TechnipFMC

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

TechnipFMC is a technology provider to the traditional and new energy industries, delivering fully integrated projects, products, and services. With its core in oil and gas, it is pivoting towards new energy sources.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: TechnipFMC operates in the energy sector, providing engineering, procurement, construction, manufacturing, installation, and life of field services to its clients. They are transforming their business to have a more balanced mix between traditional oil and gas and new energy markets. Here’s a breakdown of their operations:

Subsea: Designs, manufactures, and provides systems used for offshore oil and gas production, including subsea production systems and subsea umbilicals, risers, and flowlines.
Surface Technologies: Designs and manufactures products and systems that are used by oil and gas companies for wellhead and pressure control, including specialized high-pressure valves and pumps.
Process Technology: We do not see information about the Process Technology segment at current report. This segment appears to have been divested.

The company is navigating the energy transition, aiming to be a leader in “engineering, project management, and manufacturing in a lower-carbon world”. They are actively pursuing innovative solutions in areas like carbon capture and storage, hydrogen production, and floating offshore renewables.

Revenue Distribution: Based on their most recent 10-Q, revenues are split into two reporting segments: Subsea and Surface Technologies. By geography the company obtains its revenues primarily in North America and the Middle East.

Industry Landscape and Trends:

The energy industry is marked by volatility, impacted by global economic conditions, geopolitical risks, and fluctuations in commodity prices. Demand for oil and gas remains, but there is a growing focus on renewable and sustainable energy sources.
The push for decarbonization and clean energy transition will significantly impact their business.
Customers are looking for low-cost solutions, improved safety and automation, and integration with digital technologies.

Competitive Landscape: TechnipFMC faces competition from other providers of oil and gas products and services, some of which are larger or more established than TechnipFMC. In Subsea, there are very few players, with a small amount being direct competitors, and this segment may have significant barriers to entry. In Surface Technology segment, on the other hand, the competitive landscape is much more fragmented.

The company differentiates itself through its integrated approach that combines design, engineering, manufacturing and services and strong technological capabilities. Their focus on innovation, automation, and digital technologies are their main competitive differentiators, along with their focus to offer clients solutions instead of just a product.

Financial Analysis:

Revenue: Revenues have been increasing on a yearly basis and driven mostly by their Subsea segment. Surface Technologies have been experiencing moderate growth over the past few quarters.
Margins: Gross profit margins have been consistent around 14.5%. Operating profit has increased significantly in 2023, due to improved project performance and favorable cost trends in the Subsea segment.
Cash Flow: Cash flow from operations increased year-over-year, which reflects a better operation efficiency.
Profitability: Company has become more profitable because of operational changes in the Subsea segment, and the cost management that management has put in place. However, all three segments need to continue delivering consistent results to ensure overall profitability of the business.
Debt: Debt levels are manageable and are being monitored and optimized by the management team. Here are some specific observations from the last 10Q report, quarter ending September 30, 2024.

Latest Financial Highlights

The total revenue has increased to $2,093 million, a substantial increase compared to previous periods. Subsea segment accounted for most of the increase in revenues.
Cost of revenue decreased slightly compared to revenue increase, showing good operating efficiency.
Selling, general and administrative expenses increased due to higher employee costs.
Other income (expenses) net showed a slight improvement due to favorable foreign currency changes.
The effective income tax rate was affected by a beneficial valuation allowance.

Moat Analysis:

Based on the business description, we can assess the competitive advantages as well as the potential moat for the company:

Intangible Assets: TechnipFMC’s moat is primarily built on intangible assets like their large patent portfolio on their subsea technologies and their well-established brand name in the industry.
Switching Costs: Customers switching to competitors from TechnipFMC is costly, as the company is deeply involved in the execution of their customers’ projects, providing tailored solutions that require a learning curve to adapt to. This makes the relationship sticky.
Economies of Scale: Scale provides an advantage in production costs and efficiency in delivery, which can help attract more customers. But this benefit is not too pronounced as other competitors also have massive operations.

