Contracts With Equinor Will Keep Rigs Operational But Analysts Expect Lower Earnings

Key Takeaways

• Strategic contracts and alliances with key partners in high-demand regions boost revenue stability, enhance market presence, and support substantial future earnings growth.
  
• Selling less competitive units improves cost efficiency, while increased demand and contract awards drive revenue and profitability across various strategic regions.
  
• Potential rig suspensions and competitive pressures could reduce fleet utilization and profitability, impacting revenue stability and earnings.

Catalysts

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

• The commencement of contracts for the Shelf Drilling Barsk with Equinor and the High Island V in Nigeria are expected to significantly boost revenue streams going forward by keeping the rigs operational and generating cash flow through 2026 and beyond.
  
• The strategic alliance with Arabian Drilling Company to deploy modern jack-ups in West Africa and Southeast Asia is expected to enhance the company's market presence in these high-demand regions, likely driving up revenues and backlogs while leveraging ADC's high-specification rigs.
  
• The strategic sales of less competitive units, such as the Main Pass I, and potential sales of 2 to 3 additional rigs in 2025 could drive short-term cost savings and impact net margins positively by improving the regional rig supply-demand balance.
  
• Increased contract awards, especially in West Africa and Southeast Asia, and high demand for jack-ups in these regions, position Shelf Drilling for significant revenue and earnings growth. This includes $500 million of new contract backlog in Q4 2024 at increased day rates, highlighting stronger future earnings potential.
  
• The anticipated contract renewals in the Middle East and the positioning of rigs for tenders in regions like Qatar, India, and the North Sea indicate a robust pipeline of long-term backlog coverage, improving revenue stability and potential profitability over the next few years, supporting higher future earnings.

Shelf Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shelf Drilling's revenue will decrease by 0.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.3% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $51.0 million (and earnings per share of $0.2) by about March 2028, down from $81.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 2.4x today. This future PE is greater than the current PE for the NO Energy Services industry at 8.7x.
• 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 12.46%, as per the Simply Wall St company report.

Shelf Drilling Future Earnings Per Share Growth

Risks

• The possibility of additional rig suspensions in Saudi Arabia, if materialized, could lead to reduced fleet utilization and impact overall revenue.
  
• Payment challenges and short-term suspensions in Mexico contribute to market uncertainty, potentially affecting revenue stability and cash flow.
  
• The competitive pressure on day rates, particularly from rigs coming from the Middle East, could reduce profitability and impact net margins.
  
• Delays in securing new contracts or redeploying the suspended rigs, especially those mobilizing to West Africa, may negatively impact revenue and earnings.
  
• If the speculated additional rig suspensions in Saudi Arabia occur, it may further affect fleet deployment and utilization, thereby impacting both revenue and operating expenses.

Valuation

• The analysts have a consensus price target of NOK20.864 for Shelf Drilling based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $963.0 million, earnings will come to $51.0 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 12.5%.
• Given the current share price of NOK8.15, the analyst price target of NOK20.86 is 60.9% 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.