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

Ladies and gentlemen, thank you for holding, and welcome to the SBM Offshore Half Year 2023 earnings. At this moment, all participants are listen-only mode. After the presentation, there will be an opportunity to ask questions. Just to remind you, this conference is being recorded. I would now like to hand over the conference to Mr. Bruno Chabas. Go ahead, please.

Okay. So good morning, everybody, and welcome to the SBM Offshore Half Year 2023 Earnings Call. I'm Bruno Chabas, CEO of SBM Offshore, and I'm joined today by our COO, Oivind Tangen; and our CFO, Douglas Wood. Let me present SBM Offshore's results and our main achievements for the first half of the year, after which Douglas will go through our financials. As always, we welcome questions after the prepared section of this call. Also please note the disclaimer. And now let's go into the bulk of the presentation, and we're going to start with a reminder on how we create value to all stakeholders. As an energy transition company, we seek to reconcile bromine demand for secure and affordable energy supply with sustainability by putting our oil and gas experience and deepwater expertise at the service of a new energy era. The energy transition will not happen overnight. As such, we're pragmatic with a strategy that sets realistic pace for change, reducing costs and emissions from oil and gas production while developing competitive renewable energy solutions. We delivered this strategy and create value through 3 platforms. First, the Ocean infrastructure platform with 15 assets we lead and operate around the world and 5 FPSO under construction, which will join the fleet within the next 3 years. This platform delivers cost and carbon efficient energy to the world. It generates a record backlog, providing predictable cash flow up to 2050. Next, transition the core platform. Supporting our FPSO business transformation and decarbonization journey to remain competitive and carbon efficient through our emission program, which brings technological solution to clients and addresses the strong FPSO market. Finally, new energy through which we invest in new technology and solution, leveraging SBM Offshore decades of experience to support renewable and energy transition growing markets. Now let's take a look at the highlights for the first half of the year. Again, we delivered a strong performance across the board. Starting with our operation performance. The construction of FPSOs, prosperities and [indiscernible] is progressing well with expecting first oil by year-end. Our fleet up time stood above 99%, and the HSE performance was good with a total recordable injury frequency rate of 0.2% below our yearly target. On the financial side, the first half 2023 directional EBITDA stands at USD 457 million, and full year guidance is reiterated. Order book has reached another record of USD 32.2 billion or USD 3.2 billion new order intake during the first half of the year, mainly due to the operations and maintenance agreement signed with ExxonMobil Guyana for Guyanese fleet. We are also proud of the USD 3.2 billion secured for the financing of FPSO Almirante Tamandaré and Alexandre de Gusmão construction. Financing is now in place for the anti-construction portfolio. The market outlook for FPSO with both low cost and emission per barrel remains positive. To meet this demand, we order 2 MPF hulls, one of which is under exclusivity agreement with ExxonMobil Guyana and to ensure the company remains competitive and relevant for the long-term future, we are adapting our organization structure. Finally, we are progressing our transition journey. In fronting offshore wind market, the 3 floating foundation of the [indiscernible] project have successfully been loaded out. We continue to progress our emission program, supporting our oil and gas decarbonization mission while we can be proud of the outstanding performance from units, which joined the fleet recently, operating with much lower emission intensity than industry average. Before going through the main pack, let's start with current energy and market challenges. Regardless of the scenario you consider whether it is net 0 scenario or the announced pledges scenario defined by the International Energy Agency, oil will be needed for [indiscernible]. Combined with the natural decline of current oil production without new sources of supply, the shortage will be between 10 million to 20 million barrels of oil per day until at least the end of the decade. In this context, the world will need the lowest cost and emission solutions until renewable energy can cover global demand. Fulfilling future energy demand in an affordable and sustainable manner is possible with technology and investment, but it is also required pragmatism, transparency and commitment from all stakeholders. In this context, depots are the solution of choice to fulfill the oil supply gap as they rank amongst the lowest in terms of emission intensity and oil breakeven prices. SBM Offshore as a leader in this market has a role to play in the energy transition with FPSOs contributing to low development breakeven prices ranging between USD 25 to USD 35 per barrel with a greenhouse gas emission intensity of around 40% lower than oil and gas industry average. Based on the strong fundamentals from the previous slide, the market outlook for FPSO is very positive. We foresee over 30 potential FPSO awards over the next 3 years. Our average -- in average 11 FPSO per year could be awarded, of which we see at least 50% of those being in our niche market of large and complex FPSO. Again, providing energy with the lowest breakeven prices and low emission intensity. The majority of award is expected in the high-quality reserve or of South America, including Guyana and Brazil, where we have strong operating experience. We're also -- but also in other basins in Western Africa, in the Gulf of Mexico, for which our fast-forward solution is also well [indiscernible]. To address this positive market outlook, where our execution capacity stand at 6 FPSO at various stages of construction, we have 2 MPF hulls under construction, supporting our tendering activity. In the context of evolving financing markets with new models and sources of finance require, we continue to remain very selective and disciplined in order to continue to bring value to our stakeholders. Now turning to execution. 2023 is a busy year for the company, but also very exciting as we will be delivering 2 major FPSO projects. FPSO Prosperity is in Guyanese waters and progressing on the hookup and installation campaigns, while FPS -- so Sepetiba sell away from China in June for Brazil. Despite the challenging environment, both projects are on track to reach first or by year-end, thanks to the excellent job performed by our teams and the collaboration with suppliers and clients. The unit will have a relatively low emission intensity and low development oil breakeven prices and will contribute to fulfill the world energy demand by adding 400,000 barrels of oil per day combined capacity. So looking at our entire execution portfolio, the overall progress on the 5 FPSO construction as well as the 2 MPF hulls is good. As well leaving the [indiscernible] combined with supply chain and inflationary constraints, project teams are putting a lot of effort in mitigating the impact to the extent possible. Delivery schedule are on track, and the overall margin remained robust at portfolio level. Now let me illustrate our execution performance, and let's zoom on how the company track record on how we're delivering FPSO and the value that we bring to our clients. Time to market is key for our clients' economics. On