Moat Rating: 2/5

Justification: While TechnipFMC benefits from some level of competitive advantage, its moat is not very broad. It faces intense competition, especially in the Surface Technologies segment. Their technological capabilities and strong brand are offset by intense competition, especially from more agile companies that are willing to aggressively compete on cost. There is very high dependency on R&D spending, which may result in declining competitiveness if not managed correctly.

Legitimate Risks to the Moat and Business:

Technological Disruption: The rapid advancement of technology could render their existing technologies obsolete or give rise to lower-cost alternatives, eroding their competitive advantages.
Industry Cyclicality: Oil & Gas sector is highly cyclical with huge variations in business and customer spending. Fluctuations in demand and prices can significantly impact their revenues, margins and cash flows. They have recently made efforts to diversify into new energy sources, but they have to become relevant enough so that the business is not so reliant on the oil and gas sector.
Economic and Political Risks: They operate in many countries, each with its unique financial and economic system. Trade wars, geo-political conflict, civil unrest, climate regulations and tariffs can all affect demand, supply and profitability.
Competition: Competition can significantly affect margins and market share by quickly adopting new technologies, offering lower prices or just having better sales and marketing.
Dependence on key contracts and suppliers: Being dependent on a few key customers and subcontractors can pose challenges to the revenue generation. If any of those relationships are strained for any reason, it will directly affect the business revenue.

Business Resilience:

While their short-term earnings can vary, their long-term economic presence as a leader in the industry makes them resilient.
They are also making efforts to diversify and move their business into new energy markets, which will reduce their reliance on oil and gas sector.
They have a backlog that has been growing over the last few years. Their diversified offerings, the new contracts and projects in their pipeline is creating a sense of stability to their business and is increasing its resilience to the market.
They have a diversified global presence which allows to absorb market shocks that may occur in a specific region.

Understandability Rating: 4/5

Justification: The business model is complex and requires some knowledge of the energy industry to fully understand it, but it is easy to understand what the company does and their strategy going forward. The financial statements are also very well organized, making it easier to track the company’s performance. The segment disclosure has been improved. Overall, it is relatively easy to get a grasp of the basic principles of this business, but a deep understanding requires significant experience in the market.

Balance Sheet Health: 3 / 5

Justification: The company has a reasonable level of debt, with an equity level that has recovered since 2020, they have also improved their cash flow, making them able to service their debt obligations and continue reinvesting in their business. Even though there is no immediate financial risk, they have an average rating due to high leverage and dependency on projects. Also, their goodwill and acquired intangibles account for a large portion of total assets.
Total assets in September 2023: $15,771.8 million.
Total debt: $3,516.8 million
Cash and cash equivalents: $1,545.1 million
The debt-to-capitalization ratio is approximately 0.35.

Recent Concerns/Controversies and Management Response:

Supply Chain Issues and Inflation: Management noted in earnings calls that supply chain and inflationary pressures remain, which could impact project timelines and cost. They are working to mitigate these risks by focusing on managing the supply chain and costs.
Impact of Mergers and Acquisitions on Revenue: They have started integrating their new acquisitions and they are now generating revenue. Management is actively working to consolidate the newly acquired businesses with its own so that the business can take advantages of synergies and become more efficient.
Divesting their offshore oil and gas business, which means that the company is pivoting more towards the renewable energy sector and they are actively seeking and focusing on that market.
The shift to renewable energy, which may result in new markets and new clients. Management is working to leverage its existing expertise to participate in the new market and create a brand new value proposition for their clients.

This is a solid company with a very specific niche in the market, and its focus on both traditional oil and gas, and renewable energy sources, makes it a balanced company that is able to generate consistent revenue streams. The recent turn around in its profitability and financial performance makes this company more attractive and could prove to be a good addition to a portfolio. But it is not a moat-strong business in most segments. Its technology and unique business approach gives it some type of advantage, but it can easily be overcome by competitors.