Odfjell Technology was spun off from Odfjell Drilling, so that OTL can focus completely on the services segment, which is much more stable. While Odfjell Drilling does/has done this to some extend, ODL has more risk related to the cyclical nature of the business, since they also operate drilling units. Odfjell Drilling operates in the offshore segment and importantly is dependent on dayrates, which is very cyclical.
Thanks for the write-up. It indeed seems like a very interesting opportunity. Not your first one haha. Where do you get your ideas from?
I’m still not very convinced about its competitive advantage. What indicates that entry barriers are high or switching costs are high? How are you certain that quality and trust of service are high?
First of all thanks 🙏. Idea generation is not my problem anymore, since I follow so many people on Twitter and other Social networks (eg. Substack), that I get a lot of ideas this way. Further I try to look with open eyes trough the world and sometimes I find interesting things. This is hard to explain, since it’s a bit like magic. I know that it will happen, but i don’t know when.
To Odfjell: I’m not 100% sure that it’s impossible to compete with them. But this is generally a bet on the entire Norwegian oil & gas industry and it’s spending. Schlumberger is a competitor, but also a client ! This alone shows the quality of the company. On the other hand, they have contracts with AkerBP that reach far out the future. Their strategic relationship with AkerBP, Wintershall Dea (BASF), etc, are long standing and have been build over decades. The entire industry is booming, so we actually don’t really need to look at something like a moat for now. But since demand for services is sky highs no there is just a limited amount of professional engineers (the number of oil & gas majors at universities has dropped 90% !), teh supply is limited. Further, the family owns 60% of the shares and has integrated the company with Odfjell SA.
So all in all, I do believe that they are very well positioned to grow and profit from this market environment.
Love your work, thank you. Exceptional overview of the current market and technical detail of the company in your analysis. My only thought was that you might add where a stock is listed since I assume for many readers their opportunities are often focussed by which international stock exchanges they have access to.
Thanks for the writeup. Perhaps a silly question but could you explain how FCF yield is 20%?
My rough calculation: MC=2.15B. Net debt=0.87B => EV=3B. TTM FCF around 0.19B => 6.3% yield. Am I missing something obvious or is it implied that their FCF yield will triple in a year?
Your FCF number is way to low. Headlines, this may be correct, but working capital is what dragged down Q3 numbers. If we exclude/normalize this number, we get >320m NOK in FCF. So this is already around 15-16% FCF yield. The report from DNB is forward looking. They expect a Net Debt reduction and growth for the year 2024. Also the share price has moved a bit since the publication of the report. This is how I got to a rough estimate of 20% FCF yield.
I'm assuming the exclusion of this working capital is based on the assumption that this was a one time thing. But how did you verify this? I'm just trying to justify the odds of the working capital reversing and increase to over 320m this year. They expect a net debt reduction and growth in 2024, but will it be significant enough? EBITDA margins decreased from 11% to 7% in Operations segment in 2 quarters, decreased from 16% to 12% (1 quarter) in Projects & Engineering segment. Perhaps too short of a time frame to draw conclusions here whether they are loosing market share or expected hiccups. I haven't read in detail so maybe I missed something obvious here.
Alas, I am probably overthinking this. I am not questioning managements competence but I see some baseless statements from them. Perhaps I am just ignorant and don't understand the full picture yet
This is a fantastic selection. I'm intrigued – would it be possible for you to share the research report detailing the net-debt projections for Odfjell?
Interesting perspective. Aker BP is a great business, Equinor too, but what is striking is the 17% shareholder yield in the case of Equinor. I agree on the renewables part, since this is in my opinion mostly a waste of money for a green image. I like Var Energi. They will double production by 2025 and have a managment team that is aligned with shareholders. I don’t think that dividends are to high, in the context that the dividend is fixed 20-30% of CFFO after taxes. In order to push the tax rate lowers no create shareholder value, they invest a lot into CAPEX. Maybe I should do a write up on the tax system of Norway in the future 🤨.
Pre tax margins have been at 4.8% in Q3 2022. Now they are at 7.2%, in comparison, they were at 6.2% in Q2 2023. With Pareto (investment bank) guiding for ~7% growth in the oil service sector this year (similar to 2023), I think growth can continue. The cash generation will be used to reduce debt and pay dividends.
What's the difference between Odfjell Technology and Odfjell Drilling? Seem to do same thing. Not explained in their presentation well at all.
Odfjell Technology was spun off from Odfjell Drilling, so that OTL can focus completely on the services segment, which is much more stable. While Odfjell Drilling does/has done this to some extend, ODL has more risk related to the cyclical nature of the business, since they also operate drilling units. Odfjell Drilling operates in the offshore segment and importantly is dependent on dayrates, which is very cyclical.
