MS favor offshore names in energy services despite oil weakness

Investing.com -- Morgan Stanley is backing offshore-focused energy services stocks, maintaining a positive view despite a weak near-term oil price outlook. 

In a recent report expanding its European energy coverage, the bank favors companies with long-cycle offshore exposure, arguing they are better positioned to weather commodity volatility and spending constraints.

SBM Offshore, Subsea7, and Saipem (BIT:SPMI) are the top picks, all rated “overweight.” Analysts see these firms as insulated from short-cycle capex cuts as Brent crude prices fall into the mid-to-high $50s. 

These offshore players benefit from large backlogs and long-lead-time projects that provide visibility into future cash flows.

SBM Offshore stands out for its stable earnings stream from leased floating production units (FPSOs). 

Morgan Stanley projects a 17% free cash flow yield in 2025–26 and expects the company to distribute $1.9 billion to shareholders by 2030, around half its current market cap. 

The €29 price target implies roughly 40% upside from current levels. The report notes that 90% of SBM’s debt is tied to individual projects and paid back through contracted revenues, limiting balance sheet risk.

Analysts see SBM’s shift toward “Sale & Operate” contracts, rather than asset-heavy leases, as a key driver of lower capital intensity. 

The company is actively positioned to win more FPSO awards, with a pipeline of potential contracts across Brazil, Guyana and Suriname. Its strategy of pre-ordering standardised hulls is also credited with reducing construction timelines and project risk.

Subsea7 and Saipem, which also focus on offshore infrastructure, are similarly viewed as resilient in a tightening spending environment. 

These companies have rebuilt their backlogs and balance sheets since the last downturn, aided by disciplined capacity additions and rising energy security concerns following the Ukraine war.

Elsewhere in the sector, Morgan Stanley initiated coverage on Vallourec (EPA:VLLP) at “equal-weight.” 

While the company has closed a profitability gap with peers and trades at a discount to Tenaris (BIT:TENR), the OCTG segment is seen as more exposed to short-cycle demand.

 GTT was rated “underweight,” with analysts arguing that investor expectations have run ahead of fundamentals amid a slowdown in LNG carrier orders.

The report underscores a broader theme: long-cycle offshore investments remain a priority for producers despite lower oil prices. 

Producers are more willing to commit to multi-decade offshore projects, which support service providers with contracted cash flows and strong execution track records.

Morgan Stanley concludes that offshore-focused names with disciplined capital management and backlog visibility are best placed to navigate market uncertainty.

In a stock-pickers’ market, the brokerage sees selective offshore exposure as the most compelling opportunity within European energy services.