High Costs And Aging Rigs Will Undermine Offshore Earnings

Key Takeaways

• Structural shifts toward renewables, stricter regulations, and technological advancements threaten demand, margins, and long-term earnings stability.
  
• Aging assets, high leverage, and constrained reinvestment capacity increase operational risk and limit strategic flexibility.
  
• Focus on underserved offshore regions, tight rig supply, and strong operational execution position Shelf Drilling for sustained contract wins, margin improvement, and long-term value creation.

Catalysts

Operates as a shallow water offshore drilling contractor in the Middle East, North Africa, the Mediterranean, Southeast Asia, India, West Africa, and the North Sea.

• The accelerating shift toward renewable energy and global decarbonization efforts is expected to significantly reduce demand for offshore oil drilling, causing long-term declines in contract awards and lower rig utilization that will erode Shelf Drilling's future revenues and backlog.
  
• Intensifying environmental regulation and the implementation of more aggressive carbon pricing mechanisms are anticipated to drive operating costs higher for offshore fossil fuel extraction, compressing net margins and undermining the company's earnings power over time.
  
• A heavily aged jack-up rig fleet, combined with limited access to capital for substantial technological upgrades, is likely to result in an increasing number of uncompetitive assets, driving up maintenance expenses, reducing ability to win premium contracts, and ultimately dragging down operating margins and return on capital.
  
• Shelf Drilling's high leverage and ongoing debt servicing requirements will restrict financial flexibility for reinvestment or strategic pivots, while rising interest expenses are poised to further compress net income regardless of cyclical revenue recovery.
  
• Escalating technological advancements in rival energy extraction methods, particularly onshore shale and deepwater operations, threaten to permanently shrink the addressable market for shallow-water jack-up rigs, leading to persistent oversupply, lower dayrates, less contract visibility, and structurally weaker earnings for Shelf Drilling.

Shelf Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Shelf Drilling compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Shelf Drilling's revenue will decrease by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.3% today to 1.8% in 3 years time.
• The bearish analysts expect earnings to reach $15.2 million (and earnings per share of $0.06) by about July 2028, down from $90.7 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 18.9x on those 2028 earnings, up from 2.9x today. This future PE is greater than the current PE for the NO Energy Services industry at 7.9x.
• Analysts expect the number of shares outstanding to grow 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 12.64%, as per the Simply Wall St company report.

Shelf Drilling Future Earnings Per Share Growth

Risks

• Persistent global demand for energy, especially in emerging markets, is leading to stable or increasing offshore exploration, which supports higher rig utilization and day rates and can drive long-term revenue growth for Shelf Drilling.
  
• The company is strategically focused on shallow water jack-up rigs in high-demand, underserved regions like the Middle East, India, and West Africa, increasing the likelihood of winning contracts and sustaining revenue growth over multiple years.
  
• The offshore drilling sector is expected to remain resilient due to underinvestment in upstream oil and gas over the past decade, which is leading to supply tightness and new offshore investments that are likely to benefit Shelf Drilling's earnings and backlog.
  
• Limited jack-up new builds in the global fleet and ongoing rig attrition are creating a tighter supply environment, which should put upward pressure on future day rates and improve Shelf Drilling's margins.
  
• Shelf Drilling's operational flexibility, cost discipline, and growing track record of securing new contracts and maintaining high fleet-wide uptime position the company for improving net margins, more stable cash flows, and long-term value creation, as demonstrated by increasing EBITDA margins and positive free cash flow guidance.

Valuation

• The assumed bearish price target for Shelf Drilling is NOK5.99, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Shelf 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 NOK8.16, and the most bearish reporting a price target of just NOK5.99.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $830.9 million, earnings will come to $15.2 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 12.6%.
• Given the current share price of NOK9.37, the bearish analyst price target of NOK5.99 is 56.5% lower.
• 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.