New Contracts And Vessel Expansion May Strengthen Operations, But Market Challenges Loom Ahead

Key Takeaways

• Secured Australian contracts and vessel expansions suggest stable revenue growth and operational expansion potential.
  
• Strong backlog and favorable financial restructuring enhance earnings stability and future profitability.
  
• Decreasing vessel count, market challenges, currency losses, and reliance on debt financing could negatively impact Sea1 Offshore's revenues, profit margins, and net earnings.

Catalysts

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

• Sea1 Offshore has secured a multi-well contract with a rig consortium in Australia, offering potential for long-term revenue generation. The contract duration for Sea1 tonnage is estimated between 570 and 1,000 days, which should contribute to stable, increased revenue.
  
• The ongoing construction of two new offshore energy support vessels indicates future operational expansion, potentially increasing revenue once they are completed and deployed.
  
• With a strong contract backlog of $840 million and an additional $626 million in options, the company is positioned to maintain and grow its revenue stream, supporting future earnings stability.
  
• The refinancing of debt and current strong financial position offer the potential for a more favorable capital structure, possibly improving net margins through reduced interest expenses.
  
• The anticipated increase in semi-rig activity in the Norwegian sector could boost demand and rates for larger anchor handlers, which may positively impact Sea1's net margins and earnings by increasing utilization rates and day rates in that region.

Sea1 Offshore Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sea1 Offshore's revenue will decrease by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 50.7% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $80.4 million (and earnings per share of $0.52) by about March 2028, down from $172.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $95 million in earnings, and the most bearish expecting $61 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.1x on those 2028 earnings, up from 1.8x today. This future PE is lower than the current PE for the NO Energy Services industry at 8.7x.
• 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 10.87%, as per the Simply Wall St company report.

Sea1 Offshore Future Earnings Per Share Growth

Risks

• The company has decreased its number of vessels, selling 9 vessels, which reduces the potential for revenue generation from these assets compared to previous years.
  
• The weakening North Sea anchor handler spot market, due to increased vessel availability, could lead to lower day rates and thus reduce revenue and profit margins in this geographic segment.
  
• The presence of currency losses affecting net financial items, most notably an $8.3 million loss due to currency depreciation, could negatively affect net profits through unfavorable exchange rates.
  
• Semi-rig activity in Australia is expected to decrease temporarily in 2025, potentially leading to increased vessel availability in the region, putting short-term pressure on rates and utilization, thus negatively impacting revenue and earnings.
  
• The firm's extensive refinancing efforts, including a $250 million new credit facility, may indicate high dependence on debt financing, which could affect net margins negatively due to increased interest expenses under rising interest rates.

Valuation

• The analysts have a consensus price target of NOK35.956 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 NOK43.19, and the most bearish reporting a price target of just NOK29.98.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $302.7 million, earnings will come to $80.4 million, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 10.9%.
• Given the current share price of NOK21.55, the analyst price target of NOK35.96 is 40.1% 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.