Subsea 7 (OTC:SUBCY), the offshore energy services provider, has reported a significant increase in financial performance for the second quarter of 2024, with a record high in order intake and backlog, amounting to $4 billion in new awards. The company's adjusted EBITDA surged by 80% year-over-year to $292 million, reflecting a margin of 17%. Subsea 7's net income rose to $63 million, up from $14 million in the corresponding quarter of the previous year. The firm ended the period with a solid liquidity position and anticipates robust revenue and EBITDA for the full year.
Key Takeaways
- Subsea 7's order intake and backlog reached a record $4 billion.
- Adjusted EBITDA for the quarter increased to $292 million, an 80% jump year-over-year.
- Net income grew to $63 million, compared to $14 million in the same period last year.
- The company forecasts a margin of 18%-20% in 2025 and over 20% in 2026.
- Full-year revenue is expected to be between $6.5 billion and $6.8 billion, with adjusted EBITDA between $1 billion and $1.05 billion.
- Subsea 7 plans to return at least $1 billion to shareholders from 2024 to 2027.
Company Outlook
- Subsea 7 projects a continued positive trajectory with a margin of 18%-20% in 2025 and over 20% in 2026.
- The company's tendering pipeline remains strong, especially in the subsea and offshore wind sectors.
Bearish Highlights
- There are high barriers to entry in the offshore wind sector's cables and foundations segments.
- The turbines segment presents lower barriers to entry and more speculative capacity.
Bullish Highlights
- The offshore wind business is profitable and growing.
- Subsea 7 is committed to being a Tier 1 player in the subsea and offshore wind sectors long-term.
- The quality of projects in the offshore wind sector is expected to improve, which may lead to better margins.
Misses
- Subsea 7 acknowledges challenges in managing supply chain and asset allocation due to the record backlog.
Q&A Highlights
- John Evans discussed margin expectations and project escalations, indicating confidence in understanding market pricing and handling escalations.
- Subsea 7 is in active dialogue with Petrobras and sees potential for new awards in Brazil's subsea sector.
In the earnings call, Subsea 7 (ticker symbol not provided) emphasized its successful financial results and robust outlook for the future. The company's involvement in the energy transition, particularly in the profitable and growing offshore wind sector, aligns with its strategy to address carbon capture and storage (CCS) and to maintain a leading position long-term. Subsea 7's commitment to shareholder returns is evident in its plan to distribute at least $1 billion between 2024 and 2027. Despite the competitive environment and challenges in managing its record backlog, Subsea 7 is confident in its ability to navigate the market and continue its positive momentum. The company's leadership ended the call with gratitude to participants and a promise to update on third-quarter figures in due course.
InvestingPro Insights
Subsea 7's recent financial results have not only been positive but also indicative of a strong performance trajectory for the company. To provide a deeper understanding of Subsea 7's financial health and stock performance, we've gathered some key metrics and tips from InvestingPro.
InvestingPro Data:
- Subsea 7 boasts a market capitalization of $5.66 billion, reflecting investor confidence in the company's market position.
- The company is trading at a P/E ratio of 55.45, which is significant and suggests high expectations of future earnings.
- Revenue growth over the last twelve months as of Q1 2024 stands at 18.01%, demonstrating robust top-line expansion.
InvestingPro Tips:
- Analysts have noted that Subsea 7's net income is expected to grow this year, aligning with the company's positive outlook for future profitability.
- Despite some analysts revising their earnings downwards for the upcoming period, Subsea 7 has maintained a strong return over the last year, which could be indicative of its resilience in a challenging market.
For those interested in a more comprehensive analysis, InvestingPro offers additional insights and tips for Subsea 7, which can be found at https://www.investing.com/pro/SUBCY. There are 15 more InvestingPro Tips available, providing a detailed perspective on the company's financial health and stock performance. To access these insights, consider using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
Full transcript - Subsea 7 SA (SUBCY) Q2 2024:
Katherine Tonks: 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, CEO of Seaway 7. The results press release is available to download on our website along with the slides we will 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 2023 Annual Report or today’s quarterly press release. I’ll now turn the call over to John.
