Transition To Higher Day Rates With Deepsea Atlantic Will Strengthen Future Prospects

Key Takeaways

• Transitioning to higher day rates and a solid backlog enhances revenue visibility and financial performance through 2026.
  
• Planned dividend increases and potential M&A opportunities reflect confidence in earnings and shareholder value growth.
  
• Reliance on major clients poses revenue risks, while competition, market uncertainties, and cost challenges could impact growth and financial stability.

Catalysts

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

• The transition of Odfjell's units from legacy day rates to significantly higher day rates beginning with the Deepsea Atlantic is poised to boost future revenue and earnings as more units follow suit into early 2025.
  
• Odfjell Drilling's solid order backlog of $1.9 billion with firm contracts extending into mid-2026 provides strong revenue visibility and security, allowing for sustained or increased financial performance.
  
• The planned increase in quarterly dividends, with a potential doubling by 2025, reflects management's confidence in future cash flow and earnings growth, potentially enhancing shareholder value and investor appeal.
  
• Growing demand for rigs in the Norwegian continental shelf, particularly expected from 2026, and emerging opportunities in CCS projects could significantly increase revenue, supporting earnings and profitability over the medium term.
  
• Potential M&A opportunities aimed at increasing free cash flow to equity per share could drive further growth in earnings and dividends, aiding in valuation appreciation compared to peers.

Odfjell Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Odfjell Drilling's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 22.9% in 3 years time.
• Analysts expect earnings to reach $202.9 million (and earnings per share of $0.85) by about February 2028, up from $73.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 17.8x today. This future PE is greater than the current PE for the GB Energy Services industry at 6.4x.
• 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 10.09%, as per the Simply Wall St company report.

Odfjell Drilling Future Earnings Per Share Growth

Risks

• The reliance on a few major clients, such as Equinor, for contract revenue could be risky if these clients change their drilling needs or switch providers, potentially affecting revenue stability and forecasts.
  
• Potential delays or cost overruns in completing the Special Periodical Surveys (SPS) could impact operational efficiency and increase future capital expenditures, affecting net margins.
  
• Market demand uncertainties in international regions, such as West Africa, could lead to fewer opportunities or lower day rates than anticipated, impacting revenue growth projections.
  
• Competitors gaining traction, particularly in growth areas like carbon capture and storage (CCS), could pose challenges, potentially affecting market share and future earnings.
  
• The ability to increase dividends as intended may be threatened by unforeseen financial challenges, which could affect shareholder value and the company’s perceived financial health.

Valuation

• The analysts have a consensus price target of NOK85.405 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 NOK99.17, and the most bearish reporting a price target of just NOK70.91.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $885.3 million, earnings will come to $202.9 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of NOK61.4, the analyst price target of NOK85.4 is 28.1% 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.