TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Everybody I'd like to thank you for attending Citi's Annual Energy and Power Conference. A big thank you to FMC, TechnipFMC, and Doug Pferdehirt, CEO and Chairman of the firm. We're going to keep it as interactive as possible, and I'll kick it off with a few questions. Interestingly enough, this actually probably pays into FMC's wheelhouse. There's been a lack of like interest in the offshore space ever since 2014. But obviously, the breakeven costs have come down. We're actually in a scenario where onshore production is flat to potentially declining in a few years. And I just wanted to get FMC's overall view of the offshore market. One other side note is last week or 10 days ago, we marketed Seadrill as they were coming back to the board overseas in European trading. And when I got through quest to fill the schedule, I was like, oh no, I don't know if I'll be able to do this, but surprisingly, there was a decent amount of interest we filled 2 days.

So with that, Doug, any kind of high-level views on the offshore market and how you're going to attack it?

Sure. So first of all, thank you for having us. Thanks to Citi for putting on the conference. Thanks to all of you for attending today. It's nice to see people back in the audience again. My name is Doug Pferdehirt, I've been with the company since 2012. And we've had a pretty exciting journey over the last 10 years, really redefining who we are as a company and what we do in the offshore space or particularly in the subsea space. So if I could just start with an opening comment, and I mentioned this a couple of quarters ago on an earnings call would be that the offshore or the subsea in particular, train has left the station. And I think it's really been undervalued and underappreciated the amount of growth that is happening today. Now we're not a driller. We're a production company. So we're the ones who put the production system in place. We do it onshore in places like the Permian Basin in Saudi Arabia, but the majority of what we do and the strength of our company is everything offshore. And by the way, that could be for oil and gas, that could be wind, wave, hydrogen as well as carbon capture and sequestration. So companies come to us when they want to work below the water column. When they want to utilize the sea floor, where that company that has that experience, that knowledge to be able to put things at the bottom of the sea 3 miles below the surface of the water, 3 miles below the surface of the water and put equipment down there that's going to work for 25, 30 years in a safe and environmentally friendly way. It's all done with robotics. It's all done with advanced measurements and controls, and that's who we are as a company. So we're often kind of painted as a manufacturing company, but we're really a high-tech company, be it automation, robotics as well as proud to be a manufacturing company as well. So that's what we do. What we're experiencing right now in the market is a robust growth in terms of the amount of activity offshore. Again, both for traditional energies but also for new energy. And when looking at the traditional energies, if you go back in 2020, we had new orders or inbound of about $4 billion, that went up to $5 billion in 2021, still in the middle of the pandemic. And now in 2022, we said it would go up another 30% or around $6.5 billion. We've already inbound $1.9 billion in the first quarter. $1.9 billion represents a 1.5 book-to-bill. So it also means that the backlog is growing. Not only is the backlog growing, but the margins in backlog have inflected. So it's setting a stage for a very solid multiyear recovery. Since the first quarter, we announced our latest award from ExxonMobil and has in Guyana called Yellowtail. And not only did we FID that award or FID inbound that award in the second quarter, but it was also super size, if you will. We got an additional award along with the original award, and that's a very large award. That's in Q2 already. So Q2 is shaping up to be very strong. So $1.9 billion in Q1, a very solid Q2. And then we said in the second half would remain above a 1.0 book-to-bill. So clearly, back in a growth mode.

Great. I mean, so it sounds like a very bullish times for the offshore space. Now when you think about geographies and what's going on with the Russian and Ukrainian tension, are you starting to see higher inbounds for offshore work from a geographic standpoint, whereas maybe people or operators are starting to sense that there's an opportunity to replace those Russian barrels?

