TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Good morning, everyone in the U.S., and good afternoon to those in Europe. Welcome back to the JPMorgan Energy Conference and to today's fireside chat with Doug Pferdehirt, CEO of TechnipFMC. I'm James Thompson, Head of EMEA Oilfield Services and E&P Research here at JPMorgan. By way of introduction, Doug has been CEO of TechnipFMC since the 2016 merger between FMC Technologies, where he was CEO, and Technip. Prior to this, he was CEO of FMC Technologies, a company he joined in 2012, after a 26-year career with Schlumberger. He's been instrumental in the company's transformation over the past few years, moving ahead of the industry as TechnipFMC formed the integrated subsea business model. Under Doug's leadership, FTI has clearly become established as one of the industry's leaders. The fireside chat will last approximately 30 minutes. There will be an opportunity to ask questions. There is an Ask-A-Question button in the question -- in the conference portal. Please do fire those in at any time. We will pick them up, and I'll endeavor to ask those before the end. If you don't want to do that, just send me an email at [email protected]. So to kick us off, Doug, welcome back to the JPMorgan Energy Conference. It's great to see you.

Likewise.

Before we dive into some of the details, Doug, I was hoping that perhaps you could just set the scene for us. At a macro level, oil prices are above $70, which I think is clearly helpful for us all. In fact, the commodity space is, in general, supportive. The company has clearly evolved over the last few months with the spin-out. So maybe, as you sit today, where do you see FTI in terms of just positioning, competitiveness? And what's your take on the kind of high-level outlook for the company.

Well, again, thank you, James, for having us. Thanks to JPMorgan for hosting this conference. To all of you that are dialing in, thank you, first of all, for your interest. And second of all, I wish that you and your loved ones remain well, healthy and in positive spirits. James, I'll try to be brief so that we can then go into more of the Q&A. Look, when we formed the company, we believed that there was a requirement to drive real structural and sustainable change in the way that subsea projects were delivered. That was the rationale for the merger between FMC Technologies and Technip. And we embarked into unchartered territories. We delivered things like integrated commercial models and next-generation subsea equipment, Subsea 2.0, that had never been delivered to the industry. We are delighted with the market acceptance, which has, if you will, further strengthened our leadership position, having always been a leader, but now with much greater leadership and I would say, a more sustainable path forward. These things create for us the differentiation and allow us to deliver subsea projects and meet subsea project economic standards that are unique to the industry. All of this gives us greater visibility and greater confidence. And then when you translate those capabilities are 100% transferable to the renewables energy space. So when we look at the next generation of energy, we realize we can rely very much on those same attributes that have created the success for us in subsea and the differentiation that we have in the marketplace today. Those same attributes will then be transferable into the new energy space. And most simply kind of stated is looking at us, as the subsea architects and the company that understands the space and has by far the most experience, has delivered the most innovation, and has a very -- the most significant installed base, how we then leverage that in areas of wind, wave, hydrogen and carbon transportation and storage going forward. So we feel what we've done is we've really transformed our company. In doing so, we've transformed the industry in the way that subsea projects are done. We're excited about the outlook for subsea projects in the traditional energy space. And we think we are -- we've positioned ourselves very well as we move offshore with the new energies in the future. I'll pass it back to you, James.

Thanks, Doug. Thanks for the introduction. It goes out without saying, obviously, that we hope that you and your team have stayed healthy through the pandemic. We've seen with a number of global businesses, the logistical challenges of COVID-19 have been pretty tough to manage. It would be really good to just get an update from you about what are you seeing in the field. We're 6 months into 2021, are things getting a little bit easier? Feel like projects are kind of moving to time now. And just how things are progressing as really as we kind of exit from the restrictions?

