UPDATE 2-Norway's Aker Solutions ditches growth targets to focus on profit

Wed Dec 4, 2013 6:56am EST

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By Balazs Koranyi and Henrik Stolen

OSLO, Dec 4 (Reuters) - Norwegian oil services firm Aker Solutions ditched its longer-term growth targets, saying it needed to focus on its profit and share price as the industry faces rising costs and weakening demand from its customers.

The decision shines a light on the challenges facing oil services companies. They are grappling with rising costs for labour and equipment at a time when the oil firms they service are reining in capital spending after a decade of heavy investment growth left them with a negative cash flow, forcing them to raise debt or sell assets to pay dividends.

Aker Solutions, controlled by billionaire Kjell Inge Roekke, said it would sell some low-margin businesses and raise its investment criteria to improve profitability.

"The focus on topline growth will be toned down and more attention will be paid to growing our profit and share price," Executive Chairman Oeyvind Eriksen told investors on Wednesday. "We are going to reduce our investment levels so that we don't over-invest in capacity that could erode margins."

Aker Solutions had targeted doubling revenue between 2010 and 2015, and raising its earnings before interest, tax, depreciation and amortisation (EBITDA) margin to 15 percent by 2017, but has now scrapped those targets.

"I think we have the potential to grow in line with what we have guided before. But that is not we should be measured on," Eriksen said.

Aker Solutions has struggled to boost its own profitability and its 8.5 percent EBITDA margin in the first nine months was well behind top rival Technip's 11.8 percent.

The firm is expected to return around 12 percent on average capital employed in 2014, according to the average forecast in a poll of analysts, well below its European peers' average rate of 14 percent - an indication that it is making low returns on its investments.

"We will avoid overinvesting in capacity that could erode margins if market growth does not meet projections," Eriksen said. "To this end, we have tightened our investment criteria, moving our hurdle rate up to 15 percent."

ULTRADEEP, ULTRAHARSH

The firm sold its well-intervention services and mooring and loading systems in a $654 million deal in November and is looking to shed its oilfield services and marine assets business.

Aker Solutions acknowledged the short-term volatility in the sector as oil companies delay or cancel projects but said long-term prospects were intact and it expected its market to expand by 8-10 percent per year as the offshore sector, particularly the ultradeep and ultraharsh segments are resilient. It did not specify a timeframe, however.

It also said that Statoil's Johan Sverdrup development, the biggest oil find in the North Sea in decades, could be a make-or-break contract for its engineering unit.

"In the case of the Aker Solutions engineering business, one project stands out: Johan Sverdrup," Eriksen said. "That project alone will define our capacity and our competence in the decade to come. Johan Sverdrup is set to be awarded before Christmas."

The firm also maintained its previous target of paying out 30 to 50 percent of its profits through a combination of dividends and share buybacks.

Investors considered the strategy update neutral and in line with the consensus. The stock rose 0.2 percent by 0937, outperforming a 0.2 percent fall by the Oslo bourse. (Editing by Pravin Char)

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