Seaway 7 AS (SUBC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Subsea 7 Renewables combination with OHT conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Katherine Tonks. Please go ahead.

Good morning, everyone. With me on the call today are John Evans, CEO of Subsea 7; and Rune Magnus Lundetrae, Chairman of OHT. This morning's press release is available to download on our website, along with the presentation slides that we'll be referring to during today's call. May I remind you that this call includes forward-looking statements that reflect our current views, and are subject to risks, uncertainties and assumptions. Similar wording is also included in our press release. I'll now turn the call over to John.

Thank you, Katherine. Good day, everyone, and thank you for joining this call after such short notice. Rune and I are excited to talk to you today about the transaction we announced this morning to combine Subsea 7's Renewables business with OHT. We have a few slides that describe the deal, and then we'll be happy to take your questions. Let's start on Slide 3 with the transaction structure. We've announced this morning the combination of our Renewables business unit with OHT to form a new company called Seaway 7 ASA. Subsea 7 will own 72% of the combined company, and OHT shareholders will own 28%. The company will retain OHTs listing on the Euronext growth market in Oslo and initially have a 7% free float, as you can see depicted in the chart on the right. It is expected that the deal will complete by the end of the third quarter this year, subject to customary approvals, conditions and relevant employee consultations. Subsequently, and in due course, the company will aim to transfer to the main market on the Oslo Bors. Throughout, Subsea 7 will retain a majority stake in Seaway 7 ASA and will have access to the financial, operational and strategic benefits of the wider Subsea 7 parent company. Turning to Slide 4, the Board of Directors of Seaway 7 ASA will comprise 4 directors nominated by Subsea 7 and 1 from OHT. Rune Magnus will be nominated as Chairman; and Stuart Fitzgerald, currently Executive Vice President of Strategy and Alliances at Subsea 7, will be appointed CEO. Torgeir Ramstad; and Steph McNeill will have executive roles, and further management appointments will be announced in the near future. Seaway 7 ASA is expected to commence trading on the 1st of October with minimum debt. OHT has net debt of $6 million at the end of the first quarter, and Subsea 7 will contribute its renewables business unit with 0 debt or cash. As the parent company with a majority shareholding, Subsea 7 will provide financial support to Seaway 7 to fund its working capital needs. The Boards of Subsea 7 and OHT have unanimously approved this deal based on the compelling strategic logic, although it remains subject to the approvals I mentioned earlier. Through this combination, we're creating Seaway 7 ASA, a pure-play renewables company listed in Oslo, with a market-leading position in offshore fixed wind industry as well as a long track record of executing large complex projects, the company is equipped with a strong and diverse fleet of assets that enable it to install turbines, foundations, cables and substations in a variety of different contracting modes. The high-end vessels enable efficient operations whilst also increasing the flexibility of our fleet as the offshore wind market becomes truly global. This installation fleet is augmented by 5 heavy transportation vessels that are used to transport wind structures from yards to installation sites. Heavy transportation is an increasing high-value segment and is critical to enable the use of a cost-efficient global renewable supply chain. Overall, we believe Seaway 7 ASA will be well-positioned to capture an increasing share of the high-growth offshore fixed wind market. As you can see on Slide 7, which shows the annual installation of offshore wind power in gigawatts, the market is expected to grow at a compound rate of over 20% per year, with strong growth in all 3 regions, Europe, the U.S. and Asia. As we have said in the past, near term, the market appears lumpy due to the timing of the licensing rounds. But as the U.S. and Asian markets, in particular, The pace of growth begins to accelerate from 2025. With the vessels currently under construction and options for further new builds, Seaway 7 has access to the right assets at the right time to address this exciting market to ensure it strengthens its position as a global leader. On the following slides, we give a quick outline of each company before we circle back to look at the combination that's Seaway 7 ASA. First, Subsea 7's Renewables business on Slide 8. As many of you know, we have 5 vessels, 2 heavy lift, 2 cable and 1 support vessels. We have offices in 7 countries covering the current and future hotspots of the offshore wind market, including Europe, Asia and the U.S. We have around 500 onshore personnel and 400 offshore personnel attached to our vessels. We have a backlog at the end of Q1 of around $1.8 billion, including projects such as Seagreen and Hornsea Two in the U.K., Kaskasi in Germany, Hollandse Kust Zuid in the Netherlands and projects in Taiwan. At this point, I'll hand over to Rune Magnus to run through an overview of OHT and how it positions Seaway 7 ASA.

