Earnings Call Transcript - FTI Q2 2025

Operator, Operator

Hello, and thank you for joining us. My name is Regina, and I will be your operator for the conference today. I would like to welcome everyone to the TechnipFMC Second Quarter 2025 Earnings Conference Call. I will now turn the call over to Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development. Please proceed.

Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development

Thank you, Regina. Good morning, and good afternoon, and welcome to TechnipFMC's Second Quarter 2025 Earnings Conference Call. Our news release and financial statements issued earlier today can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q and other periodic filings with the U.S. Securities and Exchange Commission. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to Douglas Pferdehirt, TechnipFMC's Chair and Chief Executive Officer.

Douglas Pferdehirt, Chair and Chief Executive Officer

Thank you, Matt. Good morning and good afternoon. Thank you for participating in our second quarter earnings call. Total company revenue in the period was $2.5 billion. Adjusted EBITDA was $509 million with a margin of 20.1% when excluding foreign exchange impacts. We generated free cash flow of $261 million and distributed $271 million through dividends and share buybacks, further demonstrating our commitment to return a significant portion of free cash flow to shareholders. I am very proud of what our team has accomplished. This was another solid quarter, driven by continued strength in execution from both the commercial and operational teams. I regularly speak to the transformation we have made in Subsea to achieve meaningful and sustainable improvements. These include the complete reinvention of our commercial models, the development of configurable product offerings that provide solutions to our customers' unique challenges and the optimization of operational workflows that drive continuous improvement in everything we do. But I also want to recognize the much improved performance of Surface Technologies, a direct result of a similar transformation, driven by the right leadership focused on the right customers in the right markets and executing with the team working in new ways that are fundamentally changing the way we operate our business today. In North America, this means doing more with less. Here, we have exited unprofitable markets and product lines, and we have closed and consolidated facilities throughout the region. In fact, when including the actions taken in the second quarter, we have reduced our North America footprint by 50% over the last 3 years, while improving operating margins and increasing cash flow. Looking beyond North America to the international markets, which today represent nearly two-thirds of our Surface Technologies revenue, we continue to focus on core markets with longer-term production growth ambitions where our strong customer relationships and technology leadership can provide unique avenues of growth for our company. Now moving to Subsea orders. We achieved $2.6 billion of inbound in the quarter, representing a diverse set of awards. We continue to benefit from our unique combination of iEPCI, Subsea services and direct awards. Subsea services was particularly robust, representing one of the highest quarterly inbound levels ever achieved. I would also add that while brownfield activity remains strong, nearly half of our project inbound was tied to greenfield developments. We look forward to sharing more about some of these projects in the coming weeks. The uniqueness and diversity of our order book gives us continued confidence in delivering more than $10 billion of Subsea inbound for the year. Our differentiated orders, most of which are direct awards to our company, speak in part to the strength of our customer relationships, which we work to build and enhance every day. I'm proud to announce that we recently entered into a new iEPCI collaboration agreement with Vår Energi, supporting their subsea developments on the Norwegian continental shelf. Working together, we will utilize our integrated execution model to optimize development solutions and maximize value creation. Our differentiation goes beyond customer relationships. It is also fueled by technology leadership. We have been pioneering technology for decades, and we are constantly working with clients to solve their unique challenges. For instance, in partnership with Petrobras, we recently developed the technology behind HISEP, a high-pressure separation process that enables the capture of CO2-rich dense gases directly from the well stream, all taking place on the seafloor. We have also been working with the same client to create a definitive solution for stress corrosion cracking