Subsea 7 S.A. ($SUBC)

Good day, and thank you for standing by. Welcome to the Subsea 7 Q1 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Katherine Tonks. Please go ahead.

Welcome, everyone, and thank you for joining us. With me on the call today are John Evans, our CEO; Mark Foley, our CFO; and Stuart Fitzgerald, currently CEO of Seaway 7. The results press release is available to download on our website along with the slides that we'll be using during today's call. Please note that some of the information discussed on the call today will include forward-looking statements that reflect our current views. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Subsea 7's annual report or in today's quarterly press release. I'll now turn the call over to John.

Thank you, Katherine, and good morning, everyone. I will start with a summary of the first quarter before passing over to Mark for some more details. Turning to Slide 3. Subsea 7 delivered first quarter adjusted EBITDA of $385 million, representing over 60% growth year-on-year and a margin of 21%. We reported good operational and financial performance in both business units. And as a result, we have revised upwards our full year guidance. Our order intake remained strong at $1.4 billion, with a further $1.3 billion booked in early Q2. This gives us a robust backlog of $13.5 billion and a high visibility on the coming years. Our tendering teams remain busy and the fundamentals for our subsea and offshore wind industries continue to support our confidence in the outlook. Slide 4 shows growth in the backlogs of both Subsea and Conventional and Renewables, which continued to increase in quality. We have a combined backlog for execution in the remainder of 2026 of $5.5 billion, giving us over 90% visibility on the remainder of the year. Since the year-end, our backlog for 2027 has increased by 17% to $5 billion, and visibility on utilization of our global enabling vessels is strong through to 2029. The Middle East accounts for under 10% of our backlog with most activities focused on engineering and procurement phases of CRPO 148. The offshore activity for this project is scheduled in 2028. In the meantime, we have a small amount of offshore work scheduled in the second half of 2026 with a chartered vessel that is already in the Persian Gulf. And now I'll hand over to Mark to run through the financial results.

Thank you, John, and good morning, everyone. I'll start with a look at the group and business unit performance in the first quarter before turning to our improved financial guidance from 2027. Slide 5 summarizes the group's revenue and adjusted EBITDA. In the first quarter, revenue was $1.8 billion, up 17% compared to the same quarter last year, driven by solid project progress in both the subsea and offshore wind portfolios. Adjusted EBITDA of $385 million was up 63% compared with the prior year period and their margin expanded by 6 percentage points to 21%. The margin performance in the quarter reflects a more favorable than expected financial contribution from certain projects progressing towards substantial completion. Other gains and losses were a negative $67 million, driven primarily by improvements in embedded derivatives, reflecting the strengthening of the Brazilian real and the Norwegian krone against relevant currencies. As I noted on prior calls, these embedded derivatives and noncash accounting items are expected to fully reverse in future periods. Our effective tax rate improved to 28% as higher profitability lessens the impact of recovery in reporting taxes on the effective tax rate. Overall, we reported net income of $97 million, a sixfold increase on prior year. I will discuss the performance of each business unit in the next few slides. Slide 6 presents the key metrics for Subsea and Conventional. Revenue in the first quarter was $1.5 billion, up 17% year-on-year, underpinned by good progress at Sakarya 2 and 3 in Turkey, Búzios 9 and 11 in Brazil and Yggdrasil in Norway. Adjusted EBITDA was $356 million, equating to a margin of 24%. This represents an increase of over 6 percentage points from the prior year, reflecting the quality of our backlog and our predictable performance and executing complex deepwater projects. As mentioned earlier, the quarter also benefited from a favorable uplift from projects that are progressing towards substantial conclusion. Subsea and Conventional benefited from a $7 million net income contribution from OneSubsea in line with our expectations. Net operating income was $228 million, more than double the $99 million reported in the prior year period. Selected Renewables performance metrics are shown on Slide 7. Revenue in the first quarter was $282 million, up 15% year-on-year, reflecting continued activity in the North Sea for Seaway Ventus and Seaway Aimery operated through the winter season. Adjusted EBITDA was $35 million, equating to a margin of 12%, up from 10% in Q1 2025, and the net operating loss was $6 million. It is worth noting that the first quarter of 2026 marked the 12th successive quarter [indiscernible] on EBITDA margin greater than 10% in the unit. Slide 8 shows the cash bridge from first quarter. Net cash generated from operating activities was $256 million, which included an expected unfavorable movement in working capital of $54 million, as I alluded to in the fourth quarter 2025 call. Such movements have been a recurring feature in the first quarter over the past couple of years. Within investing activities, capital expenditure was $53 million, mainly related to the class renewal of dry docks with [ 3 ] vessels. We also received a $7 million dividend from the OneSubsea joint venture. Net cash used in financing activities was $128 million, which included lease payments -- liabilities, sorry, of $64 million and the repayment of borrowings of $46 million reflecting the amortization for 5 of our facilities. At the end of the quarter, cash and cash equivalents increased by $104 million to $1.1 billion, which was underpinned by our $200 million generated through free cash flow. Net cash was $198 million, including lease liabilities of $337 million, up from $21 million at the end of 2025. The group had liquidity of $1.7 billion at quarter end, which included $600 million of committed and utilized borrowing facilities. To conclude the financials, we turn to Slide 9. Following a strong financial performance in the first quarter in terms of both revenue growth and margin expansion and further increased clarity on the remainder of the year, we have revised upwards our guidance for the full year 2026. We now expect revenue of between $7.4 billion and $7.8 billion from $7 billion to 7.4 billion previously. We anticipate adjusted EBITDA margin of approximately 23% from approximately 22% previously. Our depreciation and amortization guidance has also increased slightly to be between $650 million and $670 million from between $580 million and $600 million, driven by the reclassification of assets as held for sale and the addition of a new loyalty purpose leased vessel. As a reminder, as announced in February, the company intends to pay a dividend of NOK 13 per share on the 28th of May, subject to shareholder approval at the Annual General Meeting to be held on the 12th of May. The total dividend payment amounts to approximately $400 million. I will now pass you back to John.

