With TechnipFMC on Track for Stellar 2023, We Expect Similar Performance Through 2025 

Analyst

Katherine Olexa

TechnipFMC has cultivated a reputation as a top provider for subsea equipment and services, a factor that’s crucial in a space where customers seek solutions for some of the most challenging engineering problems in the world. The firm’s 2021 spinoff of Technip Energies (representing the firm’s onshore E&C business) transformed TechnipFMC into a pure-play technology and service provider for the offshore market. 

Moving forward, TechnipFMC intends to focus on its integrated services like its iFEED studies for front-end engineering and design and its iEPCI program, among other specialized offerings. Through these, the firm can work with customers from early phase design through the life of the field. TechnipFMC ultimately aims to simplify subsea field layouts by acting as a one-stop shop for offshore producers, which, if successful, will reduce wellsite costs and production times for operators while creating a stickier, more profitable customer base for the firm.

So far, the firm appears to be executing well in its integration strategy. It’s dominated competitors in winning contracts over the last few years, posting record order intake in 2019 and winning over half of subsea tree contracts awarded in 2020. As of third quarter 2023, well over half of TechnipFMC's order intake comprised iEPCI projects, and the service represents an increasingly larger proportion of order intake each quarter. If the firm continues this trajectory, its integration strategy could lead to outperformance compared with its peers in the subsea industry, at least in the near term. The firm is currently on track to secure more than $25 billion of subsea orders between 2023 and 2025, which will support solid operating performance through at least 2027. 

We expect investment in offshore oil and gas production will increase over at least the next five years, which will provide ample opportunity for TechnipFMC to further cement its positioning as a leading subsea technology and services provider.

Business Strategy & Outlook

We expect TechnipFMC will earn excess returns by midcycle. However, we don’t observe a sufficient margin of safety to award a moat. Even amid optimistic expectations around offshore production activity, the capital intensity of TechnipFMC’s subsea operations will continue to weigh on its potential for value generation. 

TechnipFMC’s Subsea segment represents about 82% of its overall business (after spinning off Technip Energies in February 2021), and it’s a well-regarded player in the space. The subsea industry relies on investment in offshore production, a sector of oil and gas production requiring immense engineering expertise. It’s a relatively consolidated space compared with other oilfield service end markets. Beyond their myriad patents and extensive industry know-how, businesses in the subsea industry have also spent decades cultivating their reputations as the premier oilfield service providers capable of tackling the significant engineering challenges characteristic of offshore oil and gas production. The high cost of failure associated with offshore production begets well operators that are extremely risk-averse toward engaging with newer providers that have yet to prove themselves, lest their products prove inferior to the existing players’. For would-be market entrants, accumulating competitive IP is half the battle; they’ll also find it difficult to win contracts (and thus market share) without an established track record to convey competence. This benefits TechnipFMC, whose decades of offshore experience enhance its already impressive reputation for technological innovation. 

Despite the industry consolidation and partial insulation from threat of entry, overcapacity among the subsea firms prevents an economic moat, in our view. High levels of production from 2010-14 (even through 2016 for offshore players) led to over-optimistic investment in offshore production equipment, leading to industrywide overcapacity that’s limiting opportunities for a more oligopolistic pricing environment. Rig attrition has progressed steadily over the last five years—current offshore vessels available are estimated to be around 70% of 2014 levels. Nevertheless, technological advancements have enhanced productivity such that fewer rigs are required to maintain similar production levels. Average vessel utilization rates haven’t surpassed 80% since 2014 and appear likely to settle around 60%-70% moving forward. 

Beyond traditional competitive pressures, we expect TechnipFMC and its peers will continue to face downward pricing pressure from reduced production costs. Since 2013, offshore production costs have fallen about 25%-35%, and it’s a big reason for the renewed enthusiasm in offshore investment. On the one hand, more economical offshore production will spur continued investment in the space, generating higher demand for firms like TechnipFMC. On the other hand, reduced service costs (that is, TechnipFMC’s revenue source) is a significant contributor for overall project reduction costs, driving as much as one third of overall cost reduction, according to Rystad analysis. Service providers will thus find themselves walking a thin line between commanding maximally margin-accretive prices without crossing a threshold that deters further E&P investment. General technological developments and operational advancements have also driven down project costs, so it’s possible further progress in those arenas could create space for subsea service providers to command higher prices, however, we think that’s unlikely to occur until the industry’s aforementioned overcapacity issues are addressed. 

The firm’s high degree of offshore exposure also partially insulates it from the impacts of industrywide downturns, but it’s not immune. TechnipFMC’s relatively long contract periods for subsea projects and high backlogs mean downcycles impact its top line with a lag. The 2015 price crash, for example, didn’t materialize in TechnipFMC’s revenue until 2017. In 2020, TechnipFMC’s revenue decreased just 3% while its peers posted 20%-40% drops. Enthusiastic customer adoption of the iEPCI integrated service program drove record contract wins (representing over 70% of all subsea integrated contracts awarded) in 2019 which in turn padded 2020 revenue. Management touts cycle proofing as a key benefit of its integrated service strategy. TechnipFMC did book lower order intake throughout 2020, but whether the firm will experience a lagged revenue impact, (and whether that impact is reduced) of course, remains to be seen. TechnipFMC certainly derives a first-mover advantage from iEPCI at present. We are nevertheless skeptical of the strategy’s moatiness, as we believe competitor replication over time is not only possible but probable.

TechnipFMC’s Surface Technologies segment (representing about 18% of revenue) exemplifies moaty characteristics owing to intangible assets like patents, industry know-how, and firm reputation. This segment specializes in surface wellheads and trees. Representing less than 5% of total drilling and completion costs, wellhead equipment is a small but crucial component for onshore and offshore production. These products regulate well pressure and the flow of oil and gas, a critical process in well operations. The offshore space is even more consolidated, with TechnipFMC, Aker Solutions, and Schlumberger’s OneSubsea expected to compose the majority of subsea tree awards over at least the next five years. As with Subsea, the high cost of failure leads operators to trust precious few providers. We also observe modest benefits from economies of scope since some of TechnipFMC’s wellheads and trees can function in both offshore and onshore environments.

None

Economic Moat

TechnipFMC

TechnipFMC plc is an energy service company, which engages in the provision of solutions for the production and transformation of hydrocarbons. It operates through the following segments: Subsea and Surface Technologies. The Subsea segment engages in designs and manufactures products and systems, performs engineering, procurement and project management, and provides services used by oil and gas companies involved in offshore exploration and production of crude oil and natural gas. The Surface Technologies segment designs and manufactures products and systems, and provides services used by oil and gas companies involved in land and offshore exploration and production of crude oil and natural gas. The company was founded in 1884 and is headquartered in Newcastle Upon Tyne, the United Kingdom.

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TechnipFMC plc is an energy service company, which engages in the provision of solutions for the production and transformation of hydrocarbons. It operates through the following segments: Subsea and Surface Technologies. The Subsea segment designs and manufactures products and systems, performs engineering, procurement and project management, and provides services used by oil and gas companies involved in offshore exploration and production of crude oil and natural gas. The Surface Technologies segment designs and manufactures products and systems, and provides services used by oil and gas companies involved in land and offshore exploration and production of crude oil and natural gas. The company was founded in 1884 and is headquartered in Houston, TX.

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