...Over the last several years, TechnipFMC has reestablished itself as the premier offshore equipment company, having reshaped the subsea industry with its integrated offering and iEPCI approach that's led to a commanding market share in recent years. With its impressive backlog, not only do few companies have as much earnings visibility, but the firm is benefiting from structurally higher margins through its Subsea 2.0 offering. My pleasure to introduce Mr. Doug Pferdehirt, Chairman and CEO of TechnipFMC. Doug was CEO of FMC since 2016, has been CEO, since the merger back in, 2017. Doug, thank you so much for joining us today.
Thank you, Dave.
Let's just start with kind of a basic question. 2024 is shaping up pretty well from an order standpoint, pretty much right what you were looking for. How's 2025 starting to look? Any reason to think the pace of orders is changing at all? I know you've had some guidance out there for a bit.
Yeah. So just to remind everybody, in 2023, we put out a target of $30 billion from 2023 through 2025, or if you will, for three years. We turned $9.7 billion in 2023. We said we'd be targeting around $10 billion this year, leaving, you know, another $10 billion or so for next year. Let me just say, I'm extremely confident in that target. Certainly, nothing has changed to the contrary, in terms of, you know, deferments or the tone of the conversation. The tone of the conversation is very much around securing capacity and securing, you know, the right capacity.
You know, if a client wants to do an iEPCI project, which is the integrated project, or if they want to use the Subsea 2.0 configure-to-order product family, both of which, particularly when combined, can lead to the delivery of a project one year earlier than the way we used to do it, or if you will, the way the competition still does it today. They're wanting to secure that capacity, and our delivery performance, our execution performance, has been exemplary, leading to, you know, repeat orders. As a result of that, you know, Dave, I would just say it's still extremely robust. Beyond that $30 billion target, it also remains quite interesting because you start to get into some of the emerging basins and the opportunities there as well.
That was actually my next question of kind of what's beyond 2025 . So I know Namibia has been one major area. Any other kind of areas that are sticking out to you? Would you expect kind of more, kind of, I know some of your traditional basins?
Sure. So you know, it'll always be comprised of kind of three buckets. And, you know, bucket one is your mature existing basins. Think of Gulf of Mexico, North Sea, West Africa, where you're really talking about tieback opportunities, but also some greenfield, but a lot of tieback activity. Then the second bucket, excuse me, is new horizons within those existing basins. And then you think about things like the Paleogene in the Gulf of Mexico. So the Paleogene has always been there. It's just required some advanced seismic processing and the ability and the determination to go after it. It's a higher pressure reservoir, and there's been multiple projects to date, and we believe there will be more projects sanctioned in the Paleogene.
So the benefit of taking and looking within an existing mature basin is, you know, the infrastructure is already there, so it reduces your cost. You might have to go deeper to get to the reservoir, a different reservoir than you've been traditionally producing, for instance, in the Gulf of Mexico. But you know all that infrastructure exists in order to support that project. And then the third bucket would be the emerging basins. So when we look beyond 2025 , it'll still be a combination of those three. I actually think bucket one will continue to grow. There's been some speculation that there was such a focus on brownfields and tiebacks over the last several years that maybe we've exhausted that opportunity set.
But with some advancements in technology, both in terms of all-electric as well as subsea processing, we have the opportunity now to expand the radius around a host facility up to four times greater radius to look for tieback opportunities or marginal fields to tie back. So I don't think in any way we've exhausted those opportunities yet. Then, again, we talked about things like the Paleogene as far as, you know, emerging basins within a mature basin. And then as far as the emerging basins, you know, clearly, Namibia has a lot, is gonna be a big player. Mozambique, you know, 2025, 2026 and beyond, I mean, I think we'll continue to see, activity there that'll probably surprise to the upside, actually. Suriname, again, you know, there's been a lot of talk.
You know, the operators had a lot of conversations about, you know, potentially Block 58 moving forward this year, maybe next year, but I think they're targeting this year. Then you start to get into, you know, when does Tanzania come on? It's gonna come on at some point after Mozambique. Basically, the same reservoir, gas, East Africa, easy access to the Asia-Pacific market. You start to look at the continued activity in the Eastern Med and maybe acceleration of the activity in the Eastern Med, again, largely gas-driven. Then you start to look at things like, you know, South Africa following Namibia, maybe future phases in Suriname. Colombia, another deeper reservoir, but could be quite interesting as well. So there's a lot of, we're opportunity rich as we sit here today.
