New Contracts In Nigeria And Southeast Asia Will Strengthen Future Operations

Key Takeaways

• Merger and ownership of Shelf Drilling North Sea enhance fleet, driving future earnings and cash flow.
  
• Contracts in Nigeria and Southeast Asia boost backlog, offering revenue and earnings growth potential.
  
• Relying heavily on key contracts and facing cash management challenges, Shelf Drilling is at risk from market dynamics and reduced demand in hydrocarbon exploration.

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 merger and full ownership of Shelf Drilling North Sea is expected to enhance fleet composition and be a significant driver of earnings and cash flow in 2025 and beyond. (Earnings, Cash Flow)
  
• New multi-year contracts secured in Nigeria and extensions in Southeast Asia add substantial backlog, providing visibility and potential growth in revenue and earnings in 2025 and beyond. (Revenue, Earnings)
  
• The redeployment of rigs suspended by Saudi Aramco to new markets like Nigeria adds potential for increased revenue and improved utilization rates in the future. (Revenue, Utilization)
  
• Insurance proceeds from the declared total loss of the Trident VIII and sale of Baltic rig are expected to provide a significant near-term cash flow influx, strengthening the balance sheet. (Cash Flow)
  
• Rising demand in West Africa and Southeast Asia, combined with high jack-up market utilization rates in regions outside Saudi Arabia, positions the company to benefit from increased day rates and utilization, positively impacting margins and earnings. (Net Margins, Earnings)

Shelf Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shelf Drilling's revenue will decrease by -1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $46.6 million (and earnings per share of $0.18) by about January 2028, up from $40.5 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 14.2x on those 2028 earnings, up from 4.9x today. This future PE is greater than the current PE for the NO Energy Services industry at 6.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.81%, as per the Simply Wall St company report.

Shelf Drilling Future Earnings Per Share Growth

Risks

• The suspensions of rigs by Saudi Aramco have significantly impacted Shelf Drilling's financial results, highlighting a risk of reduced revenue and earnings stability due to dependency on key contracts.
  
• The company's cash shortfall at Shelf Drilling North Sea illustrates challenges in cash management and potential volatility in net margins if contract delays continue.
  
• The redeployment challenges of rigs, like the High Island IV, after suspension, indicate vulnerability to market dynamics which can impact utilization rates and future revenues.
  
• Global oil demand for 2025 is expected to grow at a lower rate than previously forecasted, creating pressure on revenue due to potential lower end-market demand for hydrocarbon exploration.
  
• The potential release of additional rigs in Saudi Arabia could further depress day rates, negatively influencing revenue and earnings in the short term as contractors seek to place impacted rigs elsewhere.

Valuation

• The analysts have a consensus price target of NOK20.88 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 $954.2 million, earnings will come to $46.6 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 11.8%.
• Given the current share price of NOK8.68, the analyst's price target of NOK20.88 is 58.4% higher.
• 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.