Thank you, Mark. On Slide 10, we have an update to 1 of our 6 strategic differentiators, collaboration and alliances, which has made more progress in 2026. The alliance structure allows us to work closely with our clients on their portfolios of developments, enabling a more holistic longer-term view that ensures timely access to the right solutions and resources. In February, we signed a new 5-year framework agreement with Var Energi. Var has a growing portfolio on the Norwegian Continental Shelf with around 30 projects in early phases, and Subsea 7 will provide a full-suite EPCI scope for its reeling development portfolio, including 6 high value prospects. In April, we announced the signing of a strategic collaboration agreement with Petronas. Alongside OneSubsea, we will provide integrated service and SPS solutions for multiple prospective projects in Suriname. Through early engagement and integrated execution, the collaboration aims to simplify complex development processes, enhanced project economics and unlock opportunities along with portfolio prospects in Suriname. Now on to review of our prospects in subsea and offshore wind on Slides 11 and 12. The conflict in the Middle East has underscored the importance of energy security, which should be supported for the long-term dynamics of both subsea and offshore wind industries. In the meantime, our clients in both businesses continue to progress their tendering as normal based on their long-term planning assumptions. In subsea, our focus on long-cycle deepwater projects with an attractive economics dampens our exposure to volatile spot prices and our tendering pipeline remains valued at around $20 billion. Opportunities relating to strategic developments in markets such as Namibia, Suriname, Brazil and parts of Asia give us confidence in the outlook of new awards. In the offshore wind industry, we have seen some encouraging developments in recent months. The U.K. remains one of the most closely watched and strategic important wind markets. Our negotiations with clients continue regarding work associated with allocation round 7 with the process for allocation round 8 has commenced. Our clients registered windows for AR 8 is expected to open in July with CfD awards anticipated before year-end. Although installation activities linked to AR 7 and AR 8 is likely to fall into 2029 and beyond, we're optimistic about securing EPCI scopes, which will sustain our engineering and procurement workload through '27 and '28. Elsewhere in Europe, we see progress in markets such as the Netherlands and Germany where new subsidy frameworks to support future developments are expected to be introduced. To conclude, I'll review our results. We turn to Slide 13. Subsea 7 finished the first quarter of 2026 with a strong backlog of firm orders valued at $13.5 billion. This gives us over 90% visibility on revenue in the remainder of 2026 and underpins high utilization of our global enablers. This as well as our combined confidence in our execution performance has enabled us to increase our guidance for revenue and margins in the full year '26. Our tendering team in both Subsea Conventional and Renewables remain busy, and our clients are keen to progress these long-cycle strategically important developments. Finally, I'll close with some comments on the up-and-coming CEO transition. As announced in March, I will retire as CEO at the end of June, and Stuart is assuming the role on the 1st of July. Stuart is well known to most of you, having spent nearly 30 years with Subsea 7 in senior positions across Norway, commercial, strategy and most recently, CEO of Seaway 7. He has also led our integration planning, placing him in an ideal position to guide the group through the upcoming merger. As Stuart steps up into the CEO role, he will be supported in the same strong leadership team that has delivered consistently robust operational and financial performance for the group. At the same time, Lloyd Duthie will take over the role of Seaway 7 CEO following 9 years leading the business across its largest market in the U.K., Ireland and Asia as part of his 25-year career with Subsea 7. After 40 years with Subsea 7 and its predecessor companies, having joined as a graduate in 1986, this is the right moment to hand over to Stuart as we enter the next phase of the business with the completion of the merger with Saipem. It has been a privilege to lead the organization over the last 6.5 years as CEO and 14 years before that as COO. I've greatly valued the meetings with many of you on both the sell side and buy side as the company has grown into one of the most successful and respected players in the offshore industry. I look forward to joining the Board of Subsea 7 S.A. and continue to contribute to the group's future success. And with that, I'll be happy to take your questions.