We heard from Jeff Miller earlier. He was saying that the change, one of the things that he's seeing in the offshore is a lot more IOCs are engaging him. I'm curious how what you've been seeing on that front in the orders. Are you seeing more of these IOCs engaging you and kind of looking longer term? Because one of the things I think about a lot is back in kind of 2014, the marginal barrel was deep water, and we were at $85 a barrel, and now it's structurally changed, sub $50 now. Is that kind of changing the mindset in your, in your view of the IOCs in terms of the horizon, in terms of what they're trying to do?
Sure, and so one, I would agree with what Jeff said. I'll add to it by saying, our customer's capital is gonna flow to... It's gonna be governed really by two things: access and economics. Right now, for the foreseeable future, again, the offshore is opportunity rich. There is access, and the economics, and we'd like to think we played a material part in that, have really structurally changed as a result of our integrated offering in the Subsea 2.0 and other innovation that we continue to bring into the subsea space, all focused on reducing cycle time. If we can reduce cycle time, ensure deliveries, the project's returns are phenomenal. It was always considered to be a long cycle activity, right? We said it was 3+ years, but then we'd deliver in 4+ years. That's just the way it was.
Now it's much shorter than that, and we're, you know, taking one year off the deliveries and delivering on a consistent basis, leading to all of these repeat awards. So when I think about it from an IOC point of view, again, I'm just thinking about access and economics, and the offshore certainly works. The quality of the reservoir is there, which obviously also helps with the project returns. But I'd add a third dimension. We always talked about it in two dimensions. I'd add a third dimension, which is the regulatory environment. And at the end of the day, you know, the capital's gonna follow a regulatory regime that is predictable and consistent. And I would say there are parts of the world right now where the regulatory environment is extremely unpredictable.
So how do you commit a significant amount of capital to these type of developments? As opposed to in the offshore, where there tends to be a lot more stability in that regulatory environment. So I think it's really those three factors. Now, maybe, an anecdote would be when I'm having conversations with the clients, they're not only talking about that upcoming project, Dave, but they're starting to talking about the one after that. They never gave us that visibility into the pipeline. We always had unique visibility because of the pre-engineering work we do, or the pre-FEED and the FEED engineering work that we do. We had a seat at the table early, but it was always for the upcoming project. We might be at the table two years ahead of time, but it was the visibility of the next project.
It's now the visibility of the next project and the project beyond. For the reason that you're saying, the IOCs are seeing this opportunity, and they want to make sure that they can secure that capacity.
So you are a big part of lowering that cost structurally. Do you feel that you have accrued enough value for what you have added, for what you're bringing to the table? Are you being paid by... Are you getting enough value from the customer?
No.
Or is that still to come here in a couple of years?
No, fair question. Yes, I do, and yes, I believe there's more to come. Now, let me explain what I mean by that. Every single day when we wake up, you know, we're a pure play. We're very focused. You know, I don't have to worry about, you know, 37 product lines. We're very, very focused on what we do. Every single day, everybody in the company, including myself, we wake up and we think about: What is the next move on the chessboard to continue to make offshore the most attractive for the capital flow? I mean, it's really not more complicated than that. If we don't remain, you know, absolutely steadfast and determined to continue to improve offshore economics, the capital's gonna flow where the best returns are.
So because of that, that laser-like focus, we continue to find ways to improve. I'm suggesting we don't believe we've gotten to the end game or to the end state yet, that there are further improvements that we can make that can continue to accelerate, shorten cycle time, or accelerate time to first oil, vastly improving the project economics. This is why our partners, meaning our clients, are entering into long-term partnerships with us. They wouldn't enter into a long-term partnership with us if they thought this was as good as it was gonna get, right? They're expecting us to drive innovation. They're expecting us to bring out new technologies, to bring out new commercial offerings that will continue to drive that performance. And it's that relentless pursuit that we're all focused on.
On the flip side, the iEPCI model has been a really unique side of your business, and it's really kind of enabled a lot of your smaller cap customers. And can you remind us how much of your business today is the iEPCI model, and what are typically the size of those projects? Are they all kind of tend to be a little smaller in projects but very standardized? Is that the right way for investors to think about it?
No, but let me answer the first part first. The iEPCI today is about 50% of our new orders are coming from for Subsea 2.0 type trees. Which is the configure to order. The benefit is it's not a first article. It's, it's not a standard single tree. It's configurable, but all the components are standardized. Why is that important? Look, this is what the auto industry figured out a long time ago. We were just a little bit late to the party. It's simply doing what the auto industry has done. When you order your vehicle, there is zero engineering involved. You might believe they're making it for you, but there's zero engineering involved. In that drop-down menu, every one of those is a pre-engineered configuration. So we have the same thing. It's called Subsea Studio.
