The current disruption to growth presents both challenges and
opportunities for the subsea industry – challenges in terms of
managing a deflationary supply chain, and opportunities in terms of
restructuring and repositioning after a period of rapid growth. We
think the main players could evolve more in the next 1-2 years than
they have done in this cycle so far, particularly in terms of growing
exposure to ‘offshore opex’ and adding technologies needed for the
next wave of deepwater activity. We see subsea activity hitting a
USD30bn per year plateau, before momentum returns in 2012. With
most stocks near trough multiples, this supports our positive stance
on this space – we have Overweight (V) ratings on Aker Solutions
(target price NOK105), Technip (target price EUR42) and
Wellstream (target price 900p), and we initiate coverage with
Overweight (V) ratings on the US subsea majors FMC Technologies
(target price USD33) and Cameron (target price USD29).

“It is not the strongest of the species that survives, nor the most intelligent, but rather the one that is
most adaptable to change” – Charles Darwin
Evolution is set to be one of the big themes of 2009. Our own context may not be as grand as the 150th
anniversary of the Origin of Species, but for our purposes we see the theme of evolution as one of the big
opportunities out there for the subsea industry – handling the evolution of costs in a deflationary supply
chain, working with the evolution of offshore investment, and positioning portfolios for the likely
evolution of subsea technology trends to come. We think this is all particularly important given the likely
structural increase in offshore and subsea activity we expect to see in the long term.
The current subsea market environment typifies that of a long cycle business – relatively few near term
concerns, many long term hopes for recovery, but little medium term visibility. The subsea plumbers are
certainly busy now, but for most the backlog horizon ends at some point next year. We think this likely
disruption to growth – which could intensify if order intake stalls – presents a major opportunity for the
subsea industry to restructure, reorganise and reshape itself after a period of fairly rapid growth. Moderate
cost-cutting and intensified supply chain management are to be expected, but with the backdrop of a
potential medium term recovery in oil prices (which we think will be catalysed by rising production
decline rates) we see an 18-24 month window for potential industry change – evolution – before the cycle
tightens once more and asset valuations once again begin their ascent towards the next peak.

The attractions of subsea – in our first Deep Blue report (published May 2008) we thought the word
‘subsea’ was no longer a guarantee of high growth. In this environment, although ‘guarantee’ is probably
too strong a word to use, we now think the word ‘subsea’ will go a long way to staving off a decline. We
see overall E&P activity down 18% this year, with further declines likely next year as well, but helped by
strong E&P economics and the arrival of numerous new ‘enabling assets’ – rigs, installation vessels – to
help ease the offshore bottleneck, we expect offshore E&P activity will be a relative winner and we see
real growth returning in 2012 as the next deepwater phase picks up momentum. The economic drivers
behind deepwater should not be ignored – the best fields need USD30-40/bbl, our scenario work shows it
would take 3-4 years of oil hitting USD25-30/bbl to make large deepwater fields uneconomic, and Infield
Systems estimated that only 15-20% of offshore capex would be at risk with oil at USD30/bbl for a few
years. For comparison, our official oil price forecasts are USD50/bbl for 2009e and USD75/bbl for 2010e.
The strategic opportunities & challenges in subsea – those hoping for a rush of private equity deals
may be disappointed, but we do expect to see trade buyer activity to expand value chain coverage of key
components, to broaden equipment portfolios, to add exposure to ‘offshore opex’ businesses, and to effect
consolidation at the heavy asset end of the industry. We also expect a certain number of ‘distressed seller’
deals in installation, and we see growing potential for activity from National Oil Companies lacking in
deepwater expertise. The big challenge we see is supply chain management – we expect pricing declines
will move ahead of most contractors’ abilities to realise lower raw materials, and we see moderate margin
declines in 2009e/2010e. We think it is possible that some of the smaller sub-suppliers could even be
pushed into looking at a ‘cost plus’ model to improve visibility. We also expect manufacturers to make
the most of running production through lower tax regions (eg: Asia).
Technology trends in subsea – we think the oil industry is focused more on reliability than new
technology, but the main themes we’d note are the challenges from ultra-deepwater and harsh
environments (including offshore gas), the rise of the ‘subsea opex’ theme to handle the growing
maintenance needs of offshore infrastructure (we think by 2012 opex could be on par with development
spending) and the balance between costs and technology. As a result, some key trends are likely to be
growth in deepwater-specific riser designs (which could be a good match for the Santos Basin), growth in
IMR (inspection/maintenance/repair) services and cost-effective well intervention, which should be
positive for ROV usage and light well intervention (LWI). We do see long term growth in LWI but we
think there are some risks to its uptake in the near term from more competitive rig rates. We think
potential beneficiaries of these trends are Aker Solutions, Technip and FMC Technologies.
The Brazilian effect – no subsea discussion is complete without reference to the Santos basin – Infield
Systems estimates Brazil will account for around 20% of global subsea capex by early-to-mid next
decade, up from around 13-14% in recent years. We expect Brazil will guarantee volume (but not pricing)
growth for the industry, and we see more upside for equipment manufacturers than installers, although
true deepwater capacity for flexibles is still limited. In terms of technology, we have few doubts that
FPSOs will feature heavily in presalt developments, but we expect Petrobras will look to use a range of
designs – flexibles, hybrid risers, steel catenary risers (SCRs) – to ensure cost effective early production.
The subsea companies – our subsea coverage is growing – in this report we initiate on the US subsea
majors FMC and Cameron, and our research now covers over 90% of the flexible pipes market, 80% of