[Operator Instructions] And our first question comes from the line of Victoria McCulloch from RBC.

Just on the Subsea and Conventional margins to start with. Can you give us some color? Obviously, we've seen higher utilization in that division on a Q1 basis in 2026 versus 2025 should we see, as a result of that, and given your only 1% group increase in margin, a flatter profile in EBITDA margin throughout 2026? And then secondly, on AR 7, could you give us an idea of the timing in order to meet the deadline for, I guess, offshore installation in 2029, 2030? When sort of award timing are expected to happen? Is it the second half of this year that we should see these being awarded to the industry?

Thank you, Victoria. I'll take the Subsea and Conventional question, and then Stuart will take the AR 7. We had a good first quarter, and the margins reflect that. As Mark touched upon in his prepared remarks, there's a couple of other factors going on there and some major projects coming to a close, which again allows us to settle the final positions on those projects. And also as well, we've had very good execution in all our ships, the key enablers are all in the right place at the right time. We completed a huge amount of work in Turkey in the first quarter and we have pipeline ships working in Brazil and in Norway now as planned. So a good first quarter. I'm not going to give you quarter-by-quarter views because we generally don't do that, but I think we're very comfortable that our 23% margin guidance is good for the rest of the year. AR 7, Stuart?

Yes. Thanks, Victoria. So as John said, we're engaged with a number of clients on the prospect list that goes with AR 7. We think that the contractor selections for most of them will be through the second half of this year, but we don't necessarily think that the backlog will come at that time. FID is more likely into '27, in the first part of '27. So definitely, contractor selections, some long lead items later this year, but final contracts more likely in the first half of 2027.

Our next question comes from the line of Richard Dawson from Berenberg.

I've got two, please. Firstly, on EBITDA margins. And just trying to think about margins beyond 2026. And I appreciate you haven't given any guidance on this. But is my logic right that if we assume project execution remains pretty solid, there are still several major projects left to complete from the 2022 group that potentially gets replaced by better price contracts to having a positive impact on margins? So when we look at this 23% for 2026, is that not a ceiling? Actually, we could see margins going higher? That's my first question. And then secondly, just on this reclassification of the held for sale assets. Is the sales process for that now stopped? Or is it still ongoing? And with that special dividend, is that now going to come from cash rather than the sale of the assets?

Okay. I'll take the margin question again and then hand over to Mark to discuss the assets held for sale. We haven't given guidance into 2027. I don't think we'll start now. But I think we have been very open about the fact that our business is a layered cake of different projects awarded at different times. Each project has a different margin profile that goes with it. But as we have guided to the market, the later work is a very good quality, and we're very pleased with the quality of work that we are getting. It's also a combination of asset utilization and project profitability that leads strong final outturn margin. At this stage, we've guided upwards this year to 23%. And later in this year, we'll give you guidance for 2027 onwards.