the graph to the left, we see that over the past 10 years, it takes on average over 9 years for deepwater field discovery to reach first oil. With our FastForward program, we support our clients outperformance with an average of 7 years to reach first oil for SBM projects. This result requires discipline, experience and strong project management further enhanced by our own optimized and standardized FPSO design. This performance is further improved through our early engagement with clients, supply chain and other contractors. To the right of the chart is the performance in Guyana with time to market of less than 5 years for Destiny development, which targeted early production and less than 7 years for Unity development. So to put things in perspective, around 240 million barrels of oil were produced by those 2 units between 2019 and 2023, which at today's price is equivalent to over USD 20 billion, while in the same time frame, the majority field in deepwater are not even close to producing. Turning to market for development using prosperity and one Guyana FPSO are also expected to be below 7 years, increasing further the value generated to all stakeholders. So let's turn to the Lease and Operate division. This segment continued to deliver solid results with an uptime of 99.5% at midyear. The number of operating units stand at 15 with an installed capacity of 1.8 million barrel of oil card. 5 units will be added to the operational fleet within the next 3 years. In total, it provides backlog visibility until 2050 and associated healthy and predictable cash flow. Again, to bring some perspective, the average cost of our fleet for our clients is between USD 6 to USD 7 per barrel produced, which underpins the resilience of our fee cash flow and future cash flow. We signed a 10-year operation and maintenance agreement with ExxonMobil Guyana for the FPSO fleet in country. This is a testament to our operational excellence and value we bring to our clients. The contract capitalized on our developments in Guyana to date, positioning the company for long-term operation in a country and enabling us to continue local and sustainable investments in people and infrastructure as well as to deploy our digital and operational technology to the Guyanese fleet. With this agreement, we are operating and maintaining the unit through our integrating operation model, together with ExxonMobil. This model is the first of its kind in the industry and extend our relationship with -- by integrating further our teams. The model success is driven by better alignment on strategy, common focus on value, maximizing production and cost reduction. We aim to eliminate duplication with less interfaces and improved scalability by combining SBM Offshore and excel Mobil strength, including experience and resources. We truly believe it is the optimal solution to achieve excellence in the operation of Guyana's asset, brings value to all stakeholders and setting a new performance benchmark for the industry. To further leverage our operating excellence and remain competitive for the long-term future, we are also adapting our organization. Firstly, we create a corporate and business solutions center to reorganize support and corporate functions. The objective of the meter discipline center is to increase synergies and improve efficiency with several functions spread over the world, centralized and led from our Portugal office. Secondly, SBM Offshore is strengthening its presence in India. To support the company's growth, we acquired the remaining 49% ownership held by our partner in our engineering center located in India. This acquisition is part of our strategy to develop a high-value engineering center focused on turnkey execution and innovation while remaining cost discipline in jail. This center has been renamed SBM Offshore India. Finally, we initiated the process to acquire partners Sonangol equity shares in the lease and operating entities in our fleet in Angola, namely FPSO N'Goma, Saxi Batuque and Mondo. With a means to rationalize our activity, we are also divesting noncore activities in the construction or panel selling our equity shares against Sonangol. The process is ongoing and will be subject to various conditions precedent to reach final completion. The other key milestone towards adapting to the long-term future is our net 0 commitment. As an energy transition company, we are focused on our emissions reduction mission. In line with previous announcement, we have the ambition to achieve a net 0 by no later than 2050. To ensure we remain on track, the company has set intermediate targets, including reducing by 50% greenhouse gas intensity for Scope 3 downstream lease assets from 2016 as a base year, achieving net 0 flare by 2030. And offer the market a near 0 emission FPSO by 2024, which will now see in greater detail how we're going to achieve this. In 2020, this company has been working on lowering emission on FPSO through an ambitious program based on in-house concept, design and technology development to support clients in reducing their carbon footprint. Looking at the program road map and past achievements, we now include closed flare in project tenders. We have digitalized our fleet through smart operation to multiturn reduce emission. And we have a market-ready electrical drive FPSO. The next milestone is the design of a carbon capture module to be market ready by the end of the year. We're progressing well on feasibility studies and getting the technology qualified. We are on track with our ambition to offer the market a near 0 FPSO by 2024. In addition to our progress in the decarbonization road map, we are also moving forward on new energy development, especially on cutting offshore wind with the province Gandler project, project reaching a new milestone. The 3 floating foundation built by the company have successfully been loaded out and the turbine with the capacity of each of 8.4 megawatts are currently being assembled. This is the company's first floating -- first pilot floating wind farm and the first project worldwide using tension leg more in technology, which has a minimum motion and seabed footprint. Once commissioned, the form will account for about 10% of the total installed floating wind electricity generation capacity in the world and will produce the equivalent of the annual electricity consumption of 45,000 inhibitors. On top of our pilot form and considering the floating offshore wind market at large, we have the ambition to be a major player in the field, leveraging our EPC experience while remaining selective and disciplined, especially as the economics remain challenging. This market will take time to materialize. Most projects are expected to be sanctioned towards the end of the decade and beyond. We remain invested in this promising market through code development projects in floating offshore wind, securing seabed rights and relevant pyramid together with partners to better understand the market and accelerate new technology deployment. Finally, we capitalized on decades of experience in floating solution to support the energy transition. With over 500 floating anchored assets delivered in the last 6 years, we have the know-how, the strength and the experience to support our clients in decarbonizing offshore energy production. As alternative and energy markets are maturing, we will remain selective and disciplined in transferring our capabilities and developing appropriate technological solution, whether it is for floating offshore wind, carbon capture, ammonia and hydrogen or digital solutions. We are well positioned to capture promising future new market opportunities. So let's now turn to the financial, and Douglas, the floor is yours.

