* Taking the credit view, how big is the equity hole?
With the equity story in European oil services being so unattractive, we look at the make up of the US$55bn EV of the sector, considerably higher than the US$32bn market cap. We conclude that even after the much needed equity raises by CGG and Saipem, we calculate US$12bn of additional equity still needs to be raised to sort out balance sheets, equivalent to a c.40% uplift to the current market cap of the sector.
* US$12bn of new equity to dilute existing shareholders
To reach US$12bn we apply 2.0x net debt/EBITDA on our 2016 forecasts, a very simplistic approach. The outputs return an implied capital shortfall of US$8bn if the multiple is raised to 3.0x. In any event, it appears that there is severe pressure on companies to rein in the amount of debt on their balance sheets, and having seen two concluded raises, EUR350m at CGG and EUR3.5bn at Saipem, more companies will likely follow. There are few alternatives, such as disposals, in this environment as the oil services sector moves through the “path of pain”.
* Seadrill may need US$4bn of equity to repair balance sheet
It is unsurprising the overwhelming outlier is Seadrill, where the equity is US$1.5bn and the EV is US$11bn. The company has committed to deciding on a restructuring plan during 2Q16, and on our analysis, using 3.0x net debt/EBITDA, the implied capital shortfall is US$4bn. Next in line is Vallourec, which are in the process now of raising EUR1bn of fresh capital, which includes a EUR485m rights issue. On the other end of the scale, Subsea 7, Tecnicas and Lamprell have the most healthy balance sheets.
* Credit ratings are not always required, and it’s just as well
Our comprehensive analysis of the sector’s balance sheet shows a collection of bonds, credit lines and bank loans. It is worth noting that for a sector with so much debt, it does not appear to be a general requirement to have a credit rating to win and execute multi billion contracts. Whilst Petrofac (BBB), Technip (BBB+) and Saipem ((P) BBB-) are
investment grade, we do not see the other European oil services companies running their balance sheet with an aspiration to achieve investment grade.
* Outlook won’t do any favours for balance sheets
We again reiterated our negative sector view in Feeling the pain and our oil industry capex forecasts keep falling (Capex crunch continues with 16% cut in 16E). The outlook may still offer more downside, and given the track record of the sector, consensus forecasts for revenue and margin capture may be optimistic and in turn could put more
pressure on to balance sheets. As things stand now, we believe the equity raises announced/executed by CGG, PGS and Vallourec may not be enough, and that further measures may need to be taken.