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Morningstar | FTI Updated Forecasts and Estimates from 10 Jan 2019

Oil and gas engineering and construction companies TechnipFMC and Saipem released positive third-quarter results. TechnipFMC saw revenue increase 6% sequentially and adjusted operating income margins increase to 10.2% from 8.8%. Saipem saw revenue grow a very strong 17% sequentially, although adjusted operating income grew a more modest 5% sequentially as margins weakened to 7.2% from 8.1%. Our fair value estimates and no-moat ratings for the two companies remain unchanged.

For TechnipFMC, the improvement in results was driven almost entirely by the Onshore/Offshore segment, where revenue increased 14% sequentially and adjusted operating margins increased to 14% from 12.1%. The strong Onshore/Offshore results were driven chiefly by ahead-of-schedule execution on the Yamal LNG project. Perhaps more encouragingly, however, margins have strengthened versus 2017 levels despite a greater share of the segment's revenue coming from non-Yamal projects (such as downstream projects in refining and petrochemicals). Still, we will have to wait until 2020 when Yamal fully rolls off to see how the segment will fare without the benefit of the lucrative Yamal project. We think management's more conservative long-term guidance of 4%-6% EBITDA margins (versus the 12% averaged over the previous two years) is likely to be correct.

Saipem's Onshore E&C segment saw a strong sequential revenue rebound of 29%, although revenue still remains flat year over year and operating margins actually slipped sequentially to 2% from 2.2%. The segment has endured a much more challenging recent history than its competitor in TechnipFMC's Onshore/Offshore segment, thanks to its focus on generally more competitive end markets. The segment has averaged a very impressive 1.38 book-to-bill over the last 12 months, signaling a positive outlook. Crucially, however, management has yet to outline a strategy for delivering better margins for the long beleaguered segment, in our view.

Meanwhile, both companies' offshore E&C-focused businesses delivered roughly flat results sequentially. TechnipFMC's Subsea segment saw revenue decline 1% but adjusted operating margin increase to 8.4% from 8.3%. Saipem's Offshore E&C segment saw revenue increase 12% but adjusted operating margin decrease to 10.5% from 11.1%. Still, it is encouraging that results for both companies appear to be hitting a trough, which was reiterated by commentary from both management teams on moderating pricing pressures on incoming contracts. We think the market has been too pessimistic about pricing headwinds in this industry in general (including peer Subsea 7 which we also cover). Among the three players (TechnipFMC, Saipem, and Subsea 7), we remain most optimistic about TechnipFMC, owing to its integrated project initiatives. We think customer adoption of the integrated project model will accelerate thanks to the benefits in terms of lowered development costs and faster execution being demonstrated in recent projects, such as Visund Nord and Trestakk on behalf of Equinor and Kaikias for Shell.