TechnipFMC: revenue synergies beyond Forsys?

TECHNIP AND FMC TECHNOLOGIES INC. plan to combine in an all-stock merger. That was the news nary a week before this issue went to press. If realized, the deal-creating a new entity, TechnipFMC, with an expected equity value of $13 billion based on pre-announcement share prices-would arguably create the most comprehensive deepwater development provider in the industry.

Along the lines of the Forsys Subsea joint venture, the deal makes strategic sense. With a vision of a more streamlined (and integrated) subsea offering, Paris-based Technip and Houston-based FMC Technologies entered into the 50/50 JV arrangement in March 2015 to bring together FMC's subsea production systems and Technip's subsea umbilicals, risers, and flowlines.

"A year ago, we were at the forefront of recognizing the importance of a broader view of our clients' challenges and seized the opportunity that working together in our alliance could bring," noted Thierry Pilenko, Technip chairman and CEO (pegged to serve as executive chairman of TechnipFMC), in a statement announcing the merger.

A large portion of the commentary I've seen since the deal's announcement points to the natural extension of said joint venture. It comes down to synergies and savings, n'est-ce pas?

In addition to the pretax cost synergies (estimated to be close to $200 million in 2018, and at least $400 million in 2019 and thereafter), is the case for "a combined entity of market leaders totally aligned and incentivized to deliver the value-enhancing solutions to clients struggling to justify project sanctions" Jefferies analysts offered in a note following the news.

But is it applicable across the portfolio?

While "it's logical to see the Forsys joint venture expanded as a larger entity that can realize cost synergies and buttress its balance sheet with seemingly more opportunities to enhance efficiency by having full company collaboration," said Capital One Securities analyst Joseph Gibney, "applying the model to the whole of the portfolio, especially onshore, is harder to see (at least at the current juncture) where the value proposition is."

I asked Gibney for additional thoughts on the deal.

"Opening up both entities more fully to each other is expected to drive further efficiencies as customers continue to push for more integration/standardization/cost efficiency. FTI has been pushing a first frac to first oil mindset within Surface for some time as it pivots away from a legacy one-off equipment sales focus to an end-to-end systems approach (not dissimilar to the agenda initially pushed by CAMShale). Early involvement in projects and selling a systems approach via an entity with more scale has merit, but taking this concept whose genesis is offshore and applying elsewhere is clearly going to take some time to marinate. Offshore customers clearly like the concept with FEED involvement, but this still has yet to translate into awards and it is proving to be an understandably slow gestation against the ongoing CAPEX austerity backdrop," he explained.

Investors' reactions in terms of feedback and trading have been neutral at best, Gibney said, detailing questions posed. What is gained beyond what was already in place via Forsys, particularly when the focus is on the core subsea competency? Should I be excited to be more fully embedded in EPC orientation, lumpier earnings and a broadly lower-margin portfolio? Where do surface wellhead and fluids fit into the collaborative systems model? Cost synergies and scale I get but how long am I going to be waiting for revenue synergies? "All fair lines of questioning," Gibney remarked.

"In the end," he said, "this is all about lowering costs offshore in a game-changing way, and if FTI and Technip can achieve even more via fuller collaboration while taking some level of costs out (even if long on the realization timeline) with more scale and balance sheet integrity, then the deal has merit. Nonetheless, we understand and to some extent share the 'I guess we'll have to wait and see' sentiment as the extent of revenue synergies beyond the original Forsys focus across the whole portfolio is going to take time to play out."