Thank you, Bruno, and good morning, everybody. So with the finalization of the new 10-year O&M agreement in Guyana, our order book or backlog reached a new record level of $32.2 billion at the end of the first half. And we've also fully secured the financing to deliver this backlog, raising an aggregate $3.2 billion in the first half for the FPSOs, Almirante Tamandaré and Alexandre de Gusmão. With these, we finalized an overall $7.6 billion financing program for the 5 FPSOs in the construction portfolio. Now this is a pretty remarkable achievement, particularly given today's challenging financing environment. And we really appreciate the support of the 25 financial institutions that have worked with us to deliver this. Now given the evolution of the financing market, new models and sources of finance will need to mature and evolve. We're well placed to capitalize on this new dynamic given our ability to structure innovative models like in Guyana and the depth and breadth of our experience and relationships with financial institutions. On EBITDA, we continue to see good operational performance from the Lease and Operate portfolio, generating a strong level of cash flow, which we anticipate will increase over the next year with the 2 new vessels expected to join the fleet by year-end. And while we continue to live with the after-effects of the pandemic plus supply chain and inflationary constraints, we are maintaining our guidance. The overall margin for the construction project remains robust at portfolio level, and you can see the overall margin in the IFRS numbers of 20%, with the average percentage of completion of the FPSO portfolio at approximately 70%. So we're continuing to demonstrate our ability to materialize cash flow from our growing long-term order book, leaving us well-positioned to fund growth and at the same time, offer attractive long-term cash returns to our shareholders. On this in May, we paid our previously announced $1.1 per share dividend, around $200 million in aggregate, which is equivalent to a yield of over 7%. If we turn to review the key metrics for the year on a directional basis and starting with the backlog of foundation and generator of our substantial long-term cash flow. So as mentioned, thanks to the O&M agreement in Guyana, once again, this stands at a record level, an increase of almost $2 billion over the first half. Again, this increase is net of turnover, so we materialized an order intake of around $3 billion with no associated CapEx. And we expect to generate an aggregate net cash flow of around $9.5 billion over the next 27 years from the lesion Operate and BOT components of this. We move on to net debt. This increased by around $1.1 billion to just under $7.2 billion as we drew further on project financing to fund the large construction portfolio. Then to the P&L metrics. So total revenue was around $1.5 billion compared with $1.76 billion for the same period in 2022. The delta was driven by the turnkey segment where revenue was around $560 million compared with around $900 million in the year ago period. Here, the main impact was the comparative effect of the one-off boost we saw last year from the partial divestment of FPSOs, Almirante Tamandaré and Alexandre de Gusmão. We also booked relatively less percentage progress on our Almirante Tamandaré as the project reached the integration place, plus we have the comparative effect of the fact that Liza Unity was completed in the first half of 2022. That means Liza Unity, therefore, commenced operations in the first half of 2022, and this helped to drive a 9% increase in lease and operating revenue to around $930 million. Now this despite the fact that the FPSO Capixaba ceased operations in the year ago period and is now in the decommissioning phase. And the segment also benefited from an increase in the reimbursable scope, contributing to its resilience in an inflationary and higher interest rate environment. We then look at EBITDA, this was around $460 million compared with around $500 million in the year ago period. There was a slight increase in lease and operate EBITDA with the main elements being the same as the revenue, Turnkey EBITDA was $37 million negative versus $16 million in the first half of 2022. Some prior period one-offs have an impact here like the sale of the SBM Installer. But as we've been highlighting, for certain projects, it's been harder to fully mitigate impacts from the pandemic and the pressure on the global supply chain. Now it's worth here taking a moment again as, in fact, we did this time last year to take a look at the turnkey model and how directional links to IFRS. On the directional which aligns with cash flow, in Turkey, the result is mainly driven by the margin made on the portion of FPSO sole partners. So it doesn't include the margin made on the SPN ownership share of the 5 FPSOs currently in the construction phase. And that's because the cash from this is generated from the backlog during the operating period. But this part of the margin is, however, included under IFRS, which reflects the margin at overall construction portfolio level. And as mentioned earlier, as you see here, this remains at a robust level. So other directional therefore, under -- during the first half, only a part of this overall portfolio margin compensated for costs allocated to Turnkey. These include segment overheads and growth-related expenditures such as sales and marketing, R&D and investment in renewables. The directional Turnkey margin is therefore influenced by choices made in relation to the level of ownership of FPSOs in the portfolio. These choices are driven by the optimization of the overall cash flow and economics for the company. In any event, on an overall life cycle average basis, including BOT purchases, which will be booked in directional Turnkey, the segment is expected to show a positive result. Finally, to wrap up the overall EBITDA story, as Bruno mentioned, we've established a new corporate business solutions center in Porto, for which we have a one-off charge of $11 million in the first half. Going forward, we expect to see a benefit from efficiencies and overhead cost reduction from the CBSE across all segments. Now we turn now to cash flow on a directional basis. The cash from operations, given the 2 start-ups in the second half phasing of dividend payments from JVs and linking with the EBITDA guidance, we would expect higher cash flow in the second half such that this will be sufficient to cover debt service tax and the dividend. In terms of debt and growth cash out, you see the impact of the significant construction phase, we continue to be in, including 2 unallocated MPFs and where we have an unwind of net working capital linked to the average maturity of the construction portfolio. Then you see we drew as anticipated on the cash balance we had at the end of last year, which was still benefiting from the acceleration of earlier low-cost financing. On the debt side, we closed the 2 financings in the period, though the first drawdown on the Alexandre de Gusmão facility was only made in July. Then we finalized the $125 million funding loan with China Merchant financial leasing related to FPSO Cidade de Ilhabela and receive the funds. And we've also secured short-term funds in the form of supply chain financing or SCF of EUR 50 million or the dollar equivalent, which was drawn for $25 million at the end of the half. And looking at liquidity. At the end of June, we had $3 billion. In addition to cash, we had $1.8 billion from the undrawn portion of project debt and $0.8 billion under the RCF and new SCS. Now if we move to the details of the backlog and the forecast net cash flow going forward. As discussed, the main change on the backlog was the impact of the 10-year O&M agreement we signed in Guyana, representing an order intake of around $3 billion. Net of turnover in the period, this resulted in an increase of almost $2 billion versus the year-end. And as we show on the large bar on the left, we expect the lease and operate part of this backlog to generate $8.9 billion aggregate net cash after tax and the BOT sales to generate $0.6 billion. We've then played this net cash backlog out over the lifetime of the backlog, where average expected net lease and operating cash flow from the blue bars has grown to $330 million per annum for the 27-year period is above the $320 million average at year-end 2022. And one point to mention here is that ExxonMobil Guyana has indicated that it is contemplating the exercise of its contractual purchase option to acquire the FPSO Liza Unity towards the end of this year, just slightly ahead at the end of the maximum lease term in February next year. So that would mean a slight acceleration of the first orange BOT bar. Now as ever, important to emphasize that the backlog net cash flow is underpinned by contracts from premium clients, supporting carbon-efficient projects with very low operating breakevens and strong protection against inflation through escalation and reimbursable provisions. So updating then our discounted cash flow analysis of lease and operating BOT sales, we've kept the same discount rates for consistency. But if you want to use a different one, you can extrapolate where the delta is EUR 1 to EUR 2 per share per percent, where mathematically, as you go higher with the discount rate, it moves from 2 towards 1. At the end of the first half, the euro per share range increased by EUR 1 compared with the year-end to EUR 24 to EUR 28 per share, reflecting mainly the increase in backlog and associated net cash more than offsetting the effect from the depreciation of the dollar. Then if we look at capital allocation, key elements around growth remain similar. We have 5 large FPSOs in the construction or commissioning phase. And related to this, with our cash planning for project funding, we typically look to prioritize financing facilities, deferring our equity investment. So the significant part of the cash net equity investment for these 5 projects were still to come at year-end 2022. On top of this, we have expenditures related to renewables pilot projects. The expected overall net equity spend on these from end 2022 remains in line with what we guided for at year-end. Then to mention, we have the 2 MPFs in the mix, which give us an advantaged position for new orders. As such, we're confident that we'll recover the investment, but affected to accommodate in our liquidity thinking. The floating offshore wind development activities where we'd expect our aggregate investment recovered as a minimum. As of today, it's likely our MAX investment will run lower than the $200 million ceiling we set. Then on equity acceleration. At current pricing levels, debt capital markets continue to remain unattractive. We have, however, made some progress with the new financing linked to [indiscernible] and we continue to work on a number of options so that we're ready when the appropriate window of opportunity arrives. At the same time, the basis of our capital allocation model continues to grow, with total net cash expected to be generated from the lease and operate backlog increasing to $9.5 billion, including the BOT sales, with 1/3 of this to come in the next 5 years. So this supports our ability to fund growth, but also offer very attractive long-term shareholder returns with our industry-leading dividend yield at more than 7% That's it for me. Now back to Bruno for the guidance.

