TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Hello. My name is David Anderson, Head of Oilfield Services Research at Barclays. Thank you for joining us today as I sit down with Mr. Doug Pferdehirt, CEO and Chairman of TechnipFMC, the premier subsea equipment provider, which has really transformed the business over the last 5 years with this integrated model. The catalyst of this integration was the merger between FMC Technologies and Technip back in 2017. And Doug has been CEO since then, having previously served as CEO of FMC Technologies since 2016 after joining the company in 2012, after previously spending 26 years at Schlumberger. Doug, thank you very much for joining us today.

Dave, as always, thanks to you and thanks to Barclays for having us.

So Doug, maybe I'd just like to start off with some big picture questions, and we'll sort of kind of bring scope inwards a little bit. So maybe just bigger picture here, just a longer-term outlook on offshore. You and I have spoken in the past about kind of that longer-term outlook. And before you recently spun off Technip, you had done some work internally to make sure that this was the right time to show the stability of the market. At the same time, of course, we have a big group of investors who are or really kind of questioning whether we need offshore at all to where does offshore fit in sort of the big energy transition. So maybe just sort of a bigger picture question, sort of maybe a 5-year kind of outlook. I mean, just sort of say, why does the world still need offshore? And why are you still convenient that it does?

Sure. Great question and a fair question and one that we obviously studied throughout the history of the company, but pretty intently around the time of the separation. And it really led to giving us the confidence of creating this industry pure play, and as you said, a leader in the space in which we serve. But it was really important to understand the market and the market outlook accordingly. So we performed our long-term energy outlook, similar to other companies and mainly the oil companies who take on this type of a task. But we -- and it's multidimensional, but we added an additional layer. And the additional layer that we added on was really to understand where was the necessary fossil fuel production going to come from onshore versus offshore, which is typically not -- most of the studies are done by region or by country but not really onshore or offshore. So we took that rather exhaustive and extensive data set. We looked at it by location, by geography, but we also looked at it by the actual resource play. And then we took into account the economics, took into account the regulatory environment and really started to study and understand where was the incremental oil and gas likely to be derived from. So when we look at that over kind of the timeframe of 5 to 10 years, clearly, there will be a continued need for fossil fuel. I think most of the studies and most of the forecasts have actually now increased not only the percentage, but the duration of the fossil fuel that will be required during the energy transition. And I hope we get time to talk about new energies and things that we're doing as a company, including carbon transportation and storage, which really helps address some of the challenges around fossil fuels. And perhaps we'll get a chance to talk about that later. But when we look at the actual fossil fuels that are going to be required, again, both in terms of the percentage of the energy mix and the duration, you can see that there's a significant gap, and that gap will need to be filled. From the studies that we've done, and we feel fairly confident that over 41% -- or approximately 41% or over 40% of the oil that will be required will come from offshore. And likewise, for natural gas, approximately 1/3 of the incremental natural gas that will be required will come from offshore. Now why is that? Well, it really comes down to 3 factors: the quality of the reservoirs, the project economics and the stability of the regulatory environment. And these are all things that the oil companies have to consider when they're making their investment decision. And it's not far off from the historicals, but certainly, gas becomes more and more of an offshore play going forward, which is quite interesting for our company as well. So that's what really gives us the confidence. The other conventional and unconventional oil and conventional and unconventional onshore gas will obviously continue to play a part of the energy mix. But I do think it's more broadly accepted these days that there are some challenges associated, again, with all 3 categories, both the quality of the reservoir, the project economics as well as the inconsistency, unpredictability in some cases, of the regulatory environment. So we're seeing more and more of our customers lean towards offshore, and we couldn't be more happy.

