Valuation of Solstad Offshore ASA: With Particular Focus on Credit Risk in one of the World’s Most Capital Intensive Industries

Seline Marthea Mørk & Zanna Rustad Belegu

Student thesis: Master thesis


This thesis investigates the current market situation of the Norwegian OSV industry and how it has impacted the value of companies in the OSV industry, in particular, Solstad Offshore ASA. After the rapid decline in the oil price in 2014, the oil and gas companies have experienced a decrease in E&P investments and rig activity resulting in a lower demand for OSV services. The imbalance between supply and demand has resulted in historically low freight rates and companies have seen it necessary to merge, restructure and refinance their debt in order to avoid bankruptcy. It is revealed that there is significant credit risk related to investing in Solstad and the respective stock. Companies in the OSV industry are almost entirely debt financed and particularly sensitive to changes in WACC through changes in variables such as interest rates, yield spread, and the leverage ratio. A research of the capital structure of Solstad both before and after the merger with REM reveals that the respective banks demand collateral in vessels while having a significant number of covenants in order to protect themselves from the difficult conditions in the OSV industry. Figure 1 displays the debt structure of Solstad. Figure 1: Capital structure of Solstad Standard and Poor’s credit rating method has evaluated Solstad to a rating of B which states that Solstad is vulnerable to challenging conditions but currently being able to meet their financial obligations. The fixed income market further confirms this with the bond trading significantly below par. An average of different approaches to estimate the probability of default yields a default probability of 36.86 percent. A DCF analysis was implemented based on the external and internal analysis which revealed improved market conditions. This resulted in a share price of 16.68 NOK. This is a potential upside of 42.58 percent from the market price as of 04.01.2017 of 11.70 NOK. Even though the share price of Solstad recommends a buy situation, this cannot be recommended as the company is considered high-risk and the market is very uncertain. However, the low share price of the companies in the OSV industry suggests growth opportunities in relation to mergers and acquisitions. Solstad is expected to arise from the challenging condition with an extensive fleet and therefore achieve a strong market position.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2017
Number of pages140
SupervisorsSøren Plesner