On Tuesday, Barclays made a notable change to its assessment of TGS NOPEC Geophysical Co ASA (TGS:NO) (OTC: TGSNF), upgrading the stock from Equalweight to Overweight and raising the target price to NOK245.00, a significant increase from the previous NOK185.00. The decision comes in anticipation of a merger between TGS and PGS, which is expected to be reflected in the company’s financial model starting in the third quarter.
The Barclays analyst highlighted the strong free cash flow (FCF) generation projected for the combined entity, with expectations that by the end of 2025, the combined company’s net debt would be nearly eliminated.
The new company is estimated to have an FCF yield of approximately 21% in 2025, which is a significant increase compared to the three-year average of 8% for TGS and 11% for PGS.
The updated target price is based on a discounted cash flow (DCF) method, which uses a discount rate of 12.5%. This rate is a median of the rates previously applied to PGS and TGS and is higher than the 10% used for other companies in the sector. The analyst justified the higher discount rate by citing the potentially variable nature of earnings from multiple clients.
According to the Barclays analyst, even with the new target price of NOK 245.00 per share, the free cash flow yield for 2025 would remain at 11%, suggesting that there could be further upside potential for the stock if the merged company meets its financial targets. Given that the new target price represents an upside potential of around 90%, the upgrade to Overweight reflects the company’s optimism about the stock’s future performance.
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