Okay. So thank you, Douglas. And finally, we confirm the guidance for 2023. Directional revenue is expected to be above $2.9 billion, with Lease and Operate revenue at around $1.9 billion and Turnkey revenues above $1 billion. Directional EBITDA is expected to be above $1 billion. And if the purchase of FPSOs Unity, as already mentioned, occurred in 2023, we will obviously revise the guidance accordingly. To conclude, the company is consistent in the delivery of its strategy with solid financial results, 2 major units on strike for first story this year, 2 holes under construction to address the positive market outlook. And as an energy transition company progressing on new energies and the company's mission reduction program. Our organization is evolving to leverage our expertise and remain competitive for the long-term future. So on this, thank you for your attention, and the floor is now used for your questions.

[Operator Instructions] The first question comes from the line of Luuk Van Beek from Banque Degroof Petercam.

First, I have a question on the supply chain challenges that you're facing. Can you comment on how you look at those going forward? Do you expect them to remain at a similar level in the second half of this year? Or is it already becoming easier for you? And the second question is on the loan offshore wind offering. Can you discuss a bit of timeline until you are able to tender commercially with your product? Obviously, you want to have the results of the units that you are currently building some data on that. You're optimizing the design. So how -- which steps are you taking how long should you take it before you can start commercial tendering?

Yes. Okay. Thank you, Luuk for your question. So [indiscernible] is going to go through the supply chain level at this stage. But let me take the floating offshore wind market. Obviously, going through the first pilot project on porting offshore wind, we have a lot of learning coming through that. And in fact, the learning last year were shown in the second version of our floater that we're developing also at this stage. What we're seeing in Parle is that the market is shifting to the right. And it's shifting to the right for a number of reasons, including logistics, including cost of those developments and the difficulty of doing those developments. So what we're doing at this stage is really engaging with a number of clients on pre-feed activities, trying to de-risk those projects and to see what is the best way to do so. We're doing this in a way to mitigate to be disciplined and really to reduce the risk, but also to find solution with our clients. So in summary, what I'm saying there, the level of activity in the protein offshore wind market, we expect this to be rather low with a number of engineering study over the coming few years. And with no project crystallizing for the coming few years, I would say, 2 to 3 years.

Yes. The supply chain challenges as to see them across the portfolio. So first and foremost, we are really happy with the progress across the project portfolio over the last quarter. And there are parts of the project portfolio more exposed to the supply chain challenges than others. And notably on the Brazil projects that has represented a larger challenge. And we do have now a very substantial degree of completion on this project, and we feel they are largely at this mitigated and the ongoing projects. We don't expect to see any further impact from this.

The next question comes from the line of Mick Pickup from Barclays.

I'm just wondering if you can go through that turnkey loss again, Douglas, Obviously, it's caused a bit of consternation this morning. And the bit I'm trying to get to is, obviously, you've now said, look, it includes R&D, includes sales and marketing, it includes overheads, but you've also got that the elimination of $50-odd million in the quarter, which I think most people probably assume that includes most of the corporate overheads in there. So it's just about allocation of costs because if there's no turnkey, discrete turnkey revenues from turnkey contracts and why are we allocating that much cost to that division?

Douglas?