Well, James, thank you for asking. Personally, I can say I feel blessed. My family has stayed healthy throughout. Obviously, like everyone we've been faced with individual and collective challenges, but very proud of the family and they've risen to those challenges. Equally proud of the -- all the women and men who comprise the TechnipFMC family. What we went through was truly challenging. And there's no way that you can try to deemphasize what a challenge it was. But the way that we stood individually and collectively and faced those challenges and continued our deep intimate relationships with our customers and the support of our customers, in some cases, having nothing to do with projects, but just in how we were sharing resources and capabilities to deal with the pandemic has brought us all much closer together. Closer together as the TechnipFMC family and closer together with our clients, our partners and our contractors, all of whom we continue to remain very focused on their health and well-being. In terms of the overall what are we seeing today versus this time last year, if you will, obviously, much greater visibility. We -- things have become more stabilized. There are still challenges. There's still challenges in the supply chain, but more so in the transportation and logistics associated with the supply chain. But the team did a tremendous job last year, and they continue to do a tremendous job to find alternative ways to support our clients and to support our project delivery teams. Certainly, the level of interest and tendering around projects has certainly increased. We were able to, in the middle of the pandemic in this time last year, call for the inflection point in our inbound, which I don't know that it was quite unique to our company, let me just say it that way, and we delivered against that. We continue to see strong inbound orders of $1.5 billion in subsea alone in the first quarter as an example of that. What gives us that ability and differentiation in the inbound orders, which obviously then results into our market position, is the uniqueness of our offering. And that's both the integrated model, iEPCI, or integrated engineering, procurement, construction and installation; but also the generation -- the next generation of subsea technology called Subsea 2.0. And it's now that unique combination of putting the 2 together that's driving even further and greater differentiation, success for our clients, success for our company and success for our shareholders. Most notably, we just announced an award for Petronas in Malaysia. Petronas is embarking on their first deepwater project. Petronas has done many projects. They're a very successful company, both in Malaysia and outside of Malaysia. But they had not yet done a deepwater or subsea project. They came to us. They came to us because of the iEPCI and the Subsea 2.0, and we were very proud to make that announcement and to continue our long partnership with Petronas.

Yes, I mean, as you said, you've already got $1.5 billion in hand, this year. I mean 2020 was a tough year for many oilfield services. I think, you did a pretty good job of, if you like, covering yourselves off in terms of what 2021 was going to look like from a revenue perspective. Looking at the sort of future, you were very confident about exceeding $4 billion of orders. You've already got $1.5 billion in hand. What is it that drives that confidence? What are you seeing in the market that makes you hang your hat on the $4 billion type order intake number for subsea? And I guess, where is the upside case from there?

Great question. There's really 2 different aspects to the confidence. One is the general market. So clearly, the amount of tendering that's happening in the general market has increased quite significantly. Often I get to question, how directly correlated is it to the commodity price. There's obviously a correlation. But we were starting to see an uptick in the tendering activity even before the uptick in the commodity pricing. That's just getting even further in greater confidence and maybe the ability to accelerate some project sanctioning as a result of the increased economics associated with the improved commodity outlook. That activity has been quite substantial, and we're very selective in where we participate within, let's say, the general market. Now why are we able to be selective in where we participate in the general or open market? That's because a substantial portion of our business is actually direct awarded to our company. Up to 50%, 5-0, is direct awarded to our company. This just comes from 3 categories: the unique integrated offering that I spoke to earlier; our subsea services, as mentioned earlier, we have 50% of the world's installed base on the seafloor and those come with long-term service contracts; as well as our unique alliance partnerships. And we've added several additional last year during the pandemic that are exclusive to our company and results in direct awards. So it's that visibility. It's the general market improving, but it's the visibility into a market segment that is quite substantial. It's a substantial portion of the total market and up to 50% of our market that we have a unique ability to be able to understand what those -- where those project economics lie because we're at the table very early in the pre-concept, concept, pre-FEED and FEED stages. So we were working those projects hand-in-hand with our clients. We understand where they are. We understand the clients' attitude towards project sanctioning and that helps us to be able to predict and provide the outlook that we do. And as you pointed out, James, we gave an outlook for inbound orders in the middle of the pandemic of $4 billion in 2020, and we delivered against that. Yes, our confidence remains high in exceeding that in 2021. The upside, as you mentioned, look, there's some very big greenfield developments that are out there, which I know surprises some people. And there's a significant amount of, obviously, tieback opportunities around the world. There's a lot of strength geographically in Brazil -- South America, Brazil, Guyana are really driving that. And in the North Sea, particularly, in the Norwegian sector of the North Sea, and tieback opportunities in the Gulf of Mexico. So there's a lot of activity and a lot of enthusiasm. We're going to be really structured and really disciplined, and we've -- that's been very clear in our tendering approach that we've taken as the market cycle recovers because there's a real opportunity to ensure that we're capturing the highest quality work given the position we have in the market.

Interesting. I'm very interested to hear about high tendering because I think there's a perception from the outside that oil and gas CapEx is going to lag forever because of the energy transition. But high tendering would certainly go against that. And I think we've seen from the inbound from yourselves and other companies actually year-to-date that it's on the up. What do you think is driving that from your customers? Do you think it's a concern about their own reserve inventories? Do you think it's -- they can see the cash flow opportunity company -- coming, sorry, what do you think is driving that high tendering?