So it's a great point on the economics, in particular, because we've seen the economics improve so much -- so drastically in offshore. At the same time, so a big chunk of your customer base would be IOCs. So major oil companies, as with all oil companies, are getting -- kind of getting pushed in two different directions, right? You've got the -- on the one hand, you got the customer, you got the investors who are begging for capital discipline and cash be returned. On the other hand, you have this, of course, need to continue to grow and to continue to replace reservoir -- replace production and we have these economics. So how are you thinking about sort of offshore spend over the next few years? What are your customers saying? We're seeing a little bits and pieces here, right? We've seen sort of a little Guyana, a little Brazil. But kind of how are they kind of thinking about the next few years? And when do you think they're going to start kind of pulling the trigger on some of these other projects?

We called over a year ago an inflection in the inbound orders for our company. And that's a factor really of 2 things: one, the overall market, as you're referring to, but also the proprietary market that we have exclusive access to with our integrated model, which is unique to our company. But let's just talk more about the broader market first. We'll have growth in 2021 versus 2020. And we've said we expect further growth in 2022 versus 2021 in terms of inbound orders. So I guess, Dave, we see that playing out as a multiyear cycle. We believe it started, and certainly, the data supports that it has started for our company. I think we're in a unique situation and in an improving situation as a company in terms of our position in the market because of the differentiation with the integrated offering, technology, et cetera. But it's definitely playing out to be a multiyear cycle, which we're in the early stages of that multiyear cycle. Now you raised an interesting question, which is who is your customer going to be during that multiyear cycle. And I do think there will be an evolution of the customer base. I will say, we're still very active with all of the traditional customers and doing either front-end engineering studies or working on newly sanctioned projects for those customers. So they've not disappeared and they're still very active and they still have a large portion of their total resource base in offshore or in deepwater. So they're still very attentive to that and we're still working very closely with them. They are asking questions like, how can you make it less -- how can you lower the emissions around these developments? And the good news is the deepwater developments rank as some of the lowest carbon emission projects that are available to the energy industry today. We're furthering that by advancing things like all-electric, which will allow us to even further reduce the carbon intensity of the deepwater and offshore projects going forward. Now we also see an emergence of a new customer base. And that's a customer base who's coming in and in some cases, taking over some of the projects and actually becoming the operator and delivering the projects. We've seen that in the Gulf of Mexico and other places where some of the large IOCs have walked away from projects or de-emphasize those projects, I should say. And an independent has come in and bought up that acreage and delivered the projects, in some cases, in record time. We have a large percentage of those customers under long-term exclusive partnerships with our company because of the way that we work because of the relationships, because of the integrated model, because of the technology and our ability to be able to deliver these complex offshore projects for them where they may not have the same internal capacity or capabilities as some of the larger IOCs. So that evolution of the customer base is actually quite interesting for us and plays well for us in the mid- to long term.

So you brought up an interesting point. I think you brought it up on your last call about how offshore is actually lower emissions. And I guess, sort of one of the big things you're reading a lot about today is the focus on methane, and that's becoming a big problem. Well, it is a big problem, I guess, that sort of began to address it. So are you seeing some of your customers starting to think that way? I know certain companies -- I know Chevron is very much focused on that kind of whole element of kind of getting cleaner. And I think they've just kind of talked about there's lower emissions barrels. So I would think that maybe that would be kind of a driver, something I hadn't really thought of before. But do you think that is kind of one of the things that kind of the IOCs or some of your bigger customers are sort of thinking about as they think about their mix and sort of their mix of production versus emissions? I mean, because I hadn't really thought about that before. You brought it up on the last call.

Most definitely, Dave. And really, all of our customers are aware of the challenge that the world faces, and wants it to be part of the solution and definitely does not want to be part of the problem. And we're going to them with very unique solutions that allow them to reduce, for instance, methane emissions. But what's important is it's -- you have to look at the total life cycle of the project. And it's not just reducing the emissions during the drilling phase or the completion phase, but actually through the life cycle of the project. And again, that's where offshore just has such an advantage. Obviously, we have things on the seabed. We have closed-loop systems instead of open-loop systems like you do onshore that really lead to a complete mitigation or significant reduction in things like futuritive and methane releases.