Richard, in terms of assets held for sale at the quarter, it would have met the criteria to be recognized as an asset held for sale. There was less certainty around the disposal process. Regarding the special dividend associated with the merger and linked to the permitted transaction and as a reminder of that is EUR 105 million dividend to Subsea 7 shareholders, that would be paid earlier of the disposal transaction or the effective date of the merger.

Our next question comes from the line of Sebastian Erskine from Rothschild.

John, best wishes for your retirement. The first question on the subsea slide deck, you kind of detailed your partnerships with operators. I'm curious, are you seeing an increased appetite among your customer base to pursue integrated kind of SURF and SPS work scopes instead of just a stand-alone that we've seen in several markets? And if so, is that motivated by cost or time lines, just thinking about, obviously, your partnership with Equinor and then now Petronas in Suriname.

Yes. We've always had a model working with our clients on whatever suits them, and how they approach their projects. We have a very large agreement with [indiscernible] to work on integrated SURF and SPS. We also work with Equinor on both testing and [indiscernible] well, and we just announced Petronas' initiatives in Suriname [indiscernible] as well. So again, different drivers to different clients. And our model is providing what could be the client wants. So to make sure, sometimes the clients wants a standalone ship, sometimes the clients wants a standalone T&I, and we plan on [indiscernible] sort of an SPS. So for us, it's our dialogue with clients, and we try to identify [indiscernible] model would help. Same with Var Energi. We've talked with Var Energi over the last couple of years. They have very large ambitions to grow the business. They have a full capacity in the future years as they, again, [indiscernible] is a very interesting project for investment. And again, we put together a similar collaboration agreement. We provided a look ahead for us with all our clients planned. And certainly then, for our [indiscernible] to understand where our assets are, when they're available to make sure we have the capability to deliver their projects in a timely manner. So it's also for [indiscernible] and has already done a very [indiscernible] way to understand, is this the right model for us and [indiscernible].

That's very helpful, John. And then my second question is, you called it in the prepared remarks around the conflict in the Middle East. And I wondered, do you see scope for IOCs and NOCs to accelerate some capital flows kind of offshore and then potentially for some final investment decisions that might have been penciled in later to be brought forward? Is that something you're hearing from your customers? Any detail would be helpful.

Well, the message I gave you in the prepared remarks is we're not seeing much fundamental change. The business as usual. We plan to focus on what they are doing in terms of their current plan. So there's no disruption in those plans in terms of what we see. I've been in a couple of discussions where, again, where the energy comes from, the location of different future LNG projects, for example, or replenishment of existing LNG projects that have been discussed. We're not seeing it crystallize as yet. But again, it's certainly on people's minds. But where you get your sources of managing [indiscernible] as much as the cost of that energy going into the future as well. But we were very, very busy before this conflict started, and we continue to be very busy with our clients and dialogues since the events in the Middle East have commenced.

Our next question comes from the line of Kevin Roger from Kepler Cheuvreux.

Yes. Frankly, the question have been answered. So just the opportunity to wish you all the best, John, and congrats for this last quarter as a CEO. But all the questions have been answered.

Thank you, Kevin. I appreciate the support over the years.

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

Can I add my congrats, John, on retirement. But I'm not sure that's a photographic view in the presentation 40 years ago. Quick question there on that depreciation change, if it's possible. You said the depreciation is up because of the for sale asset coming back in, but the increase is about $50 million to $90 million at the top end, and that seems a lot for an asset you're selling under your file. And I think Mark mentioned 8 new lease vessel. Can you just tell me what that new vessel is? Because I'm just looking at your fleet, there seems to be less vessels now than there was at the end of the year.

No, that's right, Mick. So end April, we brought a new multipurpose vessel to support us in Brazil and the start of [indiscernible], that will provide a variety of ancillary support, and as you know, with a lease vessel, if it's greater than a year just keep it as an [indiscernible] and as a result, it has an impact on depreciation. So the entirety of the shift in guidance end down to those 2 elements, the reclassification of the asset held for sale and bringing the [indiscernible] into the fleet for 2 years.

