On 29 September 2014, the old Aker Solutions split into two companies – Aker Solutions (AKSO, Financial) and Akastor (AKA, Financial). This article discusses why the new Aker Solutions is a good long-term investment option after the split.
The biggest advantage of the split into two companies is that it has resulted in the formation of a leaner company with greater focus on each of the divisions through the two companies. The new Aker Solutions has two reporting segments – Subsea and Field Designs. The other company, Akastor ASA is primarily an oilfield services investment company.
Investment positives for Aker Solutions
Market Leader in Subsea Systems and Engineering
The new Aker Solutions is the market leader in subsea systems and engineering. Between 2013 and 2014YTD, Aker Solutions has won 36% of the subsea tree awards and 51% of subsea control awards. The contract awards show the company’s dominance in the subsea segment.
Further, in the field design segment, Aker Solutions has leadership position in Norwegian offshore Engineering market with involvement in 80% of all offshore fields. With strong market position and a greater focus on the division after the split, Aker Solutions is well positioned to grow strongly.
Strong Offshore and Subsea Equipment Spending
The company’s market leadership position in the subsea and field design segment will be of great advantage at a time when strong growth is expected in these segments. Aker Solutions will be best positioned to capitalize on the coming growth.
As the chart shows, the offshore capital expenditure is likely to grow at a CAGR of 7% from 2013-19. For the same period, the growth in subsea equipment spending is likely to be at a CAGR of 14%.
With this kind of expected growth in the markets, Aker Solutions will continue to grow at a stronger pace during this period as it grabs a bigger share of the contract awards.
Strong Order Backlog
As of second quarter of 2014, Aker Solutions had a strong order backlog of $8 billion. A strong order backlog gives Aker Solutions strong revenue and cash flow visibility.
Aker Solutions order backlog is also with blue-chip clients such as Statoil (STO, Financial), Total (TOT, Financial) and ConocoPhillips (COP, Financial). Backlog with strong parties’ means that the revenue certainty is higher and there is a low probability of order cancellation.
Also, with strong growth expected in the subsea and field designs market as discussed above, the order backlog is likely to swell over the next few years. Just for the second quarter of 2014, the order intake for Aker Solutions was $3.2 billion. Aker Solutions therefore provides sound revenue visibility and is a safe stock for exposure.
Well Diversified Order Backlog
Another positive point in the order backlog for Aker Solutions is the well diversified order book from a regional diversification perspective.
As of second quarter of 2014, 37% of the backlog was from Norway, 35% from Africa and Middle East, 10% from South America, 9% from the U.K., 5% from North America and 4% from Asia Pacific.
I believe that regional diversification reduces the risk and also gives Aker Solutions inroads in new markets such as in the Asia Pacific and South America where long-term prospects are bright.
The current offshore market is not at its peak, but the long-term prospect for offshore drilling remains bright. Aker Solutions has market leadership position in the subsea and field services segment and the company looks good for growth after becoming a more leaner and focused organization.
The current weakness in the offshore markets is an opportunity to buy stocks like Aker Solutions that can be value creators for the long term.