It's an app on the phone. So our customers can go into the drop-down menus, and there's a series of different pressure ratings, different flow rates, different temperatures, flow loop, no flow loop, choke, no choke, variable choke, fixed choke. But all of those are pre-configured components, so at the time of the order, we go straight into assembly and test. So where's this twelve months of savings come from, this magical number we keep talking about? It's very simple. We do a 1.0 project, or the standard way it was done in forever, and the competition still does, I have to do nine months of engineering when the order is placed.
Because every single part number, and there could be a thousand part numbers, needs to be engineered, the CAD drawings need to be made and needs to be turned over to internal or external supply chain to manufacture. In a configure-to-order, Subsea 2.0, when that order is placed, straight into assembly and test, right away, a savings of nine months. Then, through better execution, we typically make up another three months, hence the ability to be able to deliver 12 months earlier. Now, it sounds easy, but it took four years of detailed engineering to create a configurable platform, because having a configure-to-order that nobody orders, is not very lucrative business. So we had to find a configurable architecture and then introduce it to our clients, qualify it with our clients, to get them to move and adopt that, that approach.
Today, about 50% of our tree orders, we see that growing over time, and it could grow quite substantially over time. We've not had a single Subsea 2.0 client who made the switch, if you will, we've never seen one go back, okay? So once they're in a 2.0 world, they see the benefit, and they wanna stay in that 2.0 world because of that shorter cycle time and that certainty. So that's where we are in 2.0. Now, and then one other interesting data point on the 2.0, whereas about 50% of the orders are coming from 2.0, that's not all flowing through the plant yet. Right now, only about a half of that, 'cause it takes time, the cycle time, for it to go through the plant.
Right now, we're only seeing the benefit from about 25, or half of that, or about 25%.
If I think back to last cycle, one of the where kind of Subsea almost kind of became what it is today, your big customers, whether Shell or Exxon or Chevron, they all have these big subsea engineering teams, and they love to do all bespoke work. Going to Subsea 2.0 is a big shift.
For sure
Mentality from the IOC. Are the IOCs going that way, or do they... I assume they need more convincing. Are you starting to get IOCs into the Subsea 2.0?
Oh, so, and sorry, I didn't answer that part of the question about small versus big, so thank you for bringing me back. And I'm an engineer, so this is meant to be a compliment, not an insult. The more engineers you have, the more resistance there will be. It's just kind of a, it's a pretty strong correlation. My wife tells me that all the time. But anyways, so, these large engineering, I actually had one IOC tell me, "Doug", this was the CEO. "Doug, this sounds really great. Gotta buy off on it. You convince my engineers." And they had this engineering gathering, it was huge, in a theater, and I went in there on the stage and talked about the virtues of 2.0. You know, not because of me, because that meeting was, you know, lukewarm. But today, they're 100% Subsea 2.0.
Okay.
Well, of the IOCs, they're all pretty. We've either done or have a contract to do Subsea 2.0 with them. So maybe, yeah, maybe it took a little bit longer, but just as receptive. Now, in terms of the project size, sure, a small independent who doesn't have the engineering staff tends to be a little more reliant upon us, and, but we're not taking advantage of that. But we enable them to be able to do some of these projects because we can do the iEPCI model with the Subsea 2.0. We can take and deliver that commissioned, installed on the seabed for them.
But we have Subsea 2.0 projects today, some of the largest projects in our backlog, you know, $1 billion+ projects are Subsea 2.0, with IOCs.
So you've had a long-standing target of 18% Subsea margins in 2025. You're clearly right on that path towards that. Now, you just said Subsea 2.0 is only about a quarter of, you know, the revenue conversion today. So as you kind of think going forward, is that gonna be the primary driver for margin expansion from here? Is it going from 50% to 75% to some level? Is that, is that where you're gonna see the margin expansion from here?
So great question. I would say there's really... Well, there's a couple of contributing factors. You know, first and foremost, as we execute and complete legacy backlog projects, and they fall out of the backlog and therefore out of the revenue, that's obviously contributing to margin expansion... but that doesn't go on forever, right? And also, to me, that doesn't structurally change the way that we operate the company. So the second area is the overall market, right? The overall market is, I'll just say, very supportive. So we're benefiting from that as well.
You mean pricing?
Another way of saying it. We like to say economic value.
Right, yes.