Okay. And John, given it's your last out in here, obviously, Petronas has come in now with a partnership. You've got pretty strong partnerships across the North Sea. If we look at some of the complaints in Brazil, it appears some of your peers like using other competitors of yours quite consistently. So putting your medium-term hat on, which you don't have to answer in 5 years' time, it's somebody else's problem. Do you see this market going down the lines of very tight collaborations between the few operators and the few suppliers so that we tend to be that you always do the work for Petronas, others do the work for Exxon. Is that the way it's going?

Well, I think it has always been and will continue to be quite varied to answer that question, if you know what I mean. People like Petrobras and Saudi Aramco have legal systems that insist that [indiscernible], the lowest price wins the projects. We've seen people like Petronas that have followed those type of rules in their systems in the past, looking at more collaborative ways of working when they're in an area of new exposure to them and new opportunity for them as well. So we're seeing a mixture, Mick, and I think we will continue to see a mixture. Some of our clients want to work in a traditional manner, which suits them and suits us. Other clients will see the value of working on the collaborative model. And as I mentioned before, our key has always been to offer the clients what they want rather than force fit something that doesn't feel right for us or it doesn't feel right for them. So I think it's interesting to see how these relationships change over time. I think certain clients are definitely seeing the value out of them, and it provides a way of working, which is very efficient as an industry. The other piece we've discussed a lot is about we need to utilize the asset base that we've got more efficiently and to allow that to maximize what can be delivered over the coming years as well. And we find this model certainly helps streamline the relationships and how we plan ahead. So it's horses for courses, as I said earlier. And I think it will continue to be a mixture of [indiscernible] on a traditional T&I, traditional SURF, EPIC, as well as integrated projects. And I think what I enjoyed overall years as we worked in many of those formats, it continues to be a very interesting way to look at how we contract.

Our next question comes from the line of Lukas Daul from Arctic Securities.

John, I was just wondering on your new guidance. You talked previously in your model, [ 7 billion ] roughly, and in the volume of what you can manage with the fleet that you have. Now we are at [ 7.6 billion. ] So could you sort of maybe explain the moving parts of how do we get there because you hopefully will be changing the margin?

Yes. I think for us, it's a number of different elements. We did a lot of work with Petrobras at the end of last year to resequence the growth in the build, the multiple projects we have to [indiscernible] their FPSO arrivals, which helped us get parity of a run of work, which just continues, that allows one project to feed into the next and the project teams to be optimized. So that's been very helpful for us. We have a full year of PLSVs coming in, which we knew, but we now have the benefit of full year PSLVs. And the PLSVs are working very, very well with a very high uptime in the first quarter. And lastly, our work in Turkey. We preferred we did a lot of that in the first quarter [indiscernible] and we got the extra work from [indiscernible], which was [indiscernible] as a variation order in quarter 1. But again, that will bring revenue to that margin into this year, a very fast track piece of work to bring 4 additional wells into adjacent field there as well. So a number of moving parts, I guess, with that in terms of what's moving around, but it allows us to have clarity over the revenue this year as well as what we believe the margin will be at the year end.

And do you believe that you sort of still have some upside to that in the years to come? Or would that further grow basically being subject to utilizing additional capacity?

Well, as Mark touched on, we bought an additional vessel into Brazil to help that streamlining of the workload. So as much as we were releasing tonnage, a couple of times, we release -- we touched on that in the last quarter with [indiscernible] assets, which will effectively involve construction assets, and we found that we couldn't get the economics [indiscernible] very low, of course. So we returned a number of those [indiscernible] with IRM assets out of the fleet. But then with this new asset we brought in, we increased the construction capability of the fleet as well. So for us, it's around getting our blend of work that contributes to growing the business. So it's helped us get to where we are this year. In terms of [indiscernible] vessel better, well, ultimately now it's about performance. And we have 9 months ahead of us here to perform. We've had a very good first quarter. I touched on this previously that all big pipeline ships and the key enablers are all in the right place at the right time for a good run this year. So again, as the quarters develop, we will keep the market updated.

