Equity Research - 13 January 2020 06:56 CET Oil & Oil Services Q4’19 reports likely to be mixed Big differences from company to company 2020 is likely to be another stock picking year We highlight 5 large caps and 3 small caps Akastor, Aker ASA, Aker BP, Aker Solutions, Archer, Borr Drilling, Equinor, KOG, DRLCO, Gradual, but small improvements in fundamentals Noreco, Ocean Yield, Odfjell Drilling, PGS, We expect the Brent oil price to trade near the USD 65/bbl level in 2020 Polarcus, Seabird, Subsea 7, TGS Nopec and offshore exploration and production (E&P) to grow 5%. In other words, we forecast only modest improvements in fundamentals, similar to the situation experienced in 2019. Company-specific news likely to drive share prices in 2020 BW Offshore, DNO, EMGS, Kvaerner, Huge differences in share price performance were prevalent among and Lundin Petroleum, Magseis, NODL, oil service shares in 2019. Given our view on 2020 (only modest general Prosafe, Seadrill improvements in fundamentals), we think company specifics again will be the key drivers for share prices. In general, our top picks have the following characteristics: strong balance sheets, strong market positions, ABGSC estimates are above consensus, improving company specific and positive free cash flow. Our best ideas The following companies are our top picks, all rated BUY ‒ Aker BP (with Reporting dates: Q4'19 JS, 2020 will be year of de-risking and FCF focus, ~8% 2021 dividend PGS 30/01/2020 yield is likely too high); Aker ASA (its industrial holdings like AKERBP, Lundin Petroleum 31/01/2020 OCY, AKA and AKSO have positive repricing potential in 2020, and DRLCO 05/02/2020 unlisted assets have potential to boost NAV); Maersk Drilling (positive Equinor 06/02/2020 cash flow and potential announcement of a clear dividend policy could be DNO 06/02/2020 a trigger for the share); Odfjell Drilling (FCF allows for deleveraging of the Prosafe 06/02/2020 balance sheet, low valuation); PGS (improving contract prices and a EMGS 06/02/2020 possible shareholder-friendly refinancing); Noreco (strong FCF within Aker Solutions 07/02/2020 sight, low valuation); Akastor (very low valuation, potential M&A triggers); Aker BP 11/02/2020 Polarcus (improving contract prices and deleveraging). Kvaerner 12/02/2020 Ocean Yield ASA 12/02/2020 We have made two rating changes: Northern Drilling downgraded to Awilco Drilling 12/02/2020 HOLD (Buy) and Maersk Drilling upgraded to BUY (Hold). TGS Nopec 12/02/2020 Kongsberg Gruppen 12/02/2020 Lead Analyst: [email protected], +47 22 01 61 87 [email protected], +47 22 01 60 25 Akastor 13/02/2020 [email protected], +47 22 01 61 39 Aker ASA 14/02/2020 [email protected], + 47 22 01 61 65 Noreco 25/02/2020 Magseis ASA 25/02/2020 Subsea 7 26/02/2020 Polarcus 27/02/2020 Archer Limited 27/02/2020 Seadrill 27/02/2020 Odfjell Drilling 27/02/2020 Key estimates (mill. b/d) 2015 2016 2017 2018 2019e 2020e 2021e Borr Drilling 28/02/2020 Global oil demand 95.0 96.2 98.1 99.3 100.3 101.6 103.0 Non-OPEC production 59.8 59.1 59.8 63.0 64.9 67.0 68.2 BW Offshore 28/02/2020 OPEC NGL 5.3 5.5 5.6 5.5 5.5 5.6 5.6 Northern Drilling 28/02/2020 Call on OPEC crude 30.0 31.6 32.7 30.8 29.9 29.0 29.2 Seabird OPEC crude production 31.4 32.4 32.0 31.9 30.0 29.4 29.4 Implied global stock build/draw (+/-) 1.5 0.7 -0.7 1.1 0.1 0.4 0.2 Key assumptions: Oil price (USD) 53 44 54 71 64 65 65 Global GDP growth (PPP adj.) 3.5 % 3.4 % 3.8 % 3.6 % 3.0 % 3.3 % 3.4 % Oil & Oil Services Contents Investment summary ....................................................................................4 Oil market and the oil price ........................................................................14 E&P spending .............................................................................................18 E&P company overview ..............................................................................20 Aker BP .......................................................................................................22 DNO............................................................................................................24 Equinor .......................................................................................................26 Lundin Petroleum .......................................................................................28 Noreco........................................................................................................30 Seismic market & company overview .........................................................32 EMGS..........................................................................................................34 Magseis ......................................................................................................36 