Description

Technip Energies an Engineering and Technology Company spun out of TechnipFMC in 2021. The companies primary business is the design and engineering and construction (EPC) of LNG facilities, downstream facilities, and offshore installations. Earnings growth in its core business is underpinned by a growing backlog. Future growth will come from the hydrogen business and various energy transition services as it pivots with its customers to a low carbon future. This new work is likely to be accretive and can trade at higher multiples then the EPC business. Robust revenue and a supportive macro are positive for an improvement in the share price, especially now that the share overhang from FMC ownership is gone.

TE has a strong balance sheet, sold backlog of work, limited future capital commitments and a unique work pedigree. In the presence of an Energy Transition TE has an opportunity to grow it secondary businesses on cash flow from its primary. TE has progressively moved its EPC business earlier in the project development cycle with early engagement in projects proven to reduce customer costs, while de-risking TE's own backlog growth. Technology is an important part of the firms future with ~3,000 patents held in house. The firms focus on R&D will help it maintain market leadership as it expands it typically O&G focused EPC business into a more comprehensive energy focused Technology, Engineering and Construction firm (TEC).

Current Strengths of Business

• Market leadership in its core markets, namely LNG (>20%), Ethylene (>40%)
• Leader in technological development for a number of products, including Hydrogen SMR (35% mkt share), Fischer Tropsch part of Gas to Liquids (60%), alongside significant market share in; various refining and chemical processes.
• Proven track record of the execution on large and difficult projects.
• Focused on contracting under specific contracting terms which result in a high levels of cash on the balance sheet ahead of milestones. This does create uncertainty over the true net cash position, but provides a liquidity position which allows the company to reduce debt / borrow at attractive rates relative to peers.
• Asset Light allowing TE greater flex to rapidly adjust to operating environment.

Risks

• LNG business fades quicker as gas is bypassed as a transition fuel, depriving the firm of an important source of cash.  (This appears increasingly unlikely in our opinion, especially given events in Europe). Associated Risk: Although the backlog build has been good recently, contuned weakness in O&G CapEx might make keeping the backlog full difficult.
• Contract Execution Risk – As an EPC that primarily builds very large projects on a  Lump Sum Turn Key (LSTK) basis, execution missteps can ruin any given years cashflow.  The firm has started to move away from pure LSTK contracts with more flexible mixed term contracts that contain portions, in which some parts of the project are constructed on a reimbursable basis.
• Revenue concentration: A small number of very important projects, and small number of companies usually account for the firm’s revenue.
• Pinning the future on being a TEC firm means the continued development of innovative products that competitors cannot offer is important.  A failure to continue to innovate might result in loss of market share to a competitor.   

Valuation - DCF – Base WACC assumption of 7% with a terminal FCF growth rate of 1% resulting in a value of 20 Euros.  Every 1% change in FCF growth rate produces a roughly 10% change in share price and every 1% change in WACC produces a roughly 13% change in share price.

Catalyst

• Backlog growth in globally important energy projects
• Margin expansion do to additional energy and services business focused on technology and engineering instead of just engineering and construction.