Yes, James. So look, I think, in general, the project economics and the quality of the reservoirs offshore, the regulatory environment, all in most regions, favor the offshore environment to be very blunt. In terms of our clients and what's driving their investment decision, I'll leave that to them. I don't -- it would be wrong for me to try to answer on their behalf. I can just speak to the conversations that we're having, the seriousness in the conversations, conversations that have even led, James, to discussions around concerns about capacity in the market, to be able to deliver these projects in the coming years. So I think there's a certain amount of reality that there needs to be -- these projects -- there will be projects that need to be sanctioned and the economics are quite favorable offshore. Now there is a mix question as well, James. Not all clients are maybe driven by the same investment thesis. I mean everybody has their own investment thesis. And the offshore industry has largely been driven by the IOCs and still is, but we see an increasing amount of participation from NOCs and independents. And we're -- which are very favorable to our company, that mix evolution is favorable to our company because those clients may not have the same history or internal competencies in subsea developments. So when they look to our company and realize by working with one company, a single company, that has the capabilities that we have that are unique to be able to deliver everything, from the early engineering all the way through the life of field through a single company and a single contract where they don't have to deal with multiple interfaces or multiple parties or multiple joint ventures or alliances. And a company, quite frankly, that we're proud that we feel that our clients find that we're easy to work with, that we are very transparent. We're very reliable, and we're a company of high integrity. We've signed several new clients that have not traditionally worked offshore or in the subsea space, just last year, and we'll continue to add more here in terms of exclusive alliance relationships with our company.

Interesting stuff. I mean, I guess, that leads me on to -- if you're talking about scheduling and outer years, high levels of tendering, is there anything to be done on price now? I think that's what we're looking for, for those services, it's kind of a little bit of a return of pricing power. Maybe get a little bit back from the oil companies who I think certainly, it looks like it's been in their favor in the downturn. That's for sure.

Yes, sure. So 2 different responses, James. When we're working in a proprietary relationship and an exclusive relationship with our clients, it's not a pricing discussion. We don't price day rates on a vessel. We don't price the cost of a piece of subsea equipment or even we -- on an individual and discrete basis, we're looking at the project economics. We've gotten a seat at the big table. We're no longer at the suppliers table. We're at the big boy table. We're with the adults. And we're sitting at the table and we're having very genuine conversations about how do we improve the project economics. Those clients, when we're in that scenario, there's not 3 Bids and a Buy. It's a direct award to our company. So it's not a pricing discussion, if you will. It's how do we maximize the project economics, which is good for the project. And if it's good for the project, it's proven to be very good for us as a partner in the project. Now in terms of the open traditional tendering market, certainly, what we've seen is a bit more discipline. We've always led that, and we'll continue to lead that. That's, again, because of the structure of our company and what we created in terms of this differentiated access to that proprietary market that I just talked about. We don't have to chase every tender and we won't chase every tender, and we don't have to participate in every tender. But we'll be selective. We'll work where we believe we can bring the greatest differentiation. An example of which was the Petronas award that I just talked about, where we could leverage our iEPCI and our Subsea 2.0 as an example. In that market, I would say we're seeing more discipline, James. And the pricing will obviously follow as the demand continues to absorb capacity.

Okay. Last question, I think, before moving on to what everyone is talking about, ESG and renewables, et cetera. But just maybe putting you in the spot a little bit, thinking about this improving market, how do you think about the profitability of both the Subsea and actually, your surface business longer term when you're thinking about the cycle and the ability to kind of capture margin as a business and generate cash. Can peak cycle this time be anything like last cycle?