So it's favorable and continues to be quite favorable for multitudes of reasons. But those are both kind of, you know. One is just mathematical. It's just, you know, happens over time, but it eventually you exhaust your legacy backlog. The second one is really an externally driven. Both are positive, both are constructive, but the one I get most excited about is indeed the Subsea 2.0 and the iEPCI. So it's the quality of the backlog, because the quality of the backlog has gone up substantially. And as that new high quality backlog or inbound, and it goes in the backlog, which then goes into revenue, flows through the projects and through the facilities, that's sustainable. And that's the beauty of it, is we've structurally changed the company. We've changed the operating model.
We've changed many aspects, including our, you know, the capital requirement to run the company. All these things have improved, that are structural changes, that will drive through cycle returns to a level that's never been achievable before. Because in the past, you just had one and two, the first two buckets. You didn't have the third bucket, and the third bucket was never structural and sustainable, and that's what gets me most excited.
So if you think... So in terms of that conversion, in terms of the Subsea 2.0, what are some of the KPIs that you're kind of focused on? And has it been as efficient as you had hoped? Is it better? Just kind of curious what you're watching in terms of the success of this?
Good, good question. So obviously, we're, you know, we're targeting attracting the right clients with Subsea 2.0 on the right projects. So if you will, the first part, which is the percent of the inbound, that's Subsea 2.0, but not just chasing it for the sake of chasing it. We wanna make sure it's going to be with the right client, on the right project, and that we're gonna be successful. The second area that we focus on is the execution of the Subsea 2.0. It's relatively new, you know, to the industry. We introduced it in 2017. Obviously, it's grown over time, but we're still learning from that ourselves.
I will tell you this, and this maybe sounds like we weren't ambitious enough, but it is exceeding our expectations, even in this early stage of it only representing 25% of the mix going through the plant. So recently, I was at one of our plants with a client, with their VIPs. They wanted to visit our plant, and they were getting ready to... This was one of those that was committing not only to the next project, but the project afterwards. So, you know, they wanted to have a serious meeting, and we went, and we were at the plant. And as we were walking through, we do takt time, like a lot of manufacturing companies. So there's different cells, and there's amount of time or days allocated per cell, and then you wanna have continuous flow.
You can't do that in a 1.0 engineer-to-order world, but you can do that with a 2.0 configure-to-order, so I was confused by the indicators because they were all off. In my mind, they were not showing the right numbers, so at the end, I pulled the head of manufacturing aside, and I said, without the client present, "Am I missing something? What is going on here?" because it was... We were running at 21 days takt time per station, okay? And then there's a series of stations. But none of the indicators were at 21. When you do lean manufacturing, one has to be at 21, and then the others go down to zero, but the highest one was 17, and I said: What did I, you know, what did I miss?
The answer was: We're just a heck of a lot more efficient than we thought we were going to be. Again, the flow is going faster than we anticipated. We took the takt time per station and adjusted it accordingly to continue to track. I think that 17 will become something less than 17. That just gives you a feel for how substantial this is. Again, as we have more of our volume, a higher percentage of our volume, we're gonna benefit from that more. What does that all lead to? Obviously, it leads to the ability to be able to do more with less. Through that same plant, I can put a lot more volume without having to spend capital to grow the company, which is important.
But it also means not only am I gonna deliver on time, I'm gonna deliver ahead of time, or in future projects, when I adjust, I'm just going to create the competitive moat even wider than it is today, because while I'm twelve months ahead today, I may be fourteen months ahead in the near future. And that's what drives us. And yeah, so it's... Look, it's super exciting, and I'd like to tell you, we know exactly where the endpoint's going to be. All that I know is that there's certainly room for improvement.
Recently, we appear to be entering or having been in a sweet spot here, and it looks like it could last the next couple of years. What could derail this? You know, we think of vessels as certainly one thing I've been hearing about, that there's not enough out there. I know you have different ways of dealing with that, but is there anything that's kind of, that concerns you, that could change this pace?
Sure
Or kind of slow this down at all?
Sure. So look, let's. You know, I certainly wasn't smart enough to, you know, predict, you know, the pandemic we had. You know, let's leave kind of the big events off to the side. That is always something that we have to deal with in life, and like we did, we would deal with it accordingly. And all of our projects continued during COVID. We had no project cancellations, which just shows the robustness of the business once these projects get sanctioned. But let's leave that to the side. Look, first and foremost would be our own execution.
We are in a very humble, you know, humbling position that our customers have entrusted us with an enormous amount of value, and it's beholden upon us to continue to execute at an exemplary level, to continue to earn their trust. We measure that by repeat orders. And not just repeat orders, but repeat direct award orders. As many of you know, there's a lot of the market we've done 100% of the work in. Direct award, after direct award, after direct award. You have to be executing very well to be able to do that. Now, execution sometimes is associated with risk.
