Friday 28 October 2016

Share watch: Beacon of relative safety in the troubled oil sector

John Lynch

Published 15/06/2015 | 02:30

'A satisfactory return for investors in good quality European shares has become seriously problematic'
'A satisfactory return for investors in good quality European shares has become seriously problematic'

Stock market investors are a fine bunch of people but they're capable of some notoriously sheep-like qualities.

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Just as soon as someone makes a reasonably compelling argument for either buying or selling, the flock takes off and won't be stopped until bad value reasserts itself.

That, to my mind, is what has been happening since the European Central Bank chief, Mario Draghi, instituted his welcome quantitative easing programme some months ago.

The herd (or the flock, if we are to continue the sheep analogy) piled into European shares once Draghi opened the purse strings.

Some of the favourites of this column - shares like ABinBev, Schneider, Henkel, Carrefour, Hermes and Fresenius - have all seen their market prices soar and their P/E multiples hit lofty heights.

A satisfactory return for investors in good quality European shares has become seriously problematic.

Once that sort of thing happens, the sensible thing to do is to step away from the market and wait for Bo Peep to return with her lost sheep.

Alternatively punters can try to find another compelling argument. What I like to do in these circumstances is search for a sector that has been unloved and see if I can find some value down there in the basement.

Oil services have been the sector to avoid since the decline in crude oil prices forced the oil majors to cut capital expenditure. Big players in the sector have been busy firing employees in vast numbers.

However, the company we are looking at this week, the French firm Technip, could buck this trend, even if it has had its challenges in the last few years. Indeed, it sees sales and profit growth again this year.

Technip is one of the top five companies of its kind in the world. It operates in 48 countries, from Canada to China and from Poland to Angola, with 38,000 employees.

It has a fleet of 21 vessels for pipeline installation, and is listed on the Paris Stock Exchange.

Formed less than 60 years ago, it is involved in the creation, fabrication and installations of facilities for the oil/gas industry. Its customers are the world's great oil companies and oil States.

It is well diversified geographically, with three business activities: subsea, offshore and onshore.

Its largest business is its subsea operation with sales of €5bn, operating margins of 13pc and a considerable backlog (or order book) of €10bn. The company offers an integrated package ranging from design to project management, from pipe-manufacturing to pipe-laying. It has seven pipe plants around the world and 27 ships for pipe-laying in locations from Indonesia to the North Sea.

Technip's other business is on and offshore services with combined sales of €5.8bn. It is involved in all stages of development including fabrication and installation of platforms for shallow and deep waters.

The company's onshore business has pursued a strategy of early involvement, and provides design, engineering and project management.

Oil and gas accounts for 97pc of Technip's group revenue and the company sees technology as a key driver in competitiveness.

The CEO Thierry Pilenko, appointed in 2007, has faced his share of problems. Falling sales and profits were complicated by a fine in 2010 of $300m (imposed by the US) for bribing Nigerian officials, in its attempt to win a contract for a liquefied natural gas plant.

However, things appear to be on the up. Technip sales last year were €10.7bn, its highest ever.

Meanwhile, the group's shares trade in the mid 60s, down from its yearly high of €82 but almost double that of 10 years ago. Its price earnings multiple is an undemanding 16 and the company is valued at €7bn.

Technip has a solid balance sheet but is in an industry where the outlook is negative. However, the company is a beacon of relative safety in a troubled sector.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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