Yes. Good question. Most of what I described was obviously happening before the Ukrainian war. That being said, as a result of that global disruption, certainly, there's a heightened sense of urgency amongst in our client conversations. There's a greater cadence towards FID, but there's also a greater urgency around be -- the ability to be able to lock up the Tier 1 companies that can support those type of projects. Humbly, we're well positioned to do so as by far, the market leader in the subsea space. So I would say both the cadence of those conversations, but also the level of -- trying to think of the right word, It's not anxiety, but it's just the realization that being partnered with the right companies to be able to deliver these projects on schedule is really going to be critical. And what we've done by redefining our company back in 2017, is we designed this unique integrated model offshore. We call it little eye for integrated EPCI, engineering, procurement, construction and installation. So what that allows us to do is it allows us to shorten the time to first oil by 1 year to 18 months, 12 to 18 months reduction in the time to first oil, which dramatically improves the subsea project economics. So that's really positioned us well in the marketplace in terms of being the partner of choice. And I would say those conversations including just a conversation I had yesterday morning, I'm just thinking here. Yes, it's all about we want to -- we're going to be stepping up -- accelerating some of our projects. We need to know that you're going to have the capacity and you're going to be there to deliver them. And by the way, we won't be everywhere. We've no bid multibillion -- several billion dollar projects just because we didn't feel they were the right fit for our company, be it the risk profile, be it the payment terms or being the level of profitability. So being the market leader that we are, we can be very selective as well.

You noted that you reduced project to come to production or timing by 12 to 18 months. How long does it take now for an offshore project?

Yes, that's an important part on that. So historically, what people would use is for a brownfield development where you're adding wells to an existing infrastructure a float, FPSO or a floating production unit, that was kind of in that 2- to 2.5-year range. That's now 12 months. We're the only company who can do that, and we can get into that, that's called Subsea 2.0 but it's because we redefine the subsea architecture and because of the merger, we can do that now in 12 months. A greenfield development, which used to take 5 to 6 years again, depending upon the host because that tends to be the long lead item, the FPSO as an example. But if you look at what ExxonMobil is doing in Guyana, it's like 3 years. So it's really quite phenomenal.

And then just there -- just for clarity for the audience. So brownfield 12 months and then onshore is typically 6 to 12 months [Indiscernible]

Yes. That on is no longer what it used -- Yes, you're exactly right. That spread used to be the short-term barrels are going to come from the Permian Basin. You're seeing short-term barrels come from the Gulf of Mexico, from the North Sea, from Angola, from Malaysia. Yes.

Now how big is that opportunity, brownfield?

Well, it's significant. I mean it's -- if you look at our inbound, just to put a little bit in perspective, if you look at our $1.9 billion of inbound in the range of about $800 million of that came from smaller orders, unannounced orders, which don't mean they're all brownfield, but I would say largely brownfield. So yes, it's definitely the -- on the overall activity other than Brazil and Guyana, which has been explosive growth in greenfield, the largest growth has come from brownfield.

And then you also -- I think you noted maybe not here, but another time that 40% of the subsea inbounds from smaller project awards, which you just noted. Does that skew the margin positively negatively just in terms of how to think about projects in general?

Yes. So most brownfield work -- most, not all, most will go to the incumbent, mixing and matching the subsea architecture doesn't work very well because remember, what I said at the beginning, it's largely driven by robotics and automation and control. So when you start to mix different automation and control systems, it doesn't really bode well for the operability and the uptime performance. So the good news is we have over 50% of the world's installed base on the sea floor. We kind of own the sea floor. That's many, many years of being the leader in Subsea. We've built up this very significant installed base. So in most cases, more than 50% of the time, we're pretty much going to get that award because we have the existing infrastructure already in place. In other cases, the other companies may no longer be in business that may no longer be a priority for them. So there, the customers will take the risk of mixing and matching and we pick up some work there as well. So because of that, one could infer that there's a greater sense of codependency and probably -- I'm trying not to say it specifically, but to answer your question, they are high-value contracts for us.

And just thinking about like expectations and kind of your forecast multiyear plan, has any outside of the geopolitical issues that we've encountered. Since your Analyst Day, I think, which was in November that you kind of laid out your expectations, has it all been in line to what you thought? Or has there been any acceleration, anything different versus the plan that surprised you to the upside of data?

