EUR 850.00 For Business Accounts Only

Morningstar | Subsea 7 Hoping That 2018 Marks the Trough for the Offshore E&C Industry

Subsea 7 is one of the big three subsea engineering and construction firms for large offshore oil and gas projects, along with TechnipFMC and Saipem. We expect persistent pressure in offshore markets owing to the ascendance of lower-cost U.S. shale oil and gas, and our no-moat rating reflects the difficulty Subsea 7 will face in generating economic profits in such an environment.Nevertheless, we aren’t nearly as pessimistic about future profitability for subsea E&C companies as we are for some other offshore-driven businesses, most notably offshore drilling. For one, subsea E&C is leveraged solely to development work, whereas offshore drilling is also highly weighted to exploration, which is set to fare much worse than development work going forward. Additionally, subsea E&C remains a highly concentrated market, both in terms of vessel ownership and even more so in terms of high-end technical capabilities. Finally, E&C companies hold the potential to deliver real value to customers in the form of efficiency-derived cost savings. All of this suggests that, offshore headwinds notwithstanding, investors should be careful before counting subsea E&C players out. A crucial question for Subsea 7 in particular is how it will respond to the recent merger between its rival Technip and subsea equipment player FMC. This combination makes the new TechnipFMC unique and could serve as a catalyst for increased market share at the expense of Subsea 7. Yet, Subsea 7 responded by forming an alliance (and later a joint venture) with Schlumberger and its subsea equipment arm Cameron. For now, we expect Subsea 7 to maintain a level playing field with its chief rival. And in fact, if both sets of companies prove successful in creating value via integrated solutions, there is room for both of them to grab market share and command premium pricing moving forward.