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TechnipFMC Shows Investors the Sorry State of Energy

By Andy Ryle - Apr 25, 2020 at 7:43AM

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As the market predicted, earnings for this massive oil and gas contractor weren't pretty.

One of the world's largest oil and gas engineering and manufacturing contractors just announced its first-quarter 2020 earnings, and as the world expected, they're pretty bad. Even though revenue increased over last year's first quarter, TechnipFMC (FTI 3.91%) reported a loss of $3.3 billion. But the company has instituted several cash-saving measures that may boost investors' confidence in the company's ability to outlast this downturn.



Operating results

Technip earned $3.1 billion in revenue for the first quarter of the year, up 7.5% from last year's first quarter revenue of $2.9 billion. But the company took nearly $3.2 billion in non-cash charges for impairment of assets, to end the quarter with a loss of $3.2 billion. 

When a company purchases other businesses through acquisitions or mergers, much like Technip did with FMC in 2017, the value the acquiring company pays for a business beyond the book value is recorded on the company's balance sheet as goodwill. At the end of 2017, Technip held almost $5.5 billion in goodwill associated with the company's subsea division. 

A majority of the impairments came from the company's subsea segment, which impaired $2.75 billion in goodwill. After this, and last year's $1.8 billion impairment, the company is now reporting a zero balance for goodwill associated with its subsea division. Technip reported that these writedowns in the subsea and surface technologies divisions were due to the declines in the company's market capitalization.  

In the same announcement, Technip slashed its dividend by 75% to $0.13, which was already paid in April; therefore, it has implicitly suspended its dividend for the remainder of 2020, with April 2021 being the next anticipated dividend payment on common stock coming from the company.

Technip also promised to slash CEO, board, and executive team salaries by up to 30%. Though no details were provided regarding the bonuses these executives will be receiving.

Where's the silver lining?

Investors can get a good feeling in their gut from the executive team and board cutting their own pay in a seemingly good-faith gesture to the investing public. It also helps to understand that the nearly $3.2 billion that lead to Technip's reported quarterly loss was not cash spent on anything tangible.

These non-cash charges were reductions in value of the company's goodwill that it paid for assets associated with its subsea department. Now that subsea has impaired all of its goodwill down to zero, the division may not see huge charges like this again. 

The remaining intangible assets and goodwill across all of the company's segments add up to $3.5 billion. This, along with tangible asset depreciation, is the extent of these non-cash charges the company may report in the coming periods. As far as cash goes, the company produced $27.9 million in cash from operations for the same period.

In the same filing, the company took the opportunity to tout its cash position and project revenue backlog. In the first quarter of the year, the company held $5 billion, after a drawdown of $500 million from its revolving line of credit.

Technip's revenue backlog as of the end of last quarter was $21.96 billion. This represents potential revenue in future periods its customers have commited to, but the company has not yet gotten to because of the nature of projects and their timelines.

Across all three segments, Technip plans to convert roughly $8.2 billion of that backlog into revenue for the remainder of 2020, bringing the total revenue anticipated for the year at around $11.5 billion. That's down from the comapany's $13.4 billion in 2019 revenue. 



Staying power

Technip is one of the largest engineering, procurement, and construction companies in the world, serving not only upstream subsea production, but also downstream engineering and fabrication. This announcement and non-cash impairment charges were likely an attempt to get ahead of the gloominess the industry is anticipating for the remainder of 2020.

Writing down goodwill in a division completely can often be viewed as a positive for companies, since it's one fewer thing to manage in the finance department. Still, investors may want to hold off on buying Technip until the dust settles and its customers announce higher capex spending. 

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