SBM Offshore N.V. (SBMO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the SBM Offshore First Quarter 2020 Trading Update Call. [Operator Instructions] I would now like to hand over the conference to Mr. Bruno Chabas. Go ahead, please, sir.

Thank you very much, operator, and welcome to the SBM Offshore First Quarter 2020 Trading Update Call. My name is Bruno Chabas, CEO of SBM Offshore, and I'm joined today in this virtual meeting by the management team, Philippe Barril, Erik Lagendijk and Douglas Wood. We will use the presentation, which is available on our website in the IR section under Presentation. I would like to start today by saying that I hope that you and yours are doing well in these unusual circumstances. This call is also a bit unusual. We normally do not present slides for this quarter. However, given the current situation, we thought it's appropriate to give you a more detailed overview of where SBM Offshore stands today, and our strategic positioning going forward. We will welcome questions after the prepared section of this call. On Page 2, please note the usual disclaimer. So to Page 3. Our market is impacted by a dual black swan event, both hitting our world. Obviously, the COVID pandemic spread across our world -- and the world in general, raising an unprecedented part of the oil demand for duration currently unknown. The second event was supply disruption with the initial OPEC+ falling out and generating supply increase in a distressed economic environment. Both effects negatively impacted oil price outlook with a very uncertain duration. The speed and when the recovery will happen is unknown and depend on many factors. As such, oil companies across the globe are delaying investment and eliminating CapEx in order to safeguard liquidity and free up cash flow. What does it mean for the FPSO market? We're going to see less prospects and less prospects are expected in a market for the near future. As such, SBM Offshore has taken steps to align with the market condition and is planning a way forward to come out of this crisis stronger than we enter it. So let's move to Slide 4. First, I would like to give you an overview on how the company is responding to the COVID crisis. A huge amount of effort and planning has gone into the response. It is not possible to cover every detail at the time. But I wanted to cover the key elements to demonstrate the good work done by all our teams throughout the world. So let's start with the Lease and Operate division, which is doing a fantastic job in protecting our staff and keeping the fleets running on behalf of our clients. I must confirm that we have had several cases of COVID on several vessels, but we have been able to manage the situation through a number of operational measures that we have put in place. Such operational measures include virus protocol implemented on board, including deep cleaning, disinfection, hygiene, social distancing, health monitoring. Maintenance program has been minimized and offshore staffing level reduced to limit the risk for unexpected shutdown. Onshore measures implemented, including contingency crew on standby, crew going through airlock and procedure before boarding and health monitoring. The other emphasis is on testing and the capacity on testing is currently being ramped up. Contractually, SBM Offshore has protection against disruption outside the company's direct control, which provides significant financial protection. However, through the response measure that I've mentioned previously, we were able to manage the situation and do not need to use this protection. In a turnkey sector of the activity of project teams are focused on managing yards and supply chain. Some yards have closed, some have reopened, some remain closed, and some are closing again. Throughout the supply chain situation needs hands on management and closing cooperation with our clients. Schedule impacts are being assessed on a regular basis. A mitigation measure to protect our daily schedule are being implemented. However, some delays from the pandemic are to be expected. Despite lower activity expected in the FPSO market, SBM Offshore will remain disciplined in selecting opportunities with the sole aim in providing value to all stakeholders. With respect to capacity, over the past years, SBM Offshore has created a flexible global resource pool in order to manage cyclicality, flexibility, which is now being used. This model forms the basis on how the company aligned its capacity with the anticipated market demand going forward. As such, the company has reduced its workforce, impacting around 300 positions. There are a number of ongoing existing programs designed to enhance competitiveness and flexibility, which are being progressed, and in some cases, accelerated. The company will provide more detail on this in our next half year update. Now to Slide 5. I'm not in an airport, just to reassure you. We are not changing our strategy. It remains