that occurs in flexible pipe applications where there is a very high CO2 content, predominantly in pre-salt fields. We approach this industry challenge as a technology leader. Rather than simply evolving to the next iteration of an existing product, we set our sights on an innovative technology that would retain the advantages of flexibles, but provide unrivaled corrosion resistance without compromising on other attributes such as weight. Product weight significantly impacts the design of the entire subsea architecture and can influence other major cost drivers such as the vessel requirements for the installation campaign. Our new hybrid flexible pipe is both disruptive and scalable and is fully aligned with our goal of delivering certainty through industrialization. We continue to advance our solution and are currently in the qualification process. Importantly, we have created a solution that can be used more broadly in applications that extend well beyond the pre-salt. Another focus of innovation is all-electric technology. Last year, we were awarded the industry's first all-electric subsea system for BP's Northern Endurance CCS project. This flagship project shows the critical importance of electric technology and the opportunities it can help clients realize. However, carbon capture and storage is just one application and electrification is not a one-size-fits-all solution. Additionally, the use of all-electric technology can be extended beyond new developments. It can also help our clients exploit their sizable existing portfolios, including systems that are currently operating on the seabed today. Here, we are collaborating with Petrobras to extend the performance of existing production systems using electric solutions. Whether it be new commercial agreements like our iEPCI collaboration with Vår Energi or the development of innovative technologies like hybrid flexible pipe and all-electric, we are honored to be our clients' trusted partner and the team they turn to for their most challenging projects. Turning to the outlook. Offshore activity remains robust. Front-end engineering activity is strong, and our Subsea opportunity list remains healthy with name projects progressing across multiple basins over the next 24 months. This supports continued strength in Subsea inbound. In Guyana, where a significant ramp in production is already underway, we are excited about the progression of future project sanctioning. And we also see emerging potential for brownfield opportunities to provide incremental activity in the region. Mozambique continues to be one of the most promising areas for new development, particularly in gas. Suriname is also exciting as we were recently awarded an iEPCI contract from TotalEnergies for the first oil and gas development in the region. TechnipFMC is also involved in front-end engineering for multiple operators in the Orange Basin offshore Namibia and the surrounding area in South Africa. Taken together, these constitute a rich set of near-term opportunities even before considering other frontier developments in the Americas, Eastern Mediterranean and Asia. We continue to believe that offshore markets will attract more capital due to the superior quality of these abundant reserves, their broad accessibility to operators and the strong economics these resources provide, which we aim to further enhance in part through greater execution certainty. In closing, the market is not without challenges. However, as our results clearly demonstrate, we are navigating the issues and mitigating the impacts to our company. This reflects both the actions we are taking today and the structural changes we have made over the last several years. We have emphasized the importance of new commercial models and configurable product offerings as key enablers to our continued success. Our inbound also highlights the importance of strong and enduring customer relationships. This is further supported by our legacy of technology innovation focused on solving some of the industry's biggest challenges. Our visibility into the market continues to benefit from the high level of direct awards to our company. Our unique opportunity set also gives us confidence that we will reach our 3-year goal of $30 billion in Subsea inbound by the end of this year. And we see strength in offshore continuing, supported by client discussions for projects that are likely to be sanctioned through the end of the decade. I am very proud of the financial results we shared today and want to acknowledge the unwavering efforts of our global teams that continue to drive our performance to higher levels. I will now turn the call over to Alf to discuss our financial results and more importantly, our strengthened outlook for the balance of the year.

