SBM Offshore's Stalled Returns: A Historical Lens on Capital-Intensive Cycles

For investors chasing multi-bagger returns, the core question is whether a business is a compounding machine. That requires two things: a proven return on capital employed (ROCE) that is increasing, and an expanding base of capital deployed. SBM Offshore fails this test. The company's trailing twelve-month ROCE sits at a low 7.7%, which not only fails to inspire confidence but also under-performs the Energy Services industry average of 12%.

The real structural challenge is that SBM has been reinvesting capital without improving returns. Over the last five years, the company has employed 75% more capital, yet the returns on that capital have remained stubbornly stable at 7.7%. This is the antithesis of a compounding business. Instead of deploying new funds into higher-return ventures, the capital is being absorbed into a stagnant return profile.

In a capital-intensive industry like offshore energy services, this stagnation is a critical friction point. It suggests the company is either unable to find attractive reinvestment opportunities or is deploying capital inefficiently. The result is a business that grows in size but not in profitability per dollar of capital. This directly contradicts the multi-bagger blueprint, where expanding capital and rising returns act in concert to accelerate shareholder value.

The bottom line is that SBM Offshore's financial story is one of scale without leverage. The market's recent 109% five-year gain appears to be pricing in future hope, not current execution. For the return on capital to improve, the company must demonstrate it can move beyond simply employing more capital and start generating a higher yield from it. Until then, the structural challenge is clear: a capital-intensive model with returns stuck in the single digits.

Historical Parallels: The Offshore Drilling Cycle of Returns

The offshore drilling market is projected to grow at a CAGR of 7.41% through 2033, a clear tailwind for companies like SBM Offshore. Yet history offers a cautionary tale about the durability of returns in this capital-intensive cycle. The performance of Transocean, a pure-play offshore driller, is instructive. Its TTM ROIC of 5.76% sits below its WACC of 7.97%. This gap is critical: it means the company is destroying value as it grows, earning less on its invested capital than the cost of that capital.

Transocean's ROIC history is a textbook example of the sector's volatility. The metric has swung from negative territory for years to a recent positive turn, but the underlying pattern is one of extreme cyclicality. This mirrors the broader offshore energy services model, where massive upfront capital is required to build or acquire rigs. This capital expenditure pressures returns until the fleet achieves sufficient scale and utilization to generate profits that exceed the cost of financing.

For SBM Offshore, the lesson is structural. A growing market does not automatically translate to improving returns. The company must navigate the same capital intensity trap. The projected market expansion provides the opportunity, but the execution challenge remains: deploying capital efficiently to capture growth without diluting returns. The historical precedent shows that even in a rising market, companies can struggle to earn a return that justifies their cost of capital, making operational discipline and fleet optimization paramount.

The Growth Engine vs. Return Plumbing: A Structural Tension

SBM Offshore's 2024 results present a classic tension between growth and return sustainability. The company delivered record-level directional revenue of US$6.1 billion and record-level directional EBITDA of US$1.9 billion, a 44% jump. This performance, however, was not driven by organic operational leverage but by a specific, cyclical mix: the sale of FPSOs Prosperity and Liza Destiny and new awards. The growth engine is firing, but its fuel is asset turnover and project completion, not a rising tide of operational efficiency.

This creates a structural friction. The company is simultaneously deploying capital to build its backlog and returning significant cash to shareholders. It has committed to a minimum US$1.7 billion cash return to shareholders over the next 6 years. This is a substantial sum, representing a significant portion of its US$9.5 billion net cash backlog. The tension is clear: capital used for shareholder returns is capital not reinvested into the business. For a capital-intensive, project-based company, this constrains its ability to aggressively grow its future earnings base.

The record US$35.1 billion backlog is a powerful asset, but its path to high returns is uncertain. Converting this backlog into earnings requires successful execution of complex, multi-year projects in a cyclical industry. The company's guidance for 2025-above US$4.9 billion in revenue and around US$1.55 billion in EBITDA-suggests a step-down from 2024's peak, which is typical after a major asset sale cycle. The real test is whether the company can maintain a high return on capital employed (ROCE) through this cycle, or if the capital intensity and project risks will compress margins.

The bottom line is that SBM's model is a balancing act. The growth is real but lumpy, tied to asset sales and new awards. The shareholder returns are a clear commitment, but they come at the cost of reinvestment. The sustainability of earnings power depends on the company's ability to manage this tension-using its backlog wisely while meeting its return commitments-through the inevitable cycles of the offshore oil and gas market.

Valuation, Catalysts, and the Risk of Stalled Returns

The market's verdict on SBM Offshore is a study in conflicting signals. On one hand, the stock has delivered a 109% return in the last five years, a powerful testament to investor belief in its future. On the other, the underlying business shows a fundamental tension: the company has employed 75% more capital in the last five years, yet its ROCE has remained stable at 7.7%. This disconnect is the core of the stalled returns thesis. The market is pricing in growth, but the company's ability to compound value is constrained by a return profile that underperforms its industry average.

The near-term catalysts are clear and tied directly to execution. The first is the successful completion of the remaining 16 deepwater projects in the core market of Brazil, Guyana, Suriname, and Namibia. These projects are the engine of the record $35.1 billion backlog and the source of the recent revenue and EBITDA surge. Their on-time delivery will validate the company's operational turnaround and de-risk the construction portfolio. The second catalyst is the de-risking of that portfolio itself. The recent achievement of first oil for the Almirante Tamandaré and the progress on two additional units signal a shift from a capital-intensive, project-based model to a more stable, operational one. This transition is critical for improving cash flow predictability and ROCE.

The primary risk, however, is that capital continues to be deployed into a cycle where returns fail to rise. This is not a theoretical concern; it is a documented history. The comparison to Transocean is instructive. Its ROIC % has been below its WACC %, meaning the company destroys value even as it grows. SBM Offshore's 7.7% ROCE, while better, is still a low return in an energy services context. If the company's aggressive capital deployment into new projects does not lift this metric, it will face the same fate: nominal growth masking value destruction. The market's rosy long-term view hinges entirely on a future where returns improve, not just capital employed.

The bottom line is that SBM Offshore is a binary bet. The catalysts are tangible and within management's control. But the valuation already reflects success. For the stock to move higher, the company must prove it can convert its massive backlog into higher returns, not just higher revenue. The stalled returns thesis is a warning that growth without improving returns is a path to shareholder disappointment.