consistent and will guide the company reinventions through the current crisis, while positioning the company for medium- and long-term future. Under optimized, as we have previously mentioned, we're looking at our people from our clients, from our contractor staff and obviously, our own staff. Business continuity is a priority and trying to limit the impact of this crisis. And cash flow is being protected by program to keep our fleets running. Transform. SBM continues to bring down its breakeven point for our clients' offshore development and reducing their environmental impacts for zero-emission program. Fast4Ward program started the target competitiveness and efficiency across our product offering and ways of working. Through this, we continue to change the landscape in the industry and ensure that the company is able to tap its targeted market niche, the first to attract investment and deliver value to all stakeholders. Innovate also today is part of the agenda. The company will target the Gas & Renewables market for the medium and long term, and continue to develop its concept in line with the ongoing market development. Then to the quarter update on Page 6, where we present a limited number of financials. In operation, the fleets reached a 99.3% uptime, in line with the lifetime historical average of 99%. The last 2 modules on the Castberg turret were successfully loaded up and shipped to the integration yard. This is shown in a nice picture in this slide. This underlines the success of this project under extremely difficult situation. On the financial, the revenue for the quarter increased year-on-year, mostly -- mainly -- mostly due to a destiny leasing term, but also to the higher turnkey activity. Net debt increased to USD 3.7 billion as a result of ongoing investments in major projects. Group liquidity stands at a comfortable $2.1 billion, with revolver, cash and undrawn project loans. Then through the full year guidance on Page 7. Again -- once again, it's worth highlighting that our model and profile is very different from most other companies in the sector and indeed in general. Our backlog uniquely positioned the company in navigating the current challenges and future uncertainty. As such, 2020 EBITDA guidance is maintained at around USD 900 million. Revenue guidance for 2020 is adjusted from above to around $2.3 billion, with the same split as previously announced of around $1.6 billion for the Lease and Operate activity and around USD 700 million for the Turnkey segment. Obviously, one needs to note that the direct or indirect impact of the ongoing crisis could have material impact on those results. Now to the last slide of the presentation. On Slide 8, we would like to conclude with our strategic positioning and business model. We believe that the company is well positioned to weather this downturn and come out stronger. Lease and operation through generating uptime, we are delivering our backlog reaching to 2,045, 2,046, representing a high degree of visibility of a stable free cash flow. In Turnkey, the company has created a flexible organization is accelerating the implementation of a blueprint of its future organization. The financial model is efficient, as limited equity is required for the company major investment. The revolving credit facility as working capital facility ensure optimization of the phasing of our debt funding. We are reinventing our ways of working. SBM Offshore is transforming the industry with Fast4Ward, making our clients large offshore development more competitive. This project are expected to be the first to attract funding by our clients. The company will continue to focus on sustainability. We have established our framework for creating measurable targets, and we are reporting on progress on an annual basis. We have expanded the scope of our target to cover 6 sustainability development goals in 2020, and we will add another one in 2021. We will target 7 sustainability development goals area, each with relevant KPIs by then. SBM Offshore launched eMission ZERO in February this year. Our concept development targets a zero-emission FPSO. We are making progress on this multiyear initiative, and we will report back on it on a regular basis. Digital remains an important enabler in delivering the company targets in cost, sustainability execution and eMission ZERO. As regard to Gas & Renewables, SBM Offshore will continue to invest money and time to further develop concept and define the optimal business model in respect to those markets. So in summary, SBM Offshore is responding effectively to the COVID pandemic and resulting all market crisis. Our strategy remains consistent. Our results during the quarter were in line with our expectations. 2020 EBITDA guidance is maintained. SBM Offshore remains well positioned for the future. And is actively working to optimize it further. So this concludes the prepared section of this presentation. We are now ready to take your questions.