Sure. Well, let's -- okay, so let's go through the businesses, if you will. So let's talk about Subsea first. I was asked a couple of quarters ago, I think, on a conference call, if we could see a 13-plus percent Subsea margins in the future, and I answered emphatically, yes, we could. We increased our guidance by 200 basis points year-over-year, 2021 versus 2020. That was pretty substantial when many weren't even giving guidance, and we increased it. And we had a very solid Q1, as you referenced earlier, James. So look, obviously, we're seeing the benefits of some of the restructuring that was done during 2020. But more importantly, we're seeing the quality of the backlog. We talked about inbound inflecting in the middle of 2020. Earlier this year, we talked about the backlog margin inflecting. That was profound. And I think you'll find that's very unique to our company. So not only is the backlog growing or is the inbound growing, but the margin in the backlog has inflected, which bodes very well. Now we still have to execute to turn that into profit. But I have the highest degree of confidence in our ability to be able to execute and recognize those increased backlog margins in terms of ultimate profitability. So that's what, again, gives us confidence in our ability to not only give the guidance that we gave for 2021. But to say beyond that, we would expect to see margins continue to improve. In terms of Surface Technologies, it's really a tale of 2 cities, if you will. 70% of our business is outside of North America, we are the leader. It is a very substantial business for us, high quality, both in terms of the technology offering and the overall differentiation, both in terms of our local capabilities, our local footprint. Again, the technology and the product offering is quite unique and very vertically integrated. We manage, if you will, the majority of our own supply chain for the international market, and there's a lot of leverage by doing so. That continues to be robust. We are seeing increased levels of activity. I will say versus some of the traditional downhole oilfield services companies, we did not see the decrease that they experienced. It's been a much more resilient and steady business for us. So we'll see an uptick in that business, but maybe not to the same effect as we're hearing from some of the downhole oilfield services equipment just because we didn't have the down -- we didn't experience the downside that they experienced in their international business. So very strong, very resilient, very proud, doing well and continue to be a primary focus. The North America market is improving and is recovering. We're transforming our business model there, which that market has become increasingly commoditized. We're bringing in, if you will, a digital offering that will help elevate and differentiate our product offering in the North America market. It's improving, but it certainly is not accretive to our overall Surface Technologies margins. So we would have to see an improvement in the Surface Americas to be able to get the overall Surface Technologies margins back up to what we had experienced in the past, James.

Okay, very good. So I think I'll shift gears here. Just before I do, just to remind everyone on the call, if you want to ask a question, do use the Ask-A-Question function there in the conference website. Doug, obviously, new energies, renewables, ESG, it's kind of the buzzword all around for the past 1.5 years for sure, obviously, been growing since then. In terms of what TechnipFMC is pursuing, you've outlined Deep Purple as a sort of integrated opportunity. Perhaps you could kind of frame where you're at with that? How far away are you from thinking about pilot studies, commercialization, things like that? And why the desire? Why do you think there's a business opportunity in combining these items in the offshore?

Very interesting, James. I'm going to take the last part of the question first because I think it's very intriguing. I don't know that there's a strong desire. Let me compare it to what we did in 2016 -- '15, when we had the vision; '16, we studied it through a joint venture; front-end engineering; in '17, we delivered the integrated model for traditional energy offshore. At the time, there was no desire. There was no market demand. It was just we had the vision and belief that you have to structurally change the way that you did business to have a sustainable business and a business that would be competitive against other choices to attract capital from our clients when they had other choices of where to deploy that capital. Same approach with new energies, same playbook. We believe strongly that the integration of technologies will ultimately improve the project economics. And if you keep that very basic mentality, I know it doesn't sound super technical or super exciting, but it all comes down to the project economics. We know the project economics of the renewables today are being questioned. Let's be blunt. They're being questioned. The returns are not what investors are looking for. Things have to be done differently. We are the type of company that will drive that change. So when we think about the offshore, we fundamentally believe that it is a requirement to reach the scale that is required from the renewables to be able to reach its fullest potential. So that's decision #1. Right or wrong, we strongly believe that to achieve the scale, you're going to have to go offshore. And if you just look at the numbers associated, it's hard to believe that, that's not going to be the case. So now if you go offshore, there's not a lot of renewables energies companies today who have ever worked offshore. They're not familiar with the space. And their first approach, as it was in fairness with traditional energy 50 years ago, is to build a big structure, build a big platform and put it on top of it. So you can operate it just like it was on land. But that's not the best economical way to do it, and it's certainly not the best way to do it from an ESG footprint. So what we said was, no, let's start with the seafloor. Let's think differently. And that's what we're bringing to -- that's the differentiation and the contribution that we're bringing. So we're bringing the parties together, James. We're saying, we don't have to compete against each other. Wind operators don't have to compete against wave energy generators. Why are we competing? Why don't we work together? Why don't we maximize the potential? Because we want to help the renewables reach its fullest potential. To do so, we believe it has to be offshore. And to do so, we believe it has to be integrated. So why fight each other? I feel like we're like the one trying to bring the parties together. But in doing so, we believe we'll be able to capture a significant portion of the value chain as we have in the traditional energy space in subsea. So it will be, if you will, through the integrated offerings. It will be through bringing our own technology. It's very important, and we learned this in the traditional energy space. It's not just about how many assets or the size of your assets, it's about -- or the number of days associated with your assets. It's, are you differentiated? Are you bringing a technology offering? So we've been investing, as you said, it's been a little bit the flavor du jour of the discussions over the last 1.5 years. But we've been investing 4 or 5 years in things like carbon transportation offshore, in things like wave energy, in things like hydrogen. The qualification for a hydrogen transportation and storage system takes a lot of time. It's a very different requirement. Same as for carbon. It's a very different requirement. So those are the type of things we've been doing. We've been announcing partnerships. We believe this will be done by collaboration, not by wanting to win the race all by yourself. But by collaborating with others, we'll continue to do so as we have in the traditional energy space. And then ultimately, James, if it's wind or wave or hydrogen or carbon that crosses the finish line first, James, that's not -- we're not betting on 1 horse. We're riding all of those. We want them all to run at their fastest speed. Which one finishes the finish line first, doesn't matter as long as they all do, and they all reach their fullest potential, which is good for the world, good for our industry and good for our business at the same time. So that's our approach, is to bring an integrated offering, to supplement that with our own technology so that it's differentiated and they work very well and build these partnerships that we've been announcing and we'll continue to announce more so going forward.

