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

Ladies and gentlemen, thank you for holding, and welcome to the SBM Offshore Third Quarter 2020 Trading Update Call. [Operator Instructions] I would like to hand over the conference to Mr. Aarne Luten, Investor Relations of SBM Offshore. Go ahead, please.

Thank you, operator, and thank you all for joining us today. Today's call is being recorded and will be available for replay on the company's website. Today's prepared remarks will be delivered by Mr. Bruno Chabas, followed by a Q&A session. Before we begin, I would like to point out the disclaimer at the bottom of our press release to remind participants that some of our comments today may include forward-looking statements reflecting SBM Offshore's view of future events. These matters involve risks and uncertainties that could cause our results to materially differ from our forward-looking statements. The risks are discussed in detail in SBM Offshore's 2019 annual report, which can be found on the company's website. Once again, we will welcome your questions after the conclusion of prepared remarks. I will now turn the call over to Bruno.

Good morning, and thank you for taking the time to join SBM Offshore's Third Quarter 2020 Trading Update Call. My name is Bruno Chabas, CEO of SBM Offshore, and all members of our management board are joining me today. Before summarizing the quarter and year-to-date performance, I would like to highlight the fantastic work done by SBMOs throughout the world. As example, a number of our staff are facing travel restrictions and various quarantine measures, extending times spent away from home. Others are working remotely on international multidisciplinary assignments. These solid results are there, the ones of all SBMOs. During the last quarter, SBM Offshore continued to demonstrate the strength of its business model with another set of good results. These results were obtained despite the challenging environment caused by the pandemic. Based on these and on our demonstrated discipline in managing our cost base, we increased our full year EBITDA guidance. Now I would like to walk through, through the process our team are making in both business segments. Our Lease and Operate division was able to continue to keep the COVID situation under control. Our onshore and offshore teams maintained the discipline on the existing protocols, procedures and extended SBM Offshore PCR testing capacity. The company's priority remains to safeguard our people, as much as possible, prevent occurrence of COVID-19 cases on board of the company's fleet and onshore location and to minimize impact on operations. The year-to-date fleet-up time is close to 99%, which during the last quarter saw some impact from the restart of the Brazilian unit following a planned shutdown. Now over to the Turnkey division. Commissioning work on the natural gas injection system of the FPSO Liza Destiny is progressing with the main gas compressors commissioned. The yards in Singapore, where the construction of Liza Unity is taking place, reopened during the last quarter. The progress is progressing in line with client schedule. Construction on the FPSO Sepetiba project is also progressing. Modules fabrication continues to progress both in Brazil and in China. The FPSO Prosperity project, for which the company received the award on October 1, is preparing for third site fabrication in Singapore. The hull for this project was successfully completed. And I would like to highlight our year-to-date safety performance. The total recordable injury frequency rate stands at 0.12 compared with the 2020 target of 0.20. It has to be said, however, that regarding safety, nothing can be taken for granted. And SBM Offshore continues to prioritize and generate awareness around safety. Over to the financials. The company generated total Underlying Directional revenues of $1.7 billion during the first 3 quarters. This is an increase of 16% compared to the same period last year. This increase mainly came from growth in the Lease and Operate segment from the addition of Liza Destiny to the fleet and the contribution from the purchase of minority partner stakes in 5 Brazilian FPSO, both of which events occurred late last year. The net debt position at the end of the quarter was USD 4 billion compared to USD 3.5 billion at the end of 2019. The expected increase is a logical consequence of the ongoing investment in the 3 FPSOs under construction. The energy transition sits at the core of our strategy. We have the ambition to generate 25% of our revenues from renewables and gas by 2030. On this, our renewables product line has reached an important milestone during the last quarter. SBM Offshore has entered the EPC phase of the Provence Grand Large floating offshore wind project. For this project, the company will deliver the floater for 3 floating offshore wind turbines with a total capacity of 25 megawatts and will be installed offshore Marseille. This milestone is important as it will enable SBM to establish its concept, confirm their performance and develop its experience. Importantly, it will enable SBM Offshore to fine-tune its execution model in order to scale up for future projects. Let's turn to the market and guidance. SBM Offshore is expecting to see more volatile or market with shorter cycle. The pandemic has accelerated and magnified its strength. The lower for longer oil price also means that clients are seeking to invest in projects with the lowest breakeven point. The project that continue to attract funding are very large, high-quality deepwater oil development. Fast forward, sizeably, enhancing clients' economy through reduced costs and faster speed to market. Our restructuring is on track to finish at year-end, which makes the company more competitive as well as more flexible. As such, with this unique experience, SBM Offshore is well experienced -- well positioned to benefit from the increase in demand in the large FPSO segment. Supported by our robust operation performance in Lease and Operate and Turnkey, together with effective cost discipline measures, we increased our 2020 Directional EBITDA guidance from above USD 900 million to around USD 950 million. Directional revenue guidance is maintained at around USD 2.3 billion. Please keep in mind that this guidance excludes the exceptional positive impact on revenues and EBITDA resulting from the redelivery of the Deep Panuke platform but includes negative impact on EBITDA resulting from the company restructuring costs. The Directional EBITDA and revenue guidance considers the currently foreseen COVID-19 impacts on projects and fleet operations. The company highlights that the direct and indirect impact of the pandemic could have a material impact on the company's business and results. So to summarize, year-to-date, SBM Offshore showed solid performance, despite challenging times. The company is demonstrating the resilience of its business model both in Lease and Operate as well as in Turnkey. We are progressing with our first floating offshore wind project. And on top of that, the company increased its guidance. So this concludes the prepared remarks portion of the call today. Thank you for listening. And now operator, you can open the line for questions.