the subsea tree market and 50-60% of the umbilicals market. We see attractive investment cases for all
subsea companies under our research coverage; all stocks are within 10-20% of trough multiples (in line
with the oilfield services sector) and – interestingly – on average the subsea names trade in line with their
production/process technology peers in the capital goods sector (historically have traded at a 30%+
premium – this comparison particularly highlights Aker Solutions and Cameron). According to the HSBC
Global Research ratings system, all subsea-exposed stocks have sufficient potential return to be rated
Overweight (with a volatility flag) but the name with which we have the highest conviction is Aker
Solutions, and we also see potential at Wellstream and Technip. We do not believe the US players will
lack growth in the long term – far from it – but we think growth in umbilicals/risers & flowlines products
and associated installation will exceed that for wellhead equipment, although we see growing promise
from FMC’s moves into the ‘opex side’ of subsea via ROVs and well intervention.
Aker Solutions (Overweight (V), TP NOK105) – we think AKSO has considerable long term promise
from positions in subsea/drilling equipment and exposure to ‘offshore opex’ businesses, particularly well
services and intervention. We think valuations are at extremely risk-averse levels, which we see as more
than compensating investors for risks from a near-term slowdown in order intake.
INITIATING COVERAGE – Cameron (Overweight (V), TP USD29) – it will be hard for CAM to
avoid the gas-related onshore slowdown in North America, but aftermarket services should help underpin
margins and we see long term growth from its well-positioned subsea & drilling equipment businesses.
INITIATING COVERAGE – FMC Technologies (Overweight (V), TP USD33) – we see long term
growth potential from the market leader in subsea equipment. There are near-term risks in onshore
services but FMC’s strategic moves into subsea well intervention & ROV equipment look promising.
Technip (Overweight (V), TP EUR42) – a compelling offshore story driven by the market’s leading
businesses for subsea umbilicals, risers, flowlines and deepwater installation, although the engineering
businesses are unlikely to escape the sector-wide slowdown in orders in the near term.
Wellstream (Overweight (V), TP 900p) – a unique pure-play opportunity in subsea risers & flowlines,
with strong links to Brazil in particular and deepwater in general. We see flexible riser & flowlines as one
of the fastest growing subsea equipment categories in the medium term.

Macro views on Subsea 5
The Subsea Industry 43
The Subsea Companies 82
Financials & valuation 100
Aker Solutions (OW (V), TP NOK105) 100
Financials & valuation 109
Cameron (OW (V), TP USD29) 109
Financials & valuation 116
FMC Tech (OW (V), TP USD33) 116
Financials & valuation 123
Technip (OW (V), TP EUR42) 123
Financials & valuation 127
Wellstream (OW (V), TP 900p) 127
Valuations & risks 128
Company financials 135
Disclosure appendix 168
Disclaimer 172
Contents