Technip: trial and error
The oil services company is taking a leaf out of Perry Mason’s book. Bad move
here are good reasons why lawyers tend not to become detectives. The skills required to build a case in court are not the same as those required to investigate the crime. Technip is out to prove that the same principle does not apply in the world of oil and gas.
The French engineering company builds projects, from offshore oil platforms to petrochemical plants, for energy companies. It is good business. Operating profit margins have surged over the past decade from low single-digits towards 10 per cent as oil companies raised their exploration budgets. Clients are more cautious these days, which will put pressure on margins this year. But the company still has a near-record order backlog of €19.3bn. The key thing, though, is that Technip and rivals such as Saipem and Subsea 7 do not get involved until the client has given the green light to a project.
Technip’s proposed all-cash offer for CGG, which values the target at €3.4bn (including debt) and was immediately rejected, would change all that. CGG performs marine surveys to help explore for oil and gas. It collects data by trawling through the seas with sensors. The data libraries are then sold or licensed to exploration companies. Thus, Technip and CGG operate on different sides of the client decision. One seeks out ideas for exploration, the other executes on the decision to explore or develop.
Linking the two together is novel. The logic of doing so is not clear. Would energy companies really want the same supplier to perform both functions? Yes, there might be some cost savings. There will need to be: CGG’s net debt of €2bn will add to the acquisition cost. On the basis of 2015 estimates, the deal could be accretive if Technip can chop out at least €110m. But that figure is roughly half CGG’s average operating profit over the past four years.
There are good examples of diversification into adjacent markets. Perry Mason made a career of being a lawyer who liked to dabble in detective work. But then he was fictional.