We initiate coverage of Dietswell: the company is an engineering contractor to the oil, gas and energy sectors. It is an asset-light company with technical knowledge that provides solutions to its clients along the complete drilling value chain.

As part of its diversification strategy, Dietswell is using its competencies gained in offshore oil and gas activities to design and develop an offshore floater for wind turbines.

This is not the first time an oil and gas contractor has moved to offshore wind (e.g. subsea 7) and Dietswell’s track record in offshore drilling should prove to have an edge over companies specialised in onshore wind as it has transferable skills and it is used to tight capital spending.

Being an asset-light company, it managed to weather the 2014-17 oil downturn (which extended into 2018 for oil services companies) by reducing its cost base significantly (overhead costs are down 35% between 2014 and 2018), with the audit and inspection divisions keeping the company afloat while research and development was geared towards renewable energies.

Management is committed to gaining exposure to the renewable industry and increase shareholders’ value as it has skin in the game with a 19% stake in the company.

Traditional businesses supported by strong oil

After reaching a low point in Q4 17 and Q1 18, we expect activity to continue its recovery in rig inspection and technical workforce and return to pre-crisis levels in 2020 for two main reasons:

  1. strong oil prices support drilling activity to restart fast, on which Dietswell can bring its expertise, such as in rig reactivation. This acceleration in drilling activities already shows up in Dietswell’s backlog. It stood at €9.4m in August 2018, a €1.1m increase against June 2018;
  2. workforce reductions from the oil majors during the downturn should boost manpower outsourcing in operational activities.

We also expect the engineering and project management divisions to pick up again, although at a slower pace than rig inspection and technical workforce. Dietswell has expertise that can be applied early in the cycle, such as technical refurbishment, yet offshore drilling remains subdued and it might take more time to generate contracts.

Offshore wind potential

Most of the upside stems from the new division Dietswell is launching in the floating offshore wind (FOW) market. The group is using its competencies gained in offshore activities to design and develop a semi-submersible float able to support 6-12MW offshore wind turbines.

The offshore wind market is currently in its infancy (50MW installed capacity at end 2017) and growth is expected to be driven by drastic cuts in costs per MWh, similar to the fixed offshore industry, where costs have declined to €80-110/MWh.

On the mid-term, we forecast the total FOW installed capacity to reach c.12GW by 2030, in line with research studies and corporate outlooks (Equinor). We expect Dietswell to be able to grasp c.8% of this total market.

Based on this scenario, we estimate that the group will land its first contract in 2019 (one unit) and progressively ramp up its production rate to 13-14 units by 2030.

The oil services industry could be another driver for FOW as small-to-medium size floating wind farms could be used both economically and environmentally to power offshore oil & gas drilling and production installations. Dietswell is already active in this niche market and landed a contract for a preliminary study in H2 18.

The main risks come from competition in the FOW market as Dietswell’s main competitors are on average a year ahead in terms of developments (Naval/Eolfi, PPI, Ideol).

Risks also include uncertainty around the future capital structure of the New Energies division as Dietswell will need to find a suitable industrial partner to help finance the launch of the activity while providing technical know-how in fields such as maritime installation.

Valuation

In a nutshell, Dietswell has two divisions which ensure rather stable cash flows (rig inspection and technical workforce), another two divisions the activities of which are more lumpy and dependent on exploration and production spending (engineering and project management) and one division with high growth potential (renewable energies).

The current market capitalisation stands at c. €5.70m with the share price at €0.90. We see Dietswell as an undervalued company, with a large upside (+179%) based on the recurrence of its traditional activities, the recovery in oil prices and the potential of the offshore floater.

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