Right. I'm going to deviate a little bit from my question because you brought up the all-electrification. I wanted to -- I had that a little bit later, but I'd love to talk about it right now. Talk about a little bit about the opportunity. We've been talking about electrifying the seabed for, Doug, as long as Technip's been doing this. So what's different today? Are we there? You've talked about all the number of actual graders that you have on the subsea equipment. Is that something your customers are asking for yet, or is that something you're sort of pushing? We always kind of think about being pushed versus pulled in technology. I'd love to kind of know where do you think we are in that? And would you envision -- I mean, do you envision sort of like all-electric kind of developments in the future? Is that something kind of that you think is on the horizon?

Yes. Let me start with -- I expect in all-electric development in the near future. So let's be very clear. In terms of the adoption, there are always those who pull and there's always those that require a bit of pushing. Clearly, following on your earlier question, when looking at things like reducing Scope 1, Scope 2 emissions, et cetera, it's hard to ignore when there is a solution that has a pretty material impact on the reduction of greenhouse gases, be it onshore or offshore, but we're talking offshore here. So clearly, our all-electric subsea system has a lot of benefit, not only interesting benefits in terms of being able to quadruple the distance of a tieback because you're using electric actuation versus hydraulic actuation and you don't have to deal with the friction losses and pressures of the hydraulic fluid trying to extend it for an extended reach. So it obviously really broadens the brownfield base around existing host facilities. That's important for our customers. Most of the offshore host facilities, on average around the world, are only producing at 60% of nameplate capacity. That leaves a lot of room to bring in incremental oil, incremental gas into those facilities. Being able to quadruple the size of the tieback radius is just -- it's a gift. It's an economic gift to our clients, and it's somewhat of a windfall for us because of our position. Now let's talk about our position in electric because, yes, we've been talking about it. Everyone has been talking about it for some time. What's important to understand is we have 90% market share of all of the electric -- the electrification on the seabed today, 90%. As a matter of fact, some of our technology is actually used by our competitors on their projects. So we have a significant installed base. We have run time hours or uptime hours that are light years ahead of the rest of the market. And that brings confidence to our customers because it is for them still somewhat a leap of faith to switch from hydraulic actuation to electric actuation. Anytime something is new, there's always a little bit of hesitation. But having that install base, having that market position and having that track record allows us, as I said when I opened this question, to have a lot of confidence that we'll be seeing all-electric developments in the near future.

So is there a tieback...

Dave, can I add just -- I forgot one thing, Dave. I really wanted to add to this because you and I haven't talked about this before. It's about lowering greenhouse gas emissions. It's about a simplified subsea system. It's about making the umbilical much less capital intensive. There's a lot of benefits in the tieback. But one of the things that I think is not completely understood about the subsea world is automation and controlled robotics plays a big role. And we're a leader in subsea automation and we're clearly a leader in subsea robotics. We're now with an -- with all-electric and electric actuation allows us to go and deploy even greater percentages of robotic for different things, robotic [indiscernible] operations -- actuation, excuse me, other applications of robotics on the seafloor that wouldn't be available otherwise. And when you start to think about resident robotics, when you start to start to think about AUVs and things like that, having that electrification on the seabed opens up a whole another set of opportunities for the life of field services that we provide as well.

So does this like tie-in to light well intervention and that kind of whole side of your business or this kind of ties into the service component of subsea?

Yes, interesting question. Not yet on the well intervention. I would say, it is still more traditional. We're very pleased with that business. It's a business we've been a market-leader in for a long time. But it's an interesting question. How far can you go with robotics, and we're only beginning.

Okay. Great. Great. So maybe let's talk -- actually, before I get to my next question, let me just ask you on the electrification. So is there a technical hurdle now? It sounds like you've kind of got everything all figured out. I mean, what sort of -- is it just kind of dragging the customer over, or is there a technical challenge still? It sounds like you've kind of got a lot of the issues worked out.

