We initiate coverage of Songa Offshore with a BUY recommendation and target price of NOK 47
Songa Offshore has an EV/M.cap of 6.2 (implied 16% equity ratio) and has four modern rigs on long-term contracts to Statoil until 2022/24 (three vintage rigs are stacked). This leaves the company highly leveraged but with a secured cash flow above break-even levels at the cyclical trough, which in our opinion is rare and highly attractive.
Valuation: We set our target price to NOK 47 based on a mid-cycle EV/EVITDA of 8x in 2017, a conservative multiple in our view at the bottom of the cycle. Thus, we believe the range of outcomes is skewed to the upside.