Investment Case: Solstad Offshore: A Norwegian OSV-company Tries to Navigate a Depressed Industry

Anders Berdal Vaage & Mats Sverre Wilhelm Dejgaard

Student thesis: Master thesis


As a result of the significant drop in the oil price in 2014, the oil and gas industry is expected to reduced its spending in 2016 by ~25%, implying a reduction in spending of ~48% from its peak. In effect, the oil and gas companies have shifted their focus from new investments to existing production. The slowdown in the market has led to an oversupply of oil rigs, resulting in an historically low utilization rate for the OSVs. This has led to some companies working with day rates well below operational costs. China and emerging economies demand for oil rapidly slowed down after a longer period of unquenchable thirst. U.S. and Saudi Arabia’s continuous production of oil for their respective reasons led to further pressure on the oil price. Accurately predicting the future oil price is beyond our capabilities and highly speculative by nature, but an estimate based on our research leads us to believe in a gradual normalization towards ~USD 60/bbl. It appears unlikely that the market will see oil prices at 2000-2008 and 2010-2014 levels. This will force many O&G companies to develop innovative solutions to maintain a sustainable production. Over the observed period Solstad and its peers have delivered a return on invested capital (ROIC) below their weighted average cost of capital (WACC), destroying value for its shareholders. Today, the situation has worsened, but we expect this to bottom out in 2016 and estimate a slow growth from 2017 and onwards, particularly in the Subsea segment. Solstad has one newbuild entering the market in 2016 and therefore cash reserves will not only go to pay down existing debt, but down payments on their new vessel. There is a risk of Solstad not being able pay down service debts and deliver a satisfactory invested capital in the future which has resulted in the share price to plummet. As a result, Solstad’s market value of equity dropped and are now operating with a capital structure of ~95% debt. We calculated a share price of NOK 8,18, down from NOK 15,20 as of 18/04-16. We do not however, recommend either buy/hold/sell as the share and market is too volatile in our eyes. Nevertheless, the low share price may suggest some good investment opportunities in Solstad and the OSV-segment. Due to the significant crack in share price for all the OSV-companies during the past year, we believe there is a necessity and an opportunity for companies to look beyond today’s low oil price to secure growth through acquisition. Solstad can capitalize on the situation and secure a stronger market position by acquiring a smaller player with focus on the Subsea-segment. Another possibility is for a larger, international shipping conglomerate with financial strength to acquire Solstad. Solstad’s focus onwards will be on finding solutions in the market; be it merger, acquisitions or refinancing to meet their crippling debt obligations. This master’s thesis investigate how the new market conditions affect the intrinsic value of the publicly traded company Solstad Offshore ASA, and the possibilities and challenges that may lie ahead.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2016
Number of pages177