North Sea Dependence Will Impede Performance Though Upgrades Could Help

Key Takeaways

• Shrinking demand for offshore drilling, tighter regulations, and client concentration risk threaten future revenues and increase operational uncertainty for Odfjell Drilling.
  
• Required fleet upgrades, oversupplied markets, and weak international demand are set to compress margins and challenge earnings sustainability.
  
• Strong demand, contract stability, efficient operations, and a robust balance sheet position Odfjell Drilling for continued profitability and growth while supporting higher shareholder returns.

Catalysts

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

• Rapid acceleration of global decarbonization efforts and adoption of renewable energy, coupled with technological improvements in battery storage and falling costs of alternatives, are likely to diminish long-term demand for offshore oil and gas drilling services, resulting in a shrinking addressable market and suppressed future revenues for Odfjell Drilling.
  
• Heightened regulatory scrutiny and potential introduction of more stringent emissions standards or outright drilling restrictions in key markets, such as Norway and the broader North Sea region, could raise operational costs, limit activity, and reduce overall net margins over the next decade.
  
• Odfjell Drilling's continued heavy reliance on North Sea operations creates significant client and country concentration risk; potential downturns or delays in regional offshore investment-driven by policy changes or ESG-led funding constraints-may result in volatile and declining revenues as backlogs dry up and contract renewals become more uncertain.
  
• Significant ongoing capital expenditure will be required to maintain and modernize Odfjell Drilling's fleet to comply with evolving safety and environmental standards; failure to upgrade on time risks losing premium contracts, while upgrades themselves could compress margins and inhibit free cash flow growth.
  
• Persistent structural oversupply in the global offshore rig market-exacerbated by sluggish new project start-ups outside Norway and weak international demand-will likely limit Odfjell Drilling's ability to sustain current day rates and fleet utilization once existing backlog rolls off, leading to long-term pressure on earnings and shareholder distributions.

Odfjell Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Odfjell Drilling compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Odfjell Drilling's revenue will grow by 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.4% today to 19.2% in 3 years time.
• The bearish analysts expect earnings to reach $165.5 million (and earnings per share of $0.69) by about July 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 bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 21.2x today. This future PE is greater than the current PE for the GB Energy Services industry at 7.9x.
• 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 8.2%, as per the Simply Wall St company report.

Odfjell Drilling Future Earnings Per Share Growth

Risks

• The company reported another record-breaking quarter with EBITDA reaching $100 million from $204 million in revenue, and management expects continued record-setting performance as higher day rates for its fleet persist, which supports stronger profitability and growing cash flows.
  
• Management secured a substantial contract backlog of $1.8 billion for its four owned units at leading-edge day rates, reflecting ongoing customer confidence and demand, and implying revenue visibility and stability through at least 2027.
  
• The successful completion of special periodic surveys and major maintenance projects, ahead of schedule and under budget, means the company's significant CapEx cycle is ending, which will improve free cash flow and support further increases in dividends as operating costs normalize.
  
• Demand for high-specification harsh-environment rigs in Norway remains high, with clients needing to address production declines and ongoing ambitious drilling plans, which bodes well for future utilization rates and supports top-line revenue resilience.
  
• The company's balance sheet continues to strengthen with further deleveraging and high liquidity, positioning Odfjell Drilling to withstand potential market fluctuations and to pursue value-accretive growth or M&A opportunities if they arise, thereby enhancing long-term earnings potential.

Valuation

• The assumed bearish price target for Odfjell Drilling is NOK64.85, which represents the lowest 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK95.19, and the most bearish reporting a price target of just NOK64.85.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $860.5 million, earnings will come to $165.5 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 8.2%.
• Given the current share price of NOK72.8, the bearish analyst price target of NOK64.85 is 12.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.