Technip FMC: A New Way to Play LNG

02/18/2020 5:00 am EST

Focus: ENERGY

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Technip FMC PLC (FTI) is a beneficiary of growth in liquid natural gas (LNG); the stock outperformed the energy space last year, rising 12.1% in 2019, notes Elliott Gue, editor of Energy & Income Advisor.

That said, FTI delivered a rare earnings miss in Q3 driven primarily by weak margins in the company’s North American Surface (shale) business.

Clearly, the slowdown in shale drilling last year coupled reduced demand for the sort of wellhead products FTI sells to producers; management also cited “more competitive pricing” in North America as a driver of the company’s reduced margins. However, we see 3 key drivers for FTI this year.

First, orders and profit margins in the LNG business remain strong — with much of that growth driven by major LNG project awards including Mozambique LNG and Arctic 2 LNG (Russia). Management expects 20 additional LNG awards over the next 24 months and FTI should get more than its fair share of those deals. 

Second, the company’s subsea business remains strong. The company designs and builds subsea infrastructure used to produce offshore and deepwater wells, including subsea pipeline systems, wellheads, umbilicals and flowlines used to control and produce from offshore wells.

Given the prolonged oil price bear market over the past few years, the focus has shifted to developing smaller deepwater fields that can be “tied back” to existing production platforms using subsea pipelines or adding wells to existing projects aimed at exploiting known fields and reserves (brownfield).

Such projects carry far lower costs and offer higher profit margins for the producer. And it’s also great news for FTI since such small-scale deals also require the company’s expertise in designing subsea infrastructure.

The third catalyst for FTI this year is the company’s planned split into two distinct, publicly traded companies. The company plans to spin off its Onshore/Offshore unit into a new company to be called Technip Energies. The remainder of the business, including the market leading subsea business, will remain in TechnipFMC.

Often spin-offs of this nature highlight value for a company by creating two pure-play businesses — in this case a more direct play on LNG projects and a direct plan on subsea (and surface) production. The Technip Energies spin-off is expected to complete in Q2 of this year.

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