Wells Fargo calls 2013 ‘Year of Subsea’

Wells Fargo analysts have dubbed 2013 the “Year of Subsea”, predicting record growth for offshore service providers.

Sizeable subsea equipment awards, progress on subsea processing technology and larger margins for subsea service and equipment providers all point to a boom year, bank analysts wrote in a Friday note.

“We continue to believe 2013 will be this upcycle’s first, and possibly most exciting, year of subsea production systems,” Wells Fargo wrote.

Robust economic growth and strong oil prices will be the backdrop for the growth, with Wells Fargo predicting global economic growth of 2.8 percent this year and 3.5 percent next year. Brent crude oil is estimated to reach $99.50 this year and $105 in 2014, according to the bank’s refining group.

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“Such an environment should be sufficiently comfortable for operators to push ahead with a high percentage of the planned-through-possible deep-water developments we’re tracking,” the note says.

The growth in demand for subsea equipment is one of the strongest indicators of the predicted future expansion. Last year, a total of 416 trees were awarded, up 32 percent from 2011. Wells Fargo estimates orders will grow another 30 percent in 2013.

And these numbers will keep growing, due to continued demand in the Gulf of Mexico, the United Kingdom and Norway, as well as a growing demand in Asia.

“Turning east, the market has benefited from the ongoing maturation of India and Australia and, more recently, the emergence of tomorrow’s frontiers, such as Vietnam and the Philippines,” Wells Fargo wrote.

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The West African and Brazilian markets, however, look riskier, due to political and regulatory uncertainties.

Subsea equipment companies, including FMC Technology and Aker Solutions, have recruited heavily.The sector expanded its staff by about one third in the last two years, which lowered profit margins. But Wells Fargo expects that the increasing productivity of this staff and a lower rate of recruiting will help enhance their bottom lines.

All of these factors will help push up stock prices for the subsea sector, Wells Fargo said, giving the companies more cash to invest.

“Expect multiples on subsea earnings to expand,” Wells Fargo wrote.