Subsea 7: Navigating to Profitability and Renewables Dominance

The energy transition is reshaping the offshore engineering sector, and Subsea 7 is positioned to capitalize on it. With a 15% Adjusted EBITDA margin in Q1 2025 (up 380 basis points year-on-year) and a $10.8 billion backlog underpinning its 2025 guidance, the company is emerging as a leader in both traditional deepwater projects and the rapidly scaling offshore wind market. Let's dissect how its operational execution, strategic diversification, and financial discipline make it a BUY for investors seeking exposure to energy transition tailwinds.

Margin Growth: A Structural Shift, Not a One-Quarter Blip

Subsea 7's Q1 2025 results marked a significant milestone: its Adjusted EBITDA margin expanded to 15%, a 380-basis-point jump from 12% in Q1 2024. This improvement was driven by:
1. Operational excellence: Strong execution in high-margin deepwater projects in Africa (e.g., Angola's Agogo field, Egypt's Raven field) and Brazil (Mero 3).
2. Project mix optimization: A strategic pivot away from low-margin legacy work toward cost-advantaged deepwater and gas projects.
3. Renewables' upward trajectory: While the Renewables segment reported a 10% margin in Q1 2025 (due to seasonal vessel maintenance and ramp-up costs), management expects margins to hit 21% by 4Q 2024 (based on prior guidance) as projects like the UK's Dogger Bank C and East Anglia THREE reach peak activity.

The company reaffirmed its 2025 Adjusted EBITDA margin guidance of 18-20%, with management confident of exceeding 20% in 2026. This trajectory is supported by a backlog skewed toward high-value work:
- $4.8 billion of the $10.8B backlog is earmarked for 2025, ensuring strong revenue visibility.
- $3.5B is slotted for 2026, providing a runway for margin expansion as newer, higher-margin projects ramp up.

Backlog Strength: A Portfolio Built for the Energy Transition

Subsea 7's backlog is not just large—it's strategically diversified. Key projects include:
1. Türkiye's Sakarya gas field: A $500 million+ contract leveraging Subsea 7's expertise in complex deepwater gas developments.
2. Namibia's offshore oil potential: A Memorandum of Understanding with NAMCO positions the firm to capitalize on emerging opportunities in Africa's next oil frontier.
3. UK offshore wind dominance: Projects like Dogger Bank C (Europe's largest wind farm) and East Anglia THREE highlight its role in the UK's 50GW offshore wind target by 2030.

The $10.8 billion backlog represents over 80% of 2025 revenue guidance, reducing execution risk. Management's confidence in surpassing 2025 margin targets stems from this backlog's composition—60% of 2025 backlog is in renewables and gas, sectors with higher profitability and long-term demand.

Strategic Resilience: Diversification as a Hedge Against Volatility

Subsea 7's strategy isn't just about chasing renewables—it's about balancing risk through:
1. Deepwater dominance: Focusing on cost-advantaged deepwater projects (e.g., Brazil, West Africa) shields it from price volatility in shallow-water markets.
2. Gas as a growth lever: The global gas market's structural demand (Türkiye's Sakarya, Egypt's Raven) provides stable cash flows.
3. Partnerships for scalability: Its Subsea Integration Alliance with bp and local partnerships (e.g., NAMCO in Namibia) reduce execution costs and accelerate project timelines.

This diversification has already paid off: despite 2024's macroeconomic headwinds (tariffs, inflation), Subsea 7's Q1 2025 net debt-to-EBITDA ratio of 0.5x remains among the healthiest in its peer group.

Financial Health: A Strong Foundation for Growth

Subsea 7's balance sheet is a critical enabler:
- Net debt of $632 million (including lease liabilities) is manageable, with liquidity of $1.2 billion.
- Capital allocation discipline: It reinvested in high-return projects (e.g., vessel upgrades for renewables) while maintaining a 5% dividend yield.

The company's financial flexibility allows it to:
- Pursue strategic acquisitions (e.g., in digitalization for renewables).
- Maintain pricing power in a tightening market for offshore engineering services.

Risks and Mitigation

• Commodity price volatility: Mitigated by long-term contracts and gas/diesel-hedging programs.
• Project delays: Offset by a diversified project portfolio and strong operational execution (e.g., on-time delivery of Mero 3).
• Regulatory risks in renewables: The UK's upcoming Contracts for Difference (CFD) allocation round could unlock $1 billion+ in new projects, reducing execution risk.

Conclusion: A High-Conviction Play on Energy Transition

Subsea 7's 15% Q1 margin, $10.8B backlog, and strategic focus on renewables and gas position it to deliver 18-20% margins in 2025 and >20% in 2026. With a robust balance sheet and a backlog skewed toward high-margin work, it's primed to outperform peers in both profitability and growth.

Investment Recommendation: BUY with a 12-18 month horizon. Key catalysts include:
- Margin expansion to 20%+ in 2026.
- New offshore wind awards from the UK's CFD round.
- Execution of Namibian and Sakarya projects, which could unlock further contracts.

Subsea 7 isn't just navigating the energy transition—it's steering it.