[Operator Instructions] The first question is from Mr. Luuk Van Beek, Degroof Petercam.

I have 3 questions. One is that you mentioned in the press release that the Liza Unity is either at in Singapore that is currently closed. I can imagine that this risk that will -- may happen there at further locations. Can you indicate what impact such a closure can have on your results? Do you expect any -- is it force majeure? Or is there a risk of a penalty? And the second question is on the tender pipeline. In the past, you talked about a record pipeline. That was obviously very high activity level there. Since then, a lot has changed. And as you mentioned, a number of prospects have disappeared due to changes in the market. But are there any projects left that were very close to FID and are still realistically expected to be awarded in the coming 12 months? And the third question is on press stories that Petrobras is forcing also FPSO suppliers to offer discounts on the lease rates. Can you comment on any discussions in this regard?

Okay, Luuk. Thank you very much. So I propose that Douglas takes your first question on the financial impact or if any -- on Unity and on your question on Petrobras, I will just comment briefly on the prospect. We're still going to see prospects in the industry, no doubt about it. The volume is not going to be satisfied as we gave, what was our forecast at the time, probably a few weeks ago, only 3 months ago. It's going to be much less than that. What we believe is that we're going to see prospects with the lowest breakeven points to come out to the market. And those prospects are for FPSO of a large size, requiring basically new deals capacity and requiring Fast4Ward type of model. Now one other point that I would like to emphasize in my answer there is that even though the number of prospects is going to be limited, we're going to be disciplined in which type of risk we're going to accept. In this business, it's extremely easy to win project. Anybody can do this. The issue is how you can generate value, not only to oneself, but also to your clients and to deliver projects, which are going to be delivering value and result for the clients over a long period of time and basically make sure that the deepwater industry has the future. So we will remain disciplined. And if it means that we are losing a number of clients in the meantime, that's going to be what is going to be. On this, I propose that, Douglas, you take question 2 on Petrobras and maybe, Philippe, you want to comment on Unity?

Yes. So just on Petrobras, I think, yes, as we said in the AGM press release, we have received various requests from our clients for support. We will look at those requests seriously, but always looking at the contractual position at the starting point. And if and when we can find situations that are fair for both parties, so we're balanced in terms of impact for win-win situations. Then we'll try to implement and help our clients out. But what I would say is we're very focused on the importance of charter contracts for our model for our investors and our banks. And obviously, if there's anything material to communicate, we would do that in due course.

Luuk, so on Unity, the first MPF held was delivered out of China ahead of time. And before the stoppage in Singapore, the module's fabrication was equally ahead. So we are closely interacting with the customer. And our current assessment is that we would target on schedule delivery.

The next question is from Mr. Quirijn Mulder, ING.

Question on yesterday, so let me say, you are not probably not willing to say too much about the competitor. But can you give me some ideas about why that went wrong and you, let me say, can still show result? They were suffering from a lot of procurements from the European nations, et cetera. So can you give me some differences in that respect? Is that also something you can reflect to, let me say, not to take all projects on your -- to take all projects in your hands? Is there anything to say about it?

I mean, again, what we have been consistent over the years in mentioning is our willingness to be disciplined in the volume of activity we're going to take. And being disciplined means a number of things. Means, first of all, that we're going to take projects that we have the capacity to manage and to manage properly, again to the interest of all stakeholders. So today, obviously, the situation is totally different with the COVID crisis, but we have a portfolio of projects that we can manage, and we can dedicate resources in order to mitigate the impact. We're not saying that we're not going to have any impact, but we're saying that with the portfolio of activity that we have and the discipline that we have had, we're able to manage the portfolio of projects in line with our expectation. The second point that we have mentioned in terms of discipline is that we will not be taken and we're not taking any project whereby the risk profile from a contractual standpoint is unknown or unquantified. And this also has an impact on the way we're generating value to our shareholders, but also to our stakeholders being our clients. Because at the end of the day, if we want us to be successful in the future, we need to generate value for our clients. And we believe that our model is geared to that. So being disciplined in the volume of activity of project we're going to take, and in the type of risk profile that we're going to have is part and parcel of our approach, and is showing in terms of a result that we're having.

The next question is from Mr. Andre Mulder, Kepler.

A question on the upcoming floater sales, Liza 1, Liza 2 under pressure, some things become fluid. How cite and seals are those disposals? Would you place them in the same category as people asking for support or?

Sorry, I'm not certain I understood the question. Could you do it again?

I'm asking about the fixed mesh of the floater sales in 2022 and 2024. How strong and smooth are they?

So you are meaning the build on and transfer. So to -- one reminder to start with. The first one is that Liza Destiny, which is Liza 1, is a Lease and Operate contract originally based on the 10-year duration. Today, the assumption is that the client is going to take over the unit after 2 years of operation. That's the assumption we have in our backlog and the forecast that we have provided. We don't see that there is any difference to date compared to what we have said. And likewise, for Liza 2, which is this one, a BOT contract over 2-year period. So far, no changes in our assumptions.