Okay. So yes, I mean, under directional turnkey, obviously, you're seeing the impact on more of a kind of cash flow basis, whereas as we explained in the presentation and in the release. And you can see from the IFRS results, the overall portfolio in Turnkey is pretty healthy, but the cash flow from that is going to come later. But it's -- so as such, just thinking about the cash flow in Turnkey and we've always done this. So we have the turnkey overheads. We have the sales and marketing expenses, R&D and renewables, including effectively some of the investment, which gets expensed so mechanically that's what you see. But what I would note is that we're maintaining the guidance. So this is what we did anticipate. And as we've mentioned as well, the directional Turnkey results is effectively it's a function of choices that we make in terms of how much ownership share we want to maintain, and that's very much driven by cash flow management and economics. I didn't get the about the $50 million you mentioned mid...

Yes. So you have the other and eliminations in your EBITDA. So lease EBITDA Turnkey EBITDA and then are in eliminations.

Yes. Other [Interpreted]

That includes corporate costs and R&D [Interpreted].

Okay. R&D has always been in Turnkey.

R&D is always in Turnkey. Okay. So you're now telling me -- so then you give that DCF of the free cash flow going forward. And historically, I think the message has been, take off $75 million for corporate costs every year on top of that put on a valuation assessment for Turnkey and Presto you get the group? Yes... And now you're telling me turnkeys a liability on assets.

No, not at all. If you listen to what I said, I said that we expect Turnkey over the cycle to be positive. And that's what we've always said when we talk about that -- the capital allocation model. So...

That includes the bot sales as well. Does it to be positive over the fact?

Yes. And we've been very consistent about that. But I mean, I think it's a good point you make about the cash flow because we can look at things on whatever a 3-month, 6-month basis, but we're giving guidance effectively on the next now '27 years, which I think is pretty unique among most companies. So we're giving you the net cash. We've given you guidance on the corporate overheads. We now give you some guidance on how much money we need to spend to realize that. So you've got all of the components. We've increased the guidance effectively because the backlog has gone up. So -- and we've taken into account in that, obviously, everything we know about where we are with the project portfolio at the moment. So really, the turnkey negative is really how I look at it. It's a timing cash flow effect.

Okay. And then a couple of follow-ups. Obviously, you also give the revenue in the backlog. And I think you just like we said, use a 60-odd percent margin. Now you're putting in pure operating contracts and what sort of impact on that margin should we expect from the pure operating contracts 60-odd on?

Yes, I mean, you can sort of mechanically see it from the backlog. But I mean, it will be -- it's a different margin than obviously we get from the FPSO. So it will be a bit dilutive. But as I mentioned, it's still an excellent business. It's revenue and margin for which we're not having to make any CapEx.

Okay. And then just one final quick one. I forgive me, it's probably something I've missed in the past. But what's happened to the wave energy converter?

So you have not missed it. It's a program which is still on the go. We -- it was supposed -- I mean, in all fairness, this is a program that we say was going to be in water by this year. In fact, we have had some delays and difficulty in developing the technology. We're still on track in developing the level of technology that we want to have, which is going to be done by sometime next year, and we're looking at the way forward for this technology.

Okay. And that's still planning go in offshore [indiscernible] I'm not trying to look fast.

No, at this stage, we're looking at ways to do the development, the technical development and reducing the amount of cost. So we are assessing the necessity to go offshore now.

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

A number of questions. Firstly, on the lease margin, the -- you are now making $58.5 million versus $61.7 million last year. Is this a new reality? Should we still account for this $58.5 million? Or is it just a small drop there? Looking at your guidance, looking at what you made in sales and what's in the backlog, it seems that lease is already over $2 billion, whereas in Turnkey, you're below $1 billion. What's the reason for that? Third question on the backlog. I see that in Turnkey, beyond 25%, there's an additional $100 million. What was that? One remaining question for the time being. Looking at the spread of the activities in the operations and maintenance parts, that is really increasing over time. I guess that has to do with aging. Those are my questions for the time being.

Sorry, Andre. The last question, I'm not certain. Could you repeat it.

Yes. What I see in the development of the backlog, it shows that the bigger part of the $3 billion ends up in the later years. I guess that has to do with aging because for the first few years, it's quite low. But if you look at the remaining, say, 7.5 years, it's higher.

No. Okay. So here, we're looking at the order intake on the first half of the year, which was $3.2 billion, and the bulk of it is linked to the gain on top. Now the gain enterprise contract is over a 10-year period. But some of it from a growth perspective was already in the backlog because we had a BOT contract for the first 2 or 3 years of contract. So there, there is a substitution of what we had in the backlog. So there is no change in the backlog, and you see the impact more towards the tail end. So your observation is correct. Most of the impact is going to be after 3 years compared to the back of the previous backlog. But now, Douglas, do you want to take the 3 other questions?

So on the lease margin. Yes, we're very satisfied with the current level of margin that we have. We've got a good fleet at time of 99.5%. Then specifically, the reduction compared to previous period is mainly driven by the fact that, as I mentioned, we've had an increase in reimbursable scope as we offset which there's a great feature offsetting inflation, which we charge to our clients. But in the margin that we're making on the reimbursable scope is less than the -- or it's still obviously a very nice feature. Then we have a few dilutive effects of units under extension. So we've had several of those recently [indiscernible]. So those have an impact. Then there are some positive and negative one-off, which are part of operation, which can create a bit of a variation. But overall, we're happy with the margin and just the impact of the reimbursable scope and the extensions. Yes, on the lease guidance and the revenue, the backlog goes, you point out -- I guess you could say that point to some upside. We still got 6 months to go 2 start-ups ahead of us. So we left the guidance where it was, that we'll keep that under review as we go through the rest of the year. And then I think the point around the $100 million, that's really just kind of a rounding feature.

The next question comes from the line of Thijs Berkelder from ABN AMRO OBG.

