Viking Deals And Offshore Builds Will Boost Fleet Amid Risks

Key Takeaways

• Revenue growth is anticipated through new agreements, vessel expansions, and positive market forecasts in the subsea vessel segment.
  
• Strong contract backlog and asset sales contribute to stable cash flows and enhanced profitability.
  
• Short-term gains from vessel sales, alongside heavy market volatility and high debt, may strain financial stability and hinder future growth at Sea1 Offshore.

Catalysts

Owns and operates offshore support vessels for the offshore energy service industry.

• The entering into a revenue sharing agreement with Viking Supply Ships for 6 anchor handlers and 5 large anchor handlers could lead to increased revenue through improved fleet utilization and market positioning.
  
• The signing of contracts to build 2 additional Offshore Energy Support vessels indicates future revenue growth as these vessels come into operation, supporting expansion in vessel capacity and service offerings.
  
• The sale of Sea1 Spearfish is expected to result in a gain of approximately $40 million, impacting earnings positively with one-time gains enhancing profitability.
  
• The firm contract backlog of $812 million, along with $629 million in options, ensures strong future revenue streams and secure cash flows, pointing towards stable financial health and growth potential.
  
• The positive market forecasts in the Subsea vessel segment, coupled with limited newbuilds, suggest upward pressure on rates, potentially improving future net margins due to tighter supply conditions in this high-demand segment.

Sea1 Offshore Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sea1 Offshore's revenue will decrease by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 50.7% today to 23.7% in 3 years time.
• Analysts expect earnings to reach $71.7 million (and earnings per share of $0.47) by about May 2028, down from $172.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $85.1 million in earnings, and the most bearish expecting $52 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, up from 1.7x today. This future PE is lower than the current PE for the NO Energy Services industry at 8.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Sea1 Offshore Future Earnings Per Share Growth

Risks

• The sale of the Sea1 Spearfish vessel during a tight market indicates a short-term opportunity captured at the expense of long-term fleet capacity, potentially reducing future revenue from this segment.
  
• The company operates heavily in volatile markets like the North Sea spot market and short-term contracts for anchor handlers, which could lead to fluctuating revenues and margins due to market unpredictability.
  
• The geopolitical uncertainty and potential regional pressure on rates due to temporary decreases in rig activity in Australia may impact utilization rates and revenue streams.
  
• The absence of a clear dividend policy and reliance on significant cash payouts from dividends could impact the company’s ability to reinvest in growth opportunities, thereby affecting future earnings and financial stability.
  
• High levels of debt, with gross interest-bearing debt standing at $396 million, alongside an increasing net debt during a period of vessel acquisition and dividend payouts, could lead to financial strain impacting net margins and profitability.

Valuation

• The analysts have a consensus price target of NOK31.202 for Sea1 Offshore 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 NOK35.51, and the most bearish reporting a price target of just NOK28.03.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $303.1 million, earnings will come to $71.7 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of NOK19.5, the analyst price target of NOK31.2 is 37.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.