Carnegie

PGS (Buy): At the outset of a new upcycle

Following an extended downturn after the seismic market collapsed in 2014, owners of seismic vessels either went belly up, divested their vessels, or reduced their fleet to survive. This has led to significant reduction in capacity, and there are essentially only two players left in the 3D seismic vessel market: PGS and Shearwater. With our expected increase in E&P spending, the seismic market will tighten, setting PGS up for solid earnings growth in our view.

Driven by higher prices on contract work and late sales, we forecast revenue to grow at 12% CAGR through 2024e from a high 2021 base. This implies that PGS’ revenue will account for less than 0.5% of our and consensus estimated total E&P FCF(22–24e). With PGS’ high operational leverage, amplified by the reduced cost base, we estimate EBITDA(23–24e) of USD530m–627m, leaving us 3% below and 8% ahead of consensus, respectively. We estimate this should trickle down into a strong average FCF yield (on EV) of ~21% in 2023–24e.

We acknowledge the high financial risk, with USD971m of debt maturing in 2023–24. Still, we think the rapidly improving market conditions and our positive market outlook, as well as earnings and cash flows that are increasingly supportive of the current debt load, should allow the company to refinance with either very limited new equity, or none at all. We estimate NIBD/cash EBITDA of 3.0x in 2022e, declining to 2.1x in 2023e and 1.1x in 2024e.

With this report we resume coverage of PGS after having suspended it due to our role as the sole bookrunner in a PGS share issue earlier this year. Based on our estimated SOTP and multiples valuation we arrive at a fair value of NOK12.4 per share and set a target price of NOK12. This implies EV/cash EBITDA(23e) of 4.4x, falling to 3.0x on our 2024e – levels we deem conservative. Our estimates have a solid upside if the company would activate more vessels. Furthermore, our valuation indicates a 30–40% discount to the average of PGS’ historical valuation and peers, as we believe the market is not willing to fully price in PGS’ full potential before the company has refinanced its 2023–24 debt maturities. BUY PGS.