Tecnicas Réunidas Waltzes With Sinopec To Great Effect

With a €1.1bn market cap, Técnicas Reunidas (Add; Spain) ranks as the second smallest player in AlphaValue’s oil services universe just behind Viridien (Add; France). This small cap play has however consistently outpaced the sector average, delivering a steady earnings improvement since the start of the year. 

At last May’s CMD, the company set the bar high — targeting a 21% revenue jump to €5bn, a 59% EBIT surge past €250m and net income tripling to €160m by 2026. 

Punchy numbers. But, in an ultra-competitive oil services bidding arena, where giants battle for margins, what gives a small-sized player the confidence to stake its claim?

Five decades of engineering grit in the Middle East

In the 1970s, when the Middle East was undergoing a massive transformation fuelled by oil wealth, Técnicas Reunidas (TR) saw an opportunity to expand beyond Europe. At the time, the region was dominated by American and British engineering firms, but TR managed to carve out a niche with its engineering know-how and sheer efforts. 

TR’s debut project in Saudi Arabia was a refinery upgrade in Yanbu, a remote Red Sea port. The project had all the hallmarks of a logistical nightmare—50°C heat, relentless sandstorms and skeletal infrastructure. TR’s engineering team improvised with makeshift shade structures and even imported ice from Jeddah to cool down infrastructures - a tactic later adopted by the competitors. This project was delivered on time and became the foundation for TR’s long-term relationship with the Kingdom. 

By the 1990s, TR had solidified its standing in the Middle East with the Riyadh Power Plant, delivering ahead of schedule in 1997 - a feat that earned it a coveted spot on Saudi Aramco’s golden list of approved contractors. In the regionalized playing field where relationships dictate access, this was the equivalent of an all-access pass to the region’s highest-stakes, capital-intensive projects.

Fast forward another two decades, TR’s track record in the Middle East spanning Refining, Chemicals and NatGas, speaks volumes. From the Sadara Chemical Complex (Saudi Arabia) to the Kuwait Clean Fuels Project, Liwa Plastics (Oman), and the Ruwais Refinery (UAE), the company has repeatedly proven its execution muscle in some of the most technically demanding environments.

Today, TR’s Middle Eastern footprint holds steady. Its record €12.4bn backlog (as of 3Q24, over 3x backlog-to-sales) is heavily weighted toward NatGas and refining projects for regional heavyweights - Saudi Aramco, Qatargas, ADNOC, ADNOC LNG, DRPIC(Oman), and KNPC(Kuwait) and TR remains a critical player in the region’s energy infrastructure build-out.

Exceptional connections

With 20+ years at TR, current executive chairman Juan Lladó Arburúa (son of the founder) is a pivotal figure in TR’s Middle East expansion and the public face of the company. With decades of cultivated relationships with leaders like Saudi Energy Minister Prince Abdulaziz bin Salman and ADNOC’s Sultan Al Jaber, Lladó is the company’s primary liaison with Middle Eastern energy giants - an irreplaceable asset as the region enters an unprecedented investment cycle. Succession matters seem to be well prepared though as per TR’s statements.

A capex pick up in O&G?

The recent years of elevated Brent pricing have spurred a wave of oil&gas investment, most of which comes from Middle Eastern NOCs: Saudi Arabia is pushing its gas master plan and petrochemical integration under Aramco, ADNOC is accelerating refining and blue hydrogen investments in Ruwais, and Qatar is expanding downstream alongside its LNG dominance. Meanwhile, Kuwait and Oman are scaling up refining and gas processing. The playbook is clear - maximize value from hydrocarbons while securing a foothold in the energy transition.

For TR, this is a sweet spot. With a deep pipeline of Middle Eastern projects and Lladó’s influence keeping TR in the right rooms, the company is primed for more contract wins, margin expansion and long-term earnings visibility. 

The Sinopec/China play

In September 2023, TR and China’s Sinopec made their partnership official, teaming up via a Joint Venture to chase down refining, petrochemical, gas, and transition projects on a global scale. 

The logic behind it is simple: Middle Eastern NOCs want the best of both worlds - Western expertise for credibility and Chinese efficiency for cost control. TR and Sinopec together check both boxes. TR has the engineering pedigree, deep ties with Middle Eastern NOCs like Saudi Aramco, ADNOC and KOC, and the Western credibility that regulators and technical reviewers love. Sinopec, on the other hand, has cost efficiency, brute-force execution power and access to the deep pockets of Chinese financing. 

And the numbers prove it. In January 2024, the TR-Sinopec JV landed $3.3 billion in EPC contracts from Saudi Aramco for the Riyas NGL Fractionation Facility, with TR taking a 65% cut. In July, the JV secured a Letter of Intent (LoI) from Aramco relating to three gas compression plants. By September, they secured a €2.3 billion deal in Kazakhstan to build a steam cracker unit, split 50/50 between the two partners. 

In our view, TR continues to see immense PetroChem contract potential in the Middle East as countries continue to grow the chemical arms of Oil&gas businesses via substantial investment. The alliance with Sinopec has provided further bidding muscle to capitalize on the investment upcycle spanning low carbon technology, petrochemicals, refining and NatGas on a global scale. We note that low-carbon and petrochemical projects command higher margins than traditional EPC contracts, directly supporting TR’s published long-term target of an 8% EBIT margin by FY2028 (vs. 3.8% in FY23).

The inevitable question is whether Sinopec Engineering will want to consolidate a working JV through a capital link. This hinges on the 37% held by the founding family. What is more the Spanish government, which has helped TR in the past (via Sepi funding), is unlikely to look positively on a great Spanish competence falling into Chinese hands. There is no ongoing public talk of a Chinese move.

2024 clear take-off

TR’s consistent earnings outperformance over 9m 2024 speaks for itself. Despite a relatively flat top line (9m revenue up by 10% yoy), net profit surged by 58% YoY to €65 million - already exceeding full-year 2023 net income by €5 million. Meanwhile the net profit margin increased by 70bps to 2% over the same period yoy. Accordingly, AlphaValue forecasts a 75% YoY increase in adjusted net profit for 2024, with further growth of 19% in FY25 and 30% in FY26 to reflect TR’s strengthening profitability trajectory.

AV’s cautiously optimistic FY26 projections, featuring €4.9bn in revenue, €242m in EBIT and €146m in net profit, are marginally below the company’s respective targets of €5bn, over €250m and €160m as outlined in the 2023 CMD.

In our view, the company's €12.4bn backlog as of end 3Q24, equivalent to 3 times its FY23 revenue of €4.1bn, will underpin both top- and bottom-line growth well into the latter half of the decade with the ongoing robust investment cycle expected to further enhance the company’s cash generation capabilities. With 20% upside, we maintain our ADD recommendation on Tecnicas Réunidas.