Thank you, John, and good morning, everyone. Firstly, a look at OHT overall before we highlight the 2 vessels under construction. As you can see on Slide 9, we currently have 5 heavy transportation assets that are commonly used to carry wind structures such as the jackets you can see in the photos on the right from yards in Asia and Europe to their installation sites. We also have 2 state-of-the-art assets under construction, Alfa Lift and Vind 1 as well as further yard options for additional vessels. OHT have offices in 7 countries, including Norway, Denmark, the U.K., the U.S., Dubai, Singapore, and China, and have a lean team of 65 people onshore. Our heavy transportation vessels are typically engaged on fixed price contracts covering all execution aspects, and our backlog of approximately 150 million relates primarily to the Foundation T&I contracts that we have for Equinor's Dogger Bank A and B development in the U.K. Now taking a closer look at our 2 new builds. On Slide 10, we start with Alfa Lift. This is a custom-built foundation installation vessel equipped with a smart deck, capable of installing up to 14 monopiles or 10 jackets per trip. They will be able to install in dynamic positioning modes, making it one of the most efficient installation vessels on the market. The total build cost is around $300 million, of which $175 million is outstanding currently and is due for delivery during the first half of 2022. On Slide 11, we have our second newbuild, Vind 1. This jack-up will be able to install the next generation of turbines of 15 megawatts or more as well as monopile foundations, making it both efficient and flexible. The all-in cost is estimated at $255 million, of which $210 million is still outstanding towards the yard. More details on both of these new builds can be found in the quarterly presentation of OHT available on our website, oht.no. Bringing all this together, we have the combined fleet on Page 12. The new company will have a strong leadership team, an experienced team of engineers and project managers capable of delivering the largest, most complex, offshore fixed wind projects in the world. The fleet of 12 vessels will enable us to service the global marketplace with increased efficiency, reducing the need for long transits between jobs and covering the full area of installation activities, including turbine, foundation and cables. Our combined business will be headquartered in Oslo with a strong hub in Europe, including offices in each of the key markets of U.K., Denmark, Germany, the Netherlands, France and Poland. We will also have a well-established presence in the U.S. with offices in Providence, Rhode Island and Houston. Finally, in the Middle East, we will be based in the UAE; while in Asia, our offices will be in China, Taiwan and Singapore. Let me finish our discussion of Seaway 7 ASA with Slide 14, showing the current bidding prospects of the combined company. The U.K. remains a critical market and the [indiscernible] round scheduled for December this year should yield a number of projects. Clients include Iberdrola, SSE, Equinor and Vattenfall. There are also a number of prospects in Germany, including 2 for Ørsted and Poland, where Equinor is building a presence. Although the Taiwanese market is experiencing a number of issues, there remain prospects on the horizon, and we will take a cautious approach. The new market exploding onto the stage is undoubtedly the U.S., where we see at least 6 very large projects on the bidding radar, some worth up to $2 billion on an integrated or EPCI basis. The first of these, Coastal Virginia, should be awarded to the industry by the end of this year, followed by Ocean Wind, Skipjack, Empire and Mayflower, which are expected to be awarded next year. To summarize, the bidding pipeline is strong, the outlook for longer term growth is robust, and combined, we believe we have the industry's leading research space and experience to capture an increased share of this market. Finally, let us put today's announcement into context for the 2 groups of shareholders that we represent. From OHT's perspective, the combination with Subsea 7's Renewables business represents an exciting except for the OHT organization and our clients. And we believe the combined company will offer long-term growth opportunities and create shareholder value. The offshore wind market is complex, and will require large and financially robust service providers with the right combination of fleet, organization and experience. I believe Seaway 7 is ideally positioned to be the market leader and capture an increasing share of the high-growth offshore fixed wind market. Thank you, and I'll hand back to John.

Thank you, Rune. From the perspective of Subsea 7, the transaction represents the next step in our energy transition journey. It's the one that we believe will accelerate and enhance value creation for our shareholders. The combined business of Seaway 7 ASA is armed with a comprehensive fleet and experienced management team and is poised to forge a new enhanced growth trajectory as a global leader in offshore fixed wind. We, at Subsea 7, look forward to working closely with the team at Seaway 7 in this exciting new chapter of its evolution. And now both Rune and I are happy to take your questions. Operator, please go ahead.

[Operator Instructions] The first question comes from the line of Michael Alsford from Citigroup.

It looks like an exciting combination. Just firstly, on the funding plans going forward. I think from memory, LHT has talked about the need for sort of $40 million to $50 million of funding in addition to, I think, the facility that they were putting in place to fund the Alfa Lift vessel. I'm just wondering whether you can maybe take a step back and think about it from a kind of combined perspective and think about what we would expect the funding requirements to be going forward from a Subsea 7 perspective?

