Did upstream companies’ capex affect FTI’s margin?
In the past year, crude oil has increased ~64%. Higher crude oil price can lead to higher exploration and production activity from upstream producers. From Q1 2017 to Q1 2018, the upstream companies constituting the Energy Select Sector SPDR ETF (XLE) increased their capex by 8% in aggregate. XLE tracks an index of US energy companies in the S&P 500 Index.
From Q1 2017 to Q1 2018, TechnipFMC’s (FTI) EBITDA margin (or EBITDA as a percentage of revenues) improved to 12.5% from ~7.8%. During the same period, the average EBITDA margin in the OFS industry decreased to 17.2% from 18.7%. EBITDA is earnings before interest, tax, depreciation, and amortization.
EBITDA margin comparison with peers
Higher upstream capex typically leads to higher drilling and rig count, which moves revenues and operating margin for the oilfield equipment and services (or OFS) companies. As of the week ending July 6, the US rig count was 1,052, up 6% compared to the week ending March 29. Growth in the US rig count can boost TechnipFMC’s revenues and earnings growth in Q2 2018.
However, by June 30, the international rig count fell by 13 compared to March 31. A lower international rig count can negatively affect FTI’s revenues and earnings in Q2 2018.
Next, we’ll discuss FTI’s returns in the stock market.