Alf Melin, Chief Financial Officer

Thanks, Doug. Inbound in the quarter was $2.8 billion, driven by $2.6 billion of Subsea orders. Total company backlog increased 5% sequentially to $16.6 billion. Revenue in the quarter was $2.5 billion. Adjusted EBITDA was $509 million when excluding a foreign exchange gain of $12 million and restructuring, impairment and other charges totaling $16 million, most of which were related to business transformation initiatives in Surface Technologies. Turning to segment results. In Subsea, revenue of $2.2 billion increased 14% versus the first quarter. The sequential revenue improvement was largely driven by increased iEPCI project activity in the North Sea and higher installation activity and flexible pipe supply in Brazil, offset in part by project completions in Asia Pacific. Services revenue also increased due to seasonal improvements. Adjusted EBITDA was $483 million, up 44% sequentially due to strong execution, improved earnings mix from backlog and higher project and services activity. Adjusted EBITDA margin was 21.8%, up 450 basis points from the first quarter. In Surface Technologies, revenue was $318 million, an increase of 7% from the first quarter. The sequential increase in revenue was driven by higher project and services activity in the Middle East, modestly offset by lower activity in North America. Adjusted EBITDA was $52 million, an increase of 12% sequentially due to the higher project and services activity in the Middle East, modestly offset by North America. Adjusted EBITDA margin was 16.4%, up 70 basis points versus the first quarter. Turning to corporate and other items in the period. Corporate expense was $27 million. Net interest expense was $14 million and tax expense in the quarter was $106 million. Cash flow from operating activities was $344 million, and capital expenditures were $84 million. This resulted in free cash flow of $261 million. We repurchased $250 million of stock in the second quarter. When including $21 million of dividends, total shareholder distributions were $271 million. During the quarter, we repaid EUR 200 million of private placement notes that matured in June, reducing our gross debt to $696 million. We ended the period with cash and cash equivalents of $950 million. Net cash decreased modestly to $254 million. Moving to our guidance. For the third quarter, we expect Subsea revenue to grow low to mid-single digits sequentially with an adjusted EBITDA margin that is similar to the 21.8% reported in the second quarter. For Surface Technologies, we anticipate revenue to increase low single digits sequentially with an adjusted EBITDA margin of approximately 16%. Moving to our full year outlook. For both Subsea and Surface Technologies, we continue to expect revenue to come in near the midpoint of their respective guidance ranges. However, we are increasing our expectations for adjusted EBITDA margin, which we now expect to come in near the top end of the guidance range for both segments. When including corporate expense at the midpoint of guidance, we anticipate total company full year adjusted EBITDA to approximate $1.8 billion when excluding foreign exchange. Our current estimated impact from tariffs is contained within our updated guidance. With the improved operational performance, we now expect free cash flow to come in near the top end of the guidance range of $1 billion to $1.15 billion. All other guidance items remain the same. In closing, given the strength in Q2, we have solid momentum as we enter the second half of the year. We have increased our full year guidance for total company adjusted EBITDA by $40 million with an expectation that we will now deliver $1.8 billion in 2025, an increase of 30% versus the prior year. This guidance is supported by our substantial backlog and continued strength in our execution. Through the first 6 months of the year, we have distributed 85% of free cash flow to shareholders. We are reiterating our commitment to distribute at least 70% of free cash flow. And given the strength of our balance sheet, we certainly have the flexibility to exceed that level.

Operator, Operator

Our first question will come from the line of David Anderson with Barclays.

John Anderson, Analyst

So another strong Subsea order book this quarter. Clearly, you're confident in beating the $10 billion target this year. I was hoping you could break down sort of the composition a bit more and kind of how you see it changing this year. I'm first curious about the services. You had called out services being very strong this quarter. I'm curious if there was kind of a one-off or if this is a new trend. And secondarily, as you're expecting more awards in the second half, I'm curious if you're expecting more awards in the second half to come from the Subsea opportunities list? Or is that more likely iEPCI direct awards?

Douglas Pferdehirt, Chair and Chief Executive Officer

Sure, Dave. Thank you. Regarding Subsea services, it's clear we've seen success in the marketplace with our clients embracing our iEPCI and Subsea 2.0 offerings. This adoption has led to a considerable number of direct awards, which means these contracts are awarded straight to us without going through competitive tenders. This shift has altered the market dynamics. As a result, our installed base on the seafloor continues to grow. We operate on an OEM model, where we inspect, maintain, repair, and service our products on the seafloor, typically over a lifespan of 20 to 35 years, depending on the equipment's design and contract requirements. This results in a long-lasting stream of services that is expanding due to our recent successes. Combining these factors reflects a positive trend for our Subsea services business. Last year, we reported $1.6 billion in revenue for Subsea services, and we anticipate it will grow roughly to $1.8 billion this year, which confirms our plan. There are no one-time factors influencing this; it is solely the outcome of our strategic focus, a high winning rate, repeat orders, direct awards, and beneficial alliances we've formed, alongside a commitment to innovation and technology, and excellent project and service execution. This groundwork has positioned our Subsea services division as a strong and vital part of our incoming business. I believe there was a second follow-up question that I missed, so you may want to reiterate that.

John Anderson, Analyst

I was asking about your updated Subsea opportunities list. I'm curious if, in the second half of the year, there will be more awards moving toward the Subsea opportunities list, or if we can expect more direct awards. I'm just interested in how that is developing.