Congrats.

Our next question comes from the line of Guilherme Levy from Morgan Stanley.

Just wanted to wish both John and Stuart all the best in their new stages. But well, by now, most of my questions have been answered. I wanted to ask about CapEx deployment over the coming quarters. In 1Q, there was a little bit slow. So just wanted to pick the company's brain in terms of base over the coming quarters? And then maybe secondly, just thinking about the current state of the industry, perhaps a more long-term question, but we have been in this up cycle now for 5 years and new builds, they continue to be quite shy. So how do you guys reflect about debt over the coming years. What needs to happen for companies to perhaps start investing again, be more comfortable to build new units, particularly as we think about the repercussions and implications of the current developments in the Middle East.

Well, I'll take the first question, and then I'll ask Mark to hand over on the depreciation questions later. If we look at where we're at here, we have spent a lot of time on optimizing where the fleet is minimizing transits, working in a manner with our clients where we can get the sequencing to it. For example, the discussions we had with Petrobras helps them and helps us, and it allows us then to have a very efficient delivery. So there is still capacity in the industry, I believe, in general, for us to put more capability back in, and that's part of one of the main plans of the arguments for the merger with Saipem, and we've been very vocal about that from day 1 in the merger, and we continue to believe some of the analysis that we provided for the antitrust shows the transiting days for our assets over the last 6 years from both sides. And there are a lot of days there that these assets are just tumbling around the world from one place to the other. Similarly, for us, I think we know that these assets can do many, many tasks. And we have spent a lot of time in the last 6 to 9 months, just using the global enablers for exactly what they were designed for the very high end and then sharing work further down on to lower capacity tonnage, and then making sure then that the right tonnage is performing the work. We came from a downturn where you'd put a single asset in and we do everything. But placing mattresses with a high-end pipeline ship is probably not the most efficient use of a pipeline ship in tough times, that's the use of an asset in good days, you need to make sure that the pipeline ship is only doing the pipeline work. So there is capacity there. I think coming back to the more general question of investment, it's about return on capital employed. We are now seeing the return on capital employed our shareholders want, but it's been many years of pretty [ fallow ] returns in the industry. So again, I believe there needs to be a number of years of very good returns for our shareholders to make sure that the future investments don't end up in a place where, again, we go back to 1% or 0% return on capital employed. So there are some structural pieces that need to happen in the industry. But let's stand back and look at it, we have always talked about the attractiveness of deepwater and the ability for our clients to make major projects work for them in terms of volumes and results. We know a number of our major clients are looking at reserve replacements, and deepwater is a very attractive part of that. We know that the big LNG plants around the world will need feeding and more gas to be brought on there as well as continued developments in places like Norway, which have had a new lease of life again and off we go again with future expansion. Equinor shared with the market that they would like to bring 75 step-outs online in the next 5 years. So again, for us, we do see a lot of good opportunity, but we will do any investments in a very structured and methodical way to make sure that the investment is good for us, our shareholders and our clients.

And on your CapEx question, Guilherme, you'll have noted we maintained our CapEx guidance for the year, that's between $350 million and $380 million. Equally, you are correct to observe that the $53 million that we incurred in cash CapEx is literally right in respect to the guidance that we have maintained, and I do expect a catch up in the second quarter. But the key message here is it's a period on period within the year. We do not have control over this, this is the dependency of contract of providing services to us. But our CapEx guidance for the year remains between $350 million and $380 million.

Our next question comes from the line of Erik Aspen Fossa from SB1 Markets.

Congrats on the well-deserved retirement, John. I remember when I first met you in 2022, I got the task with asking the question if you would be able to get to an EBITDA of $1 billion. A bit skeptical, but thought maybe, yes, just maybe, we can do it. And look around today. So congrats on that. Well done. My question is on pricing and margin levels. I think if you could give us some color on how that has developed over the last 1, 2 years or maybe since 2024? It seems like there's been some pricing pressure in Brazil, but I guess the rest of the world, maybe stay there, come down or even increase. So I appreciate if you could give us some color on that.

