Modern Offshore Rigs Will Capture Booming Asian And African Demand

Key Takeaways

• Tight rig supply and record operational execution are driving strong pricing power, supporting upside surprises in revenue, margins, and earnings growth potential.
  
• Modern fleet and operational efficiency enhance client relationships and utilization, positioning the company for sustained high margins and increased dividend capacity.
  
• High dependence on a limited market, specialized fleet, and key clients exposes Odfjell Drilling to regulatory, demand, and energy transition risks that could undermine future growth.

Catalysts

Engages in owning and operating mobile offshore drilling units primarily in Norway and Namibia.

• Analyst consensus expects higher day rates to lift revenue and margins, but current record-breaking operational execution and tight supply could drive day rates significantly above expectations, pointing to an upside surprise especially as limited newbuilds and asset retirements intensify rig scarcity and bolster pricing power-directly boosting EBITDA and net income.
  
• While analysts broadly agree backlog and long-term contracts provide visibility, the $1.8 billion backlog is underpinned by leading-edge day rates and ongoing client interest, setting the stage for early contract repricing at premium rates, which could accelerate earnings growth and drive a step-change in dividend capacity sooner than expected.
  
• Odfjell Drilling's modern, harsh-environment fleet is uniquely positioned to capture the outsized long-term demand from energy-hungry emerging markets in Asia and Africa, supporting sustained high utilization, rising revenue, and superior margins well into the next decade.
  
• The company's industry-leading efficiency in special periodic surveys (SPS) and maintenance-evidenced by completing complex upgrades ahead of schedule with minimal downtime-strengthens operational uptime, maximizing asset availability and driving higher free cash flow conversion.
  
• Increasing market focus on energy security in stable, OECD regions like the North Sea-where Odfjell Drilling holds a strong market share-is poised to accelerate premium rig utilization and deepen client relationships, supporting both revenue durability and the potential for long-term upward revisions in consensus earnings estimates.

Odfjell Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Odfjell Drilling compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Odfjell Drilling's revenue will grow by 6.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.4% today to 31.8% in 3 years time.
• The bullish analysts expect earnings to reach $302.7 million (and earnings per share of $1.26) by about August 2028, up from $81.6 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 bullish analyst cohort, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, down from 20.4x today. This future PE is greater than the current PE for the GB Energy Services industry at 7.5x.
• 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 8.41%, as per the Simply Wall St company report.

Odfjell Drilling Future Earnings Per Share Growth

Risks

• Odfjell Drilling is highly concentrated in the North Sea market, making its revenues and earnings vulnerable to regional regulatory changes, fluctuating local demand, and project delays, which could disrupt revenue stability and long-term growth.
  
• The company's reliance on a small, specialized fleet and key clients such as Equinor and Aker BP increases sensitivity to day-rate downturns or contract lapses, risking gaps in fleet utilization and thereby creating potential sharp declines in revenue and inconsistent earnings.
  
• As the global push for decarbonization accelerates and investments shift to renewables, long-term demand for offshore drilling is expected to diminish, potentially leading to a reduced future contract backlog and lower revenues for the company.
  
• The aging nature of Odfjell Drilling's rig fleet could drive up maintenance costs and reduce utilization rates over time, putting downward pressure on net margins and capital efficiency, even as near-term SPS and CapEx needs appear to subside.
  
• Increasing investor focus on ESG and the ongoing industry-wide transition away from hydrocarbons may limit Odfjell Drilling's access to attractive financing, potentially raising its cost of capital and compressing valuation multiples, which could negatively affect share price appreciation despite current operational strength.

Valuation

• The assumed bullish price target for Odfjell Drilling is NOK98.8, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Odfjell Drilling's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK98.8, and the most bearish reporting a price target of just NOK67.3.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $951.6 million, earnings will come to $302.7 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 8.4%.
• Given the current share price of NOK70.8, the bullish analyst price target of NOK98.8 is 28.3% 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.