Yes. Everything in subsea starts at the component level and qualifying at a component level. So we are fully qualified at a component level. And then it's about doing system integration and system testing, which is actually reduced complexity with an all-electric system versus hydraulic -- or electrical hydraulic. And so for some of our customers, we're kind of at that phase. For a lot of our customers, it's -- they're actively sourcing with that next -- the development that they want to go all-electric on. It's getting it integrated into their portfolio. As you know, we have very long-term relationships with our clients, which allows us, in some cases, to have and the ability to be able to repeat part numbers, et cetera, which means when you introduce something new, it might take a little bit longer to get into the marketplace. But on the other hand, they work very closely with us on the qualification of the technologies. So net-net, Dave, this is something that I think will be -- when we look back 5 years from now, the rate of adoption, I think, will be quite surprised at what the rate of adoption was. I'm still, as you know, and I say this openly, I'm still -- the rate of adoption of the integrated model exceeded our expectations. I admit that, which is a good thing, by the way, because we have that market, and we couldn't be more proud of the rate of adoption, which was probably the highest rate of adoption we've experienced yet in our industry for some -- new commercial model or a new technology. Subsea 2.0 is not far behind that. But I actually think all-electric could accelerate beyond that. There's really nothing technically holding it back right now. It's just getting the market and getting the clients and starting to get those projects developed. And again, we are working with clients on full field all-electric developments as we speak.

Very interesting. Looking forward to seeing how that continues to progress and adopt. So maybe let's get about kind of the hard kind of the meeting and greeting on the subsea side. So you recently increased your opportunity list by 20% on your subsea, kind of where you see that kind of incremental expansion in terms of the potential bookings over the next 24 months. So maybe just a little comment in terms of kind of that outlook and how that's improved.

Yes. Well, look, I think it goes back to the first question, and it just supports our confidence that we're in a multiyear -- beginning of a multiyear cycle on the offshore developments. We updated the opportunity list. It was up a little bit over 10% 2 quarters ago, 20% this past quarter. These are good solid projects. We have a high degree of confidence. We obviously consider probability of the project moving forward and with the timing of the project in terms of if it makes the opportunity list or not. The opportunity list is looking very strong. And again, it's just what gives us the confidence. And it's important to point out, that opportunity list is more or less the overall market, the available market, let me be clear, the available market. What is not on that opportunity list is all of the iEPCI projects that will be directly awarded to our company as a result of the integrated feed that we're doing on an exclusive basis with our clients. That level of activity is at the highest level that it's ever been. Now Dave, they take 9, 12, 18 months sometimes to go from that integrated feed to a project. But you layer the two on top of each other, you have the -- because for a while, our growth, if you will, or the differentiation in our growth was really coming from that proprietary opportunity set. Everybody -- people were somewhat surprised every quarter at the level of inbound that we booked and the quality of the inbound that we booked. And it's because they don't see those direct awards, and we -- that's something we have visibility to that the rest of the market does not. So we now layer on top of that, the overall available market increasing as well. Again, it just sets up very nicely, Dave.

So if we think about kind of the macro and how it's sort of been clouded a bit recently with the new COVID strain, just when we think we're out of this, it comes back in. Just wondering, has that impacted any kind of near-term views? I mean, when -- your guide, sort of your implied guide on the subsea orders is a little bit softer in the back part of the year. You had a really nice strong surge in the front year. Has anything kind of pushed back at all from what you can tell in terms of kind of -- because this is probably going to be the big question we're going to get all week during the conference. But I'm just kind of curious if anything has kind of changed in your customers' plans based upon what we're all sort of enduring, let's say, over the next month -- over the past month and the next month.