Douglas Pferdehirt, Chair and Chief Executive Officer

Yes, that's a good question. To remind everyone, we publish the industry's Subsea opportunity list, which includes opportunities expected to reach Final Investment Decision over the next 24 months across the industry. This serves as a reference document, and we update it quarterly, which we have done again this quarter. The list has been growing. Additionally, there's an important secondary list exclusive to our company. This is due to our unique iEPCI and Subsea 2.0 offerings, allowing us to work in the early stages, typically two to three years before a contract is awarded, developing a unique subsea architecture with our clients. This proprietary work means that projects, when they reach FID, are directly awarded to us. I can say that this list is also expanding. Both the public and private lists are growing in size. Regarding the mix in the second half, I believe it will continue to be well supported by both. I am confident that our level of direct awards will remain strong, making the private list very crucial for our company.

John Anderson, Analyst

And Doug, if I could sneak one more in here. I know it's early, but I was wondering if you could just kind of give us an early look at how you think orders are starting to shape up for 2026. Based upon what you were just saying there, is another $10 billion in 2026 a reasonable assumption at this time?

Douglas Pferdehirt, Chair and Chief Executive Officer

Yes.

Operator, Operator

Our next question comes from the line of Marc Bianchi with TD Cowen.

Marc Bianchi, Analyst

I wanted to drill down a little bit more into the services success that you had this quarter. And specifically, it sounds like the services orders were quite strong. I'm curious if the revenue was also strong because historically, this was like a book and ship type of business, but I think more recently, some of that's been going into backlog. So maybe you could talk a little bit about that and how we should think about the growth of services for '25 and beyond.

Douglas Pferdehirt, Chair and Chief Executive Officer

Sure, Marc. You correctly point out, it's largely a book and turn, but we do have a backlog and a growing backlog actually in our services business. And that just depends upon the type of awards and the nature of the awards that we receive. But the majority is book and turn. So yes, if inbound is strong, revenue is most likely to be strong as well. So I can confirm that to the first part of your question. In terms of the growth trajectory, as I was commenting earlier to Dave's question, the installed base has a significant contribution to that very long and sustainable services revenue, again, over decades following the initial project. Clearly, we've been successful. And if we've been successful on the project side and on the Subsea inbound side, that will reflect in the Subsea services growth, not only at the time of the award, but again, very importantly, creates a very long, sustainable, important contributor to our company going forward.

Marc Bianchi, Analyst

Doug, I previously understood that the expectation was for services revenue to grow in line with the overall Subsea business this year. Is that still accurate, or are we noticing an acceleration in that growth?

Douglas Pferdehirt, Chair and Chief Executive Officer

Let's stick with the current guidance that's out there, which is the $1.8 billion, which would be in line with the revenue growth. But I'm very confident that our Subsea services will continue to respond very favorably.

Marc Bianchi, Analyst

Super. And if I could just ask one quick question for Alf. The corporate has been running quite a bit below the guidance range. You set the updated guidance with a target for corporate at $120 million. What is happening there? How should we view this as we move beyond the second half of this year?

Alf Melin, Chief Financial Officer

No, I appreciate the question. Clearly, there is some timing in this. As a reminder, corporate expense includes executive management expense and corporate functions as well as some programs. And there are some timing in spend first half versus second half in our programs, and in particular, the spending for upgrading our ERP environment that has a higher run rate in the second half compared to the first half.

Operator, Operator

Our next question comes from the line of Scott Gruber with Citigroup.

Scott Gruber, Analyst

I want to come back to the inbound details that you mentioned, Doug. You mentioned that we'll hear more about some greenfield projects in the coming weeks. Will those be included in your 3Q volume? Or are we going to get the details on some projects that were included in 2Q?

Douglas Pferdehirt, Chair and Chief Executive Officer

Thank you, Scott. The answer is likely both. You can expect to hear about some Q3 awards coming in during Q3. There may also be press releases in the coming weeks that will reference the awards we received in the second quarter. I want to clarify that this only happens if the client, host country, or others involved have set a requirement for public disclosure of such awards. Once we meet all internal requirements to report these, we are obligated to account for them in the current quarter. Therefore, you will hear about some awards, including references to Q2, as well as some Q3 awards.

