Technip Energies: A Clean Cut Oversell?

Fact

• The French newspaper Le Monde has reported that Technip Energies facilitated the delivery of two modules of the trains for the Arctic LNG 2 project to Murmansk where the modules are dispatched to the Gydan peninsula close to the production fields.

• According to the report, the transfer of the modules from China to Murmansk took place in August-October 2022 after EU sanctions were implemented.

• According to the report, Technip moved the headquarters of two JVs (Novarctic and Gydan LNG) with Saipem and NIPIGAZ to UAE after the transfer of the modules to Murmansk.

• Technip Energies announced that it had completed the full orderly exit of Arctic LNG by H1 2023 per an earlier notification in October 2022 and confirmed that it has transferred all the shares in the JVs.

• In April 2022, the EU banned the exports of essential LNG equipment and technology to Russia, which took effect in late May 2022.

• In 2019, Technip was awarded a $7.6bn contract for the Arctic LNG 2 project as the leading contractor in the JV formed with Saipem and NIPIGAZ. Saipem’s share was $2.5bn.

• Technip’s backlog incurred a €2bn negative impact from the exit of the project.

• Artic LNG 2 is a $21bn project with three LNG trains that can produce 20 million tons per annum by 2026. The partners include Novatek (60%), TotalEnergies (10%), China CNPC (10%), China CNOOC (10%) and Japan Arctic LNG (10%).

Analysis

The report in Le Monde claiming that Technip facilitated the transfer of liquefaction modules to Murmansk in Russia even after the EU sanctions on the supply of LNG equipment and technologies came into force in May 2022 has taken a serious toll on the company’s share price. A long resident of our Active List, Technip Energies had been enjoying almost 60% YTD appreciation until the Le Monde report reminded the markets of the company’s past business exposure to Russia.

Following Russia’s invasion of Ukraine, Technip was one of the energy stocks that had been severely battered given the company’s exposure to the country at the time. While there had been great uncertainty about the company’s Russian strategy and how the backlog would be impacted back then, a well-managed exit program mitigated the potential bruises.

The report by Le Monde claiming that Technip facilitated the transfer of liquefaction modules to Murmansk in Russia even after the EU sanctions on the supply of LNG equipment and technologies came into force in May 2022 has taken a terrible toll on the company’s share price. A long resident of our Active List, Technip Energies had been enjoying almost 60% YTD appreciation until the Le Monde report reminded the markets of the company’s past business exposure to Russia.

The overall claim of the article is the following: Technip Energies left no avenues unexplored to minimize its financial losses from the Arctic LNG 2. And that is exactly what the company should have done.

The company completed the exit by H1 2023 with the transfer of shares in the JV in May 2023, per previous announcements since October 2022.

In our very simplistic view, we believe that the reaction was a strong oversell and it offers a good entry point opportunity for a company that is driving the energy transition with constant technology and production development while taking on high-quality LNG projects.

Here is why we believe it is an unjustified overreaction:
1) The article lacked fundamental aspects to document the claims, thereby leaving the issue quite overstretched. There was no proof given implicating Technip Energies in direct involvement in transferring modules. In our view, is quite surprising that investors did not spend a bit more time reading and understanding the article.

2) Investors should be aware of the fact that for contractors it is not possible to abruptly leave such mega-scale projects. The exit needs to be managed over time to mitigate the risks both for the company and the client. If Technip had not done this, it would have suffered more.

3) Since Technip had already collaborated with the French Ministry of the Economy – responsible for sanction compliance – we do not see any legal and fiduciary risks for the French contractor. At the EU level, no investigation on Russian sanctions is ongoing for the moment as the sanctions are already being circumvented for the trading of energy products.

Bottom line again: While acknowledging the fact that this is a headache for Technip and will make the management uncomfortable, this big over-sell does not reflect the company’s strong fundamentals supported by its steadily expanding and margin-supportive business, its industry-leading diversification and its strong backlog that is set to grow more. A $10bn contract from Qatar was bagged in Q2 and we are expecting Technip to be awarded more LNG contracts throughout next year. Nor does today’s reaction show a proper comprehension of how the sanctions regime works. We reiterate our view that Technip was in communication with the French government throughout the process to minimize any legal and financial repercussions.

Part of the sell-off (2-3%) is related to sector-wide performance and the expectations of the upcoming results on Nov. 2 but this has been visible in the stock’s performance over the past two weeks:

1) Technip had a quiet quarter and there were no big projects. In Q2 though the company booked a giant contract with QatarEnergy ($10bn). The revenues will be in line with the previous quarter.

2) Technip lost a contract with ADNOC in Q1 this year for a big gas development (Hail and Ghasha) after the company decided to hold a tender and last week Saipem (BUY, 29% upside) bagged the contract.