I hope this helps.
Excellent write-up. I've put in on my watchlist
Thanks 🙏
Thanks for the write-up. It indeed seems like a very interesting opportunity. Not your first one haha. Where do you get your ideas from?
I’m still not very convinced about its competitive advantage. What indicates that entry barriers are high or switching costs are high? How are you certain that quality and trust of service are high?
First of all thanks 🙏. Idea generation is not my problem anymore, since I follow so many people on Twitter and other Social networks (eg. Substack), that I get a lot of ideas this way. Further I try to look with open eyes trough the world and sometimes I find interesting things. This is hard to explain, since it’s a bit like magic. I know that it will happen, but i don’t know when.
To Odfjell: I’m not 100% sure that it’s impossible to compete with them. But this is generally a bet on the entire Norwegian oil & gas industry and it’s spending. Schlumberger is a competitor, but also a client ! This alone shows the quality of the company. On the other hand, they have contracts with AkerBP that reach far out the future. Their strategic relationship with AkerBP, Wintershall Dea (BASF), etc, are long standing and have been build over decades. The entire industry is booming, so we actually don’t really need to look at something like a moat for now. But since demand for services is sky highs no there is just a limited amount of professional engineers (the number of oil & gas majors at universities has dropped 90% !), teh supply is limited. Further, the family owns 60% of the shares and has integrated the company with Odfjell SA.
So all in all, I do believe that they are very well positioned to grow and profit from this market environment.
Love your work, thank you. Exceptional overview of the current market and technical detail of the company in your analysis. My only thought was that you might add where a stock is listed since I assume for many readers their opportunities are often focussed by which international stock exchanges they have access to.
I replied on Substack Notes to your post 🙏
Thanks for the writeup. Perhaps a silly question but could you explain how FCF yield is 20%?
My rough calculation: MC=2.15B. Net debt=0.87B => EV=3B. TTM FCF around 0.19B => 6.3% yield. Am I missing something obvious or is it implied that their FCF yield will triple in a year?
Your FCF number is way to low. Headlines, this may be correct, but working capital is what dragged down Q3 numbers. If we exclude/normalize this number, we get >320m NOK in FCF. So this is already around 15-16% FCF yield. The report from DNB is forward looking. They expect a Net Debt reduction and growth for the year 2024. Also the share price has moved a bit since the publication of the report. This is how I got to a rough estimate of 20% FCF yield.
I'm assuming the exclusion of this working capital is based on the assumption that this was a one time thing. But how did you verify this? I'm just trying to justify the odds of the working capital reversing and increase to over 320m this year. They expect a net debt reduction and growth in 2024, but will it be significant enough? EBITDA margins decreased from 11% to 7% in Operations segment in 2 quarters, decreased from 16% to 12% (1 quarter) in Projects & Engineering segment. Perhaps too short of a time frame to draw conclusions here whether they are loosing market share or expected hiccups. I haven't read in detail so maybe I missed something obvious here.
Alas, I am probably overthinking this. I am not questioning managements competence but I see some baseless statements from them. Perhaps I am just ignorant and don't understand the full picture yet
This is a fantastic selection. I'm intrigued – would it be possible for you to share the research report detailing the net-debt projections for Odfjell?
Whats your Email ?
q3ms49@gmail.com
I send it out !
Interesting, I like your series on Norway energy producers. I'm also building a shopping list:
- Equinor's business is OK, but they promise to spend too much on renewables by 2030.
- Aker BP's numbers looked good. Sustainable.
- Var Energi, I think they pay too much dividends: TTM dividends plus capex is greater than CFO.
Interesting perspective. Aker BP is a great business, Equinor too, but what is striking is the 17% shareholder yield in the case of Equinor. I agree on the renewables part, since this is in my opinion mostly a waste of money for a green image. I like Var Energi. They will double production by 2025 and have a managment team that is aligned with shareholders. I don’t think that dividends are to high, in the context that the dividend is fixed 20-30% of CFFO after taxes. In order to push the tax rate lowers no create shareholder value, they invest a lot into CAPEX. Maybe I should do a write up on the tax system of Norway in the future 🤨.
Thanks a lot for sharing 🙏
A writeup on the tax system would be interesting. All I know is that they can get 78% of their investments back, within a few years.
When I ind time, I will write it down. I have the feeling that many people are confused and are making objectively bad decisions as a result
Pre tax margins have been at 4.8% in Q3 2022. Now they are at 7.2%, in comparison, they were at 6.2% in Q2 2023. With Pareto (investment bank) guiding for ~7% growth in the oil service sector this year (similar to 2023), I think growth can continue. The cash generation will be used to reduce debt and pay dividends.