Well, thank you, Erik, for reminding me of those discussions. I do remember them very well. And we had a belief, and it's great to be here today talking to you about what we've been able to develop as a company with a fantastic team of people that we have here. In terms of margins, as I said many times, every single bid that we put in and every single project that we win is an individual margin, [indiscernible] by individual project in individual client location opportunity window that we have. We get a lot of questions about Brazil, and I've answered them a number of times. There are some projects in the sequence of Petrobras' work that suit us better than others. And therefore, our pricing and our costs vary quite a bit between projects. If I need to mobilize another pipeline shift from halfway around the world and requalify all the welding procedures and redo my supply chain, my cost into Petrobras is different. So we are busy in Brazil, and we have a sequence of projects where resources in terms of vessels and people and supply chains come off one project and go on to the other. So our recent award of Sakarya was an example of one of those projects which fitted. The previous one was one where Petrobras' windows were quite difficult. We did price it, but the windows were quite difficult for us to see. Equally, Brazil has always and will continue to be one of the most competitive markets that we are in. But we always put a price in Brazil or anywhere in the world, but we would be comfortable to take the project at that price. So I think just taking a price per meter in Brazil is a relatively straightforward way of running numbers, but it doesn't really get to the crux of where we are in terms of our competitiveness and the profitability inherent in the project. So again, I'd just be careful taking the rough rule of thumb. I understand why people do it, but it's a sequencing of project that matter mostly to us. If we can get a project which finishes one existing project finishing and another one starting, it is very important for us in terms of how competitive we can be on our cost and still protect margins that come with it. Margins vary around the globe. But at the moment, we are comfortable with the margins that we are picking up. And we continue to be very acutely aware that there is competition in just about everywhere that we are working in. And one last item on margins. We picked up work in the Middle East for 153 and 148, 2 CRPOs recently. So we are reasonably comfortable with the workload that we need to keep that capability running. And as I mentioned in our prepared remarks, most of that work is in 2028 for us. So at the moment, we do not need to replenish that work very quickly. So margins vary, but direction of travel remains positive for us, and we don't see at the moment any major need to go back to where we were 5 or 6 years ago. And the market is behaving rationally. Our competitors are behaving rationally. And there is a lot of work out there, and we expect to get our fair share of it.

Can I have a quick question to you, Mark, on lease payments. On the last call, I think just looking at how depreciation were developing, I think it looks like lease payment has gone down by $100 million from '25 to '26. Now I'm not sure if that picture has changed. You talked about leasing another vessel. Can you give an update either on these payments or kind of the net effect on depreciation effects on these?

Yes. I think you asked the same question in Q4, Erik, if I remember correctly. So we exited last year with our lease payments of around $293 million and how [indiscernible] this previously, there would be a notable reduction this year, yes, bringing the [indiscernible] into the fleet will have a modest uptick. But even that being said, it's still a substantial reduction compared to the full year that we recorded in 2025.

Our next question comes from the line of Matt Smith from Bank of America.

A couple of quick clarifications left from me, please. The first one would be around the Middle East. Clearly, you've noted low disruption to the business at this point in time. I just wanted to clarify for the avoidance of doubt, if the situation was to remain in a status quo for months to come. Would that still be the case and your guidance sort of assumption still hold? And then secondly, coming to working capital, once again, noting a working capital build expected this year. I just wondered if you could remind us of the drivers, speak to the quantum and how that might develop throughout the course of the year, please?

Yes. Thanks, Matt. I think I touched on it earlier. We have some offshore work to execute at the end of this quarter, start with quarter 3 in Saudi under the LTA agreement 153. We have a chartered vessel working for us on that work, and our vessel is already in the region, working on another project at the moment. So we don't expect any disruption there, and we are ready for that project in terms of materials and capability. The large piece of work we have is 148, which was our newest award under our Saudi Aramco LTA, and we're in the engineering and procurement phase, which is not interrupted by the work at the moment. Barring a major global recession that may come out of this, we don't see any major issue affecting Subsea 7 here in the near term, to answer your question. And Mark, maybe on the working capital?