Yes. So November 17, 2021, if you look on the calendar, that was not that long ago. But if you look at it from a macro -- from a macro viewpoint, and certainly from a traditional energy viewpoint, I mean, the world has dramatically changed. So when we laid out at the time 2025 guidance, which was unheard of. No one was doing that in 2021. Everybody was still kind of recovering from the pandemic and probably not very comfortable forecasting next quarter, let alone laying out the 2025 plan. At our Analyst Day on November 17, 2021, we laid out a 2025 plan which is viewed at the time to be very bullish and the fact that we were that confident. And we were confident for all the reasons I just described, other than that question about the impact of the Ukrainian war on our customers' mindset that was obviously new. But everything else I talked about setting up that scenario as we were already experiencing and forecasting. So what we said was that we would take our margins from 10.5% to 15%, we would take our revenue to $7 billion. This is just for our Subsea business. We would go to $7 billion, and that would double our EBITDA from $500 million to $1 billion. Now what I was asked last quarter on a conference call is, well, and at that investor conference -- at our investor conference back in November of 2021. One of the very first questions I was asked was a good question. And it was so let me just understand, Doug, how much of a pricing element did you include in this 2025 forecast because you're going from 10.5% to 15%, you're doubling your EBITDA dollars, this is bullish. Back then, it was considered bullish. And I said, which is exactly how the facts, which was very little. This is really being done by how we've redefined this operating model, this integrated business of Subsea 2.0 architecture, it was largely self-help initiatives. And there was like silence in the room. I mean, I think people were really surprised because they probably thought we were betting on a lot of pricing to get there and we weren't. So then there was a follow-up this past quarter a couple of weeks ago, on the quarterly earnings call and said, if we remember right, they obviously did they read the transcript. You said there wasn't a lot of pricing element in the 2025 forecast. Things have changed. You're talking about you're getting pricing and that's important, obviously, offsetting inflationary costs, but also capturing more of the value creation. Does that mean that you could obtain the 2025 guidance earlier. And my answer was yes.

You heard it. I mean, your peer Baker Hughes was here earlier, and they sounded a little less bullish on the offshore. I think they were talking about trees, and they were noting '21, they thought from an industry perspective was pretty strong. It was like 300 trees this year. They expected Bakers bidding -- baker into their number, but they thought this year they could do in line or maybe slightly less. And they were a little less inclined to say there was a step change in like a multiyear cycle. So I mean, obviously, everything you're saying seems to be the flip -- not the direct flip side, but you're obviously much more bullish. What do you -- you're not asking you to compare both companies and their business lines. But what may you be seeing that they're not? Or what business are you in that they're not, they're missing?

Sure. Okay. Well, first of all, Baker is a good company. So I don't want to say anything that would be perceived to be derogatory. But let me give the facts and then maybe, and then I'll give maybe the why there's a disconnect at least from our opinion. So the facts are the tree count will double in 2022 versus 2021. The tree count will double in 2022 versus 2021. We've been pretty good at forecasting as the market leader. We've never missed the forecast. So you can put whatever factor upon that, you want a [ 1.1 ] or 0.9 or whatever. But I'm quite confident that the tree count is actually going to double in 2022 versus 2021. And we believe that we'll see that level of tree count is sustainable for multiple years. And that's what gives us the confidence. Now maybe part of the why there's a disconnect. And by the way, I didn't -- I wasn't in that session. I didn't hear what was said. I'm just answering your question. If there was a disconnect, then the disconnect would be the fact that -- and this is another really important takeaway, not only has the train left the station, the tree count is going to double year-over-year. On top of that, 70%, 7-0 of our inbound orders, are direct awarded to our company, never go out to competitive tender. Wow, how do we do that? Well, it's really a combination of 3 things. It's a 50% installed base, which is an OEM model. So we get that services over and over and over again on those assets. But more importantly, it's coming from the project awards that come through our integrated model. Our integrated model, we -- is exclusive to our company. We formed this company back in 2017 by the combination of Technip and FMC Technologies, which enabled us to be able to offer this exclusive integrated model. So when we sit with our customers and they're interested in developing their assets using this integrated model because it accelerates time to first oil, which drives their economics. We signed a contract where we do an integrated FEED study, and if we achieve a certain project economic threshold that we both agreed to, then that is direct awarded to our company. It never goes off to competitive tender. In addition to that, we have very intimate long-standing client relationships. That's who we are as a company. We're easy to work with, where if you will, we're not threatening. We're not a big OFS company with all these product lines that want to sell you one thing and then add on 3 more things you don't want. What we do, we do really, really well, and that's what we're focused on. We're a very focused pure-play company. So as a result of that, we have these exclusive alliances whereas with some of the largest IOCs in the world, we've done all of their work exclusively for 25 years. So what I'm alluding to is our addressable market is a lot bigger than some others. And maybe they're just looking at their addressable market.