Okay. Second question on this request for support. Would you indeed translate that into asking for a discount on lease rates? Can you comment on the number of clients that are asking for that? Is it just 1 or 2 or?

Again, I mean, Douglas is going to take this again because we have had the same question on Petrobras. But at the end of the day, let's not forget what is the business model there. The business model is that we're taking a turnkey risk that we're leasing after -- over a period of time. That's the business model, and there are a lot of stakeholders associated to that. Those stakeholders are relying on this business model and including the banks, including the investors and so on and so forth. So at the end of the day, it's really an ecosystem, which works by itself. So we don't see any reason why this ecosystem should be changing. But maybe, Douglas, you want to comment more in line with what you said on the Petrobras case?

Yes. I mean I think the message is the same. We've received various requests. So they're all different in nature. And I think our starting point is always the contractual position. But if we can find a win-win solution that doesn't compromise our overall model, then we'll try and help our clients out. And again, I'd emphasize the importance that we attached to the charter contracts in particular.

And probably another point, which was mentioned by Douglas, is if you look at our fleet, the marginal cost of our fleet is less than $7 per barrel. And if you could look from an economic standpoint, the breakeven points of our fleet is around $20 per barrel. So it puts you also in perspective, the type of project we're after and the reason why there is such a long duration on this whole contract.

The next question is from Vladimir Sergievskii, Bank of America.

The first one on the sources of liquidity. I mean liquidity at a fairly healthy $2-plus billion level right now. Do you expect this level to be maintained or perhaps even increased as this year progresses? And more broad question, are financial markets actually open for you right now? And second, unrelated one. Could you perhaps share your plans or thinking with regards to the 2 unallocated calls, which are under construction in China?

Sure, no problem. But we know that regardless of what we're going to say, you're going to have a different view on our assessment. So in any case, I propose that Douglas is going to provide you some comments on the financial and that Philippe will provide you some comments on the hull build in anticipation. Douglas?

Yes, Vlad. So I think overall, we're maintaining a very constructive dialogue with our lenders, and that's based on our market positioning and financial stability. During the quarter, we finalized the condition precedent on the Unity facility. So we started to draw down on that. Then the other project we have in hand is obviously Sepetiba. The financing there is progressing in line with the project execution. As a large financing, we have export credit agencies, banks. So as we've seen with those kind of loans in the past, takes a bit of time to put that in place. But a bit like Bruno were just mentioning, I mean, it's one of those projects that's in a world-class basin with a mix of NOC and IOC partners. In the meantime, we have the option to use the RCF to bridge our share of 65% in the stake in the project. And then I think, going forward, when it comes to future tenders, I think the concept of discipline applies to financing as well. So that's linked to the availability and cost.

Yes, moving on to hulls. So the first 3 years are allocated and contracted. For hull #4, we are in advanced discussion with the client and are reasonably comfortable the hull will be allocated to a project in due course. On hull #5, we are assessing the time line and under stress that the hull publication has not started. We believe we have an opportunity to align the milestones with the market conditions. While there will be less projects coming to market in the short term, to medium term, we believe there will be demand in deepwater basins with low breakeven, where fast forward can further derisk projects and enhance value.

The next question is from Mr. Thijs Berkelder, ABN AMRO.

Yes. I have a couple of questions. First, to have some grip on the impact of COVID-19. Can you give us the fleet time in April? And secondly, in the press release, you're talking about the incremental costs related to COVID-19 measures and the business continuity plans. Can you quantify these incremental costs in any way? Then thirdly, you are working on cost reduction measures to mitigate the effects. Can you quantify these targeted cost savings and what kind of one-off expenses you expect there? And maybe the fourth question maybe for Philippe on the eMission ZERO FPSO. Your Brazilian FPSOs on average now let's say, emit 8 kilos of CO2 per barrel, is my understanding. Your Fast4Ward FPSOs, what kind of CO2 emissions are you planning or expecting there?