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

First of all, I have a question about the uptime, which was relatively low in the quarter. Is it just your planned downtime? Or is there any -- would you expect any impact's on the bonuses that you're able to realize this year?

So yes, as I mentioned, and the uptime for the full year is at 99% on the quarter. We were restarting a unit, which has an impact on the uptime. But overall, the performance is in line with our expectation.

Okay. And then on the impact of COVID, on the one hand, you mentioned that you increased your test capacity to lower the quarantine periods. But looking at the overall impact, are you becoming -- is it going to be easier to handle the impact or the cost still increasing? And can you indicate how the impact on your day-to-day operations is evolving?

Okay. So Philippe Barril, our COO, will provide you a bit of an overview on the COVID impact, not only for the fleet but also for the company at large. Philippe?

Yes. So thank you, Luuk, for the question. So gearing the situation today, it's clear that you would expect to find some cases of COVID. I would start by saying that from the medical standpoint, no, not being the sales. Coming back to your question on the protocols and the durations to -- the idea of proposed protocols, they continue to be in line with what we've reported in the previous Q3 -- Q2. So in Q3, one of the things that is changing is that we have more limitations in travel, but I want to thank the efforts of the organization for having been able to adapt and to deliver a rather solid result. So we will continue to operate with those mitigation measures in order to minimize the probability of disruptions and, in particular, on the fleet.

Your next question is from Mr. Nick Konstantakis, Exane.

I guess I will start with the Fast4Ward hull. I mean you are progressing the fifth one, a clear sign of confidence on the sanctioning and the market improving. I guess can you just remind us, has the fourth hull as found a home yet? When do you believe the fifth [indiscernible] should be allocated? And I appreciate that given COVID, I'm really running ahead of myself, but what do you need to see to start ordering the next batch of hull of the Fast4Ward? And then on floating wind, it's good to see that you're progressing. Is this -- is 2023 still the time you're expecting the project to be on stream? And then, I guess, the next question would be, given this pile that you have with your debts, do you think you can mature that into a partnership or a frame agreement in order to be able to participate in the future sanctioning?

Okay. Philippe will take the question with regard to Fast4Ward, the progress we're making, the view on the market. Let me expand a bit on the renewable side of the business. And first of all, to mention 2 points. As we -- as you noted and as we notified the market a few months ago, we're making a number of progress on the renewable side. First of all, the Wave Energy project that we confirm will be offshore by 2022, and we're going to be able to test the technology, to validate the technology and really to make significant progress on this. The Provence Grand Large project is also a project which is going to help us to validate the technology that we have to make progress vis-à-vis the perception that there is in the market on our position in the Wind Energy and obviously allow us to take a significant position into the floating windmill market. Now one of the things that we're seeing in this market, it was extremely quite from -- I would say, at the beginning of this year, but we're seeing an acceleration in this market where there is plenty of opportunities due to the wind actually going more offshore. And there is plenty of opportunity also to reduce the cost of the solution. We already believe that the work we have done under the Fast4Ward concept and that we have transferred throughout the organization on a number of products is going to be transferable to what we're doing on the floating windmill that we're going to be able to reduce the cost significantly on the product that we're going to provide and on the other system and ready to gain market share on this. So obviously, we're looking at working in a partnership with a number of developers, taking position in a number of fields. And our aim and our ambition is to take a significant portion of this market going forward. Now going to the Fast4Ward program, Philippe?