First question on one-off effects. Turnkey gross margin in H1 was more or less 0. So that makes a negative $40 million year-over-year. Can you explain that as the mentioned extra supply chain costs and meaning that they've now gone should that more or less bring $40 million more in the second half than in the first half? Secondly, can you maybe give one-off costs indication for the project in India, maybe for the offshore wind costs as well as for the costs in H1 or maybe expected for Q2 in terms of restructuring of Angola? Then my second question is more related to the higher financing costs. Interest rates, of course, going up all over the world, so also visible in your P&L. Where can we see that pushing up your build towards customer towards the customers or should we see that more coming out in the second half? Third question is a much more general question is on your stock market listing. For many years now, you're trading at a 50% discount versus your own DCF calculations, how you say you work to create shareholder return. But somehow financial markets simply do not want to your DCF. Is there any discussion ongoing private or be going part of another list entity?

Okay. So let me take the last question first, and Douglas will go through more of the detail. I mean, as you can well recognize from a management perspective, we have little influence on the perception of the financial market. We have done a lot of things to be clear on our strategy to increase value from a cash flow standpoint and real valuation of the company. And that you can see over the years, if you look over the past 12 years, the backlog has been multiplied by more than 2. The cash flow associated to that by a greater factor even. So we're generating value and generating real cash flow into the company. The way the perception of the market is whatever it is, and we're just showing that we are delivering on our strategy as an energy transition company. And eventually, reality is going to strike and we hope that we're going to be valued at the proper level. That's where we are. Douglas, do you want to go through more of the detail?

Okay. So now I think the first one was kind of the comparables going on with the comparative turnkey one-off effect. So as I mentioned in the speech, I mentioned the one-off effects. I said they had some impact, but more of the point here is that some projects go better than others. And we still -- what you're seeing now is what I would say is like the after-effects of the pandemic and supply chain that's now baked in coming through into the directional result for the projects where we don't have 100% ownership. So what you're saying you're seeing there, it's the margin that we're taking on partners, and we tried to explain overall, Turnkey is good. You can see it in the IFRS numbers, but let's say, the cash flow from the part that's going better is coming later and we're seeing the impacts of the project where it's been more challenging to offset the impacts of the pandemic and some of this the supply chain impact. So that's really the overall story. So yes, it's overall good. But yes, what you see is the projects that don't do that haven't done so well. On the one-off costs, you asked about India. You see in the interim results, the purchase cost $21 million that is in the balance sheet too. We don't give a total breakdown on the turnkey numbers, but there is some breakdown you can see it in the interims. Then you asked about Angola. What are the restructuring costs there. Actually, overall, we'd expect that to have a positive result. There are some details to be worked out condition precedent, et cetera. So we'll let you know what that is when the deal closes. Then you adhering on financing costs. Obviously, for us, we're pretty much fully hedged than going forward for new projects, yes, to the extent that we have a model that involves a significant amount of financing, then the cost will be factored into the cost of those deals for our clients. But as Bruno mentioned, the fundamentals of the deepwater market FPSOs are very strong, such that given those, we think that the client will be to -- will be able to accommodate those additional costs in our pricing. [indiscernible] the 3 points.

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

A couple of questions from ING Quirijn Mulder. A couple of remarks here maybe. First of all, maybe you can tell me what happened. If I look at the pro visit turnkey or the, let me say, the lower-than-expected results in Turnkey, there are, in fact, 3 suspects. That is Tamandaré, that is the Gusmão, that is the Sepetiba. And it looks like that the effect of the COVID-19 is still playing a role there. Is the [indiscernible] -- and I know you're not going to speak about too many details about individual projects, but is it somewhat legacy from Sepetiba still playing a role here? Given the fact that, that is the most -- was the most affected by COVID-19, and there's still some impact. And then certainly -- and secondly, on the turnkey. As I understand, from the first half of 2022, you said Gusmão not contributing because of the moment of taking profit there. So it was a positive in the second -- in the first half of 2023 in according to plan, to give you -- to give some feeling on what's exactly happening with the 3 Brazilian FPSOs. And the other question is about Angola. I see that your -- I understand you're selling PAENAL --PAENAL Yard. But picking up the 50% of the Mondo, Saxi Batuque seems a little bit strain, given the fact that these 2 projects are already in the extension phase and I always see somewhat 1-year extension, but not more than that. Is there any prospect that these vessels will continue to produce? [indiscernible]. Those are my questions.

So I propose Douglas to take those 2 questions.

Yes. Okay. So indeed, as [indiscernible] mentioned, what you see coming through turnkey in direction, it is the Brazilian projects. For sure, all of those were awarded certainly before we started to see all the supply chain impacts. So we -- there are definitely impacts there. They all have -- all of them have an all-China execution model. So when it comes to the pandemic, where remember, actually, we had some challenges last year as well. They all were impacted to varying degrees. And the fact is, whilst, yes, they're still generating a margin. So we did see some margin contribution from all of them during this period. The fact is that versus the full turnkey costs, which are in directional. So the 100% of the turnkey costs are in directional. The margin from those 3 projects that we were able to book in the first half wasn't enough to offset the cost. But again, I go back to the fact that what you really concentrate on is portfolio level. So I think every EPC company, some projects go better than others. The portfolio level margin is very healthy, and that's the thing to concentrate on. And the timing of realization of the cash from that margin is going to be more back-ended as a function of how we've chosen for good economic reasons to structure the contracts. Then on Angola, yes, I mean, in the price that we pay, it's an overall package, remember. And as Bruno mentioned, basically, we're kind of simplifying our operations there. So we took into consideration the outstanding terms on all of the projects that we purchased.

Okay. And my final question, if I'm aloud, is on the guidance. So I understand that the guidance, is it correct to understand that the guidance is depending on the moment you get the first oil of prosperity starts and also said Pete in the second half of 2023. [indiscernible]

That's a factor. So that's the our assumptions relating that are taken into consideration in the guidance. And we, as I always say, that 6 months to go, we'll keep you posted as everything evolves.

Okay. But you have taken into account maybe something like October for prosperity and maybe December for Sepetiba. That is something which we can assume or something like that.

We've taken into account what we to be the realistic start-up date.

