Historical valuation

On a five year chart the stock price has mainly moved side-ways. SBM Offshore has not been able to translate growing back-log with long-term contracts and valuable assets into a higher share price. The investor interest in the company has been low. This could be explained by ESG policies by institutional investors, the complexity of the accounting and volatility of earnings from turnkey projects.

SBM has however improved its ESG profile and improved quality of earnings. I expect the valuation to improve in the next 12-24 months.

Shareholder returns

The company policy is to provide a stable annual return with the flexibility in form of dividend and/or repurchase of shares. This results in a yield of 8.5% at €14.

Backlog

The company has a contractual backlog that gives good visibility into future cash-flows. The segment Lease- and operate shows steady growing cash-flows based on long term contracts.

Floating Production Storage and Offloading

The main activities are the design, supply, installation, operation and life extension of Floating Production Storage and Offloading (FPSO) vessels. These are either leased to clients or supplied on a turnkey sale basis.

FPSOs process well fluids into stabilized crude oil for temporary storage on board, before being transferred to a shuttle tanker for export from the field. Oil and gas enhanced recovery systems − such as water injection, gas injection, chemical injection and gas lift systems − are used to improve efficiency and production levels. Latest FPSO designs include CO2 removal from gas streams for re-injection into the well offshore.

FPSO's are competitive oil platforms with break-even at $40/boe (barrel oil equivalent).

Ongoing FPSO projects

SBM has 5 FPSO(s) under construction for delivery until 2027. Project results and asset development will materialize in the next years.

Under IFRS the project results are recognized during construction which impacts revenue and earnings in the Turnkey segment. SBM Directional reporting only recognizes the revenue and results on the portion owned by customers.

Renewable energy

SBM Offshore has offshore products for renewable energy e.g; Floating Offshore Wind (FOW), Wave Energy Capture (WEC) - piloted in France - and offloading Carbon Dioxide. It provides anchoring technology for the offshore energy market.

The renewable energy is not a significant part of the business (yet), but more a field for innovation.

Market potential

Market intelligence firm Rystad Energy sees an increasing demand with a mixture of contracting types.

Net zero strategy

SBM Offshore's strategy is to be aligned with the transition to net zero by 2050. Focusing on deep-water oil production taking part in the energy transition producing fossil fuels at lower CO2 emission. SBM is investing to keep a leading role.

MSCI upgraded the ESG rating of SBM Offshore from A to AA, recognizing SBM Offshore’s environmental management systems and its industry leadership in managing carbon emissions.

Debt

The debt is split into $4B non-recourse (asset backed) financing in SPVs and $5B borrowing for the ongoing construction of FPSO(s). The ongoing projects will become non-recourse when going into production.

The debt levels do not seem to worry credit providers supplying $3.2B credit in 2023.

Directional earnings

In the coming years the companies more profitable Lease and Operate (60% EBITDA margin) business is expected to continue to grow. This should improve the quality of the directional earnings as reducing the weight of Turnkey. Based upon the management guidance from the 2023 annual report net profit could be between $400-500M. At €2.5B market cap that is 5-6x PE.

The $1.2B EBITDA guidance leaves room for $700-800M ($600M in 2023) interest payments and $400-500M profit before tax.

Financial market ESG policy

The ESG policies constrain exposure by financial institutions towards fossil fuel financing. This is a risk for SBM to finance ongoing projects and sign new deals. Interest rates are higher than before and the ESG policies further increase financing costs.