PGS .............................................................................................................38 Polarcus ......................................................................................................40 Seabird .......................................................................................................42 TGS Nopec ..................................................................................................44 Drilling market & company overview ..........................................................46 Awilco Drilling .............................................................................................48 Borr Drilling ................................................................................................50 Maersk Drilling ...........................................................................................52 Northern Drilling Limited ............................................................................54 Odfjell Drilling .............................................................................................56 Seadrill .......................................................................................................58 13 January 2020 ABG Sundal Collier 2 Oil & Oil Services Field dev. market & company overview ........................................................60 Akastor .......................................................................................................62 Aker ASA .....................................................................................................64 Aker Solutions ............................................................................................66 Archer Limited ............................................................................................68 BW Offshore ...............................................................................................70 Kongsberg Gruppen ....................................................................................72 Kvaerner .....................................................................................................74 Ocean Yield.................................................................................................76 Prosafe .......................................................................................................78 Subsea 7 .....................................................................................................80 Company financials .....................................................................................82 13 January 2020 ABG Sundal Collier 3 Oil & Oil Services Investment summary Only small improvements in fundamentals We forecast only For 2020, we expect: modest improvements in A flattish oil price around USD 65 fundamentals for oil and oil service in A moderate, 5% increase in offshore E&P spending 2020 Main assumptions (key figures highlighted in yellow) Key assumptions 2015 2016 2017 2018 2019e 2020e 2021e Future price (Brent, USD) 62 59 Factset (Brent, USD) 64 66 ABGSC (Brent, USD) 53 44 54 71 64 65 65 Q1 55 34 54 67 63 65 65 Q2 62 46 50 75 69 65 65 Q3 51 46 52 75 62 65 65 Q4 44 49 62 68 63 65 65 Other key assumptions: WTI (USD) 49 43 51 60 57 60 60 Brent-WTI spread 4.0 0.2 3.3 10.6 7.3 5.0 5.0 Offshore E&P spending growth -20% -25% -12% 0% 3% 5% 7% NOK/USD 8.06 8.40 8.27 8.13 8.80 9.00 9.00 Source: ABG Sundal Collier, company data 2019 was a year for stock pickers; 2020 ‒ likely the same Fundamentals The charts below shows that 2019 was a typical stock-picking year. Norwegian oil trailing sideways and oil shares were flat on average, but the differences among winners and losers means another were huge. stock-picking year Nordic oil and oil service shares’ performance in 2019 150% 109% 100% 61%58% 48% 46%43%40% 50% 32%32% 26% 23%19% 0% 0% 0% -2% -5% -8% -24%-27%-29% -50% -38% -45% -57%-59%-61% -74% -100% -84%-87% IPC Borr PGS KOG DNO Axxis EMGS Noreco Akastor Seabird Prosafe Aker BP Aker Equinor Magseis Polarcus Kvaerner Subsea 7 Subsea Aker ASA Aker TGS Nopec TGS Seadrill Ltd. Seadrill Ocean Yield Ocean BW Offshore BW Odfjell Drilling Odfjell Awilco Drilling Awilco Archer Limited Archer Solutions Aker Northern Drilling Northern Lundin Petroleum Lundin Source: ABG Sundal Collier, company data 13 January 2020 ABG Sundal Collier 4 Oil & Oil Services Our best ideas Oil companies are Given the assumptions of a flat oil price and only a modest increase in E&P increasing spending, we think 2020 is likely to be another year for stock pickers in the oil & oil spending – services sector. Our top picks appear in the table below. In general, our top picks improving oil have the following characteristics: services fundamentals Strong balance sheets ahead