Scott Gruber, Analyst

I appreciate that. I'm just trying to get a sense for the brownfield and the small projects because just contemplating history, usually, when crude price is moderate, you see the elevated returns and lower capital intensity of the brownfield projects kind of drive a mix shift toward tiebacks and brownfield. But this cycle, it seems like the appetite for greenfield remains robust. You see it in your project list, but also seems robust on the brownfield side. Can you just kind of discuss the appetite for brownfield and large greenfield kind of both sustaining even in light of more moderate crude prices? Does that just reflect the volume of capital dollars kind of shifting towards deepwater? Some color there would be great.

Douglas Pferdehirt, Chair and Chief Executive Officer

No, Scott, thank you. I hope everyone takes away that there is a strong focus and commitment to advancing offshore greenfield projects, and we haven't seen any changes in this approach. In fact, I recently spoke with a major operator who confirmed their commitment to progressing these projects for various reasons, including their market insights and the understanding that these projects require several years to start production. They are adjusting their financial models accordingly, especially as capital flows are increasingly favoring offshore investments over other opportunities we've seen in the last decade. This leads to a substantial increase in capital directed at the offshore market. Greenfield projects have proven resilient, while brownfield projects have maintained steady activity, evident in our unannounced awards. I mentioned earlier that we likely have more projects ready for announcement from Q2, but we did not have the chance to reveal them yet. In the coming weeks, we expect to do so. Even considering unannounced projects, which consist mainly of brownfield and smaller awards, we are nearing $1 billion. Brownfield activities remain strong and are economically favorable due to the minimal capital investment needed since existing facilities often operate below their full capacity. This allows us to enhance returns on initial investments by adding incremental production without substantial upfront costs typical of large greenfield projects. We continue to focus on the brownfield market and are innovating in this space, particularly with all-electric solutions, which will expand the reach of existing facilities to capture stranded reserves farther away. This significantly increases the potential for brownfield opportunities, and it remains a priority for us.

Operator, Operator

Our next question comes from the line of Arun Jayaram with JPMorgan Securities.

Arun Jayaram, Analyst

Doug, I was wondering if you could highlight what you're seeing outside of the Golden Triangle across the globe and perhaps some emerging areas where we could see some FID activity over the next, call it, 12 to 24 months as well as maybe address some of the recent question marks around Namibia.

Douglas Pferdehirt, Chair and Chief Executive Officer

Sure. I believe we need to reconsider the concept of the Golden Triangle because it has clearly evolved. Traditionally, the Golden Triangle included the North Sea, West Africa, and Brazil, along with the Gulf of Mexico, but this has changed significantly. Activities in these regions remain strong. Norway, for instance, continues to be a vital source of energy security for Continental Europe. The U.S. Gulf remains active, especially with both brownfield and greenfield projects in the Paleogene, where our company provides a 20K solution. West Africa has slowed down over the past decade, but we are noticing a rise in activity, such as a recent award in Nigeria and increased efforts in Angola. Brazil is also strong, with Petrobras and other international operators leading multiple billion-dollar projects. Additionally, Guyana is becoming increasingly important to us as the exclusive provider of subsea equipment there, along with our new project in Suriname for offshore production. We are also exploring various future opportunities in South America. If we broaden our focus beyond the triangle, we have to include East Africa, which holds significant gas reserves, particularly in Mozambique, where we have been a pioneer and anticipate further growth. The Eastern Mediterranean features prolific gas reserves, and we are currently involved in projects there, expecting ongoing investments. In Southwestern Africa, including Namibia's Orange Basin, we are engaged in numerous pre-FEED and FEED studies and are in commercial negotiations. Looking at the Asia Pacific region, Indonesia has substantial gas reserves, and we expect continued success and investment from various international operators. Overall, this illustrates the strong potential not only in the traditional areas but also in new regions, which inspires our dedication to our work.