Yes. We continue to see the Fast4Ward not only as a hull program but as well as an accelerator to delivery and as an improved product. On hull #4, the construction is progressing in line with schedule. And we are comfortable that the hull will be allocated to project in due course. The hull #5, hull construction and also we have volumes about the allocations. We will update you on the project, but as well on the continuation of the program. And more generally, also on the market, as I mentioned in my introduction, we're seeing opportunities coming into deepwater, which are significant. And we believe that the experience of the SBM Offshore, which is unique, our capacity to deliver faster will really help us to position ourselves in a preferential position going forward.

The next question is from Mr. Edward Donahue, One Invest.

Well, the question I was thinking of asking was actually just asked just now. But could you actually be maybe a bit tighter with it, Bruno, with regard to your view on the market itself in the sense that at H1, you were indicating that actually hull #5 might not be the steel cut on the side of Christmas. And now you're actually saying it very likely will. So how's your view on the market firmed up that you're prepared to actually move on hull #5? Can you just be tighter on the actual allocation? I mean, simplistically, I can see where 3 of them are allocated. Could you give us an idea of where the other 2 are or a time frame when you might be looking to make a hard announcement on the allocation just to start with?

Okay. So it's -- I mean, as you can imagine, it's rather difficult to provide detailed information on this because it doesn't depend only on us, but it obviously depends on the market. However, what we have seen on the evolution of the market throughout this period is that project with high capacity of production, high-storage capacity really fleeted for Fast4Ward or projects which are still maintain -- which are still maintaining their planning, and the investments are still going ahead. So we had some uncertainty at the beginning of the COVID crisis about the evolution of the market. Today, those uncertainties are being lifted out given the strength that -- of what we're seeing under the deepwater market for large units. The reason of this uncertainty being taken out is most of the projects that we're looking at have an economic breakeven point, which is extremely low. And you can read this in the price, but it varies between $20 to $30 per barrel or $35 per barrel, which means that those projects are going to remain economical regardless of where the oil price is going to be in a different cycle. And as such, the deepwater segment and which is really in our segment is going to remain active and increase -- and therefore increase our confidence about the commitment for the hull #5. When those hull are going to be allocated? Time will tell, will depend on the client. But basically, given the positioning that we have on this, we have a high level of confidence that they're going to be allocated.

Okay. Just following on from that. Am I correct that even on under the Fast4Ward concept, the hull itself, the size of it, not necessarily the shape but the size of it, is actually specific to the project you would be expecting to get? So by going forward on hull #5 would imply that you are having a project almost in hand? Or am I wrong on that?

Yes. Here, the concept that we started really in 2014, which -- it's important to remind the market that we started to work on Fast4Ward in 2014. So we're 6 years down the road. We have learned a lot. We have improved a lot on this. And -- but the concept, the original concept was saying, how can we standardize in order to accelerate speed to market and to reduce cost. And as such, the hull, which can be allocated to a number of projects throughout the world. And when you look at one hull, you could see a number of different projects what this hull could be allocated. And I would say, the more we evolve, and now we are at hull #5, the more we see where there are some areas of improvement and where you can gain on the learning curve. And that is really where our strength is going to materialize even further going forward.

Great. Okay. And my second question is just on the renewable side. You talked just now on the offshore winds that you were -- I think you used the phrase several partners. You mentioned one. What are the other partners positioning with regard to the offshore wind? And are you looking to actually do some beta testing with those same partners?

