Expansion Into California And Ireland Will Position Us For Future Participation In New Energy Sectors

Key Takeaways

• Successful merger and refinancing efforts are expected to enhance net margins and reduce financial costs, boosting potential net earnings.
  
• Strategic expansion into new regions and projects aims to drive future revenue growth through diversification and market participation.
  
• TGS faces risks from integration challenges, offshore dependency, industry competition, uncertain project timelines, and overly optimistic revenue forecasts affecting cash flow and profitability.

Catalysts

Provides geoscience data services to the oil and gas industry in Norway and internationally.

• The successful merger and integration of TGS and PGS is expected to realize synergies ahead of schedule, with an estimated cost synergy of between $110 million to $130 million by year-end 2025, improving overall net margins.
  
• Refinancing of legacy PGS debt at attractive terms is anticipated to result in $35 million of interest rate synergies, leading to lower financial costs and potentially higher net earnings.
  
• Expansion into new regions and projects, including new energy operations in California and offshore wind in Ireland, positions TGS for future revenue growth through diversification and participation in fast-growing segments.
  
• A strong order backlog estimated at around $750 million suggests improved cash flows, indicating potential increases in future revenues and earnings stability.
  
• Continued strong performance in the multi-client market, with a sales-to-investment ratio of 2.2x achieved in 2024 (above the long-term average), is likely to sustain revenue growth through high pre-funding levels and ongoing investments.

TGS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TGS's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $213.0 million (and earnings per share of $1.09) by about March 2028, up from $94.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $266 million in earnings, and the most bearish expecting $127 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 19.1x today. This future PE is greater than the current PE for the GB Energy Services industry at 7.1x.
• 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 8.89%, as per the Simply Wall St company report.

TGS Future Earnings Per Share Growth

Risks

• The integration and restructuring process following the TGS-PGS merger, though progressing well, can still pose significant risks. The company must ensure that the integration does not distract from core operations and revenue generation, potentially impacting overall earnings.
  
• Delays and uncertainty due to environmental permits and geopolitical factors in project timelines can lead to lower-than-expected vessel utilization, which might negatively influence contract revenue and profit margins.
  
• Competition with smaller players in the OBN market who are attempting to enter may lead to price undercutting, impacting TGS’s profitability and net margins if significant industry pricing discipline is not maintained.
  
• Heavy reliance on offshore markets with less than 10% onshore exposure means that any downward trend in offshore E&P spending, like the flat spending anticipated for 2025, could constrain revenue growth and profit margins.
  
• If the forecasted dividends are based on unrealized synergies or overly optimistic revenue predictions amidst uncertain market conditions, there may be a risk to cash flow and shareholder value, impacting investor returns.

Valuation

• The analysts have a consensus price target of NOK167.849 for TGS 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 NOK380.98, and the most bearish reporting a price target of just NOK78.28.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $213.0 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of NOK98.7, the analyst price target of NOK167.85 is 41.2% 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.