Yes, I think it's probably best if I just give an overview to that question Michael and Rune can supplement, I guess, in terms of where we're at here. I think one of the benefits that this transaction gives is that it allows the new Subsea 7 ASA to gain the benefit of being part of the wider Subsea 7 group. And that is part of our thinking that we will be looking at how we will fund that and how we can cover that. There's a possibility of Subsea 7 to lend to Seaway 7 in terms of how they move ahead. We also know today, as we discussed earlier, that OHT has net debt of about $6 million at the end of Q1. And we're going to put our business ineffectively at a sort of net debt -- excess cash free basis. So really for us, we're going to work through in the next few months, the future capital expenditures, and we can see that either being covered by operating cash flow and new debt facilities, which Subsea 7 will support because we have very good and strong access to the capital markets.

Yes. The only thing I can add to that is we want 2 things the combination brings is that there will be even stronger operating cash flow in the combined company. And I think also there will be more options for us to consider when it comes to meeting future obligations from new build programs. So I think we leave it at that for now, and we'll come back to the market with more details on how we plan to capitalize for the medium and long term.

And a quick follow-up, if I could, just with the combination, subject I'm talking about a sustainable a majority stake, but should we therefore expect you to be sort of selling down and increasing the free flow of the listed entity? Or how should we think about the kind of shareholder structure over the medium term?

Well, Michael, on that one, We've already had some discussions with the Euro Euronext growth market. There needs to be a minimum free flow to 15%, and we're in discussions there, and they've said that they understand there's some flexibility needed to achieve that. So for us, we will work that to make sure we meet our listing requirements in due course. But the main aim for Subsea 7 here is to be long-term majority shareholders in Seaway 7 ASA.

The next question comes from the line of Haakon Amundsen from ABG Sundal Collier.

A follow-up actually on the financial situation going forward. You mentioned that you will maintain a majority stake. But I was just wondering, do you consider to raise fresh equity in connection with the main listing? And a follow-up to that would be what are the kind of next leg of the investment stuff that the new company will endeavor in terms of the various exposures that you now have in the portfolio?

Thank you, Haakon. I guess as we covered in the previous question, we'll come back to the market closer to closing on the view how we will handle the capital side of it, and how we will decide whether we use equity or debt to grow the business. We will reveal that in due course as we work that through. So for us, it's about that we have the flexibility to do what we'll need to do here to invest long term. This is all about a long-term investment. The crux of this discussion was in OHT shareholders in Subsea 7. We had an alignment that longer term, there's a good opportunity here. OHT has some very interesting options in some of their shipbuilding contracts. And again, the new company, one of the first roles of the new company's Board and management team, will be to look at those, and again, to try to fit it together with the demand that we inevitably see in that curve from 25 up to 2030. So for ourselves, it's about positioning this business to be at the very top 2 players at the top table in this business, which is inevitably going to grow. So I think the takeaway here, some interesting options that exist in the shipyard contracts that OHT have, and that the new management team and Board will look at this topic and work it through over the next few years.

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

Quick two questions, if I may, on OHT. Obviously, you're selling OHT as a transport of jackets and monopiles and ultimately, installation. But that business, when they used to cover it was about moving oil and gas assets around rigs, modules, vessels around the world. So can you just talk about the business mix today in OHT and how that goes towards being wind? And secondly, you're now going into turbines. I think at last year's Capital Markets Day, you were very specific on that's not an area you wanted to go into. Why now going into it?

Yes. So we do this way. if I take the turbines first, Rune, and then maybe you come back to the transport vessels. Mick, you're right that we have looked at the area that Subsea 7's business, which was primarily in array cables and foundations, and that's a business that we've been very comfortable with. But what's been very interesting for us is we have seen 2 of our main competitors use their very, very large jackups in foundation mode. And what we like about the Vind 1, it's also been engineered not only to install the largest turbines, but it's a heavy-duty crane, a heavy-duty deck structure and jacking system, which allows it to work on the largest foundation contracts as well. So for us, when we started to sit down and talk to OHT, we could see the attraction of the very top end of a jackup. So if we were ever going to build a jack-up, it would be the Vind 1 or Vind 1 equivalent. And secondly, its ability to multitask between wind turbine installation and foundations will provide a very interesting flexibility for the new company. I'll hand over to Rune to talk about the heavy transport vessels.

Yes, so you're right. Historically, OHT has been a transportation company for heavy equipment and assets covering oil and gas. What we have seen in the last couple of years is an increase in activity related to offshore wind projects and specifically transportation of monopiles and jackets, as they are increasingly produced in Asia and the Middle East. Last year, we have a significant part of the EBITDA related to the transportation fleet from offshore wind-related projects. There will be still work to serve nonrenewable markets if the opportunities are there. But we also see going forward that especially from 2022 and forward that there will be an increase and significant increase in work related to renewables.

Okay. And can I just follow up on the offshore heavy lift market for memory when they used to look at this space, there was capacity coming out of Asia every time I looked at the market. What's that market like today? And are there other vessels coming to market that are capable of coming into the space?