Arun Jayaram, Analyst

Great, I really appreciate it. Doug, my follow-up is regarding Surface. You announced some business transformation and self-help activities focused in North America. I was wondering if you could address some near-term changes in the competitive dynamics with Cactus planning to enter the Middle East Surface market through their transaction with Baker. Could you discuss how this capable player, considering their successes in North America, might impact FTI in light of that transaction?

Douglas Pferdehirt, Chair and Chief Executive Officer

Sure. Let me first step back a little bit on the transformation because it's really important. As I said, this has been going on for 3 years. This isn't a response to any kind of current events, if you will. We recognize that in order to have a sustainable high returns business in North America, we needed to change our approach, and it needed to be very focused, and we needed to really bring the knowledge and the technology that we have in the company, particularly in the area of automation and control. And that's what we're doing, and we're doing it in a very focused effort. Hence, the reason we've reduced our footprint by over 50%, and it's important while increasing cash flow. So I think clearly was the right thing to do. As we look outside of North America, we are also using a similar playbook outside of North America. So it's not exclusive to North America. And it's important that there, too, we really identify where is it that we can create the greatest value and be — gain our portion of the economic value we create for our clients. And we're doing that by looking at the footprint and the products and services and again, increasing the amount of digital offerings in our business outside of North America for Surface Technologies. Speaking specifically to the Middle East and the recent transactions, look, this is a very high-end portion of our Surface Technologies business. At an investor conference that we had a few years ago, we actually did a side-by-side of a surface tree for the unconventionals or for the U.S. versus a surface tree for the Middle East. And it's about ten times, ten times the degree of difficulty, ten times the cost, ten times the complexity. There is no translation between the North American market and the Middle East market. There is no translation. It is a very different market. And look, I think everybody knows that acknowledges that. But it's important that that is emphasized. So what we have seen historically is a very focused group of companies, two to maximum three of us who work on that very high end. So in this transaction, you're just swapping one for the other, but with a massive learning curve associated with it. So we look forward to continuing to have a very focused market structure in the Middle East. And we will continue to invest both in technology where we are the leader in technology and qualified technology in the Middle East, which is important and very much recognized and rewarded by our clients.

Operator, Operator

Our next question comes from the line of Sebastian Erskine with Rothschild.

Sebastian Erskine, Analyst

I'd like to start with Brazil. You mentioned it briefly in your response to Arun. Historically, we've had some concerns with Brazilian tenders that are non-integrated, like SURF only or SPS only, as it didn't make sense to divert vessels from integrated projects for those. Recently, we've seen the Atapu 2 project come out, and it has been awarded at a relatively low bid along with some other opportunities. How do you see the situation in Brazil developing? You maintain a strong relationship with Petrobras, but what are your realistic expectations for converting those prospects?

Douglas Pferdehirt, Chair and Chief Executive Officer

Sure. The Brazilian market has its own dynamic. It's incredibly important. We have had a very long-term relationship with Petrobras. We have been recognized and continue to be recognized as their #1 subsea supplier, something we're very proud of, and it's reflected in our installed base and a very significant Subsea services business that we have in Brazil. In terms of the construct of their awards, actually, they've done integrated awards. And the one and only integrated award they did, not surprisingly, is the only integrated company went to TechnipFMC, and that was the HISEP project. Petrobras continues to invest in technology and innovation. They always have, and we've always been right there beside them, and we're proud of that, and we will continue to do that. The most recent example of that, as I pointed out, is some work we're doing on all-electric to retrofit hydraulic equipment that exists on the seafloor today, which is completely, completely game-changing. So look, an important relationship, very much focused on technology. In terms of their opportunity set, it remains robust, and we remain selective. Beyond the Petrobras portfolio of opportunities in Brazil, we must remember there are many other operators now in Brazil. We have done iEPCI projects for some smaller independents, and we are executing iEPCI projects for some of the largest international companies in the world today. So the market remains a mix of integrated projects, which we benefit from and nonintegrated projects where we remain selective and a lot of focus on technology and technology development. We're proud to be considered to be a trusted partner and the #1 supplier to Petrobras.

