Deepwater FPSO Risks Will Hamper Outlook With Modest Diversification Gains

Key Takeaways

• Heavy reliance on offshore oil and gas projects and major clients exposes long-term revenue and earnings to energy transition and changing investment priorities.
  
• Rising project complexity, technical risks, and industry competition threaten margins, while diversification efforts face slow adoption and execution challenges.
  
• Reliance on concentrated hydrocarbon contracts, energy transition risks, rising competition, slow diversification, and tightening ESG regulations threaten SBM Offshore's future profitability and growth stability.

Catalysts

Provides floating production solutions to the offshore energy industry worldwide.

• While SBM Offshore is benefiting from consistent execution, a substantial installed base, and rising demand for FPSOs to meet growing global energy needs-particularly in emerging offshore markets-the company remains heavily reliant on continued investment in offshore oil and gas developments. Should the accelerating shift toward renewables and stricter decarbonization policies take root, there is a risk this core contract pipeline will diminish, impacting the visibility and resilience of future revenue streams well beyond 2030.
  
• Although SBM Offshore highlights its robust multi-year backlog and ability to lock in predictable, inflation-protected cashflows with blue-chip clients, long-term revenue stability is still concentrated among a few major oil and gas players. Any project deferrals, cancellations, or shifts in client capital allocation priorities could jeopardize backlog materialization and increase earnings volatility, undermining the current forecast for dependable free cash flow and returns.
  
• Despite the 26% revenue increase and margin expansion in the Turnkey segment, SBM's ongoing capital intensity and exposure to technical risks in large FPSO projects could lead to future project write-downs or unplanned cost overruns. This threatens to erode already thin net margins, especially as project complexity increases and profit recognition is tied to construction milestones and timely delivery.
  
• While SBM's gradual diversification toward floating renewables, offshore energy storage, and ocean infrastructure is forward-looking, meaningful earnings contributions from these newer lines remain distant. Execution risks, slow client adoption, or capex overruns in the transition could dilute returns and prolong the company's dependence on hydrocarbon-centric portfolios, limiting multi-year growth in EBITDA and margins.
  
• Even as SBM Offshore's standardized Fast4Ward model and digitalization efforts are delivering operational efficiencies, the competitive landscape is intensifying. Heightened competition from lower-cost Asian yards, stricter regulatory requirements, and potential local content rules could compress contract pricing, lengthen project cycles, and drive higher compliance costs, putting persistent downward pressure on long-term sector returns and SBM's profitability.

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 $562.7 million (and earnings per share of $3.58) by about August 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 10.4x on those 2028 earnings, down from 29.1x today. This future PE is lower than the current PE for the GB Energy Services industry at 29.1x.
• 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 9.31%, as per the Simply Wall St company report.

SBM Offshore Future Earnings Per Share Growth

Risks

• SBM Offshore remains highly reliant on a concentrated set of deepwater FPSO contracts, particularly with a limited pool of large oil majors, exposing the company to the risk of client project deferrals or cancellations, which could jeopardize the future revenue pipeline and long-term cash flow stability.
  
• The accelerating global transition towards renewables and increasing decarbonization policies may erode long-term demand for new deepwater oil and gas developments, impairing SBM Offshore's future contract pipeline and putting downward pressure on long-term revenues.
  
• Heightened competitive pressure from low-cost Asian yards and new entrants into FPSO construction, coupled with ongoing bids from companies seeking to drive costs lower (such as Petrobras), poses a risk to SBM Offshore's ability to sustain healthy contract margins and could lead to cyclical net margin compression.
  
• Delays or insufficient progress in diversifying into floating renewables and emerging ocean infrastructure markets could prolong SBM Offshore's dependence on structurally challenged hydrocarbon revenues and expose the company to earnings volatility as the energy mix evolves.
  
• Increasing environmental scrutiny, evolving regulatory requirements (such as stricter emissions standards or local content rules), and sustained ESG investor activism could raise compliance and financing costs for SBM Offshore, ultimately diminishing net profits and valuation multiples over the long term.

Valuation

• The assumed bearish price target for SBM Offshore is €23.97, 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 €34.98, and the most bearish reporting a price target of just €23.97.
  
• 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 $562.7 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of €21.74, the bearish analyst price target of €23.97 is 9.3% higher.
  
• 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.