Technip, in anticipation of further challenges in the oil and gas industry, launched a restructuring plan and accelerated its cost reduction plans to reinforce the company through and beyond the downturn, the French company reports.
The company targets a savings of €830 (US$918) million, of which €700 ($774) million will be delivered in 2016 and the balance in 2017. One-off charges of €650 ($719) million will cover all the different aspects of the current announcement, Technip said.
The restructuring plan will involve a reduction of the global workforce by about 6000 and further optimization of its asset base. The onshore and offshore adjusted underlying operating income from recurring activities is then expected to improve in 2H 2015, consistent with previous objectives.
“As noted in the 1Q 2015, the sharp fall in oil prices has had a substantial impact on clients’ behavior, national and international oil companies alike,” Technip said. “New projects continue to be deferred as clients assess their investment priorities in a durably changed oil price environment.
"On occasion there appears to be irrational behavior in bidding on some of the projects that are being sanctioned. Negotiations have been protracted on contract changes and variations, in particular on onshore-offshore projects, where some discussions are now even stopped and will find their resolution through a legal process. We conclude that these trends have not improved and, in some cases, have actually worsened over the last two months,” the company continued.
Accordingly, Technip decided to go substantially further in reducing its direct and indirect cost base while maintaining its strategic direction. Specifically, reductions will continue, via sales or closures, in Europe, Asia, Latin America and Brazil, where “profitable business is unlikely even in the medium-term,” Technip said. One-off costs will cover asset impairments, lease overhangs and additional amounts on ongoing projects impacted by the restructuring plan.
Also, Technip put aside appropriate monetary amounts on projects where disputes with clients exist regarding changes and variations. Technip expects to take time to resolve claims on these, which include two refinery projects in Brazil and Algeria.
As a result of the above actions, the company therefore expects onshore-offshore will be significantly more profitable in 2H 2015 compared to 1H 2015, with adjusted underlying operating income from recurring activities between €140 (155) million and €160 ($177) million.
Technip will also further reduce its fleet. The originally planned reductions in the fleet would have reduced it by two vessels this year and now the company intends to take out a further two vessels, one fully-owned and one leased, taking the fleet down to 23 vessels from 36 at the end of 2013. The one-off cost includes the associated impairment costs.
Despite the gloomy outlook, Technip confirms the outperformance of its subsea segment in 2015, with an adjusted revenue between €5.2 ($5.75) billion and €5.5 ($6.08) billion, compared to initial expectations. Cost reduction will be in those markets where new project awards are under pressure (North Sea).
“The slowdown in the oil and gas industry is prolonged and harsh," said Thierry Pilenko, chairman and chief executive of Technip. "Therefore, we have decided to accelerate our cost reduction and efficiency measures – which I know will have tough consequences for employees across the group.
"Technip has built its leadership on sustained investment in key technologies and assets, to create a business with a breadth of skills and knowhow," he continued. "The launch of the plan today, together with our recent initiatives, such as our Forsys Subsea joint venture, shows our determination to maintain this strategy which is based on a long-term vision of how Technip can be best positioned to deliver our industry’s needs, to reduce project costs and continue to create value.”
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