Sebastian Erskine, Analyst

I appreciate that, Doug. Just a quick follow-up on the opportunities list. I noticed some changes in the scope value for Vår Energi following the exclusive agreement with them. Regarding Eni's Coral Norte, is the increase solely due to a tree count or is there something specific you can highlight? Moving forward, is this a typical occurrence where a developer might look to change the scope, leading to an increase in the project's value?

Douglas Pferdehirt, Chair and Chief Executive Officer

That's a great observation and an important question. We had been noticing a decrease in project sizes as they moved towards Final Investment Decision. This was either due to operators opting for phased developments or because the reservoirs did not turn out to be as productive as initially expected. Currently, the quality of offshore reservoirs, along with advancements in evaluation technology, is providing operators with greater certainty as they progress into the field development and FID stages of their projects. In one instance, a client added another reservoir to be integrated with existing ones, thereby expanding the project scope. In other situations, the increased confidence in reservoir quality is evident as well. It's important to note that the market dynamics in the subsea sector have shifted significantly. The market is now quite concentrated, and there is a strong desire to secure resources due to our unique ability to manage integrated projects and our Subsea 2.0 configure-to-order approach.

Operator, Operator

Our next question comes from the line of Victoria McCulloch with RBC.

Victoria McCulloch, Analyst

So just firstly, it times well to carry on. Vår Energi's CEO commented about cost depreciation that he's seeing in the market. Obviously, that doesn't appear to be aligned, particularly with the upsizing of the scope that you mentioned for their projects in Norway. Now I appreciate you're not responsible for the entirety of the project. So it's not maybe this is outwith your scope, but maybe that helps us to kind of get your view on where pricing is in the market. And you talked to being in a competitive environment, but your views on that would be interesting.

Douglas Pferdehirt, Chair and Chief Executive Officer

Thank you for the question, Victoria. It's important to note that over 80% of our business comes from direct awards, which means there isn't a pricing or competitive dynamic in that significant part of our operations. This uniqueness is something we take pride in and strive to earn from our clients daily, leading to repeat direct awards. This changes the dynamic you mentioned, which may be more relevant to other companies in the industry. Regarding the opportunity you're referring to, our main focus is on reducing the cycle time. This isn't about unit costs; it's about speeding up the cycle time. One success we've had with Vår and similar past partnerships is helping them achieve first oil much sooner than they would have through other partnerships. By accelerating time to first oil, we significantly enhance overall project returns. It's crucial to distinguish between unit cost inflation and project returns. Concentrating on project returns is how we provide value to our customers, which is why we receive 80% of direct awards, enter exclusive agreements, and are appreciated for repeat awards. We'll keep focusing on shortening cycle times and improving project economics. I cannot comment on the rest of their supply chain, but we take our role seriously. Our approach is not about pricing or supply and demand; we operate as a technology company, dedicated to enhancing project returns while sharing a portion of the economic value we generate.

Victoria McCulloch, Analyst

That's really helpful, Doug. I think that aligns with the comments that may have been misunderstood, as it wasn't necessarily deflationary regarding subsea pricing. It's interesting to hear you're aligned with my views on that. If I could ask a follow-up, although not directly related, could you share your thoughts on which markets outside of Brazil would be most attractive for selling the hybrid flexible pipe?

