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

Ladies and gentlemen, thank you for holding, and welcome to the SBM Offshore Third Quarter 2022 Trading Update Conference Call. [Operator Instructions] I would like to hand over the conference to Ms. Krystel Brand, Investor Relations. Please go ahead.

Thank you, operator. Thank you all for joining us today. This 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 and remind participants that some of our comments today may include forward-looking statements, reflecting SBM Offshore's view of future events. These matters involve risk and uncertainty that could cause our results to materially differ from our forward-looking statements. The risks are included in detail in SBM Offshore's 2021 annual report, which can be found on the company's website. Once again, we will welcome your questions after the conclusion of the prepared remarks. I will now turn the call over to Bruno.

Thank you, Krystel, and good morning all. Thank you for taking the time to join SBM Offshore's third quarter 2022 trading update call. I'm Bruno Chabas, CEO of SBM Offshore, and I'm joined today by all members of our management board, Oivind Tangen and Douglas Wood. SBM Offshore delivered solid results over the third quarter 2022. This is despite the continuing challenging environment, we all know. Ranging from the COVID-19 constraints in China, where a partial lockdown are still imposed to supply chain capacity issues and accelerating inflation. These good results reflect our high level of activity, the reliability of the fleet and the resilience of our Turnkey division. Once again, I would like to highlight the fantastic work done by SBM throughout the world to overcome those challenges. This performance is only possible, thanks to their hard work, resilience and dedication. Now a few words on the progress the teams are making across the business. On the Lease and Operate segment, the reported 91% year-to-date fleet-up time was impacted by the ongoing shutdown of FPSO Cidade de Anchieta. Tank repair work is progressing. The restart of production is scheduled by year end. Following restart, repairs will continue at least until the end of the next year. And it is expected that the associated cost will require one-off impairment charge in the range of $75 million to $100 million, impacting the 2022 net profit. An update will be provided with year end results on scope of repair and associated cost estimates will be finalized. On an underlying basis, the fleet performance remains strong and as expected. The third quarter uptime, excluding FPSO Cidade de Anchieta was above 99%, which is in line with historical level. On our turnkey activity, with 5 FPSO projects under construction, the company continues in a major growing phase. 2022 is proving to be a challenging year with construction activity impacted by the quarantine measure in China on top of inflation and supply chain global issues. We continue to work closely with clients and suppliers teams to mitigate this impact. Despite varying effects on project execution and turnkey is expected to deliver robust margin at portfolio level this year. On top of these macroeconomic challenges, we experienced a tragic incident following the collapse of a peer alongside FPSO Prosperity project, where contractor loss is live. Safety must, and will remain our top priority. The learning from these events have been applied across all our worksite. The team has completed the damage assessment of the incident and has managed to limit the impact of the overall schedule. First of all, this project is still likely to occur before end of 2023. As for the other projects, on FPSO Sepetiba, integration and commissioning activity are ongoing with first oil expected in 2023. On FPSO Almirante Tamandare and Alexandre de Gusmao, the topsides fabrication is progressing in line with plan. The Fast4Ward hulls were launched out of drydock as scheduled, expected first oil date are 2024 and 2025, respectively. The top 5 construction has started as planning on FPSO ONE GUYANA. and first oil is expected in 2025. Confirming the strong FPSO market outlook for large and complex FPSO, a memorandum of understanding was signed with ExxonMobil Guyana, granting the exclusivity of 7 Fast4Ward MPF hull for use on future cost and emission intensity competitive FPSO project. This is in line with the company's commitment to support our clients in reducing their emission. Also on our turnkey activity through our new energy platform, the teams have reached an important milestone in Provence Grand Large project. The transition pieces linking the floater to the mass of the wind turbine have been successfully installed. The project commissioning is scheduling in 2023. Finally, we are pleased to see our efforts once again recognized by third-party experts in their assessment of the company's sustainability performance. SBM Offshore was quoted by S&P Global for very high disclosure quality and industry based on climate strategy. On the financial side, the company generated a total underlying direction of revenue of $2.5 billion over the first 3 quarters of the year. This is an increase of over 45% compared to the same period last year, mostly driven by the Turnkey segment. Turnkey activity increased year-on-year by over $700 million due to the ramp-up of execution projects, combined with a partial divestment of 2 projects at the beginning of 2022. As for the performance of the Lease and Operate segment, it is mostly due to the contribution from Liza Unity joining the fleet in 2022, partially offsetting by the end of Deep Panuke and Capixaba lease contracts. Net debt at the end of September was $5.6 billion, compared to $5.4 billion at the end of year end 2021, supporting the ongoing investment in growth. We are progressing the financing of FPSO Almirante Tamandare and Alexandre de Gusmao projects in preparation for what will be a year of large investment in the construction portfolio in 2023. Over to our guidance. Based on our outlook for the remaining of the year, we have revised our guidance upwards. 2022 directional revenue guidance is increased from around $3.2 billion to above $3.2 billion. 2022 directional EBITDA guidance is revised from about $950 million to around $1 billion. So to summarize, year-to-year, SBM Offshore reported solid results and increased its guidance. The company is demonstrating resilience in a challenging environment and is successfully executing its energy transition strategy through the delivery of this record-breaking backlog. Strong market outlook and with the highest sustainability standard. This concludes the prepared remarks portion of the call today. Thank you for listening, and operator, you can now open the call for questions.