That's pretty clear. We're running short of time, unfortunately. I mean I've got a whole sheet of more questions actually here, which I could definitely carry on with. So I'm just going to change track a little bit. I mean it's been pleasing, you must have been pleased to see that both FTI and TE have performed pretty well since the spin actually. And the market has been very accepting of that, which I think is a very good result. You sort of made the first move there in terms of the pathway to monetizing that remaining stake. I've done the math. Clearly, there's a significant balance sheet improvement, assuming you do exit that full position meaningfully below 1x levered. I guess the question is, other than how much of that stake you're going to monetize, but it's really what's next for FTI? You're going to have a very strong balance sheet. You've got a market-leading brand, kind of where do you take that? Do you consolidate more? What's the kind of goal post monetizing that stake?

Yes. Wonderful question. And certainly, I want to start by saying how proud I am of the Technip Energies' leadership team. They're driving a very successful business. We are a very pleased shareholder of that business and continue to wish them the very best as they continue to move forward in their future and just doing a wonderful job, we couldn't be happier. As you pointed out, we've moved fairly quickly in monetizing a portion of that investment from 49.9% down to just over 30%. We'll continue to look for opportunities, but we'll be very structured, very disciplined. We're not in a hurry. There's no, if you will, requirement other than our fundamental belief that these companies should be independent. And I think Technip Energies will benefit from that independence. And obviously, we will benefit from the improved balance sheet and leverage, as you pointed out, very clearly, James. It's a very different outcome and quite interesting. We've been -- we talked about it for quite some time, but I think the world is now coming to acknowledge and accept that this is a pretty rapid transformation in terms of the deleveraging. Where do we go from there, James? Look, we have an Analyst Day coming up in November. We obviously have a lot that we'll want to share then. This just in no way was the last play in the playbook. This in no way was the last chapter of the series. There will be more to come. Look, I will speak -- you asked, so I respectfully will answer to your question about consolidation. We don't see a real need to consolidate, if you will, but we do see a need to do things smartly and do things differently than we have traditionally as an industry. So we'll continue to look for those opportunities to do things that are different and unique, but not necessarily to be a consolidator, if you will. We're pretty proud of what we have. When we put the 2 companies together for the purpose of creating the integrated subsea offering, not only was it the right 2 partners, and that's certainly proven to be the case as we have the 1 family now with TechnipFMC, but it was also the capabilities. You -- in one single move, we're bringing together all of the capabilities that were required in order to deliver that integrated subsea project. There is no other combination of 2. There is no other combination of 2. Either you're missing flexibles or you're missing umbilicals or you're missing control systems. You're always missing something. This was the only combination of 2. And I think the market has come to embrace that. We'll continue to build upon that. We'll continue to leverage both in the traditional energies and now into the new energy spaces, this very successful foundation that we built.

Great. We are, unfortunately, out of time here, Doug. Really appreciate your time. Thank you very much for this discussion. It's been really interesting. And thanks, again, for supporting the conference again this year. Thanks, everybody.

Thank you, James, and thank you, JPMorgan.