Understood. Also just to kind of, I guess, touch upon tangentally, the onshore market within service, just using 1 product line, pressure pumping. There's been a lot of attrition over the last 5 to 7 years because of the depressed commodity prices and things are tightening up. Is there the potential for that to happen in an offshore, whether it's trees or any other product lines where capacity actually came out of the system or the products are just no longer workable, which could lead to pricing in your '25.

Sure. Sure. I think when you think about our company, it's fine to play us for the supply and demand cycle. I mean we're happy to have you invest in the company based on whatever methodology you wish. But we're derisking it for you because 70% is direct awarded. Our margins are basically double our competition already. We're able to move pricing in that environment that has almost nothing to do with supply and demand. So it's kind of a unique value proposition. You don't have to worry about picking the exact timing of when supply is going to exceed demand and we're going to get that ticker, if you will. And that's kind of what's happening on the onshore today, to your point. We spent 5 years transforming our operating model. Along with that, we transform the way we do business, who we do business with, and got to this point of, again, up to 70% being direct awarded to our company. So you take that a little bit off the table. Now for the other 30% or more, depending how we want to play the market because we can move more to the open market if we want. We control that. I think what you'll see in 2024, a real tightening in the offshore installation capacity. We're starting to see it now. It's showing up in the tenders today and latter part of '23 and '24, it will be quite significant, and then that will last for multiple years. So that's just an additional multiplier or ticker or adder to what we would experience because we're getting it now upfront because of this mix that we have. And then we can shift more of the mix to that open market if we choose to and participate in that, if you will, demand, let's call it, demand-based price.

Maybe we can move along and touch upon, I guess, more of the day-to-day financials. For the second half of the year, I noticed that margins compressed on the surface business. They maintain in the offshore business. What are you doing in each of the businesses to offset inflationary impacts, supply logistics. Maybe if you could talk to how much of a headwind you're experiencing from both of those. And what you're going to do to offset them and going into the second half?

Sure. So we really have -- I'm going to split our business into kind of -- well, I don't want to, I would say, 4 categories. Let me just bring it down to kind of 3 categories. We talked a lot about Subsea. You've got 70% direct awarded. You're not bidding against anybody. You're just working with your customer capturing the appropriate value. They're happy because they're getting the highest level of project returns by working with us and mainly through the acceleration of time to first oil and with a reliable partner that has demonstrated decade after decade that they can work well with this company. So let's leave that to the side. So then let's look at our surface business. Now our surface business you're looking at like $6.5 billion and $1.5 billion for surface being $1.5 billion. So it's a smaller part of the portfolio, but an important part of the portfolio. And I'm going to split that between outside of North America or sometimes referred to as international and then the North America business. So the international business, this is more of a project-based business, but not a 12 to 3-year project like we were talking about in Subsea, more like a 9- to 12-month project. There, we built that backlog is normally consumed within 12 months because of the cycle time that I just described. But we are seeing positive pricing trends. But those are more -- you're under a contract, you have inflationary indexes built into the contract. And by the way, Subsea has all of that as well. But that's where you're sitting down and you're just having a direct negotiation with the client. Particularly when they're multiyear surface projects, not the majority, but some are like in Saudi Arabia and the United Arab Emirates as an example. So we're seeing pricing. I would say we're having the conversations to move the pricing in international now. The pricing is moving, but it's really the conversation. But when they move, it will be more of a step change movement. Okay. Now let's compare that to North America. And I can't think of a better analogy, but I'm sure somebody can. But it's a tennis match, and it is growing and it is exhausting. It's evolving. Think about -- so you raised price inflation goes up. You raise price, inflation goes up. It is a long duration [ volley ] that will keep going until it impacts the actual economics of the project, and we just see fewer projects. And I think we're heading in that direction in the North America market. So basically, we're raising pricing anywhere from weekly to every other week. It's all about net pricing. You can't get that incremental like you can international. It's just a different mindset. It's more of a commodity-based market from a supplier point of view. So if it's a commodity-based market, the customer is always willing to go to the lowest denominator. And because of that, you just got to keep raising price and then inflation hits you, you raise price, inflation hits you. It's a zero-sum game. There's not enough people. There's not enough materials, transportation costs, logistics costs, diesel costs. It is a growing exhausting tennis match. And I think basically, the tennis match will go until the referee blows the whistle and the referee is going to blow the whistle because that amount of -- the clients will have to make a decision on what type of capital they're willing to invest in that business. Totally different than what we see offshore. We don't have that [Indiscernible] offshore. Because those projects, again, we're working off of a backlog. We've got backlog coverage that goes out 3 years. We have back-to-back with our suppliers. We have indexes built in. You don't have the labor kind of challenges that you have in the North America market. It's just a very different business. And that's why we're very bullish and we are experiencing that offshore. And then just -- and I know this is -- I'm going to embellish here a little bit, but I also want to put a word in for the Middle East. I mean the Middle East is where the growth is going to come from. And we're experiencing that right now. We just announced a $1 billion award from Abu Dhabi National Oil Company, or ADNOC. We're seeing a ramp-up of spending in Saudi Arabia. That's going to be very prolific and that's part of our surface international business and very important to us and one where we have a leadership position. So we've got that leadership position in the Middle East. We have that leadership position offshore. And we think those -- we think those are the 2 markets that are going to drive this cycle.

