venture between TechnipFMC and Island Offshore.TIOS provides fully integrated riserless light well intervention services.Additionally, in July, it partnered with Loke Marine Minerals to develop seabed mineral extraction technology.This marine mineral could meet growing demand for metals used in electric vehicle batteries and clean energy technologies.Therefore, the restructuring process will help FTI tap the potential renewable energy boom.
Over the past year, through May 2021, U.S. LNG export prices have risen about 18%, according to EIA data.LNG prices have risen over the past few years as ethane demand has surged both domestically and for export.Average shipments from LNG export terminals have increased recently.I think LNG prices will remain strong in the short term.
Like most other energy companies, FTI is diversifying into renewable energy to remain competitive.Its Deep Purple solution provides technology development and integration capabilities to convert renewable energy into hydrogen.Most recently, it announced a partnership with Portuguese energy utility EDP to develop a new offshore wind power system for green hydrogen production.As the company has expertise in subsea engineering, it plans to combine it with renewable energy capabilities and develop standardized solutions for large-scale hydrogen production from renewable wind resources.
FTI’s subsea segment revenue remained virtually unchanged in the second quarter of 2021 compared to the first quarter of 2021.However, the segment’s operating income more than doubled during this period.Higher installation and service activity and a general increase in profit margins led to operating income growth, while lower project activity dampened revenue growth.As mentioned, the strong order growth indicates solid revenue growth visibility for this segment in the second quarter of 2021.So far, the U.S. rig count is up 8% compared to the end of the second quarter.International rig counts have been relatively resilient since June, although up 13% from the start of 2021.Despite the progress, we may again be concerned about a resurgence in the coronavirus-hit for the rest of the year, which could dampen energy demand growth.
In the second quarter, management raised its fiscal 2021 revenue guidance to $5.2 billion to $5.5 billion, compared with a previously set guidance range of $500 to $5.4 billion.Adjusted EBITDA guidance for the segment has been raised to the 10% to 12% range.However, the company also expects an increase in net interest expense and tax provisions for the year, which could dent the net margin in fiscal 2021.
FTI’s Surface Technologies segment had a strong second quarter of 2021.A quarter ago, the segment’s revenue was up about 12%, while operating income was up 57%.Increased North American activity increased international services, while strong program execution contributed to revenue and revenue growth.Inbound orders for this segment have also increased as demand in the Middle East, North Sea and North America has increased.
FTI’s operating (or CFO) cash flow improved sharply from negative CFO a year ago and reversed to positive ($162 million) in the first half of 2021.Despite modest revenue growth during the period, benefiting from timing differences in project milestones and improved working capital management led to an increase in CFOs.On top of that, capital expenditures also declined, resulting in a significant increase in free cash flow in the first half of 2021 compared to a year ago.In fiscal 2021, it expects capital expenditures to be less than $250 million, or at least 14% lower than in fiscal 2020.So with the addition of the CFO and the reduction in capex, I expect FCF to improve in fiscal 2021.
FTI’s debt-to-equity ratio (0.60x) is lower than its peers’ (SLB, BKR, HAL) average of 1.12x.The company reduced net debt after a net inflow of $258 million to sell its partial ownership in Technip Energies.In addition, it repaid the $200 million outstanding balance on its revolving credit facility.Overall, the company’s net debt decreased by $155 million in the second quarter compared to the first quarter.On August 31, the company repurchased $250 million of long-term debt, funded by cash on hand.
FTI’s forward EV to EBITDA multiple expansion is more pronounced than its adjusted 12-month EV/EBITDA as its EBITDA is expected to decline more sharply than its peers next year.This typically results in a lower EV/EBITDA multiple compared to peers.The company’s EV/EBITDA multiple (3.9x) is lower than its peers’ (SLB, BKR, and HAL) average of 13.5x.Compared to its peers, I think the stock is reasonably valued at this level.
According to data provided by Seeking Alpha, 10 analysts rated FTI a “buy” (including “very bullish”) in August, while 10 recommended a “hold” or “neutral.”Only one sell-side analyst rated it a “sell.”The consensus price target is $10.5, yielding a ~60% return at current prices.
Over the past few quarters, FTI has made significant investments in Subsea 2.0 and iEPCI technologies.While these technologies are powerful, uncertainty in the energy market has delayed their mass adoption in the market.However, during the second quarter, we noticed that large customers such as Equinor and Petrobras have started implementing the technology.
Most of the company’s inbound orders come from subsea projects.FTI has been adjusting its business mix by selling and acquiring business or ownership stakes.After selling a majority stake in Technip Energies, it acquired an interest in another joint venture.To make a foray into the renewable energy industry, it partnered with another company to develop seabed mineral mining technology.It raised its fiscal 2021 revenue and operating income guidance slightly in light of the positive changes in the energy environment since early 2021.The company’s cash flow has improved, while capital expenditures have declined, indicating that its FCF has improved in fiscal 2021.After Technip Energies was sold off, its net debt fell as the company looked to reduce its debt levels.In the medium term, I expect stock price returns to strengthen.
Disclosure: I/We have no positions in stocks, options or similar derivatives in any of the companies mentioned, nor do I plan to initiate any such positions within the next 72 hours.I wrote this article myself and it expresses my own opinion.I received no compensation (except Seeking Alpha).I have no business relationship with any company whose shares are mentioned in this article.
Post time: Jan-17-2022