Okay. I can see that you're quite eager to get the information on the second quarter now, but we are -- I'm afraid, I was only at the first quarter. So it's going to be difficult to provide you the results of mid-year. However, what we said is that we're obviously looking at ways to reduce our expenditures. We mentioned some example of what we're doing. We're going to give you a much more broader and comprehensive view of all of these in the second half of the year for a variety of reasons. First of all, we need to understand what is the impact of the COVID-19 in terms of the market and the market expectation. Second of all, because we are in the middle of preparing for all of these. And we cannot tell you things we shall not prepare, and we don't want to mislead any of you. With regard to the cost associated with the mitigation effect on COVID-19 on the fleet, those costs are included within the guidance that we have provided to you, namely within the guidance of EBITDA at $900 million. So I'm not going to give you the detail of how much it is, but it's part of the guidance that we have given and is included there. With regard to the uptime of April, the uptime in April has been good without going into further detail on this. And with regard to the -- your last question was -- with regard to the CO2 emission. So I leave the floor to Philippe on what we have done historically, where we are positioned and our ways forward there. Philippe?

Yes. So on emission, I think when we look at the emission in 2019, we've set ourselves a target of production of flaring emissions of 25% within the fleet. That includes the current fleet in Brazil. What I would like to say is that at the end of the first quarter, we are doing reasonably well against our target. But again, this is a yearly target and we'll report into more details later in the year.

The next question is from Mr. Mick Pickup, Barclays.

Apologies, I missed the start of the call, so just if I -- apologies if I'm repeating. Can you just confirm on the prosperity project on the hull there? Obviously, it's awaiting final approvals. What do you do if those final approvals don't come?

So the hull is committed, nevertheless. So you missed the best part of the call, Mick.

I only missed the first 5 minutes, Bruno.

That's the best part of the call.

Yes. Okay. The hull is committed nevertheless, but then you would just start progress at that point once the hole is built?

I mean there is no FID on the project. So there is some expenditure, which have been agreed. So we're working on those. But in order for the project to progress, we need FID.

Okay. And it just goes into inventory at that point?

Exactly.

The next question is from Ms. Amanda Battersby, Upstream.

I just have one question, please, as my other one has been asked and already answered by somebody else. Please, can you say whether the current coronavirus pandemic is likely to have any effect on the timing of delivery of the Sepetiba FPSO, please?

Philippe, do you want to take this?

Yes. So some further detail on Sepetiba or Mero 2. The hull construction started in China at pandemic time and was impacted as a result. Likewise on other critical element of engineering, supply fabrication, it's currently too early to estimate any potential deals. We are working very closely with the clients who align on the best way forward, discussing recovery and mitigation measures.

Your next question is from Mr. Quirijn Mulder, ING.

Yes. I have 3 follow-up questions, very short. Can you give me an idea about your CapEx in 2020? And the second question is, where is the hull #4 being built, which yard, if maybe you can say that to us? And then with regard to the adjusted development of the revenues for 2020, is that related to typical operations, maybe to normally install -- I don't know. I'm trying to figure out where is that effect? Is that maybe pre-fleet work, et cetera? Can you maybe elaborate somewhat on that?

Sure. So I propose that Douglas speak both about the CapEx and the revenue side. For the hull #4 it's -- in fact, I don't know which one you count #4. But yes, the one which is being built today is on the SWS yard. And with regard to the revenue, Philippe, do you want to take this? Or Douglas?

Yes. Okay, Bruno let me do the CapEx and the revenue one. So on Capex, I think it's fairly straightforward. You know which projects we have in hand. So it's Unity. That's 100% Sepetiba. That's 65%. I think you have a good idea of the size of those and the typical phasing. So bear in mind, everything that's been said on the call, I think you should have enough to make a pretty good estimate on that. On the revenues, yes, so it's an adjustment. It's a variety of things. As you know, we always have a sort of relatively small amount of the activities, which aren't in the backlog, which we include. So there are some impacts there. Then you can also think about the gate park and how that's working.

[Operator Instructions] No further questions.

Okay. So if no -- there are no further questions, I would like to thank you for taking the time of joining us today. You can now take up your mini pledge, stay safe, and you can now resume a normal activity. Thank you very much, everybody.

Ladies and gentlemen, this concludes the SBM Offshore event call. Thank you for attending. You may now disconnect your lines. Have a nice day.