[Operator Instructions] And the first question comes from the line of Thijs Berkelder from ABN AMRO ODDO BHF.

Congratulations with the lift in guidance. Let's start with the first slide question, there was some of my clients worried that their extra repair costs for the onset would be a restriction for your dividend payment. So can you please answer that question? Second question from my end is on -- maybe more on 2023. There you maybe remind us a bit on -- actually 2 FPSOs about to produce first oil input as '23, plus your offshore wind project being delivered in 2023. Are you also losing a couple of contracts in 2023 or not? I assume all-in-all that EBITDA then in 2023 should be clearly higher than in 2022.

Okay. Douglas is going to take the dividend question, and probably also expand a bit more on the 2023 guidance. As you know, normal prices is not to provide guidance at this stage of the year. And so the -- what we're going to do so at this stage. What can be said is, you are seeing in our portfolio of the projects which are likely to be delivered next year and the one under construction. So you can make up your mind where we're going to go. The other part that we have mentioned is that the market to-date is extremely strong to say the least. And as a company, we have a capacity to have a portfolio of 6 FPSOs under construction, which is the case today, by the way. We have 5 projects under construction, plus one that [ were being in ] anticipation. And we have also said that we're going to be extremely disciplined and prudent in our way of taking project. So that's where we are at this stage. But I'll leave Douglas to expand on those 2 points.

Okay. Let's start with the first. So on the dividend, I think as we've been very clear, our policy is to pay a stable dividend that grows over time. And with the word stable, that implies we need to think very carefully about changing it in a downward direction. So when we put it up, in other words, we are quite cautious in terms of making sure that we're going to be able to hold it at that level. So we make allowances for unforeseen things that could crop up during the year. So to answer your question, no, we don't see the Anchieta incident impacting the dividend next year. I think Bruno, you gave a pretty good answer relative to the guidance next year. Yes, we'll give you the guidance in February. I think you mentioned the elements. The only other thing I would mention is, yes, we have some planned start-ups next year. But as you know this year, Capixaba has come off high, so there'll be a big impact from that.

Next question comes from the line of Luuk Van Beek from Degroof Petercam.

First, a question on the Memorandum of Understanding you've signed with ExxonMobil. Can you elaborate a bit on the type of project for which the project will be -- the hull will be used. You mentioned CO2 equivalent intensity and so on. So can you explain a bit what you mean by that? And the second is on the repair to the Cidade de Anchieta. Is there any read across for the remainder of the fleet to do quite extensive repairs? And did that review any weakness in the FPSO design that should be addressed at other units as well?

Okay. So thank you Luuk, for this question. Oivind, do you want to take the second question and I would take the first after.

Yes. So we've understood the nature of the problem on the Anchieta, and we do not see any reason for this to repeat itself across the fleet. And that's what we can say about that.

And with regard to the next hub that we are building. So we started our Fast4Ward program in 2014. We have under construction or built 7 FPSO, which is under this category. Those FPSO by definition are large FPSO with a strong production capacity, but also low emission impact. And if you look at the portfolio of our new asset coming into production, they're going to have on average once they are producing at full capacity, an emission of CO2 of somewhere in the range between 8 to 9 kilograms of CO2 per barrel oil produced, while the average in [indiscernible] the average emission and [ the water ] is around 16%. So it shows you the progress that we're making and the trend that we have done through the industry. Specifically, the next hub that we're looking at is really in the same range of projects that we're looking at. And we're looking at the opportunity to deploy this asset in Guyana or elsewhere depending on what the opportunity are going to come.

Next question comes from the line of Quirijn Mulder from ING.

Indeed, congratulations with your upgrade in spite of COVID, zero policy, et cetera. But I have questions about the -- first question is about the situation with regard to ExxonMobil breaking into that market. Is that -- how do you look at it? Is that too much work or is that -- is Exxon now a real competitor -- sorry, [indiscernible] a real competitor in that market? That's my first question. And the second question is about the hull situation. As I understand, you will have ordered to set sales a couple of months ago. Is this drill number 8? How should you guys see this position with regard to the hulls? And do you have now hull on inspection or something like that? That were my questions.

Okay. So if we look at our client portfolio and specifically what we have done in Guyana, we need to put things in context. The first oil discovery was made in Guyana in May 2015. 7 years down the road, in 5 plus months, we produced oil assets almost 11 million barrels of oil during the month. So 7 years after the first discovery. On average, in deepwater fuel development, it takes 10 years before we get first oil. So it shows the capacity that SBM Offshore, along with its clients and all the stakeholders have had to deliver value to all stakeholders, including the Guyana State. As you have seen, there is plenty of opportunity coming up in Guyana. The way the clients manage this portfolio, I cannot comment on it. The only point I can comment is the satisfaction and the track record that we are having in delivering this project. With regards to commitment of hull, every time we made a formal commitment we make an announcement, and we have done so in August saying that we were going to build a new hull in anticipation for the market. We do this only when we do a formal commitment. It doesn't mean that we don't have a plan to do more. But again, we are aligned with our policy of being extremely prudent and disciplined on our way of committing to assets and to make sure that we have a line of sight on where the assets are going to be deployed. So that's where we are. And so when there is a -- when we need to do an announcement, we would do so, but it's not the time today.

