FMC Technologies (FTI) is an equipment and services provider for the oil & gas industry. The company was incorporated in November 2000 and went public in June 2001. FMC is globally diversified, with over 75% of its sales generated from its non-U.S. business. The company provides equipment and services to both the offshore and onshore drilling markets, serving major Exploration and Production (E&P), refiners, and drilling companies, including Royal Dutch Shell (RDS/A), Statoil (STO), and Petrobras (PBR) to name a few.
The equipment manufacturer reports revenue under three segment lines: Subsea Technologies; Surface Technologies, and Energy Infrastructure. On average, the divisions represented 65%, 25%, and 10% of sales over the past three years. The company’s current backlog is heavily weighted towards the subsea business (88% of total backlog), with close to $6 billion expected to be awarded by the end of 2013. Management is anticipating strong demand in near term orders from the Gulf of Mexico and Africa.
The Subsea Technologies division designs and manufactures subsea production and processing systems, high pressure fluid control equipment, and wellhead equipment and services. The Subsea production system unit is the largest revenue generator for the company, representing roughly two-thirds of its total Subsea Technologies sales. The production system is placed on the ocean floor and is attached to a platform where crude oil or natural gas is pumped and processed by the E&P operator.
The company has been an industry leader in subsea trees for some time. The “subsea tree” is one of the most crucial components of the deepsea operation and an important indicator in determining the health of the subsea industry. A “tree” is an assembly of valves attached to the wellhead, which helps to control the flow in and out through flow lines to a platform. These trees act as a conduit for various other applications with regards to production and performance.
In 2010, there were a little over 300 subsea trees awarded, and forecasts suggest that number should grow to between 700 and 800 a year by 2015. These projections for “trees”, coupled with the limited competition and high barriers to entry, make it a promising opportunity for investors. Over the last five years, FMC Technologies led the industry with roughly 40% of tree awards. Cameron International (CAM) and Aker (AKER) both have captured close to 20% each over the last few years. While General Electric’s (GE – Free GE Stock Report) Oil & Gas unit and Dril-Quip (DRQ) have made some headway in recent years.
We believe the subsea equipment and services market is set to grow at a rapid clip, driven by the current exploration of offshore oilfields worldwide. In fact, Quest Offshore, a leading data provider, is projecting growth in subsea tree and umbilical orders to increase by 55% and 40% in the next five years, respectively. Additionally, Quest expects E&P companies to spend $70 billion on subsea trees, umblilicals, and flowlines through 2017. The international market should remain a longer-term catalyst as governments look to develop their offshore resources for tax revenue and employment opportunities.
The Surface Technologies division primarily provides equipment and services to land-based oil & gas activity. The company manufactures and supplies drillers and E&Ps with valves, pumps, wirelines and well-completion services. The company competes with Cameron International, Weir Oil & Gas, GE Oil & Gas, and Gardner Denver, Inc. (GDI).
This business has been under some pressure over the last 12 months, largely due to low natural gas prices and intense competition. Indeed, lower drilling activity levels and pricing pressure have hurt margins by a couple hundred basis points from their high in 2011. We are cautiously optimistic on an increase in the North American rig count, but demand for its subsea services should help to offset the softness in land-based drilling.
We believe the subsea industry’s healthy outlook, coupled with the company’s strong book of business, should drive solid share-net gains in the coming years. Consequently, the stock offers interesting prospects over the 3- to 5-year period and should be considered as part of a well-diversified portfolio. For more information regarding FMC’s long-term prospects, subscribers are encouraged to check out our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.