John Evans: Thank you, Katherine, and good afternoon, everyone. I will start with a summary of the second quarter before passing over to Mark for more details on the financial results. Turning to Slide 3. Subsea 7 delivered a strong second quarter adjusted EBITDA of $292 million, up 80% year-on-year and with a margin of 17%. We’re on track to meet EBITDA guidance, which has been revised upwards by 5%. The second quarter was a record for Subsea 7, both in terms of order intake and backlog. The addition of more high-quality projects support our expectations of strong margins in the remainder of 2024 as well as our goal to achieve a margin of 18% to 20% in 2025 and over 20% in 2026. Our tendering pipeline in both subsea and wind remains robust, and we’re confident in a positive outlook for both businesses. Turning to Slide 4. Order intake in the second quarter was $4 billion, reflecting new awards in Brazil, Turkey, UK and the Gulf of Mexico. Our book-to-bill for the quarter was 2.3x and 1.7x for the first half. With a high book-to-bill, we continue to drive strong growth in our backlog. And at the end of the first half, we had $12.5 billion of firm work, a record high. Slide 6 shows the backlog by business units. After recent awards in Subsea and Conventional including Buzios 9 and 4 new PLSV contracts, we have good visibility of the years ahead, including $4 billion already secured for 2026 and beyond. In renewables, the backlog is roughly flat, as we remain selective in our tendering approach to support future margins and returns. And now I’ll pass over to Mark to run through the financial results.
Mark Foley: Thank you, John, and good afternoon, everyone. I will begin the financial performance review with some details of group and business unit performance in the quarter before returning to the group cash flow and financial guidance for 2024. Slide 7 summarizes the group’s second quarter results. Revenue increased to $1.7 billion, up 15% compared to the second quarter of 2023, largely driven by Subsea and Conventional. Adjusted EBITDA of $292 million was up 80% compared with the prior year, and our margin increased by over 600 basis points to 17%. Net finance costs of $24 million, a net foreign exchange loss of $8 million and taxation of $41 million resulted in net income of $63 million compared with $14 million in the prior year period. I’ll now discuss the drivers of the group’s performance in the next few slides. Slide 8 presents the key metrics of Subsea and Conventional. Revenue was $1.4 billion, up 21% year-on-year, reflecting good progress on fabrication of Vigra, Wick, [indiscernible] and Bintan spoolbases as well as the execution of offshore swaps in Guyana, Brazil, Australia and Norway. Adjusted EBITDA was $247 million, equating to a margin of 17.2%, an increase of approximately 700 basis points from the prior year. This result was underpinned by the continued mix shift to higher-margin projects, high utilization of the global enabler vessels as well as a $9 million of net income contribution from OneSubsea. Net operating income was $126 million compared to a loss of $10 million in the same quarter last year. Selected renewables performance metrics are shown on Slide 9. Revenue was $281 million, broadly flat year-on-year, reflecting ongoing activity installing foundations on transition pieces on Dogger Bank as well as cable lay projects in the U.K. and Taiwan and our first turbine installation project in Germany. Adjusted EBITDA was $38 million, resulting in a margin of 13.6%. We continue to expect the Renewables business unit to generate a double-digit adjusted EBITDA margin in the full year. Slide 10 shows a cash waterfall for the second quarter. Net cash generated by operating activities was $187 million, which included a modest $12 million adverse movement in working capital. Net cash used in investing activities was $202 million, including capital expenditure of $55 million, and the second of two payments for our investment in OneSubsea amounted to $153 million. Net cash used in financing activities was $213 million, which included dividend payments of $82 million, share repurchases of $19 million and lease payments of $55 million. Restricted cash increased by $83 million related to the purchase of African Inspiration, a 250-tonne crane class construction vessel. The purchase was completed on the 18th of July, and the vessel will be renamed Seven Merlin. At the end of the quarter, cash and cash equivalents was $290 million and net debt was $1 billion, which included lease liabilities of $533 million. The group had liquidity of $1.1 billion at quarter end, which included $860 million of committed unutilized borrowing facilities. At the July 24, the company had utilized $52 million or 65% of the $80 million allocated to share repurchases as part of our $250 million shareholder returns in 2024. To conclude, Slide 11 shows our guidance for the full year. We have raised our expectation for revenue and adjusted EBITDA slightly as well as reflecting the purchase of Seven Merlin and capital expenditure. In 2024, we now expect revenue to be in a range between $6.5 billion and $6.8 billion, with adjusted EBITDA being between $1 billion and $1.05 billion. This reflects the good progress on our existing portfolio of projects. Our capital expenditure guidance now includes the purchase of Seven Merlin for $83 million. The underlying capital expenditure guidance has not changed. I will now pass you back to John.
