Carbon Storage Projects Will Open New Revenue Streams And Improve Utilization

Key Takeaways

• Contract extension and future higher day rates ensure revenue growth, earnings stability, and boost EBITDA margins.
  
• Incremental demand from carbon storage projects and reduced debt obligations enhance revenue streams and cash flow, benefiting shareholder distributions.
  
• Heavy reliance on day rate increases and precise operational execution are critical for financial stability amid market uncertainties and deferred debt pressures.

Catalysts

Owns and operates mobile offshore drilling units primarily in Norway and Namibia.

• Secured long-term backlog with a contract extension at a lucrative day rate provides visibility into future revenue growth and earnings stability.
  
• Transition to higher day rates for multiple rigs in 2025 is expected to significantly boost revenue and EBITDA margins.
  
• Incremental demand from carbon storage projects is anticipated to open new revenue streams and improve utilization rates and margins.
  
• Reduced debt obligations due to deferment arrangements enhances cash flow, providing more room for shareholder distributions, increasing earnings available to equity holders.
  
• Strong operational performance with high financial utilization rates despite challenging conditions points towards sustainable operational efficiencies, which positively impact net margins and profitability.

Odfjell Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Odfjell Drilling's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 20.0% in 3 years time.
• Analysts expect earnings to reach $178.0 million (and earnings per share of $0.74) by about March 2028, up from $64.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $222 million in earnings, and the most bearish expecting $134 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 20.8x today. This future PE is greater than the current PE for the GB Energy Services industry at 8.7x.
• Analysts expect the number of shares outstanding to grow by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.25%, as per the Simply Wall St company report.

Odfjell Drilling Future Earnings Per Share Growth

Risks

• The outlook for longer-term contracts in the Norwegian sector, while promising, may not result in significant new contract announcements until 2027, leading to potential uncertainties in long-term revenue predictions.
  
• The company relies heavily on day rate increases for their financial performance; any stagnation or decrease in these rates could negatively affect their revenue and EBITDA growth.
  
• The need for precise execution of the SPS programs and other operational tasks is critical; unexpected delays or cost overruns could impact net margins and earnings.
  
• Although Odfjell Drilling's debt maturities have been deferred, significant semiannual interest payments could strain net income if cash flows do not sustain the projected growth.
  
• The market outlook internationally is less robust compared to Norway, potentially limiting Odfjell's ability to expand revenue streams beyond the Norwegian sector.

Valuation

• The analysts have a consensus price target of NOK85.683 for Odfjell Drilling based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK99.45, and the most bearish reporting a price target of just NOK70.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $891.2 million, earnings will come to $178.0 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 10.3%.
• Given the current share price of NOK59.4, the analyst price target of NOK85.68 is 30.7% 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.