Breakingviews: TechnipFMC may work better with split personality

TechnipFMC may work better with a split personality. The $11 billion French American oil and gas servicer is breaking itself in two not long after completing a merger. Investors in the engineering unit will need a higher risk tolerance. However, the remaining business should benefit from a higher rating.

It’s less than three years since Technip of France teamed up with its American peer FMC. The union has hardly been a triumph: Shares in the combined company are down some 30% since the merger became effective in January 2017, lagging rivals like Italy’s Saipem. CEO Doug Pferdehirt’s plan to spin off the engineering business, announced on Monday, is an attempt to close that shortfall. The unit, which typically manages projects related to liquefied natural gas plants and generated some $6 billion in annual revenue in 2018, will be listed in Paris. The rest of the company, which lays and manages oil wells and pipelines, will retain the company’s listings in New York and Paris, and its Houston head office.

The separation will offer investors more clarity, and the ability to choose between two segments which are exposed to different business cycles and have varied risk profiles. Take TechnipFMC’s work on the giant LNG plant in Russia’s Yamal peninsula, which has taken years of work in sub-zero temperatures and requires special icebreaker ships to transport the gas. Such big and risky projects mean the engineering business will probably have a lower rating than the combined company, which trades at about 7.5 times its EBITDA next year, as forecast by UBS analysts. On the other hand the pipes and wells unit, which has less complex contracts that typically last up to two years, should enjoy a higher multiple.

Assume the slimmed-down TechnipFMC is valued at around 11 times its 2020 EBITDA, or $11.8 billion, and the newly listed engineering division is worth $3.7 billion. Knock off $1.7 billion for corporate overheads, and the largely debt-free company’s equity value would be $13.8 billion. That’s roughly 25% more than it was valued at on Tuesday afternoon, after a 3% jump.

The discount probably reflects the complexities of separating the two businesses, as well as disappointment with TechnipFMC’s past record. Rising awareness of the dangers of climate change among investors is another cloud over the oil and gas business. Even so, shareholders should benefit from a split.

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