TechnipFMC creates an oil & gas projects powerhouse
The planned merger between FMC Technologies (NYSE:FTI) and French company Technip SA highlights the changing landscape in the oil services sector. The $14 billion deal is identical in size to the recent merger between Schlumberger (NYSE:SLB) and Cameron International (NYSE:CAM), and is almost identical in scope, as an equipment manufacturer joins forces with a completions expert.
The two tie-ups will also create a direct challenger to Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI), who recently abandoned their own $28 billion mega-deal after opposition from US and EU anti-trust regulators.
The main issue in the blocking of the Halliburton/Baker deal was the coming together of two of the top three oil services companies in the U.S., raising fears of a pricing duopoly. The merger between FMC and Technip is seen as being more complementary, as the firms operate in a different space within the sector, so the deal has a higher chance of approval.
Increased strength, synergies and global reach
The $14 billion TechnipFMC merger would bring together the equipment manufacturing skills of FMC and the construction and project management ability of Technip in a deal that the companies say will create $200 million in synergies by 2018, and at least $400 million in annual pretax savings in 2019.
Technip CEO Thierry Pilenko highlighted a key reason for the merger stating, "We are complementary companies. If you stay narrow, sooner or later you're going to be commoditized."
The merger between these two market leaders is a strategic fit which benefits the two companies and wards off any speculative advances from challengers as the low oil price creates consolidation in the sector. The two companies have already been working together on a joint venture, Forsys Subsea, since 2015, so the barriers of entry for the company will already have been reduced, and the joint venture could further boost the potential for a favourable regulatory ruling.
This latest deal will create a full-service offering of equipment manufacture and delivery across a wide range of projects with global reach. The combined balance sheet will be one of the strongest in the industry, with an order backlog of $20 billion, which gives the new company some breathing space to complete the integration and develop the planned synergies.
(Source: FMC Technologies)
The supply chain of the combined company will be the major benefactor, as FMC gets a big customer and partner for its products, whilst Technip gets to plan its projects more efficiently and benefit from lower input costs. The combination of the two companies brings with it a large order backlog of $20 billion, primarily from Technip, which, as the chart below highlights, is 50% focused in Europe. The merger could allow Technip to leverage FMC's geography and break further into the U.S. shale and GoM markets. As the partnership gets underway, this backlog of work would be a cushion for lower oil prices and allows time to create the planned synergies by 2018-19.
(Source: Technip SA)
Sizing up the competition
The joint company would create a new competitor to the established industry leaders. The following chart is a snapshot of some key metrics for the oil services industry after the first quarter of 2016.
The biggest competitor to TechnipFMC may be Schlumberger, due to the recent acquisition of Cameron, which manufactured similar products as FMC. Despite having higher revenues, Schlumberger derives $2.5 billion of that from its drilling operations. Revenue on the production business was $2.5 billion for the first quarter, so this levels the playing field and makes the TechnipFMC picture more appealing, as Schlumberger will always be focusing around half of its resources on drilling, and it may also change the focus of Cameron's output.
Baker Hughes is in a very similar financial position to the new tie-up, although TechnipFMC has a much stronger cash and debt picture than all participants. The failure of the Halliburton merger will, however, bring in $3.5 billion in cash to Baker Hughes - which, management has noted, will be used to buy back $1.5 billion in shares and $1 billion in debt, so it appears these two will be going head-to-head from a similar financial base.
Halliburton, like Schlumberger, has a lot of cash on hand, but recent losses are troubling against a large long-term debt picture. The failure of the merger deal with Baker Hughes had seen both firms' debt downgraded, so the path ahead is risky if oil fails to hold the $50 level. Schlumberger is currently valued at a P/E ratio of 60, so I'd be wary of buying any of those stocks at this juncture.
TechnipFMC investors would need to consider that two-thirds of revenue will be driven by lump sum turnkey projects and exposure to construction risk and project cancellation, but I do feel this would be the better investment if the oil price consolidates over the next 6-12 months, which could bring a good valuation for TechnipFMC.
Aligning the skills and finances of FMC Technologies and Technip has changed the game for FMC, in particular, and both two companies will benefit from their complementary business models and a strong combined balance sheet, which will be one of the strongest in the oil services industry.
The deal would pitch the new company in direct competition with the established oil services players, and with manageable debt and a very strong order backlog, this should create the cushion needed to ride out lower demand and develop the desired synergies of the pairing.
At the right valuation, this would be a good investment for the return of stronger capital expenditures in the oil & gas industry.
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