EUR 850.00 For Business Accounts Only

Morningstar | Offshore E&C Market Turnaround Should Lift Subsea 7's Results in Coming Years

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 rival TechnipFMC, which emerged as a combined entity in 2017. TechnipFMC has pioneered a unique integrated approach to offshore projects and this could boost its 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. While we don't expect Subsea 7 to match the peer-leading margins that we think TechnipFMC will generate in coming years, we do expect Subsea 7 to maintain enough parity with TechnipFMC's capabilities in order to preserve its market share.