Morningstar | Subsea 7 Reports OK 4Q; Renewables Segment Weighing on Results
Subsea 7 reported decent fourth-quarter results, with revenue down 2% sequentially but up 6% from the prior year. Likewise, adjusted operating margin of 6% was down sequentially from a strong 10.2% in the third quarter but slightly up from the 5.8% in the prior year quarter. For now, our fair value estimate and no-moat rating are unchanged.The Surf segment (Subsea's traditional business) actually saw revenue up 1% sequentially and roughly flat adjusted operating margin of 10% (in spite of the typical winter activity slowdown). The segment participates in the offshore oil engineering and construction industry, which has reached a trough and is now beginning a slow recovery. Encouragingly, Subsea has continued to deploy unique, proprietary technologies (like electrically heated pipes) on recent projects, and the company is also winning integrated project awards via its alliance with Schlumberger. The Subsea 7/Schlumberger alliance is still a step behind leader TechnipFMC in offshore development integration (which has the potential to deliver large cost savings), but it has established itself as a clear second place.
However, the renewables segment saw revenue down 46% sequentially and 55% year over year, as the company has struggled to replace large offshore wind projects like Beatrice, which supplied large volumes of profitable work in 2017. Management said it expects an even weaker 2019 (compared with 2018 as a whole) before a likely industry recovery in 2020. Still, the longer-term prospects for this business remain bright as global power generation shifts to renewables like offshore wind in coming years. Conservatively, our midcycle operating profit assumption is only about 25% of the windfall level achieved in 2017 (due primarily to the Beatrice project).
Subsea 7 is a provider of seabed-to-surface engineering, construction and services contractor to the offshore energy industry. Co. provides products and services required for subsea field development, including project management, design and engineering, procurement, fabrication, survey, installation, and commissioning of production facilities on the seabed and the tie-back of these facilities to fixed or floating platforms or to the shore. Co. also provides products and capabilities to deliver full Life of Field services to its clients. Through its i-Tech Division, Co. provides remotely operated vehicles and tooling services to support exploration, production and drilling activities.
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