Well, the projections we have is a pretty tight market going forward. It's been soft this past winter. That was expected. That was communicated by us also last fall. We see an improved market and also an increasing number of inquiries coming in.

And Mick, just to supplement what Rune says. Today, Subsea 7 has 6 heavy transport ships moving jackets on Seagreen, and we have them booked for 18 months solid. On some of our U.S. bids, we have even more heavy transport ships booked solid. So interestingly enough, when you look on the very largest project where the money goes, a lot of it goes to getting access and reasonable rates for the heavy transport vessels as well. So for us, there is a real industrial logic as well here in the longer term as these projects globalize. It's the heavy transport ships that allow a global supply chain to work, I think, in the renewables business. So if we think of it in that context, that's the appeal of the combination that we see here.

The next question comes from the line of Mark Wilson from Jefferies.

And two questions from me, please. The first is to John. The financial framework you showed at your Renewables Day last year talked about Seaway 7 as it is now, getting to $1 billion in average revenue and over 10% EBITDA. Could you frame those figures with the combined business, please? The second question would be, I think, more to OHT side. The option on the second installation vessel, Vind 2, would you be actively considering building a Jones Act compliant vessel? Do you think that is necessary in the medium term?

Mark, if I take the first one then Rune can take the second question. As we discussed in our Investor Day that we had, we talked about that we believe that the renewables business in the medium to long term can be $1 billion business in terms of revenue. And that you could get EBITDAs of above 10%. We talked very openly to the market that it remains a lumpy industry as it starts to settle and it starts to globalize, but we do believe that longer term that this industry and this business will settle around those margins. And just as in the oil and gas industry, you've got 2 or 3 very large players that can offer a full suite of capability to the largest utilities and the big energy and oil and gas companies that are working on that front, we believe we will get there. Will we get that straight away? No, it's a process that we will need to go through as the market stabilizes and grows. But we do believe that those targets are feasible. And it's really about just as we've discussed at the time, the timing of which these larger projects come and how they are packaged together and how much scope gets put into those different packages. The new toolkit that Subsea 7 ASA has is a far stronger toolkit that either Subsea 7 or OHT have individually, very complementary toolkits. And as we globalize, we will also save on transits and such like, as I discussed in my prepared remarks. So I think for us, it's around reinforcing the foundations that give us the ability to say those figures are feasible for us in the medium to long term. I'll hand you over to Rune to talk about the optionality.

Yes, so we have 3 options in OHT today. They will not be relevant for Jones Act. When it comes to Jones Act, I think it's not -- I think it's something we need to get back to the market on. But what I can say is that the CapEx for Jones Act vessels will be significantly above the levels that we have seen for non-Jones Act vessels, and I would at least look for longer term contracts and projects where you can actually defend the additional CapEx if we should -- if we are to build Jones Act vessels. But too soon to give a definite answer on whether or not that will be vessels for us to build.

Okay. And -- So I come back to John, defending the 10% EBITDA margin seems understandable. But maybe if I could just push again on the revenue side of things. Do you think the additional opportunity would be what, upside on the $1 billion longer term?

Mark, we -- I think we've shared with the market that it's possible we'll make the $1 billion this year in terms of just the pure Subsea 7 business because of the size and shape of some of these large contracts coming through. But it's the lumpiness that is one of the challenges this industry has today. But once it starts to normalize and starts to become stable across large geographies such as Asia, Europe and the U.S., we could expect to be able to see that. And once we get to that place as we see in our Subsea business, we're not transiting assets backwards and forwards around the globe, we're able to position assets in key geographies and that's how our EBITDA goes up by putting the ships to work every day rather than transiting them. So for ourselves, we can see that growth coming. It really reflects on the timing of the Bloomberg graph that's in the materials here. Will those projects in '24, '25 arrive in time and will they fit together. One thing we've talked at length is the fact that this market does have a lot of government/subsidy regimes and a lot of regulatory environments around them. And so for us, it's about how do we give ourselves the ability to see where we go from there in terms of building out that business. So at this stage, Mark, I won't -- we won't be giving any more details at this point, but we can see the ability for the pieces to fit together. It's just the timing of that curve. There's some lumpiness between now and 2025. But then when you look at our Bloomberg curve, there's another trajectory upwards very, very sharply from that point onwards as well. In our discussions with the key utility clients, everybody is focusing on those areas and pushing ahead. And I think it's fair to say in my prepared remarks, I think all of us have been quite pleasantly surprised by the scale of the U.S. business, which we didn't really have in focus a year, 1.5 years ago in terms of its size and scale. So it's a very fast-moving market, and that's what makes it exciting.

And congratulations on the combination, I'll hand it over

The next question comes from the line of Turner Holm from Clarksons Platou.