Technip: Slick Play on the Oil Boom

Because the French outfit builds infrastructure for Big Oil clients, it draws its profits from extraction, not the more risky exploration

By Eric Wahlgren

Long before gasoline hit a record average price of $2.06 a gallon in the last week of May, motorists were already grousing at the pump. Not energy investors, however, who have been clucking with delight as the increasing price of crude oil put the stocks of Big Oil outfits like Exxon Mobil (XOM ) and ChevronTexaco (CVX ) on a roll that has hardly slackened since the beginning of 2004.

Recently, one category of energy-industry companies has outperformed the rest: the oilfield-services companies that help petroleum giants get fuel to filling stations by building offshore drilling platforms, onshore refineries, pipelines, and other facilities. Among the best-positioned outfits in this latest oil boomlet, analysts say, is an engineering and construction enterprise little known to U.S. investors, France-based Technip.

SOUP TO NUTS.

  Year-to-date, Technip (TKP ), one of the few French companies to trade on the New York Stock Exchange, has seen its American Depository Shares gain 21%, closing at $33.80 on May 28. That compares with only a 6.4% increase in Standard & Poor's oil and gas equipment services index over the same period. Meantime, the broader S&P 500 index has more or less flat-lined.

So why is Technip pumped up? Analysts say the large private and state-run oil concerns that are its main clients -- accounting for about 80% of its business -- are spending more these days on development than on exploration. That means outlays are going toward extracting crude rather than underwriting costly exploration efforts. Industry experts generally agree the number of yet-to-be discovered oil fields is probably limited. Technip, with its expertise in building facilities that help extract, transport, and refine the precious black stuff gives it an edge.

"They have a notable track record of success with respect to their large-scale projects overall," says Bill Herbert, co-head of research at Simmons & Co., a Houston-based investment bank that focuses on the oil industry. Herbert rates Technip's shares overweight, and he has a $38 target price on them -- a rise of about 11% -- over the next 12 months. (Simmons has done investment banking with Technip in the past.)

Technip and its main rival, Italy-based Saipem, have carved out a rich niche for themselves by becoming world leaders in providing Big Oil and state oil monopolies with so-called turnkey projects, analysts say. These soup-to-nuts undertakings typically involve the construction of entire facilities that oil concerns can basically take over and run once the construction crews have departed. Several U.S. oilfield-services firms, including Halliburton (HAL ), have largely moved away from these types of contracts to focus on building components of larger projects. Though Saipem also has many strengths -- the Milan-headquartered operation is more exposed to higher-margin offshore work, analysts say -- there's one major reason why U.S. investors may favor Technip: Saipem's shares aren't listed on any U.S. exchange.

MOMENTUM.

  Herbert is a fan of Technip, although his firm also has an overweight rating on Saipem. "Technip has strong earnings visibility," he says. Part of this visibility stems from Technip's hefty backlog of orders. In 2003, that backlog rose 24%, vs. the 1% increase in Saipem's backlog over the same period, according to Vincent Zelenko, an oil and gas analyst with JP Morgan (JPM ) in London. In Technip's Feb. 26, 2004, earnings statement, Chief Executive Daniel Valot said the big backlog means that more than 70% of the group's 2004 revenues forecast "is already in hand."

In fiscal 2004, Zelenko believes Technip's net income could rise 36%, to 129 million euros (about $159 million at a May 28 exchange rate of approximately 0.81 euros per U.S. dollar) on 8% higher revenues of 5.1 billion euros ($6.2 billion). The net-income figure excludes 114 million euros ($141 million) in goodwill amortization from Technip's 2001 acquisition of France's Coflexip. The deal combined the firm's gas- and engineering-services business with Coflexip's offshore operations. With goodwill included, Zelenko sees net income in 2004 at 14.9 million euros ($18.4 million), vs. a 19.7-million-euro ($24.3 million) loss in 2003, including 113.7 euros ($140 million) in goodwill amortization for that year.

Next year, Technip will come close to matching this year's strong performance, predicts Zelenko. Indeed, he believes net income could rise 30% or more in fiscal 2005. But Zelenko recently changed his rating on the stock to neutral from overweight, saying he wants to get a better idea of the contracts the company will land before restoring his highest rating. Typically, most of the deals are made in the second half of the year. "We don't have enough visibility yet," Zelenko says. While much of Technip's past good news has already been factored into the stock price, "for the long term, it's still a good stock," he adds. (JP Morgan has done business with Technip in the last 12 months.) By Eric Wahlgren

LOWER MARGINS.

  Another analyst is less hesitant. Nick Griffin, an industry analyst with Deutsche Bank in Edinburgh, believes Technip shares could appreciate as much as 18% in the next 12 months. That's because Technip is poised to benefit from a new trend in the oil and gas industry. Big Oil is shifting capital spending toward larger-scale infrastructure investments focused on emerging regions and technologies to develop new reserves, Griffin says.

Exploration as a proportion of upstream oil and gas capital expenditures fell 15% in 2003, from 25% in 1998, highlighting these trends. Technip's exposure to the onshore business, including the building of facilities for oil refining, gas processing, and liquefaction, suggests the outfit is well-positioned to take advantage of the shift, Griffin says. He has a buy rating on the stock. (Deutsche Bank doesn't have any ties to Technip.)

Not everyone is hot on Technip. Michael Carter, head of equity operations with ING in Milan, has a hold rating on the firm. He favors Saipem, which he rates a buy, because it is more exposed to higher-margin offshore work. "Half of Technip's work is 'downstream,' such as refining work, and it's lower-margin work," Carter says. (Carter's firm has no ties to Saipem but has done business with Technip in the past.)

What's more, there are risks to owning Technip r any other oilfield-services stocks. And Technip's focus on turnkey or full-service projects means the stakes are higher than for firms that work on pieces of larger projects. "If there's something really wrong with one of these contracts, the company may have to issue a profit warning," Zelenko says.

HIGH HOPES.

  There's always the chance, too, that the price of oil could fall further than what is already widely expected, slowing the Technip's growth, which has been fueled by oil-company capital spending, Zelenko adds. Technip did not return calls seeking comment.

Still, many analysts remain bullish on Technip. For starters, says Griffin, "oil prices look like they are going to stay high." And that likely means more contracts coming Technip's way in the future as the global recovery underway has cranked up demand for ever-scarcer oil.

For investors looking for exposure to the oil sector, this aggressive and diversified French oilfield services might be one way to play the economic rebound.

Wahlgren writes for BusinessWeek Online in Paris

Edited by Beth Belton

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