How To Play The Deep-water Oil Boom: FMC Technologies
A good technology company should sell products that pay for themselves. In other words, products should have a rapid payback period for customers.
In the oil field equipment business, technology should offer solutions that cut operating costs or enhance production at customers’ projects. Oil companies spend billions on large offshore oil and gas projects. Typically, the deeper the project, the more money is spent. So any high-tech equipment that can cut costs or boost production can essentially sell itself.
In the market for highly engineered offshore production equipment, FMC Technologies Inc. (FTI) is the clear leader. FMC installed its first “full field” subsea separation, boosting and injection system on Statoil’s Tordis field in the North Sea in 2007.
FMC increased recovery by an extra 35 million barrels of oil and extended the life of the field by 15 years. With a payback of an extra 35 million barrels, this sort of equipment pays for itself.
Deep-water drilling is a growth market, and FMC is investing heavily to capture a large share of the market. Tore Halvorsen, a senior VP of Subsea Technologies at FMC, recently explained FMC’s long-term vision to Bloomberg News:
“Instead of all that up and down travel through the ocean, FMC Technologies wants to move those operations to the seafloor… There would be less need for the massive floating production platforms that can cost as much as $1 billion and contain tons of equipment. Operating costs would drop with no need to ferry workers by helicopter to offshore sites, or house and feed them there, Halvorsen said. And the less equipment sitting at the top of the sea, the less vulnerable operations would be to hurricanes sweeping through warm seawaters during the summer.
“With more equipment located at the seafloor and not tied into platforms, wells could be more widely spaced, draining the reservoir more efficiently, he said. And if processing is done at the seafloor, water would be separated and left behind, minimizing energy consumption and eliminating the problem of ice crystals plugging up pipelines in the cold waters below.”
James West from Barclays, a leading oil service and equipment analyst, agrees that more offshore production and processing is likely to migrate to the ocean floor: “The main drivers of subsea processing include accelerating production, increasing recovery and extending field life, reducing [capital spending] on topside processing equipment and pipelines, improving flowline efficiency, and alleviating topside capacity constraints.”
Byron King, our in-house geologist, recommended FMC four years ago to his Outstanding Investments. “It’s fair to say that without the equipment that FMC Technologies has invented and provides, the deep waters of the world would still be off-limits to energy exploration,” Byron wrote. “Looking broadly at the subsea equipment business sector, there are only a handful of major vendors with the technical ability to build, supply and service this kind of equipment.”
Byron’s readers are up 67% on their shares, and there is much more potential upside for patient shareholders…
FMC’s equipment has pricing power; you can see it in FMC’s consistent profit margins — even during downturns.
The quality of FMC’s business shows up in its high average return on equity (ROE) over the past decade: 33%. A high ROE allowed FMC to grow revenues rapidly without stressing its balance sheet or increasing its share count.
FMC has a long history of conservative financial policies, and only recently borrowed a reasonable amount of debt to fund its 2012 acquisitions. Acquisitions helped round out FMC’s vision for underwater well processing, and broadened its offerings in the onshore shale drilling market.
FMC’s profit margins were down a bit in 2012, but this can be explained by management’s decision to hire and train its workforce aggressively to fulfill a $5.4 billion (and growing) backlog of orders.
The stock’s valuation is rich, but FMC is the type of company that can “grow into” its valuation. With huge growth potential, FMC is an attractive stock to own — and buy on weakness.
Dan Amoss, CFA
Original article posted on Daily Resource Hunter