I understand that, but I'd caution you not to jump to that conclusion because with this 2.0 , you know, repeat orders and the volume that we have, and the example I just gave you of visiting the manufacturing plant with the client, we're just not seeing the same challenges that we would have seen in a standard 1.0 world, where you're building everything for the first time. So much greater certainty, much greater confidence, but still, it's right to call out execution. The third bucket, I would say, is some sort of a significant disruption in the supply chain. Because I've consistently, even through the 2020-2021 era, never got on the mic and complained about inflation, and it's impacting my margins or whatever it may be.
To me, we're paid to manage that, and that's part of our job, so I'm not suggesting that, you know, the normal disruptions that happen every day, there's always something going on, either with a shipment or a local geopolitical issue within a particular country. It's our ability to be able to manage those in the aggregate and minimize the impact on the business, so it would have to be something really quite significant. Other than that, you know, it's. I'm not suggesting it's easy. It took a lot of work to get here. Obviously, the four years of detailed engineering to create Subsea 2.0, the ability to be able to go out and not only create the integrated offering, but to have the courage to consummate the relationship and go become one company in 2017.
Done the integration, which, you know, integrations last three years. You know, all that's behind us now, so it really is focusing on execution and just continuing for our customers and for us to benefit from all the hard work.
We have a couple of minutes left. I want to ask you about one thing that's on the horizon, or it's been on the horizon for a while, but now it's kind of here, is electrification.
Yes.
We've talked about this, gosh-
Yep.
Ten, fifteen years.
Yep.
You now got some orders in electrification, but it has a lot of other benefits as well, particularly in subsea tiebacks. Can you just talk about what electrification could mean in terms of kind of initial orders or in terms of the market itself?
Yeah, and, and look, I'm with you, Dave. I, I've been kind of frustrated that the adoption rate on all electric hasn't been more quick than it has. But think about it like the aviation industry, right? Every airplane you got on had hydraulic controls. It took a long time for the aviation industry to, let's say, have the courage to go to electric over hydraulic or fly-by-wire. Every plane you get on now, unless you're up in Alaska, salmon fishing, is almost certainly a fly-by-wire, you know, plane, and, and you don't, you know, you most probably don't hesitate. It, so it's a little bit of the same transition curve, you know, hey, we've all--all valves subsea have been controlled by hydraulic pressure, so by golly, it needs to stay that way. We're gonna get past that. I, I don't think we're...
I'm not suggesting we're at the tipping point today, particularly in traditional oil and gas. I still think it's gonna be a little bit lethargic, but it'll get there. The benefit in traditional oil and gas is it's a higher upfront cost, and this is, I wanna emphasize that. You know, and if it was cheaper, you know, it would be a lot easier, but it shouldn't be cheaper. The benefits are not in the unit cost of the actuators on the tree. The benefit is the overall architecture becomes greatly simplified, because that umbilical that was pushing all that hydraulic fluid down becomes basically an extension cable. All you need is electricity. You probably still have telemetry and things, but it's greatly simplified.
You know, if the customer wants me to build an all-electric tree cheaper, I'm not gonna do it. It's not right. They got to look at it in terms of the total value. Anyways, we'll get there. That's kind of in the oil and gas domain. You'll see onesies and twosies. Where it's going to take off, and this is the benefit of being in a new market, is in the CCS market. We've gone into the CCS market with only an electric offering. Now, could we use hydraulics? Yes. But we've gone out there and said: Don't even think about it. This needs to be done via all electric.
So the Northern Endurance Partnership project that we announced earlier this year, we are taking the CO2 from a terrestrial source, and we're taking it 145 km offshore without it ever coming back up to the surface, all underneath the water, with the ability. Because of it all, because of electric actuation. We wouldn't be able to push hydraulic fluid that far. You'd have to come up, have a hydraulic boosting station, go back down, have a hydraulic boosting station, go back down. Much better for the environment, much better socially. You don't have all these structures out there. So I'm really bullish on all-electric for CCS. I'm a little more cautious on all-electric for oil and gas. It will grow, but I think it'll grow at a more moderated pace. But now, on the tiebacks, I'm sorry, I'm gonna...
On the tiebacks, it is a big benefit on the tiebacks, because what it allows us to do is to go further away from the host facility, find stranded reservoirs and tie those back.
When will that Northern Endurance Project be in the water? When do you expect to install that?
Oh, that's in, like, the 2027 timeframe.
Okay. Great. Doug Pferdehirt, CEO of TechnipFMC. Thank you very much for your attention.