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

So a handful of questions left. Firstly, looking at the work in progress has risen from $3.6 billion to $4.5 billion. Can you give us the average stage of the projects? And can you remind us what it was at the end of '22? That's the first question. Second question is on financing. We've seen some banks dropping out of oil and gas financing. How do you look at the pool? Is it decreasing? Or is it increasing? Are others taking their place? Related question to that, what about the Chinese? What -- why is it taking so long to have this news on stake in Sepetiba by the Chinese? Then a question on possible share buybacks. You currently have a mandate of 18 months for 10%. Is there any maximum that you could ask for the AGM for more than 10% or a longer mandate than just 18 months? Question on the FPSO. It seems to be a regular product and a regular client, an irregular country. So can you make some men on that? And last on the offshore wind floater, [indiscernible] let's say, 1,000 offshore wind projects around 240 are floater projects. And it seems that semi-submersibles are taking an 80% share there. Do you still feel that it's possible to take a high market share in that segment? And also, there are other competitors with the TLP design next to you. So how do you look at that field?

Okay. So let me take the 2 last questions first, and Douglas will take the remaining one. Let me start with the footing offshore wind market. There are a number of projects, as you mentioned, in the drawing board. But at this stage, there is really limited projects which are going to go to FID in the near future. And for a variety of reasons, the logistics, the complexity, the cost associated with that. Today, once we're going to have installed programs gas project, we will have 10% market share. We don't pretend that we're going to be able to grab 100% of the market with our technology. We believe that our technology is well suited for a number of alternatives, in particular, were the ones which will require a low footprint and with a high level of stability. Now this market is in this infancy. There is a lot of needs to get from the market. Let's get the track record on the installation of Parenting and we'll see which technology is going to evolve and where to go. But more generally, I think the way we're evolving in this market is not to -- is to get technology agnostic in reality. What is important is the capacity to deliver the capacity to commission those projects. And that's where the strength of SBM Offshore is. And if at the end of the day, we need to install submissible or any type of other technology we will do so. With regard to the FPSO potential is project that you mentioned, the rationale for that is, in fact, as a company, we're a leader in anchoring system and complex anchoring systems. This FPSO requires a disconnectable target, which really is the sweet spot of what we're doing and requires a high level of technology. It's also a project which is in a market which we believe has high potential of growth and help us to enter this market with a limited level of risk. So when we look at this project, plus a new client who has it with this project, it's one of the project that we decided to focus our attention on really to position ourselves into a new market with a new client and in the technology where we are the leader on. And that's the reason that we are looking at this project and being focused on this target project.

Okay. So running through your questions. On the sort of average completion level of the portfolio, the end of 2022 was 57%. Now as I've mentioned, we're about 70% at the moment. On financing, yes, for sure. I think we're basically -- we're seeing an evolution in the market. So indeed, there are some players dropping out. I think many ECAs have now such that as we've said in the past, I think we, in fact, mentioned today, the models are going to evolve over time, potentially with maybe shorter-term financing or different players coming in. And we've talked in the past about potential interest of infrastructure funds, Chinese leasing and all of these things, there are different sources of long-term financing. But also alternative models as I mentioned, with the depth of our relationship in both fronts, I think we are going to be well positioned for this new dynamic relative to what is a strong opportunity set back what strong economic fundamentals in terms of the FPSO pipeline. I'm talking of China, so as we've continually mentioned, so the CMFL deal on Sepetiba season coming in after startup. So that's what you can expect at some point next year. And finally, you asked about buybacks and would we change the percentage. Right now, we don't have any plans to change that.

But there is no, let's say, sort of max you could ask the AGM for 15% or maybe a longer or shorter mandate.

Yes, we could. But as I said, we don't have any -- we don't have any plans to do that at the moment. We think we have a very robust capital allocation, shareholder returns policy. We've been increasing the dividend. That's notwithstanding significant growth period as we've discussed today, buybacks and buybacks remain part of the equation.

The next question comes from the line of Arjan [indiscernible] from Antares.

I have another question on the mitigation of the cost increases. You expect to deliver FPSOs in the second half of this year. And I understand that you are in discussions with customers to mitigate the cost overruns. And I just wonder what happens if the customer is not willing to compensate? Will these costs then still have to be taken at the completion of the project.

So just to be clear, today, the forecast that which translate into both our results to date and the guidance that we have are based on what we expect the project to give and the result that we expect. They do not take into consideration potential variation orders, which could come or claims which will be happening. So the information that we have at this stage when we close the account are included both in our financial to date and the forecast to complete.

Okay. That's clear. And then 2 other questions. The net cash amounts to 380 million. Previously, you also indicated what the amount of net available cash is. And why did you need to draw the -- the RCF in the first half? And then the other question is you've given the evolution of the financing markets and the new models, do you expect that the new models will imply a need for a larger initial equity investment by SBM?

Yes. So Douglas, you want to take those 2 questions?

So firstly, the $380 million cash, most of that, when you look at the details of the interim financial statements, you see that as ever a portion of our cash is at the joint venture level. So as such, it's not readily available, it's in the JV bank accounts have always been clear about that. And then with the RCF, it's really a timing thing relative to bridging between either implementing financing for projects or drawing on the drawdowns for project financing. And then another point we have at the moment is the spend on the NPS that we have. So we've got 2 of those on the go at the moment. So that's the background for that. And then the -- sorry, the second question on -- can you just repeat your second question, please?

Yes. So you indicated the evolution of the financing markets and you see new financing models. And if that would imply a larger initial equity investment by SBM.

So in principle with the same model, and we've actually mentioned this fact for several years now. Larger FPSOs mean a larger absolute amount of equity investment. So that's definitely a feature in the mix now.

The next question comes from the line of [ Sander Lobe from Meris Research ].

I have just the one question. In the past, you have mentioned that in 2025 and beyond, net cash inflows could allow for some more room for buybacks and maybe increase of dividend. How are you looking at these investments into, for example, a new NPF hole versus share buybacks when the stock is trading at current levels?

