INITIATING COVERAGE REPORT William C. Dunkelberg Owl Fund September 15, 2014 Michael Kollar Lead Analyst [email protected]Nathan Eisenberg Associate Analyst [email protected]COMPANY OVERVIEW FMC Technologies, Inc. (FTI) is an oil and gas equipment & services company that provides a wide array of production systems and services to upstream energy companies. FTI has three distinct segments: subsea, surface and energy infrastructure. The Subsea Technologies segment is the largest (66.3% of revenue); followed by Surface Technologies (25.4% of revenue) and Energy Infrastructure (8.7% of revenue). FTI’s subsea and surface systems work with offshore and onshore explorers & producers (E&Ps) to develop, boost, and process production fields. Revenue by geographic region is allocated: United States (27.2%), Norway (17.1%), Brazil (9.7%), Angola (7.2%), Australia (6.5%) and all other countries (32.3%). INVESTMENT THESIS FTI is currently trading at a 16.8% discount to its historical 1 year average EV/EBITDA multiple and a 25.1% discount to its one year historical peer group average EV/EBITDA multiple. Shares have also underperformed the average return of the S&P 500 Oil & Gas Equipment & Service Index by 13% over the last 12 months. FTI first became undervalued in October 2013 when the company reported cost overruns and execution problems in its premier segment, Subsea, which led to a 2Q2013 margin drop from ~13% guidance to 10.8% reported. Since then, FTI’s management has improved execution which is evident in margin expansion and earnings growth. FTI’s top line has been growing at a 4 year CAGR of 14.6% while diluted EPS has been growing at a 4 year CAGR of 8.2%. With FTI’s economic moat of size & scope, dominant market share in the subsea market (~40%), positive industry outlook for the remainder of 2014, FTI’s discount is a buying opportunity. We expect 14% multiple expansion from 12.6x to 14.4x over the next 12 months which corresponds to FTI’s one year historical average. With anticipated NFY EBITDA of $1.3B we have a target price of $73.59, indicating an expected return of 27.9%. Energy Oil & Gas Equipment & Services FMC Technologies, Inc. Exchange: NYSE Ticker: FTI Target Price: $73.59 Current Price: $56.69 Sector: Outperform Recommendation: BUY All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl Fund does and seeks to do business with companies covered in its research reports. Key Statistics Price Projected $73.59 52 wk High $63.92 Return 28% 52 wk Low $47.58 Shares O/S (mm) 239 Yield N/A Market Cap (mm) $1,331 EV (mm) 1,424 $ P/E 25.3 Beta 1.12 Date EPS Est % Surp Δ Price 3Q2013 $ 0.53 $ 0.58 -5.3% -8.6% 4Q2013 $ 0.72 $ 0.65 7.0% -3.2% 1Q2014 $ 0.57 $ 0.50 7.2% 4.2% 2Q2014 $ 0.72 $ 0.63 9.0% 3.1% Earnings History $- $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $- $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 2011 2012 2013 2014 2015 Diluted EPS & Consensus 1Q 2Q 3Q 4Q Year Period 2011 2012 2013 2014 2015 1Q $ 0.32 $ 0.41 $ 0.43 $ 0.57 $ 0.75 2Q $ 0.39 $ 0.49 $ 0.48 $ 0.72 $ 0.85 3Q $ 0.50 $ 0.41 $ 0.53 $ 0.73 $ 0.87 4Q $ 0.41 $ 0.57 $ 0.79 $ 0.79 $ 0.97 Year $ 1.62 $ 1.88 $ 2.23 $ 2.81 $ 3.44 Earnings Per Share ( $) for Fiscal Year 5 year chart
COMPANY OVERVIEW FMC Technologies, Inc. (FTI) is an oil and gas equipment & services company that provides a wide array of production systems and services to upstream energy companies. FTI has three distinct segments: subsea, surface and energy infrastructure. The Subsea Technologies segment is the largest (66.3% of revenue); followed by Surface Technologies (25.4% of revenue) and Energy Infrastructure (8.7% of revenue). FTI’s subsea and surface systems work with offshore and onshore explorers & producers (E&Ps) to develop, boost, and process production fields. Revenue by geographic region is allocated: United States (27.2%), Norway (17.1%), Brazil (9.7%), Angola (7.2%), Australia (6.5%) and all other countries (32.3%).
