Jack-up Rig Oversupply And Capital Costs Will Worsen Margins

Key Takeaways

• Prolonged industry oversupply, customer concentration, and rising financing costs threaten revenue stability, margin expansion, and future contract opportunities.
  
• Regulatory, ESG, and decarbonization pressures may shrink addressable markets and limit flexibility for reinvestment or technological adaptation.
  
• Exclusive focus on efficient shallow-water rigs, strong contract backlog, and tight market supply position Shelf Drilling for stable growth, margin protection, and long-term earnings strength.

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 recent and expected near-term oversupply of jack-up rigs, intensified regional competition, and falling bidding levels are leading to persistent day rate pressure across key markets, which threatens future revenue growth and could compress EBITDA margins in the medium term.
  
• Despite strong historical performance, the medium-term global energy transition and increasing regulatory pressure towards decarbonization may begin to constrain Shelf Drilling's addressable market, potentially reducing contract opportunities and putting downward pressure on long-term revenue and utilization rates.
  
• Continued capital outflows and rising cost of capital for fossil fuel extractive industries-driven by greater ESG focus among institutional investors-could make refinancing or fleet investments more expensive, thereby impacting Shelf Drilling's earnings stability and long-term net income.
  
• High customer concentration, with material exposure to a small number of NOCs and IOCs, increases revenue volatility risk if key contracts are not renewed, especially in the face of growing regulatory and macroeconomic uncertainty, potentially resulting in lower top-line growth.
  
• Cash flows may be pressured by aging fleet capital requirements and high ongoing debt service payments, limiting the company's ability to reinvest or pivot in response to technological and regulatory shifts, with potential negative implications for future earnings and free cash flow margins.

Shelf Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shelf Drilling's revenue will decrease by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.8% today to 1.4% in 3 years time.
• Analysts expect earnings to reach $12.2 million (and earnings per share of $0.07) by about September 2028, down from $116.5 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 41.0x on those 2028 earnings, up from 3.1x today. This future PE is greater than the current PE for the NO Energy Services industry at 6.6x.
• 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 12.67%, as per the Simply Wall St company report.

Shelf Drilling Future Earnings Per Share Growth

Risks

• Shelf Drilling has secured significant multi-year contract extensions and new awards with major customers across diverse regions (e.g., 5-year extension with Saudi Aramco, 1-year+ extensions with Eni and ONGC), resulting in a backlog exceeding $1.5 billion and providing increased revenue visibility and reduced earnings volatility over the medium to long term.
  
• The company's exclusive focus on shallow-water jack-up rigs in cost-efficient, lower-emission basins aligns with sustained upstream investment needs and ongoing demand for offshore production as oil remains a critical part of the global energy mix, supporting stable utilization and protecting net margins.
  
• Industry dynamics indicate a tightening supply of jack-up rigs due to limited new builds and potential attrition of older units, which, alongside healthy tendering activity and structurally tight markets in regions like West Africa and the Middle East, could exert upward pressure on dayrates-directly benefiting top-line growth and EBITDA margins.
  
• Shelf Drilling's strong operational execution (fleet-wide uptime of 99.5%, improved safety metrics, and efficient cost management) is translating into high EBITDA margins (39% for Q2 2025) and strengthened balance sheet fundamentals, as evidenced by declining net debt and increased cash reserves, enhancing long-term earnings stability and investment capacity.
  
• The company maintains established relationships and a balanced customer mix of national oil companies, international oil companies, and independents across key growth markets, positioning Shelf Drilling to win incremental contract awards and capture future demand increases, thereby supporting revenue growth and long-term shareholder value.

Valuation

• The analysts have a consensus price target of NOK11.171 for Shelf 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 NOK14.03, and the most bearish reporting a price target of just NOK8.32.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $866.1 million, earnings will come to $12.2 million, and it would be trading on a PE ratio of 41.0x, assuming you use a discount rate of 12.7%.
• Given the current share price of NOK13.94, the analyst price target of NOK11.17 is 24.8% 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.