EUR 850.00 For Business Accounts Only

Morningstar | Slightly Lowering Subsea 7 FVE; Company Still Looks Undervalued

We're slightly lowering our Subsea 7 fair value estimate to NOK 127 per share from NOK 130 previously after reviewing the company's third-quarter results and incorporating updated near-term guidance. The lower fair value estimate comes primarily from a revision in our midcycle (2022) expectations for the SURF & Conventional and Renewables & Heavy Lifting segments (in USD terms), slightly offset by about a 6% depreciation in the krone-dollar exchange rate since our last update. Our no-moat rating remains in place.

We're lowering our midcycle adjusted operating margin forecast for the SURF segment to 12% from 13% previously to account for potentially heightened competitive pressures. Additionally, we've incorporated updated management guidance that now calls for likely slightly lower margins in 2019 vs. 2018 as the effects of lower-priced contracts begin to play out. As such, we think the pace of SURF segment margin recovery will be somewhat lagged relative to our prior expectations. In particular, we are disappointed that Subsea 7 has made slow progress on integration initiatives (particularly its alliance and joint venture with Schlumberger), which we think will lead it to underperform peer leader TechnipFMC in the near term as Subsea 7 struggles to catch up.

Our Renewables segment margin forecast falls to 6.5% from 9% previously. This segment (mostly assembled from recently acquired businesses) has a short track record, and therefore the sharp drop in profitability in 2018 vs. 2017 has a solid impact on our long-term expectations. Management is also guiding for a further profitability drop in 2019 as offshore wind installation activity slows down. For now, we are taking a more cautious view on the segment--we are worried that the high profitability achieved in 2017, driven chiefly by a single project (Beatrice), may have been an aberration.

Even with this reduction, Subsea 7 looks solidly undervalued, in our view. We think the market is underrating the long-term prospects of offshore engineering & construction companies. Whereas the market seems to expect these companies to experience the kind of pricing degradation that has afflicted the offshore drillers, we believe the E&C portion of the offshore value chain can't be so easily equated with the drillers and that pricing and activity will hold up much better.