Legacy Oil Operations Will Face Steep Headwinds Amid Renewables

Key Takeaways

• The shift to renewables and increased automation threaten TGS's core revenue streams, pricing power, and long-term profitability.
  
• Expansion into new energy sectors has not offset losses from declining oil and gas business, creating sustained margin and earnings pressure.
  
• Diversified growth strategies, disciplined capacity management, and expansion into new energy markets enhance revenue resilience and earnings quality while reducing cyclicality risks.

Catalysts

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

• The accelerating shift from fossil fuels towards renewables is likely to erode long-term demand for TGS's core oil and gas subsurface data offerings, reducing the company's primary revenue streams as global exploration budgets decline.
  
• Rising regulatory scrutiny, potential for higher carbon taxes, and increasingly stringent environmental policies may further dampen oil and gas development activity, resulting in a weaker pipeline of funded projects and sustained margin pressure for TGS.
  
• Growing prevalence of automation and open-access geoscience data platforms is expected to steadily commoditize TGS's proprietary data products, undermining pricing power and threatening recurring earnings as customers internalize more data processing functions.
  
• Heavy reliance on a shrinking base of oil and gas exploration and production clients-who are themselves consolidating and cutting exploration budgets-makes it likely that TGS will face declining sales, lower contract values and sustained revenue headwinds for the foreseeable future.
  
• Although TGS is expanding into new energy verticals like CCS and offshore wind, early results show flat or weak growth and these segments are unlikely to fully replace the profitability lost in the core seismic business, resulting in long-term pressure on net margins and earnings.

TGS Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on TGS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming TGS's revenue will decrease by 7.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.4% today to 9.8% in 3 years time.
• The bearish analysts expect earnings to reach $138.7 million (and earnings per share of $0.7) by about September 2028, up from $25.0 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 11.6x on those 2028 earnings, down from 61.6x today. This future PE is greater than the current PE for the GB Energy Services industry at 6.8x.
• 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 7.84%, as per the Simply Wall St company report.

TGS Future Earnings Per Share Growth

Risks

• The long-term global demand for oil and gas exploration is supported by declining reserve life and low replacement ratios, which implies that exploration activity-and thus demand for TGS's seismic data and services-will need to increase to secure future energy supplies, benefiting TGS's top-line revenues over time.
  
• TGS's strategic willingness to take higher equity in multi-client projects, especially in high-potential regions like Brazil and the Gulf of America, leverages its strong balance sheet and provides it with greater upside when market conditions normalize, potentially leading to improved earnings and net margins from successful projects.
  
• The company is actively reducing costs and vessel capacity in response to market weakness, evidencing disciplined capacity management and business optimization, which supports EBITDA margins and helps protect profitability during cyclical downturns, rather than eroding them.
  
• TGS's Imaging and Technology division is showing robust growth, with external revenues nearly doubling year-over-year and EBITDA margins rising from negative to 40 percent, suggesting structural improvements in recurring revenue streams and higher long-term earnings quality through digital and high-end data services.
  
• Expansion into new energy verticals, such as carbon capture and storage and collaborations with major clients like Equinor for digital CCS operations, positions TGS to benefit from the energy transition and broadens its addressable market, which may support future revenue growth and reduce reliance on volatile oil and gas cycles.

Valuation

• The assumed bearish price target for TGS is NOK65.38, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of TGS'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 NOK405.63, and the most bearish reporting a price target of just NOK65.38.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $138.7 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 7.8%.
• Given the current share price of NOK78.75, the bearish analyst price target of NOK65.38 is 20.5% 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.