If you look at -- so let's go a bit into detail of the offshore wind. Today, the offshore wind installed capacity -- the floating offshore wind, I'm speaking about, is 120 megawatts of installed capacity. The expectation is by 2030, the commitment of 6 gigawatts of capacity will be committed/installed into the market. Now one of the things that you can see is that in order for this market to develop, you need to have a position as a developer, either directly as a partner or even as a developer. So when we look at this, we already are looking at how we need to position the company in order to accelerate our position in the market to make sure that we have access to a large number of projects and basically that we're grabbing the market share that we want to grow up. This is essential in order to be able to reduce the cost of the solution that we're looking at. And whereby, basically, we need to reduce the cost by somewhere in the range of 20% for every doubling of the capacity. So our approach to the market today is, first of all, to demonstrate to the overall market that the solution that we have is effective, is performing well and that we're going to be able to do this shortly with the Provence Grand Large. And in the meantime, we need to put ourselves into position to expand the number of opportunities that we have and in order to be able to deliver much more the floater and to have a significant market share. So that's our first and really with the idea of going down the cost curve faster.

And when do you move -- just on the EDF project, when do you move out of, let's call it, the beta testing into when it ticks all the right boxes, it can be industrialized and ramped up? Where could it go to from -- I mean, because this will in the world, if 3 floating units, it's technically great, but it's not the size of a project that is economically viable.

Yes. That's correct. But still, it's 3 quarters of a bit more than 8 megawatts each. So the farm of the future will be probably between -- with farm -- or initially with farm of 10 to 12 megawatts or anywhere between 8 to 12 megawatts. So the floaters that we're going to provide really are going to demonstrate the capacity to do that. And once we have demonstrated this, it's pretty easy to beat for a farm of 50 to 100 floaters. And that's really the idea. Now more importantly, I think, and that's relevant to our strategy that we have in all the segments of the energy sector is we believe that the energy sector is going to be under a huge amount of pressure to reduce cost and to become much more competitive and basically to behave like any other industry. As such, we started Fast4Ward in 2014 for the oil business. We applied the same concept in a number of other products that we have inside the company, and we're applying the same concept into the renewable business. And this is what is going to make us competitive. It's what is going to make us relevant for years to come. And it's going to give us the ability along with the experience that we have and the technology that we have to be relevant for years to come in the energy or share business.

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

A couple of questions, if I may. Firstly, I noted the other day that Kosmos will look into sell and leaseback the floating LNG prospect. Given obviously you have ambitions in gas, is that something you'd be interested in? Or does the fact that there are potential financial investors in FPSO out there presents any opportunities to you?

We don't have this specific project on our radar. But I mean, at the end of the day, our business model, as you know, it's really looking at the full life cycle of the product that we're selling. So there is opportunity in the gas market. Along those lines, we're going to look at them. But we're going to be extremely selective. We haven't seen a number of potential opportunities in the gas market, which we didn't believe were worthwhile. So we didn't go after those. But the -- from an economic standpoint worthwhile from a technical standpoint itself, we're going to look at it. But I don't know the specific case.

Okay. And then secondly, obviously, I think the presses have some more allegations of further troubles on projects coming out from one of your former employees. Is there anything to comment on that?

Erik?

Yes. Thank you. No, we have nothing to comment. There is no news. We read the media, but we're not involved from any of his current issues.

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

A number of questions. Firstly, on restructuring costs, there is still a feel that this $50 million to $60 million that you mentioned before in seller. And is that amount fully taken in this year or approximately somewhat from [ cash flow ]? How about the effect of savings for this year? Can you give us any detail on that? Further, on the financing of the Sepetiba, how you're progressing in that respect? That would be it for the time being my questions.

Okay. So thank you very much. Douglas was starting to get worried that you will not have any question, and so he was going to do attention on me. So thank you for the question. Douglas, and maybe you'll take the opportunity also to provide some flavor for the guidance?

Yes. Thanks, Bruno, and good morning, Andre. Thanks for the question. So on the restructuring costs, indeed, $50 million to $60 million guidance we gave is still valid, and you can look at those as being this year. Cost savings, obviously, we announced in June, we're working through implementing those. So I think you could expect you got a pretty limited impact this year. And on Sepetiba, the financing, I think it's progressing satisfactorily. As we've always noted, it's a complex financing, intensively involves a lot of parties because when you're trying to raise that amount of money, you have lots of banks involved, export credit agencies. So from a process perspective, these things always take time. Then, of course, we have the circumstances of the day, the impacts of the pandemic, where those are heavy workloads on many of the financial institutions with the export credit agencies that may work to support various government initiatives. And then a simple fact is they were all managing working remotely, and there are some inefficiencies in that process. So the point being, it takes a bit longer. But as I said, overall, progressing very satisfactorily.