No, sure. And obviously, first and foremost, the health and well-being of our employees, their families, our suppliers and our customers is above most importance, and we'll never put anything above that. To answer your question directly, this offshore business is multiyear contracts. The -- it helps offset some near-term effects, if you will. So in terms of its timing of projects being sanctioned and will there be an impact in the timing of a project being sanctioned because of the current environment around the delta variant, Dave, I don't think there's a direct correlation. We have said that following an extremely aggressive or a very strong first half of the year in terms of inbound that we -- and we gave a projection kind of for the full year that we felt that the consensus number, the 45-ish number was in line, [ 45, 47 ], I think is consensus that we felt very comfortable around that, which does mean that we'll see a lower quarterly inbound in the second half. But I don't think there's anything to read into that because it's very important to also state that we see a very -- we see a strong and a growth in 2022. So it's really just timing and the fact that we got it earlier in the year benefits our company because of the ability to convert it in the revenue. And then it will all come down to the month of December. It's not even the fourth quarter, Dave. In the month of December, some years we see an acceleration of FIDs, and in some years, we see them being deferred to the first half. It's really just a budgetary issue where the clients are on their budgetary spend. If they want to pull something forward, if they want to push something out, we are in the midst of those discussions right now, where we have clients saying, could you pull this forward. So we'll see how it plays out. But right now, we'll stick with kind of the discussion and the guidance we've had around inbound. I don't see any reason to change it. But knowing very well that we could see something pulled into the fourth quarter. There's some material projects out there, big greenfield developments that have yet to be awarded that are scheduled to be awarded at the end of this year or beginning of next year.

Looking forward to that. Well, Doug, I do want to hit on a couple of questions on the new energies portfolio here before we end. But maybe just a real quick question on your Surface business. You have got a really, really nice business internationally, in particular in the Middle East. I was just kind of curious, what have you been seeing on that side of the business? Are you starting to see any inflection? We've been hearing a lot of chatter about increasing capacity, increasing volumes. Just maybe just a little bit of kind of color of what you're seeing in that business today.

We are indeed. It's not exclusive to the Middle East. But you're absolutely right, we're very proud of our position in the Middle East. Look, really across Saudi Arabia, United Arab Emirates, Oman, we are really beginning to see an uptick in the level of orders. There are some very large tenders out there, both in Abu Dhabi as well as in Saudi Arabia. And we are seeing a replenishment of their inventory levels, additional orders coming in. Again, we have other areas of activity as well internationally that are picking up. But clearly -- to answer your question directly, clearly, in the Middle East, we are seeing an uptick in activity. And you're right, that's a very important part of our business. It's where we have the greatest differentiation and the #1 market position. And that's an area that we expect to grow, and again, expect to see some mega awards coming through still in 2021.

Great to hear. Great to hear. So let's spend maybe the last 5 minutes here, just talking about your new energy strategy. Every oilfield service company needs to have a plan for pivoting. There's a lot of opportunity out there, maybe 5 years out. So you've kind of been pretty aggressive recently just talking about, hey, this is where we're going to go. You've talked about wind. You've talked about wave energy. You've talked about hydrogen. You've talked about carbon transportation storage. It's a wide net you're casting out there. Help us zoom in -- zone in a little bit on com, maybe the one or two things that you really want people to focus on of where you see that huge opportunity, whether it's on that deep purple side or -- there's just so many different ways that you're seeing kind of your business be able to translate into other markets. So kind of what's the most exciting for you as you sit here today that it really kind of gets you -- you think can really move the needle?

Yes, I'm really smiling here, Dave, if you can see me. First of all, I can't do it in 5 minutes.

I know that, sorry.