INVESTMENT THESIS FTI is currently trading at a 16.8% discount to its historical 1 year average EV/EBITDA multiple and a 25.1% discount to its one year historical peer group average EV/EBITDA multiple. Shares have also underperformed the average return of the S&P 500 Oil & Gas Equipment & Service Index by 13% over the last 12 months. FTI first became undervalued in October 2013 when the company reported cost overruns and execution problems in its premier segment, Subsea, which led to a 2Q2013 margin drop from ~13% guidance to 10.8% reported. Since then, FTI’s management has improved execution which is evident in margin expansion and earnings growth. FTI’s top line has been growing at a 4 year CAGR of 14.6% while diluted EPS has been growing at a 4 year CAGR of 8.2%. With FTI’s economic moat of size & scope, dominant market share in the subsea market (~40%), positive industry outlook for the remainder of 2014, FTI’s discount is a buying opportunity. We expect 14% multiple expansion from 12.6x to 14.4x over the next 12 months which corresponds to FTI’s one year historical average. With anticipated NFY EBITDA of $1.3B we have a target price of $73.59, indicating an expected return of 27.9%.
E
ne
rgy
Oil
& G
as
Eq
uip
me
nt
& S
erv
ice
s
FMC Technologies, Inc. Exchange: NYSE Ticker: FTI Target Price: $73.59 Current Price: $56.69
Sector: Outperform Recommendation: BUY
All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl Fund does and seeks to do business with companies covered in its research reports.
Key StatisticsPrice Projected $73.59 52 wk High $63.92
T h e W i l l i a m C . D u n k e l b e r g O w l F u n d
Page 2
CATALYSTS Future subsea tree orders FTI’s leading market share (~40%) in the subsea tree market should allow the company to win a significant amount of orders in 2015. These contracts are won based on competitive bidding, but only if companies have the capacity available to complete the projects. FTI has been able to process the large amount of orders it received from Petrobras last year, and IR states that FTI’s backlog is at a comfortable level to accept more orders -- different from that of two of its main subsea competitors, Aker and GE Oil & Gas, who may not have the capacity given their recent backlog growth. Increasing Supply of Rigs Many new drillships and semi-submersible rigs are scheduled for delivery in the next few years. The increasing rig fleet will provide a much larger base for FTI to market its higher-margin, service business. Deepwater E&P Capex Shift According to Douglass-Westwood’s Deepwater Market Forecast, deepwater capital expenditures should total $260 B from 2014 to 2018 (A 130% increase over the prior five year period), with an even great focus on depths > 1,000m. FTI’s subsea products rated at these depths are the best in the industry and should be able to capture significant market share in this category. Margin Expansion In the near term, FTI is expecting to see margin expansion in its leading segments, subsea and surface. Subsea margins will be helped by more profitable contracts being converted out of FTI’s backlog as a result of better pricing. Because surface margins are mainly driven by volumes, the continued growth of onshore production in North America will allow FTI to drive incremental margins in the segment.
Industry Move to Standardization FTI recently announced the securitization of Joint Development Agreements (JDAs) with four major deep-water operators – Anadarko, BP, ConocoPhillips, and Shell. This sort of agreement had never been made before and marks operators’ shift away from reducing costs via independently aggressive bidding on projects to sharing costs to achieve greater returns overall. FTI is the only subsea equipment manufacturer to reach an agreement like this and will be the first in the industry to bring a standardized design to market. Despite the JDA, FTI will still be able to sell these systems to other E&Ps. The timeline for these project orders is 2016, however additional agreements with other operators and/or earlier than expected project order could benefit FTI shares.
ECONOMIC MOAT
Innovation: FTI is the global leader in subsea
innovation. Subsea separation and rigless well
intervention are two areas of subsea production
that FTI is advancing through value-added new
systems. Cutting-edge equipment and processing
systems are helping operators access more reserves,
cut operating costs, increase production and
lengthen the life of each well.
Scale: FTI leads the subsea services industry, with
a 40% market share in global tree awards. FTI’s
size allows it to compete globally for almost all new
awards by the world’s largest E&Ps. Leveraging
this market dominance, FTI has developed
important partnerships and customer relationships
that help it continually grow its backlog.