Yes. Indeed, as I flagged in the Q4 call, we anticipated unwinding of the favorable work that we have had on working capital that will come in the first quarter, there was an unfavorable movement of $55 million. As I've shared before, we have grown the business and had a very good outcome in terms of cash management by the focus that's been applied across the group now for several years. But I do really expect this year to be one where we have an annualized basis and unfavorable movement in working capital. The quantum, as I've shared before, it would be something in the region of $100 million to $200 million, but that needs to be set into the context of the very favorable performance that we've had in recent years. As I've said, we have grown the business substantially.

Our next question comes from the line of Alejandra Magana from JPMorgan.

I'd like to echo my best wishes to you in retirement. John. My first question goes back to vessel utilization. It stepped up to 79% versus 75% in 1Q last year, and up 6 percentage points versus first quarter in '24. I appreciate that some of that may reflect lower weather downtime and you mentioned your optimization efforts. But what level of utilization should we think of as your new normal going forward? And my second question is you mentioned some closeout effect on margin during the quarter. But more broadly, is there anything else in this quarter's margin besides continued improving mix shift that you would call out as nonrecurring?

Thanks for your comments. The second question, I don't think there's anything nonrecurring in it. It's just business as usual and how we see a lot of our projects play out. The utilization figure is one that I know you guys keep a very careful eye on it. We try to time our maintenance and our activities. So these vessels work very hard for us, so we do need to give them time for their maintenance and fast dry docks and such like, which as Mark said, one is calendarized by our [indiscernible] societies and secondly then is the availability of yards and such like to do so. So Q1 was relatively light on that, although we got what we needed is done. I don't intend to declare a number for utilization, but it's -- we've had a good first quarter, it shows in the figures. And again, for us, it's around getting the right assets in the right place. And I think I've said it a couple of times, we have for this season everything where they need to be, and that's important for us. So I think you can see from the workload that we have ahead that you will expect to see utilization quite high in the fleet.

We are now going to take our last question, and this question comes from the line of Kate O'Sullivan from Citi.

Just some quick follow-ups. But firstly, echoing also the congrats, John, and good luck to you and Stuart in the future moves. So on the new guidance range, are you fairly confident that will carry you through the year now, obviously, upgrading at 1Q? And what variables could you at the upper end of the guidance range? And then secondly, a quick one on order intake. So if you could just give an outlook on the shape of new awards for the remaining quarters, maybe how you see escalations?

Well, guidance is very much about we have the confidence, otherwise, we wouldn't have upgraded it today. I think I've touched on it before, it's all about performance. We have 9 months ahead of us in terms of performance to achieve it. And any upside of that will come out of performance and how we settle with our clients over time. It is very fine margins now, I think, in terms of where we're at. The pieces are all clear to us that we need to bring together and we have them all together now to execute this year. So we're comfortable with the guidance and it's all about performance and execution. In terms of order intake, we are very -- sorry. Yes, go ahead.

Sorry, my point on that is that you're confident that, that guidance will get you through, you might not upgrade again because you do it later in the year? And what would get you at the upper end versus still kind of a broad range?

Performance will get us to the higher end. And again, Stuart and Mark will come back to the market if they see fit to adjust them to change. But today, we've done that review, and we're comfortable with where we're at here. Order intake, we've discussed many times. We are very lumpy in terms of order intake. You'll see the Q2, of course, Sakarya will be a big part of Q2. We know the moving parts of this year in terms of order intake and how they fit together. So at the moment, we feel comfortable that we will have another productive and good year. Stuart has touched on that Renewables will probably be the area where we are clear for what we want, but we won't have it in the backlog. But we feel comfortable that the oil and gas side of the business will give us a very good footing for having another successful year this year. So I think you can look at the map that we put on, on Page 11 of the slide deck in terms of what projects are out there and the timing of those are reasonably well known to the market. So again, we're lumpy. I would again advise people not to try to model by quarter. We are pretty good at getting to where we want to be in the year. Quarters can vary quite a bit. Well, thank you very much, everybody. That is the end of the questions today. Thank you very much over the years for all your challenge and support to myself and Subsea 7. Next quarter, it will be Stuart, Mark and Katherine that will answer your questions, and I will have the luxury, hopefully, if the AGM approves, of sitting as a Director to ask some difficult questions as well. But look forward to supporting Stuart in the transition, and I look forward to meeting you again in due course. Thank you very much. All the best. Bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.