Yes. So Douglas, you want to go through the capital allocation principles and [indiscernible] Because I think it's important to put this in the context of where we are in view of the market and the opportunities. So Douglas?

Yes. I don't like to recognize the 2025 date in terms of a time when things would change. I think for quite a number of years now, we've had a very consistent capital allocation policy, where we start with the cash from the lease and operate backlog and we look at that as driving the dividend. So as the lease and operate backlog has increased over the last few years. So we've increased the dividend, and there's no change to our policy regarding that. Then we need to think about growth and investments. So we have to cover the turnkey overheads as we've discussed on the call and in previous calls on average, we expect the turnkey portfolio to break even on a cash basis with some upside from the BOT payments. And you look at that also in the mix, and we have the investment to come, and we've given you the investment for the -- incorporating the fact that FPSOs are larger these days. So that gives you the full equation. We are in a period of significant growth. Yes. So we have the 2 MPSs, but there are a lot of -- which position us for quite an attractive opportunity set. That's if you like, I would say, a temporary investment because, as I mentioned in the speech, we expect to get our money back when we finally allocate those to projects. So yes, I think a pretty positive cash flow outlook, $200 million dividend more than 7% yield. Yes, we constantly monitor where we stand from a liquidity perspective. We integrate the possibility to do equity acceleration into that. But there are sort of less great opportunities than there were a few years ago before the interest rates went up. So that's a component to think about there. But as ever and as I mentioned in answer to the previous question, and it says on the slide, we discussed on capital allocation, buybacks are still part of the overall mix.

Yes. Maybe if I just take the $950 million required investments and you look at the cash flows, that's where I get the 2025 and beyond, where there should be free cash again. But maybe I should rephrase my question a little bit. I'm more asking if -- how the internal discussion in those years, how you would look at investing in share buybacks or shareholder returns in any form versus investing in the new hole? How is that discussion internally?

Yes. Well, I mean we're in the FPSO business. So the market is a positive outlook. So what we always say is yes, we prioritize the dividend and growth. So we're looking at growth, if there are attractive opportunities, those are the ones that we go for. That's the reason. We see attractive opportunities. That's the reason we're investing in the 2 unallocated holes. And if then as we look at our liquidity requirements, cash flow, et cetera, there's access for buyback, then we look at the buyback, and that's been consistently the way we've communicated on this and the way we think about it.

Okay. And the -- just to finish it off, the increased risk that might be there from inflation and those kinds of effects doesn't change anything about the secondary nature of share buybacks in the share allocation or in the capital allocation decision?

No, because a few points here. So the -- on the -- in the lease and operate contracts, we have either indexation or they're reimbursable. So there's a hedge there. Then going forward, when we bid for new projects, we incorporate the latest market conditions, including supply chain costs and interest rate costs if we are going to be doing them on a lease and operate basis. So I think the point is, it's kind of behind us now. But as everyone is well aware, there was quite a dramatic change in the world relative to well on the pandemic and then the Russia-Ukraine World War, which meant that certain respect some of the assumptions that we bid into the attenders before. Those events happened weren't quite enough to deal with the reality of what we faced.

Your next question comes from the line of Thijs Berkelder from ABN AMRO ODDO BHF.

Two additional questions just as a double-check. So you mix gain on, let's say, interest hedges. Is that part of the P&L or is that booked via other comprehensive income via the P&L? Second question is I'm looking at your Slide #34. You are not that far clear from at least 2 of your 3 covenants. And at the same time, your share price, like I said before, is continuing to trade at a 50% discount to your own, let's say, DCF calculation. Are there discussions ongoing, let's say, to maybe slow down the pace of growth and to simply use the available cash to buy back shares, so the 50% discount and/or got dividends, let's say, in half, and you still scream for dividend investors but then you can use the other half for share buybacks at a 50% discount.

Okay. So thanks -- so the first one on the hedging, those all run through other comprehensive income, the -- there in the balance sheet and not the P&L. And yes, when it comes to sort of shareholder returns, there are always differing opinions when you ask people dividend versus share buyback, every person every one person that says one thing, you find another that says the other. But as of now, we have no plans to change our capital allocation policy as I went through and answer to the previous question.

Is there not any discussion ongoing from, let's say, with the Supervisory Board, shareholders are important group within the overall stakeholder group. So don't they want to see some action on the share price?

Yes. You have a point. And the mission of the company is really to increase value to our stakeholders. By doing so, the best way for us to increase value to all stakeholders is to increase the cash flow that the company is going to be able to generate to see we see a lot of opportunity to do so in the FPSO market. If the market were to turn, obviously, given our business model, when the market turns, you generate more cash flow and you have more opportunity to do things. And then we're going to consider where we are. But at the end of the day, our mission is really to increase value to our stakeholders. And the best way you increase value is by increasing the amount of cash flow that the company is going to be able to generate, and that's what we're doing at this stage. We also have a clear capital allocation policy that we have voiced for the past few years. We're sticking to this one, proof is the level of dividend that we have as a company. And today, what we're seeing is there is a lot of opportunity to grow the company, to increase the cash flow of the company, and that's the focus that we'll have.

Yes. Coming back on the gap between reported and governance on solvency, it's small and interest cover ratio is also not that gap is also no longer that wide, is there even any risk of having to raise equity?

No. We don't see any risk at the moment. I think when you look at the RCF, the key covenant is the lease backlog cover ratio. You can see that's in a very healthy state. We have actually capacity to borrow above that. And the specificities of the calculation on interest cover ratio, it's only -- we only get a contribution from things that are operating. So you'll note that we've got the 2 FPSOs starting at the end of the year. So we see no issues at all with that.

There are no further questions in the queue. So I'll now turn the call back over to your host for some closing remarks.

Okay. So thank you very much all for attending this call. Again, I believe as a company, we're consistent in delivering our strategy and with a set of solid results. I'm not going to repeat all the key points that we have. But in the meantime, I thank all of you for attending this call, and you can now resume your normal summer activity. Thank you. Bye-bye.

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