Robust $11 Billion Backlog Will Positively Impact Future Earnings And Cash Flow

Key Takeaways

• Subsea7 anticipates strong EBITDA growth with a robust backlog and strategic deepwater contract focus, positively impacting earnings and cash flow.
  
• Promising offshore wind prospects and shareholder returns support long-term revenue growth and stable dividends.
  
• Uncertain market conditions, fluctuating costs, and increased competition could impact Subsea 7's revenue stability and market share in multiple regions.

Catalysts

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

• Subsea7 is on track to achieve strong EBITDA growth, with guidance indicating adjusted EBITDA margin increases to over 20% by 2026, driven by a robust $11 billion backlog and active tender pipeline, which will positively impact earnings and cash flow conversion.
  
• The company has a promising prospect in the offshore wind segment, with improved operational performance and higher margin expectations of 14% to 16% in 2025, suggesting potential increases in revenue and profit contributions from this renewable sector.
  
• Subsea7 is strategically focused on securing large contracts in deepwater markets, such as Brazil, U.S. Gulf of Mexico, West Africa, and Turkey, which are expected to contribute significantly to future revenue streams as these projects progress.
  
• The company's deliberate selection of high-quality contracts and strong order intake, including $5.9 billion in the first nine months of the year, should underpin stable revenue growth and improved net operating income through 2025.
  
• Subsea7 is committed to returning at least $1 billion to shareholders from 2024 to 2027, supported by strong cash generation, potentially enhancing earnings per share through buybacks and maintaining a stable dividend policy.

Subsea 7 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Subsea 7's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $600.1 million (and earnings per share of $2.09) by about January 2028, up from $162.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $688.6 million in earnings, and the most bearish expecting $444.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, down from 30.0x today. This future PE is greater than the current PE for the GB Energy Services industry at 6.5x.
• Analysts expect the number of shares outstanding to decline by 0.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Subsea 7 Future Earnings Per Share Growth

Risks

• The offshore wind industry, although showing signs of improvement, has experienced an extended period of uncertainty and fluctuating input costs, which could impact future revenue stability.
  
• Market dynamics in the U.S. for offshore wind are shifting, with recent election outcomes potentially reducing the scope of developments. This uncertainty could affect future revenue and project opportunities.
  
• Capital expenditure is expected to increase year-on-year, with costs associated with maintaining vessel availability and supply chain pressures, which could impact net margins.
  
• The presence of a new bidder in Brazil introduces competitive pressures that may impact Subsea 7's ability to secure future contracts, affecting revenue and market share in this region.
  
• Volatility in the oil service industry may lead to fluctuations in order intake, with impacts on revenue growth and financial stability.

Valuation

• The analysts have a consensus price target of NOK237.94 for Subsea 7 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 NOK276.52, and the most bearish reporting a price target of just NOK190.34.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.5 billion, earnings will come to $600.1 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 8.1%.
• Given the current share price of NOK186.2, the analyst's price target of NOK237.94 is 21.7% 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.