Renewables Surge Will Reduce Oil Projects Amid Middle East Risks

Key Takeaways

• Reliance on oil and gas projects and slow progress in renewables leave long-term revenues and margins exposed to energy transition risks.
  
• Geopolitical concentration, rising regulatory burdens, and growing competition threaten margin stability and future contract wins.
  
• Strategic focus on energy transition, operational improvements, and expansion into high-margin services and global markets could structurally boost earnings stability, profitability, and long-term growth.

Catalysts

An engineering and construction company, designs and manages industrial plant projects worldwide.

• Although Técnicas Reunidas is currently highlighting a strong order intake and record backlog, the accelerating shift toward renewable energy and the advancement of global net zero policies are expected to materially contract future demand for oil and gas infrastructure projects, which comprise a significant portion of the company's pipeline-likely leading to a long-term decline in revenues and backlog replenishment by the end of this decade.
  
• Stricter ESG standards and increased regulatory scrutiny on hydrocarbon engineering projects will steadily increase compliance costs and may restrict access to project financing, directly eroding net margins and limiting the company's ability to secure large EPC contracts in the future.
  
• Heavy concentration of current and future projects in the Middle East exposes the company to substantial geopolitical and client-specific risks, including abrupt cancellations or payment delays, which threaten revenue stability and could result in earnings volatility.
  
• Intensifying competition from both established players and technologically nimble new entrants-leveraging digitalization and modular construction techniques-will likely compress sector-wide margins, making it increasingly difficult for Técnicas Reunidas to maintain its current profitability and EBIT performance.
  
• The company's slow pace of diversification into green energy and limited visibility on renewables order backlog means that as global fossil-fuel capital expenditure declines, long-term revenue growth and margin expansion will be severely constrained, undermining both the top and bottom line in the coming years.

Técnicas Reunidas Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Técnicas Reunidas compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Técnicas Reunidas's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.1% today to 3.8% in 3 years time.
• The bearish analysts expect earnings to reach €187.1 million (and earnings per share of €2.35) by about August 2028, up from €106.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, down from 15.4x today. This future PE is lower than the current PE for the GB Energy Services industry at 15.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.99%, as per the Simply Wall St company report.

Técnicas Reunidas Future Earnings Per Share Growth

Risks

• Técnicas Reunidas has secured a record €13.1 billion backlog and a €72.3 billion pipeline, with strong client prequalification and bidding momentum in both traditional and low-carbon projects; this long-term visibility could enhance revenue stability and future earnings growth.
  
• The company is developing a strategic pivot towards energy transition and high-margin service contracts, including significant work in green hydrogen, ammonia, and low-carbon fuels, which may structurally support higher net margins and revenue diversification.
  
• Management reported twelve consecutive quarters of growth with EBIT hitting the highest quarterly level in company history and margins in line with guidance, reflecting improved operational performance and risk management that could further stabilize or improve long-term profitability and earnings.
  
• Técnicas Reunidas is substantially growing its engineering workforce and global presence-expanding low-cost talent in India and increasing proximity to Middle East clients-which could improve competitiveness, execution capacity, and operating leverage, thus enhancing margins over the coming years.
  
• The success and scaling of the company's services segment, including high-margin contracts and recognized technology leadership, is expected to incrementally increase EBIT margins each year, which could drive a structural uplift in earnings and support higher share prices in the long term.

Valuation

• The assumed bearish price target for Técnicas Reunidas is €16.63, which represents two standard deviations below the consensus price target of €22.54. This valuation is based on what can be assumed as the expectations of Técnicas Reunidas's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €25.5, and the most bearish reporting a price target of just €16.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €5.0 billion, earnings will come to €187.1 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of €20.94, the bearish analyst price target of €16.63 is 25.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.