Why don't we move along to the energy transition, if you could kind of highlight where you are today. You noticed -- you said your business is roughly $8 billion total TechnipFMC right now. And how material can the transition business be 5 years from now as it relates to where you are today?

Yes, we're maybe a little more conservative. We think it's being realistic. But I always like to say 10 years from now. I just don't think it's a 5-year cycle. And back in November 2021, we gave guidance out to 2030 for the renewables or what we call new energy ventures. Let me kind of start by what we do, okay? So again, if you're -- if you want to move your terrestrial new energy to offshore, if you do it nearshore on a fixed bottom structure, it's just like working onshore, meaning nothing is moving. You don't feel any movement. If you try to put a windmill or anything else, offshore on a floating structure, people start to get a little queasy. I mean it's a completely different world. You go from a static world to a dynamic world. People haven't really fully graph. We're that dynamic company. We don't get seasick. We love being under the water. It's just what we do. It's a culture of our company. So everything we think about, we think about that dynamic environment. Everything is always moving. Something as simple as a cable. If you want to take a cable from a static environment, put in a dynamic environment, it will snap. People don't realize the type of forces and the type of currents that exist below the beautiful peaceful calm surface of the water 2-3 miles down into the water call. So look, this is what we do. We understand this. We live in that world. I always say we kind of have web feet. I mean it's just who we are. So the amount of inbound calls that we're getting from governments, academia, start-ups, large oil companies, other large industrial companies that are getting into the offshore space, they're calling us because they see us as a trusted partner. We're not threatening. Again, we're not trying to take over the world. We're just trying to be really, really, really good at what we do. And that's our reputation. We're not a jack all trades. We're just really, really, really good at what we do. And so they come to us and we sit down with them and we say that idea will never work, and here's why. Or, hey, that idea will work, but here's what you need to do. So look, we're big bulls on to get the scale that is required for the renewable business, you have to go offshore floating. You can't just keep putting wind mills up and down the coast. They have to go further and further offshore, both from a socially acceptable point of view, but also just because that's where the greatest winds are. Now you get it offshore, what are you going to do with it? Well, you can generate electricity back to shore, or you can convert that into a renewable energy that can be transported like hydrogen. So we're the only company that's out there doing offshore floating wind, generating hydrogen and can store it on the seabed. We call this project Deep Purple and we're doing a bit of activity in Norway now as well as offshore Portugal. So you just got to think differently, but the world needs an enormous amount of energy. That energy needs to transition to renewable energies. And we can't just keep putting wind mills in Kansas and offshore, nearshore, offshore, the coastlines. So in addition to that, give you another kind of how we think differently. When we're talking to a wind turbine company, right away, we say, what about installing wave energy, they get really mad because they see that as a competition. We're kind of the UN here. Where is it -- we just say, we want everybody to win, and we do. So if I want to put an offshore floating structure, why not capture the motion of the ocean, wave energy. It might only add 10% to the output but why not capture, but a wind guy will never do that because they see that as competition. So we take that then and we integrate that. So we integrate wind in a wave into the wind. So it's just thinking differently, and that's the role that we intend to play. We think how big is the market $50 billion, $60 billion, $80 billion. It's a huge number. We think we'll have $1 billion of orders here as we continue to build up our business. And yes, 1 day, it will be larger than the traditional energy. And I don't think there'll be a cliff. I think it will be something that we'll continue to manage. But you're going to have years where you're going to have a compounding effect. Because not only was the oil and gas or the traditional business is going to be steady, and we're going to be adding these new energies. Now it's growing and looks like quite substantially and you're going to be growing that new energy. I just think people haven't really grasped the full potential of what's happening offshore.