But is the seventh hull mentioned in August, is that the same as the -- is that one used for ExxonMobil, or is that another one?

No, it's the one that we have committed in August, that's the -- the option has been taken.

Next question comes from the line of Guillaume Delaby from Societe Generale.

The first one, Bruno you mentioned that the market is extremely strong to say the least, if I am taking you correctly. Maybe could you provide us a little bit of maybe of qualitative color when you have discussion with your clients, I would say, today versus, I would say, maybe 6 months ago. What has changed? Is it only a continued gradual improvement or maybe any element which structure during your clients especially? And my second question, which relates to the first one. To what extent, given the fact that you are mainly working at full capacity in terms of FPSO, to what extent do you still and, I would say, some optionalities to grow your turnkey division in 2023? Maybe I'm thinking about are there some equipment sales, which could be expected [indiscernible] or any color regarding potential increase in equipment sales in 2023.

Okay. So thank you very much for your question. So when you look at the market and try to provide some color on it, you -- I mean you can see the number of awards which has been done in the market over the past few months. I believe in Brazil the past -- less than 12 months, 5 FPSO been awarded. There's going to be more than 8 FPSO, which are going to be up for tender or awarded in the coming 12 to 18 months. That's a huge amount of projects, and that's only in one country. On top of this, when you look at the capacity constraints, which exist in key suppliers, fabrication yard long-lead item equipment, you can see that there is a lot of bottleneck into the industry. So as such, and that I rebound in your next question. We, as SBM Offshore, we have said we have a capacity to build to have a portfolio of 6 FPSO under construction, and we're going to remain at this level. We're going to remain at this level because we believe that this is the best way for us to generate value for all stakeholders involved, starting with our clients, the [indiscernible] government and obviously ourselves. So when you look at our turnkey division next year, we're likely to deliver 2 FPSOs, which are in construction. It's going to provide more capacity for us to get new projects. Those projects are going to start. But as you said the ramp-up from a revenue standpoint and a margin standpoint is slow at the beginning of the project because we do not recognize margin for the first 25% of the project and the engineering phase, by definition, provide less revenue recognition. But that's where we're going to be. Now we're not looking at growing the turnkey top line. We're looking at making it stable, but making it profitable for all stakeholders.

We currently have no questions in the queue. [Operator Instructions] And the next question comes from the line of Quirijn Mulder from ING.

Yes, on the follow-up here. With regard to the Anchieta, is there anything you can say about operational profitability next year? I mean to say if it starts up, what is the -- I think that in the results, there was something like an EBITDA included. So maybe you can elaborate on that what the situation is there with regard to the operational part of it. And the last question I had is about the situation in Guyana because it looks to me that, let me say, number 5 was an easy target for you [indiscernible]. So I'm somewhat surprised let me say that SBM did not win this project or was there a reason for you to be cautious there or you said, we are over -- we are fully occupied and we have now no space at this moment. Is that the reason?

Okay. So I mean, I cannot comment on the way our clients manage their portfolio of award, and that's really their prerogative. The only thing I can say is really the track record that we have had in Guyana and that we're having and also the fact that we got an option for the upcoming years, which is a demonstration of our capability and our no order. With regard to the profitability on the lease and operate aspect, Douglas is raising its hand and wants to jump on the microphone, so Douglas?

Yes, so with the restart at the end of this year, you can assume a normal level of EBITDA next year. Obviously, though noting from a cash flow perspective, there will be an impact from the CapEx on the repair costs.

The next question comes from the line of Andre Mulder from Kepler Cheuvreux.

Just one question left. Can you be a bit more specific on the timing as these units will come on stream in '23?

Yes, we said during 2023, that's all the detail we can provide at this stage. I mean, as we are going to come closer to the delivery date, we're going to provide more color to that. But as you can realize, Andre, is the situation today is extremely volatile on a number of aspects. And let's take the example of Prosperity, just to highlight this. Prosperity, we were ahead of schedule when the incident happened. We could have had a potential delivery before year-end and obviously, this incident has happened and has pushed the delivery to next year. Now we have said 2023, our internal planning is showing some precise date, obviously, but there is always the unknown, unknown that we cannot quantify. And as such, we'll rather say, give the overall guidance in 2023. And when we come closer to the date, we're going to provide you more color. But yes, I mean it's a highly volatile environment. That's what I want to say.

There are no further questions. So I will now hand the call back to your host for some closing remarks.

Okay. So thank you all of us for joining us today. If you have further questions, please do not hesitate to contact us. It's going to be with pleasure. In the meantime, have a nice day, and you can now resume a normal activity. Thank you.

Ladies and gentlemen, this concludes the SBM Offshore conference call. You may now disconnect your lines. Thank you for your participation.