RISKS
Commodity: Volatility in the price of energy
commodities (oil, natural gas, etc.) could have
detrimental effects to future operations, especially
in the offshore space. This volatility is a reflection
of supply (reserves discovered) and demand
(consumption trends), geopolitical turmoil and
production efficiency.
Regulatory Environment: Changes to
environmental laws and regulations impacting
exploration and development of drilling for crude
oil and natural gas could have a material impact on
the equipment, systems and services FTI provides.
Compliance would likely have an adverse financial
impact on operational efficiency.
Backlog Disruption: Long lead times are required
on many of FTI’s contracts. Delayed delivery upon
this project backlog could affect profitability as
customer relationships, which could negatively
affect future tree awards.
FX Risk: As a global company, FTI recognizes
revenue in a number of currencies and adverse
fluctuations in exchange rates can impact revenue
and earnings. FTI does employ derivatives to hedge
this risk.
Fall 2014
T h e W i l l i a m C . D u n k e l b e r g O w l F u n d
Page 3
INDUSTRY OVERVIEW
Disclosure: Industry data discussed below was sourced from Douglas-Westwood’s 2014 Deepwater Intervention Forum which took place on
August 14, 2014. Douglas-Westwood (DW) is a leading provider of market research and consulting services to the energy industry worldwide
and has completed over 1,000 projects for clients in 70 countries.
Offshore / Deepwater / Subsea FTI’s main business segment Subsea (66% of FY2013 revenue), provides services and highly specialized products and
systems which aide in the extraction of oil & gas from wells below the ocean’s surface. As such, the company is
materially impacted by the capital expenditures of large international oil companies (IOCs) and national oil companies
(NOCs). For perspective, these NOCs are so large that many
have annual capex budgets greater than the total market
capitalizations of many E&Ps in the S&P 500 index. Some of
these are Saudi Aramco, Gazprom, National Iranian Oil Co.,
PetroChina, Royal Dutch Shell, Petrobras, and Pemex. As
onshore and shallow offshore reserves are depleted, operators
will need to shift production to deep-water discoveries.
Projected oil demand in 2020 will require an additional 56
million barrels of oil to be produced per day, and 36% of these
additional barrels will be produced from deep-water wells not
currently tapped.
Oil Prices & Operator Focus on ROC International oil companies (IOCs) and national oil companies (NOCs) possess the majority of global proved oil
reserves and service the majority of demand. These massive companies’ multi-billion dollar annual capex budgets greatly
influence demand for oil & gas equipment & service providers. In short, as oil demand has grown, these companies
ratcheted up production and consequently, saw their reserves depleted more and more quickly. The race was on to
discover and claim new reserves wherever possible. The need to replace oil & gas reserves resulted in innovations in oil
& gas exploration technology and led to the discovery of billions of barrels of oil in many challenging locations around
the planet. Global capex has shifted away from exploration
spending to production spending, with the goal of driving
efficiencies to extract the commodity more economically.
Production costs ballooned due to the need for more advanced
drilling technology, IT infrastructure, global positioning systems,
raw materials, and the need for highly skilled workers. The
combination of aggressive capex projects and oil price fluctuations
have material effects on cash flows and can pose liquidity risks on
highly levered IOCs and NOCs. ROC is now the chief concern for
operators and oil & gas equipment & servicers able to drive
marginal costs down will see a long runway for future earnings.
DETAILED COMPANY OVERVIEW
Revenue Streams
Products
FTI’s product-based revenue accounted for 80.3% ($5.7B) of total revenue in FY2013 and provided a 20.3% gross
margin.
Services
FTI’s service-based revenue accounted for 19.6% ($1.4B) of total revenue in FY2013 and provided a 28.0% gross
margin.
Fall 2014
T h e W i l l i a m C . D u n k e l b e r g O w l F u n d
Page 4
Business Segments
Subsea
FTI’s largest business segment is Subsea (FY2013 revenue of $4.7 billion, 66%
of total), where the company markets products and services relating to the
production, or extraction, of oil from wells on the sea floor. FTI’s offshore
product portfolio includes subsea wellheads, drilling systems (not actual drills),
both topside, shallow water and deep water processing systems, separation
systems (to separate oil, gas, sand, and water), tie-in & flowlines, chokes & flow
