Decarbonization Will Drive Costs And Curb FPSO Prospects

Key Takeaways

• Energy transition trends and changing capital flows threaten core business stability, making future revenue and project pipelines uncertain.
  
• Intensifying ESG demands, client concentration, and aging assets are set to increase costs, heighten operational risks, and erode profit margins.
  
• Strategic diversification into new energy markets, client expansion, and technological leadership enhance earnings stability, margin strength, and long-term revenue growth while supporting shareholder returns.

Catalysts

Provides floating production solutions to the offshore energy industry worldwide.

• The global acceleration of decarbonization policies and increased fossil fuel divestment threaten to undermine long-term offshore oil and gas demand, which could weigh heavily on SBM Offshore's contract backlog and future revenue generation as fewer new projects are sanctioned.
  
• The rapid technological advancements and falling costs in renewables like offshore wind and solar may draw capital away from new FPSO developments, eroding SBM Offshore's core business opportunities and leading to a deteriorating revenue pipeline over the coming decade.
  
• Escalating stakeholder scrutiny and tightening ESG (Environmental, Social, and Governance) requirements are likely to increase the company's costs of capital and force stricter compliance measures, resulting in sustained margin pressure and limiting earnings growth.
  
• With a high dependence on a limited number of large clients and projects, SBM Offshore faces significant risks of order cancellations, project delays, or unfavorable renegotiations, which could drive heightened revenue and net income volatility in future years as sector concentration persists.
  
• An aging fleet of FPSOs will require substantial investment for upgrades, conversions, or replacements, creating ongoing capital expenditure burdens that could compress free cash flow and further pressure net margins in the years ahead.

SBM Offshore Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SBM Offshore compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SBM Offshore's revenue will grow by 6.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 9.8% in 3 years time.
• The bearish analysts expect earnings to reach $558.1 million (and earnings per share of $3.23) by about July 2028, up from $150.0 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 10.3x on those 2028 earnings, down from 30.4x today. This future PE is lower than the current PE for the GB Energy Services industry at 30.5x.
• Analysts expect the number of shares outstanding to decline by 2.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

SBM Offshore Future Earnings Per Share Growth

Risks

• The company's record-high backlog of $35.1 billion, with robust contract awards and a net cash backlog of $9.5 billion, provides strong revenue visibility and predictability for several years, supporting continued revenue growth and financial stability.
  
• SBM Offshore's increasing presence in decarbonization and new energy markets-including floating offshore wind, carbon capture solutions, and blue ammonia infrastructure-diversifies its revenue streams and positions it to benefit from the global energy transition, reducing reliance on traditional oil and gas and supporting long-term earnings.
  
• Expansion into new markets and client diversification, including landmark FPSO awards in Suriname, Guyana, and the Gulf of Mexico, spreads geographic and customer risk, fortifying the company's earnings stability and de-risking future cash flow generation.
  
• The company's technological leadership and successful Fast4Ward program enable it to deliver complex FPSO projects at scale and ahead of competitors, resulting in high levels of operational uptime, frequent new contract wins, and the ability to command attractive margins and return on invested capital.
  
• A disciplined capital allocation framework with a minimum $1.7 billion shareholder return commitment until 2030, supported by accelerated cash generation from current and new projects, underpins stable dividend growth, increases in share buybacks, and ongoing improvement in net margins and free cash flow.

Valuation

• The assumed bearish price target for SBM Offshore is €23.34, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SBM Offshore'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 €34.47, and the most bearish reporting a price target of just €23.34.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $558.1 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of €22.48, the bearish analyst price target of €23.34 is 3.7% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.