With plans for its first IPO on April 4, The Drilling Company of 1972 A/S, or Maersk Drilling Listco, joins struggling subsea and offshore drillers seeking public investment in a market expected to remain tough for another two years.
"The Maersk Drilling IPO provides a new set of datapoints for investors in offshore oil services, giving insight into a subset of the spending habits of some oil majors, and showing how cash-flow generation is changing for the worse in this emerging upturn," Bernstein senior research analyst Nicholas Green said March 28.
Five years of recession and a 16% loss in average annual total shareholder returns since 2014 drove investors out of the subsea and offshore market. Years of under-investment, fewer rig days, gross margin compression and excess supply have left the segment damaged, Green said.
Signs point, however, to sector rejuvenation.
Jefferies International Ltd. equity analyst Mark Wilson said March 28 that higher sector day-rates and utilization suggest light at the end of the tunnel. Further, global subsea and offshore capital expenditures for fourth quarter 2018 climbed 15% year on year, from just 7% growth the previous year. More significantly, estimates show incoming awards thus far in 2019 reached a new high.
As the subsea and offshore market begins to improve, "offshore drillers offer enormous option value" at about 0.9 times beta to the oil market with "high gearing to any uptick in offshore spending," Green said.
Awards in the first quarter were materially weighted to U.K.-based TechnipFMC PLC and Houston-based McDermott International Inc., while Maersk Drilling, to be spun off from Danish conglomerate A.P. Moller-Maersk A/s, is lined up to become a major competitor for market share and investor dollars.
The large pureplay asset rental business boasts 23 rigs, with a leading about 27% market share in North Sea jack-up rigs. It is expected to have the sixth largest global fleet and perhaps the second largest market cap after Switzerland-based Transocean Ltd., Green said.
Yet, while encouraging investors to capture option value at "minimal risk," Green suggests that although the subsea and offshore market may have already hit the trough, Maersk Drilling's earnings expectations may not have.
It is undergoing severe operational deleveraging as lower embedded day rates take effect; it has a collection of quality-of-earning and debt-like items that worsen the cash flows; and 70% of the fleet requires servicing over 2019 and 2020, Green said.
Maersk Drilling's order book suggests added risk as 79% of orders are concentrated with five independent oil companies, and its rig fleet maintenance schedule shows yard stays on three rigs were deferred from 2018, and about 70% of the fleet will require servicing over 2019 and 2020.
Green said investors should also consider that 31% of trade receivables, amounting to $105 million, are past due, with only 1% provision for bad debts. The company also is expected to incur sizable costs to resolve a November 2018 Norwegian safety audit and faces fines and penalties and civil claims stemming from the death of a worker in December 2017.
Saipem SpA and Aker Solutions ASA, both rated outperform, and TechnipFMC and Subsea 7 SA, both rated market-perform, are Bernstein's top pics for investors looking to play the offshore recovery.