Despite crude being on an upward trajectory for most part of 2018 and shale producers reaping profits, the picture for oilfield services players has not been rosy. One such offshore and land-based drilling services provider TechnipFMC plc (FTI - Free Report) has been in the red territory for quite some time now.
The company’s stock price movement has not been quite impressive, with its shares declining almost 10% over the past month.
With oil prices dipping into bear-market territory of late, the oilfield services industry has been badly hit. Further, weaker-than-expected results in the third quarter have dented investors’ sentiments. Lower-than-anticipated profits from its subsea and surface technologies segment resulted in weaker results. In fact, the company has been delivering weaker-than-expected earnings over the trailing four quarters.
What’s Weighing on the Stock?
TechnipFMC’s subsea segment, which was once the company’s largest and fastest growing unit, is facing pressure on revenues and margins due to volatile pricing scenario and competitively priced backlog. In the last reported quarter, Subsea revenues and operating profit dipped 18.2% and 22.5%, respectively. Moreover, decline in margins and most of its key projects (in Africa, Europe and the Asia-Pacific) nearing completion hit the segment hard. Also, lower vessel utilization and stiff competition reduced the company’s pricing power.
It has also been facing top-line pressure, both in the offshore and onshore segment, as revenues recorded a year-over-year decline of 34% in the last reported quarter. Unfortunately, TechnipFMC's best-performing segment, Surface Technologies, is its smallest unit, accounting for just around 12.7% of the company's revenues. It forecasts EBITDA margin from this segment to drop to 16% from the prior guidance of 17.5%, due to a reduction in overall activity in North America.
TechnipFMC also does not fare well in the cash flow parameter, which is a key metric to measure the financial health of a company. Notably, it has been posting negative free cash flow over the last four quarters. In the nine months ended Sep 30, TechnipFMC's free cash flow came in at negative $344.7 million.
Notably, the last reported quarter witnessed a major uptick in inbound orders, indicating promising prospects for the company. Notably, all the three segments witnessed gains in backlog and order activities. The inbound orders in the quarter under review came in at $3.6 billion, reflecting a 48% year-over-year increase. In fact, the inbound orders also surpassed sales, brightening prospects for future revenue growth of the company.
Importantly, its backlog stands at $15.2 billion, reflecting a steady demand from customers. On a further encouraging note, it increased its full-year revenue forecast to around $13 billion, up from the prior guidance of nearly $12.3 billion, on the back of improved outlook for the onshore/offshore business.
The company also boasts a strong balance sheet, with long-term debt-to-capitalization ratio of 23.8%, lower than industry’s average of 29.2%, which provides it with ample flexibility to tap on growth opportunities. The company has also initiated dividend payments and share repurchase programs, which have boosted the confidence of investors. It remains committed to repurchase up to $500 million of common shares by the end of this year.
While the company’s guidance and backlog raise optimism about this Zacks Rank #3 (Hold) firm, we are not certain if the company can turnaround very soon. Even with the spike in oil prices, the improving landscape is not likely to filter down to oilfield services soon, as the upstream players are benefiting from discounted dayrates. We do appreciate the operational efficiency of TechnipFMC, along with its encouraging inbound orders and revenue forecast. However, increasing pressure from Trump to avoid production curb may push crude prices lower, which may spell further trouble for oilfield services companies like TechnipFMC.
Stocks That Warrant a Look
Investors interested in the energy sector can opt for some better-ranked stocks given below:
Houston, TX-based Enterprise Products Partners L.P. (EPD - Free Report) holds a Zacks Rank #1 (Strong Buy). The company’s earnings for 2018 are expected to surge more than 36% year over year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rome, Italy-based Eni S.p.A. (E - Free Report) has a Zacks Rank #1. Its earnings for 2018 are expected to grow more than 100% from the 2017 level.
Houston, TX-based Shell Midstream Partners, L.P. (SHLX - Free Report) carries a Zacks Rank #2. The company’s profits for 2018 are expected to grow nearly 20% from 2017.
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