Douglas Pferdehirt, Chair and Chief Executive Officer

Good question. We are still exploring that and considering it ourselves. However, it seems reasonable to conclude that this could be applicable not only in all existing markets for flexible pipe but also increase the total market for flexible pipe. Brazil has clearly been a significant market and a major driver for flexible pipe technology. In fact, Petrobras has developed an entire ecosystem, including vessels, onshore support, and investments in products to make the flexible pipe market appealing in many ways. They have benefited from this because one notable advantage of flexible pipe is its reusability. You can use it in one field for a while and then move it to another field. Rigid pipe, on the other hand, is limited in length and application. Therefore, it is more advantageous for long-term projects. Flexible pipe is utilized globally across many regions. When I traveled around the world discussing existing basins and new activities, I saw that our architecture and the unique opportunity we provide, including shortened cycle times, are largely due to flexible pipe. Yes, it has a broad application. Now, regarding why hybrid flexible pipe could be used anywhere conventional flexible pipe is applicable, it possesses a very positive attribute, which I mentioned in my remarks, specifically its weight. The weight of these products impacts various factors such as manufacturing costs, transportation costs, and especially installation costs. Heavier products require larger vessels and cranes, which increases costs. Our objective is to reduce cycle times and improve economics for our customers; we are not focused on selling larger boats. We are innovating to disrupt the vessel industry by considering how to make this product lighter and simpler, which can be installed with less expensive vessels, for example. Additionally, the durability and design life of this product will exceed that of conventional flexible pipe. Considering all this, one could ask, why couldn't it be used anywhere, and why wouldn't it start to replace some rigid pipe applications? These are all valid challenges and opportunities for us, which is why we remain strong believers that this will indeed be a disruptive technology.

Operator, Operator

Our final question will come from the line of Saurabh Pant with Bank of America.

Saurabh Pant, Analyst

Doug, I think at the top of the Q&A, I heard a short and sweet yes to Dave's question on $10 billion for Subsea 2026 potential, right? So that was fantastic. And maybe I'll ask another question on life beyond '25, right? But this time, maybe on the margin front. I know it's hard to guide numerically, right? But Doug, how should we think about where Subsea margins can go because there are a ton of moving pieces, right, Subsea 2.0, just more integrated work, more backlog roll-off, right? Just maybe help us think about potential margins and what are the moving pieces for us there, please?

Douglas Pferdehirt, Chair and Chief Executive Officer

Sure. For all of the reasons that you stated, in addition to a very robust backlog that we continue to grow and the new inbound opportunities that we talked about are continue to be accretive to the backlog margins, we would anticipate further growth in our EBITDA margin for Subsea in 2026.

Saurabh Pant, Analyst

Right. That's fantastic. That makes a ton of sense. And then maybe one follow-up question on what you said in your prepared remarks, Doug, on the all-electric side of things, right, especially the opportunity to replace hydraulics on current projects, right? That sounds like a pretty big opportunity over a longer duration of time, right? Maybe just talk to that, Doug. How big could that opportunity be? How quickly could that manifest, right? And in what regions?

Douglas Pferdehirt, Chair and Chief Executive Officer

Sure. Let me elaborate on that. In my earlier comments, I mentioned that all-electric solutions aren't a one-size-fits-all approach. We aimed to create a scalable and adaptable system that could be utilized for various purposes to meet our customers' needs. Initially, we concentrated on new oil and gas production but soon recognized that a more significant opportunity lay in the carbon capture and storage market. This focus materialized with our CO2.0 tree, which is specifically designed for carbon capture applications and led to our partnership with BP for the Northern Endurance Partnership, marking the first all-electric subsea field development. The significance of electric in this scenario is that the carbon captures take place onshore, and the CO2 must then be transported 145 kilometers offshore for secure and permanent storage in a subsea structure. This can only be achieved with an all-electric solution, as managing hydraulics over that distance would not be cost-effective. Currently, we are exploring how to tap into the considerable existing market, which we dominate with over 50% share, and how to extend our reach to cover 100% of that market. This includes retrofitting existing systems, which predominantly rely on hydraulics. Over time, hydraulic systems can deteriorate, potentially leading to operational issues, requiring either the shutting down and abandoning of wells or retrieving, repairing, and reinstalling the equipment, a process that can take several months. Imagine if a company excelled in robotics, automation, and electric solutions; it would be transformative if we could deploy a robot to retrofit an existing system, replacing hydraulic controls with electric actuation without halting production for more than a couple of days. That would be revolutionary, and we are very enthusiastic about pursuing this direction.

Operator, Operator

And I will now turn the call back over to Matt Seinsheimer for any closing comments.

Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development

This concludes our conference call. A replay of the call will be available on our website beginning at approximately 3 p.m. New York Time today. If you have any further questions, please feel free to contact the Investor Relations team. Thank you for joining us. Regina, you may end the call.

Operator, Operator

This will conclude today's call. Thank you all for joining. You may now disconnect.