Accelerating Decarbonization And ESG Risks Will Undermine Offshore Projects

Key Takeaways

• Decarbonization and rising ESG pressures threaten Subsea 7's long-term revenue, margin stability, and access to attractive capital.
  
• Overcapacity, execution risks, and shifting project dynamics expose the company to shrinking margins and unpredictable earnings.
  
• Strong project backlog, renewables expansion, deep client partnerships, and operational improvements position the company for stable, diversified growth and margin resilience amid energy transition.

Catalysts

Subsea 7 S.A. delivers offshore projects and services for the energy industry worldwide.

• As global decarbonization initiatives accelerate and renewable technologies rapidly advance, long-term capital investment in offshore oil and gas projects is at risk of significant decline, directly shrinking Subsea 7's core addressable market and causing future revenue growth to stall or reverse, undermining backlog replenishment in coming years.
  
• Intensifying ESG scrutiny and environmental regulation could lead to higher financing costs, investor divestment, and potential exclusion from public or institutional capital markets, compressing net margins and increasing the risk of stranded capital tied up in oil and gas assets.
  
• Subsea 7 remains highly leveraged to large, late-cycle, capital-intensive offshore projects, which exposes the company to substantial earnings volatility and limits its ability to pivot quickly as market dynamics shift toward shorter-cycle or onshore renewables, leading to an unpredictable and potentially shrinking earnings base.
  
• Persistent overcapacity in the global offshore service fleet and surging competition from regional EPC contractors threaten to erode pricing power and dampen vessel utilization, resulting in lower revenues and driving down profitability margins over the medium to long term.
  
• Ongoing project execution risks, including cost overruns and schedule slippage in technically complex deepwater and wind projects, combined with increased regulatory complexity and compliance costs, are likely to result in negative operating leverage and reduced net income, particularly as the mix of projects increasingly includes less familiar geographies and regulatory regimes.

Subsea 7 Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Subsea 7 compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Subsea 7's revenue will grow by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.8% today to 7.4% in 3 years time.
• The bearish analysts expect earnings to reach $529.0 million (and earnings per share of $1.77) by about July 2028, up from $193.5 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 11.1x on those 2028 earnings, down from 30.4x today. This future PE is greater than the current PE for the GB Energy Services industry at 7.9x.
• Analysts expect the number of shares outstanding to decline by 1.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Subsea 7 Future Earnings Per Share Growth

Risks

• Subsea 7's substantial and growing backlog, reaching $10.8 billion with over 80 percent revenue visibility for 2025, underpins stable forward earnings as recurring long-duration projects provide resilience to revenue and cash flow.
  
• Expansion and strong performance in renewables, particularly offshore wind in the U.K. and Taiwan, create diversified revenue streams that help reduce cyclicality and could support sustained top-line growth even as energy markets transition.
  
• Deep client integration and alliances-such as the Subsea Integration Alliance with BP and collaborations with SLB OneSubsea-reinforce long-term strategic customer relationships, making it more likely for Subsea 7 to secure repeat business, thus contributing to revenue and profit stability.
  
• Focus on cost-advantaged deepwater and ultra-deepwater projects, where client investment appetite remains robust and projects breakeven well below prevailing oil prices, positions the company in a sweet spot that supports utilization and net margin expansion.
  
• Continued investment in vessels, digital project management, and contractual protections (such as indexation and change-in-law clauses) enhances operational efficiency, helps to maintain or improve net margins, and limits downside financial risk from industry volatility.

Valuation

• The assumed bearish price target for Subsea 7 is NOK170.06, which represents two standard deviations below the consensus price target of NOK220.81. This valuation is based on what can be assumed as the expectations of Subsea 7'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 NOK261.68, and the most bearish reporting a price target of just NOK158.65.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.2 billion, earnings will come to $529.0 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of NOK200.4, the bearish analyst price target of NOK170.06 is 17.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.