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TechnipFMC Takes a Multibillion-Dollar Hit

Energy stocks had a tough 2018, as an initial bounce in crude oil prices gave way to weakness toward the end of the year. Yet 2019 started on a positive footing for the sector, and offshore and land-based drilling services specialist TechnipFMC (NYSE: FTI) saw its stock regain a significant portion of its losses from 2018 during the first couple of months of the year.

Coming into Wednesday's fourth-quarter financial report, TechnipFMC investors hoped that the company would be able to start putting its difficulties behind it by posting strong earnings growth. Instead, a set of massive charges left the company more than $2 billion in the hole, and even after adjusting for those one-time impacts, unexpected red ink left investors feeling shell-shocked.

Image source: TechnipFMC.

What caused TechnipFMC's pain?

TechnipFMC's fourth-quarter financial results didn't live up to expectations. Revenue of $3.32 billion was down 10% from year-ago levels, doing worse than the 8% decline that those following the stock had expected. Net losses amounted to $2.26 billion, and even after taking out one-time items, adjusted net losses of $39 million worked out to $0.09 per share -- disappointing investors who had projected an adjusted profit of $0.37 per share.

TechnipFMC had a variety of different charges to address. Asset impairments for goodwill and fixed assets amounted to $1.69 billion, while the company made a $280 million provision for settling investigations surrounding historical projects. Tax provisions, restructuring charges, and other miscellaneous items accounted for the remaining amounts of roughly $250 million.

Weakness was present across TechnipFMC's business lines. In the subsea segment, revenue fell 5%, with a roughly 40% drop in adjusted pre-tax operating earnings. The business saw its inbound order volume slashed in half, and that led to a 3% drop in backlog levels to roughly $6 billion. Completed projects in Africa weighed on performance, with merger-related synergies and other cost-cutting efforts only partially offsetting the impact on the segment's bottom line. Vessel utilization dropped 3 percentage points to 62%.

The onshore/offshore segment was more mixed, with a 17% top-line hit cutting adjusted operating earnings by 26%. But at least there, inbound orders were up almost 85%, and the backlog there jumped 27% to almost $8.1 billion. Even so, TechnipFMC faces the prospect of moving closer to completion on key projects, which could contribute to even weaker revenue performance in the future.

TechnipFMC's surface technologies segment was the only one to post gains in revenue, with sales climbing 12%. However, even there, adjusted pre-tax operating earnings were down almost 15%, although rises in inbound order activity and backlog levels were encouraging.

TechnipFMC looks ahead

CEO Doug Pferdehirt tried to keep his eye on the long-term prospects for the company. "Many significant achievements contributed to our success in 2018," Pferdehirt said, noting key efforts across the business. Particularly noteworthy was the early start-up of portions of the Yamal liquefied natural gas project, and TechnipFMC's Subsea 2.0 product platform showed early signs of success. LNG could be a long-term driver of growth for the company, especially as new project opportunities start to multiply.

TechnipFMC's guidance for 2019 offered some signs of promise. The company expects total revenue in a range of $12.8 billion to $13.5 billion, split across its segments. Subsea sales should be around $5.4 billion to $5.7 billion, while onshore/offshore activity should account for $5.7 billion to $6 billion. The remaining $1.7 billion to $1.8 billion should come from the surface technologies business. TechnipFMC hopes that cost synergies will accelerate and help produce stronger profits, but adjusted operating profit margin levels of 11% in subsea, 12% in onshore/offshore, and 17% in surface technologies might not produce the level of profit that shareholders had hoped to see.

Investors didn't seem satisfied with the report, and the stock initially fell 10% in after-hours trading following the announcement before recovering some lost ground. In the long run, improving energy markets could help TechnipFMC, but the signs of an immediate recovery still haven't shown themselves.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends TechnipFMC. The Motley Fool has a disclosure policy.

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