But we do -- no, no, no. But on the positive side, we do have an Analyst Day coming up in November, where we will obviously be highlighting a lot of the new activities that we have going on around the new energy. So I will try to do it in 5 minutes. So let me start with the big macro assumption. The big macro assumption for our company is that we need to drive and enable the growth of renewables to scale to make a difference. And right now, we're far from the scale that's required to make a difference. Hence, my comment earlier, why traditional energy is likely to be a higher percentage of the energy mix for a longer period of time than was originally forecasted. That bodes well for the traditional business, but we really want to be the enabler to help drive the new -- the renewables or the new energies to scale. We believe the appropriate way to do that is offshore. If you just look at the requirements in terms of carbon storage, if you look at the requirements in terms of wind energy, obviously, wave energy is exclusive to offshore. And in terms of hydrogen production, storage, distribution like oil and gas, it could play a very key role in the hydrogen business value stream as well. So that's the macro assumption. So therefore, we have been investing for much longer than people realize around developing these technologies and having the enabling technologies and putting together the integrated offerings that will allow these to be both economical and scalable offshore. There is no easier place to scale than the seabed. It's just a simple fact. You don't have money of the constraints that you have, geopolitical constraints, social constraints, et cetera, that you deal with when you're trying to put large developments of any type any type of developments in a highly populated area, it's counterintuitive. Second to that, the majority of the population lives around the world close to a coast. Therefore, the energy source being offshore versus in the middle of the country where there might be less population and the transportation and distribution costs of that energy to the consumer, it really doesn't make sense. So like the oil and gas industry did, it found that offshore was a very viable geography or location to scale and develop to scale and develop the energy source. I think the same will play out for wind as it is today, very clearly moving onshore to offshore hydrogen in the future and wave, obviously, as I said, is exclusively offshore. The one that's getting very exciting for us, Dave, is carbon transportation and storage. The source is known. We know where the major sources are. The technology and the cost to capture that either will be absorbed by those who are producing it or will be passed to the consumer or offset by government support. But it's known that model works, you can sequester that CO2. But then the question is where you're going to put it? And I just don't see -- I see the social push. There will be significant social repercussions, if you start to try to store significant amounts of CO2 terrestrially, particularly under areas of high urban population. It's -- we know how to move CO2. We know how to transport CO2, and we know that we've got very interesting saline aquifer, salt domes, et cetera, offshore, that will allow us to be able to not only store it but store it safely for a very long period of time. So we're working hard on that, Dave. We will be talking about that in November. We will have the industry's only fully integrated -- fully certified, excuse me, carbon transportation storage system, from source to injection. It's very interesting for us, Dave. It opens up a whole new frontier. And we actually think, even though wind and hydrogen has been talked about a lot more, and we've actually been investing in wind and hydrogen for over 5 years and wind and then wave and then carbon kind of in that order. In terms of when we believe it will start to have an economic impact, we actually think it could be a little bit of the reverse. It could be carbon first and hydrogen may take a little bit longer. Our approach, Dave, and maybe it's too simplistic, but we like to keep things simple in our company. And the way we look at it is we care about all 4 of those. We want all 4 to reach their fullest potential, which one grows the fastest, the soonest is not irrelevant to us. We obviously care, but we are well -- we just want to be well positioned in all 4. We think all 4 will grow. We think all 4 will have a meaningful impact. And then we want to do what we do best is we want to be that company that can be the subsea architect that really understands integration and how to integrate these technologies because right now, they're being looked at in silos. We look at everything integration first. Does integration bring value? And if it does, we drive for the integrated solution. And we think, Dave, it will have a similar level of success around the new energies as we've been able to have in the traditional energies.

That's fantastic, Doug. Well, we really look forward to hearing about that at your Analyst Day. Can you just remind us what the date is? Sorry, I'm -- I mean, everyone could remember.

You put me on this spot. I think it's the 16th of November, but the invites will be coming soon. I think it's the 16th of November.

Sounds good. All right. Well, we're looking forward to that. Doug, thank you so much for your time today. And if anybody has any questions, feel free to reach out to myself. I'll be happy to push it over to Doug and surely he'll give answers for you. Doug, thank you so much for your time, and thank everybody for listening today.

Dave, all the best. Dave, stay well, stay safe.