Sakarya Field And UK Wind Market Will Drive Future Opportunities

Key Takeaways

• Strategic project developments and alliances enhance Subsea 7's revenue potential and earnings stability through long-term, cost-advantaged projects and integrated contracts.
  
• Focus on long-duration, deepwater, and renewable projects ensures resilience to market volatility, sustaining project acquisition and promoting revenue growth.
  
• Exposure to macroeconomic risks, merger challenges, foreign exchange variability, and regional market changes could affect Subsea 7's revenue, margins, and cash flow.

Catalysts

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

• Subsea 7's backlog growth and the increase in quality of projects, with 80% revenue visibility for 2025, suggest a strong pipeline that is likely to bolster future revenue and earnings stability.
  
• The strategic gas developments, such as the Sakarya field in Turkey and new oil provinces like Namibia, position Subsea 7 to capitalize on long-term, cost-advantaged projects, potentially enhancing future revenue and net margins.
  
• The BP Alliance enables Subsea 7 to work at a portfolio level, optimizing project execution and possibly improving net margins and earnings by securing long-term, integrated contracts with a major oil and gas company.
  
• The tendering pipeline's resilience to short-term market volatility due to its focus on long-duration and deepwater projects could ensure sustained project acquisition, positively influencing future revenue and earnings.
  
• The up-and-coming CFD allocation round in the U.K. wind market, with expected bidding for 10 gigawatts of capacity, presents significant growth opportunities for Subsea 7's Renewables segment, potentially driving revenue and higher margins.

Subsea 7 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Subsea 7's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $562.0 million (and earnings per share of $1.79) by about May 2028, up from $201.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $761 million in earnings, and the most bearish expecting $424 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 22.2x today. This future PE is greater than the current PE for the GB Energy Services industry at 8.6x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Subsea 7 Future Earnings Per Share Growth

Risks

• Exposure to macroeconomic uncertainties and potential changes in global economic conditions could affect Subsea 7's project pipeline and tendering activity, impacting future revenue streams.
  
• The merger discussions with Saipem and the associated risks, including integration challenges and potential regulatory hurdles, could impact operational efficiency and earnings.
  
• Variability in foreign exchange rates and global commodity prices might result in non-cash embedded derivative losses and affect net margins.
  
• High lease liabilities and significant working capital requirements could lead to increased financial strain and impact cash flows and net income.
  
• Exposure to regional markets like the U.S., despite low overall direct exposure, carries risks such as changes in tariffs or regulatory environment that could affect cost structures and net margins.

Valuation

• The analysts have a consensus price target of NOK215.993 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 NOK251.25, and the most bearish reporting a price target of just NOK157.05.
  
• 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 $562.0 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of NOK156.5, the analyst price target of NOK215.99 is 27.5% 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.