Now this might be a far-fetched question. But do you have enough expertise, say, to do a model similar to what Schlumberger did with their kind of quasi E&P business partner with some of the developers on the power side, like for floating [ storage ].

Yes. Look, so far, when oilfield services companies have moved into kind of the role of developer in traditional energy that hasn't worked out well for them. Their shareholders don't really like them deploying their capital in that direction, time will only tell. But I think that's a question for 10, 15, 20 years from now. In the meantime, again, we're very comfortable collaborating. So in each of these spaces and wind, wave, tidal, which we didn't get to talk about, which is super cool and nothing like what you think. You'll hear more about what we've developed, a very different technology, tidal and then hydrogen and then carbon capture and storage, we haven't got to talk about. But Anyways, in each of those, we have a partner. So in carbon capture and storage, we're partnered with Talos Energy. So Talos Energy will be the developer, who will be their technology partner. In wind we're working with Magnora offshore. We won a license in the recent Scotland run. But we're not going to be putting our balance sheet to work as a developer. I don't think that's what our investors want from us. Others may try that. I know it didn't work well for them in oil and gas. We'll see what happens going forward.

Great. Great. And then I guess, as we come in on the close, getting into the multiyear cycle and how your backlog and your orders ultimately flow through to cash and to the shareholders. How do you view that? I think you threw out a number of 50% free cash flow conversion, I might have my tickers wrong, sorry for that. But how ultimately this growth cycle could pan out for shareholders and how they should think about it?

Sure. So look, I want to be very clear. We are extremely capital-disciplined company. We're not out there building new big assets, and we won't. So then, Doug, how do you grow Subsea so substantially without adding new big assets, we work well with others. So we go to our competitors, and we say, we're winning all the integrated work. If you want to use your assets in the sector, work with us. We're very happy to use your assets. The assets aren't the vessel in this case, isn't the differentiator. It's all about equipment and all that infrastructure and all that robotics and all that automation and control. So we've signed up now 2 partners, and we'll continue to sign up. We call that our ecosystem. So we have our own core, but then we -- instead of adding to that, we bring in and work and collaborate well with others. So that's kind of on the capital side. So our capital is more in the range of 3.5% of revenue. And we said it would stay between 3.5% and 4.5%. And as we grow the company, it will be closer to 3.5%, and we're comfortably within that range today. So don't expect a big capital surge, not kind of that traditional model that you see from other OFS companies. That's not what we -- we don't have to do that. Subsea 2.0, which we didn't get to talk about is part of the reason why because it allows us to have a much more efficient operating model, which is called configured to order. But again, we don't have time to cover that. But that's why we can control the CapEx. On the M&A side, we did our big merger. We did the big merger. We have it behind us. We're 5 years into the new company. We've been able to realize those synergies. We've been able to optimize the company. I'll be honest with you, it wasn't fun to do in the middle of a pandemic. And we announced in 2017 and 2018, the market went south and then 2020 to pandemic, but we persevere. We never gave up. At the same time, we spun off and created Technip Energy as an engineering construction company. That was important to separate that from our portfolio. We delisted, became a much more focused company, a much more simplified investment option for everybody. At the end of that, we always have and maintain that shareholder distributions is a commitment. What we said back on November 17, 2021, was that we were targeting the second half of 2023. We hope to be able to bring that forward as well.

Great. That brings us into the hour, but if there's a question or 2, feel free. With that, I'd like to thank Doug and TechnipFMC, excuse me. Any inbound? All right. I like the story. Go out and bye.

Thank you.