Special Situation: Technip Energies N.V.

The Spinoff

TechnipFMC initially spun off 50.1% of its stake in Technip Energies N.V. in February 2021. For every 5 shares held in TechnipFMC, shareholders received 1 share in the new company. The former parent also planned to substantially cut its stake in Technip Energies within 12-18 months.

Reasons for the spinoff include:

• the growing lack of synergies between the firms,

• distinct and compelling market opportunities,

• strong individual balance sheets and new custom capital structures,

• varying investment appeal,

• increased management focus and new performance incentives.

The Business

Technip Energies (TE) has a market cap of €2.7 billion and trades on Euronext Paris. In essence, the firm is an engineering and technology contractor for the energy industry. It focuses on the ‘study, engineering, procurement, construction, and project management of the entire range of onshore and offshore facilities related to gas monetisation, refinement, and chemical processing from biofuels and hydrocarbons’. As mentioned in an earlier write-up on the VIC, a typical project involves extensive planning and design work by engineers, with this being put into action by construction workers, often in areas with extreme weather conditions.

TE’s market is competitive and projects are complex in nature. Thus, clients must decide whether they should sign contracts with firms that offer cheap services or those that have an established, proven track-record. TE fits into the latter group, having installed about 20% of existing global liquefaction capacity and delivered the intricate Yamal LNG project in Siberia about a year ahead of schedule.

It’s clear that these projects are prone to cost overruns or simple failure to deliver, which is why TE’s stellar track-record appeals to clients, helping the firm secure contracts going forward. For instance, the Artic LNG 2 contract, which will bring on stream three LNG trains (total capacity of 20 million tonnes per annum), was awarded to TE in 2019 on the basis of its record. Also, as of Q3 2021, TE had a backlog of €16.5 billion, representing about three years worth of revenue. Total pipeline opportunities - which TE can bid for - stand at €90 billion.

The company may seem like an oil and gas play, with management looking closely at industry capex, oil prices, and the number of oil rigs to infer contract demand. However, TE’s leading position in LNG entrenches its relevance in the energy transition. The reason is simple: wind doesn’t always blow and the sun doesn’t always shine. This intermittent energy provision must be supported by natural gas - which is also cleaner than other fossil fuels - to match sudden spikes in energy demand. Projects relating to the existing energy infrastructure will also be phased out and not wiped out.

Indeed, the company estimates that total capex for its current markets by 2030 will grow at a CAGR of 1-5% to reach €70 billion; breaking down into €10 billion to €15 billion for LNG and gas monetization, €10 to €15 billion for offshore, and €40 billion to €45 billion for traditional downstream. Further, capex for growth markets such as hydrogen and sustainable chemistry, is expected to reach €20 billion by 2030, at a CAGR of 5-15%, and adjacent markets may also comprise a €15 billion opportunity by 2030. In other words, TE’s business is unlikely to shrink within the next decade. Further, depending on the firm’s ability to market itself as a green enterprise, the stock could also attract restless ESG capital.

Financials, Valuation, Management, and Ownership

TE’s financial profile is also admirable. Despite less predictable and occasional lump-sum payments, the firm has been consistently profitable on an EBIT basis, with margins ranging between 3% to 7%. Its net cash position of €14.5 per share reduces its operational risk, and the firm is capital light, with capex comprising about 5% of sales. Returns on invested capital (ROIC) are also excellent, at 11% and 13% in 2019 and 2020, respectively. At its current valuation (€12.8 per share), TE trades at a P/E of about 10, with P/FCF at 4, and P/CF at 3. S&P 500 firms in the oil and gas services and equipment sector trade at a forward P/E of about 16, according to Yardeni Research, implying substantial upside.

A note on management. The CEO, CFO, and COO have an average of 25 years experience in the international oil and gas industry. Their cash bonuses are based 75% on financial metrics, and 25% on strategic and personal goals. The equity incentive plan comprises 70% performance stock units (PSUs) - assessed over a three-year period - and 30% restricted stock units. The PSUs are based on growth (net sales or EPS), ESG metrics, efficiency metrics (like ROIC and operating margins), and total relative shareholder return. The exact details are not available yet, but it is reassuring that the equity package leans towards financial performance. 1.8 million shares are eligible for awards during 2021, representing about 1% of outstanding shares, and my hope is that this will be revised upward for 2022 to further align shareholders’ and managements’ interests. Guidance is €6.5 to €7 billion in revenue for the full year, at an EBIT margin of about 6%. Assuming that the net income margin of 2020 is replicated (3.8%), this would put the firm at a forward P/E of about 8-9.

Regarding ownership, TechnipFMC has cut its stake from 90 million shares in March 2021 to 22 million as of the new year, and now holds about 12% of outstanding shares. This, combined with a reduction of ETF holdings from 99.7% to 11.6%, may have had the effect of keeping TE’s share price unduly low. In sum, the spinoff of Technip Energies and ensuing selling pressure has created the opportunity to own a cheap, financially sound, leading oil and gas contractor with exposure to renewables and business longevity.

Catalysts

• The announcement of a dividend in 2022, which will involve 30% of net income being paid out (about a 4% yield). This will likely attract institutional investors.

• The release of the first full annual report as a separate company, which will also contain further information on management incentives.

• Updated Bloomberg financials, which should allow the firm to pop up on various screeners (currently, you would have to be looking at spinoffs specifically to find this company).

• Subsiding share sales from TechnipFMC and other institutions could tilt supply-demand in favour of the stock price.

Disclaimer: this write-up describes the author’s own research and opinions, and does not constitute investment advice, whether explicit or implied. Invest at your own risk and do your own due diligence. I hold a material position in the issuer’s securities.