John Evans: Thank you, Mark. On the next three slides, we have a few highlights from the last quarter, starting on Slide 12 with our Gas to Energy project in Guyana. This was our first project in Guyana and involved the fabrication and S-Lay of 119 kilometers of rigid pipeline using Seven Borealis. The pipelay scope was successfully completed 10 days ahead of schedule, and the Seven Borealis is now mobilizing to Saudi Arabia for work on Aramco’s Zuluf field. Slide 13 continues a theme from our recent Investor Day of enabling products, including our range of roll-on solutions. As we discussed in June, the Alliance framework and early engagement with Aker BP (NYSE:BP) allows a very open dialogue about the solutions that could be used to optimize their field developments. At Vigra, we saw the fabrication of high-performance, corrosion-resistant rigid pipelines, Yggdrasil. While across the water at Wick in Scotland, our spoolbase is also working on Yggdrasil, fabricating pipeline bundles. As you can see in the image, these bundles combine several pipes and control lines in a single structure. This highly efficient solution saves vessel days and simplifying the field infrastructure and is proprietary to Subsea 7. As we explained in June, these solutions are part of the suite of enabling products and capabilities that keep us at the forefront of the Subsea industry. When combined with the benefits of early engagement, they have been key to unlocking reserves and optimizing value, both to clients and Subsea 7. Turning to Slide 14. In March, we took delivery of the Seaway Ventus, our new-built turbine installation jacket. And on the July 2, we completed our inaugural contract at Gode Wind 3 in Germany. After installing the turbines on that project, the Seaway Ventus moved to Borkum Riffgrund 3, where we continued to install project installation turbines on that project. This winter, during the off-season, the vessel will be equipped with a gripper to enable monopile installation before it commences foundation installation on East Anglia 3. Now on to review of our tendering pipeline on Slides 15 and 16. Bidding for subsea work remains very active, and our tendering has exceeded $21 billion. The outlook for incremental work in Brazil remains very good with several projects on the bidding horizon valued at multiple billions. Elsewhere, there’s a wide range of small and medium-sized projects in deepwater markets in the U.S., Gulf of Mexico, West Africa, Turkey and beyond. Overall, we are confident that we have a strong tendering pipeline that can support continued momentum in our subsea order intake. On the next slide, we have our wind prospects. The recent licensing round in the Netherlands was a success with two 2-gigawatt developments being awarded to consortiums, including SSE (LON:SSE) and Vattenfall. For both these clients, we have delivered substantial and similar project scopes recently and have good track record and relationships. Likewise, in Germany, there were two lease awards in June for EnBW and TotalEnergies (EPA:TTEF). So Continental Europe, the market is functioning well with regular bidding and prospects for Seaway 7. In the UK, we’re optimistic that the change in government will provide continued support to offshore wind with potentially increased volumes. This is expected to support strong activity in current and future CFD rents, and we expect Seaway 7 to remain one of the leaders in this market. Although there is political uncertainty in the U.S., both Atlantic Shores 1 and 2 and New England 1 and 2, together representing 5.4 gigawatts, have received final governmental approval, and bidding activities for future prospects continue. Overall, we remain confident that the long-term outlook for offshore wind is strong and that through selective bidding, we can continue to deliver good financial performance in our renewables business. To conclude, we turn to our final slide on Page 17. As discussed during our Investor Day last month, we have a strong suite of solutions, vessels and technologies that unlock opportunities for Subsea 7 and create high barriers of entry. You heard from Aker BP last month about the benefits of early engagement and alliancing in optimizing field development design. This goes hand in hand with the ability of our experienced project teams and crews to deliver complex offshore scopes on time and on schedule. We’re very clear that there is an energy transition happening, and we’re very much involved in it. Our offshore wind business is profitable and growing, and we have a well-developed strategy to address CCS. Financial strength starts with good project delivery and good risk management. These are fundamentals to delivering profitability and maintain the balance sheet strength that enables us to win super major projects. Finally, we intend to be a Tier 1 player in subsea and offshore wind in 2030, 2040 and 2050 and beyond. And as part of that goal, we will be considering the long-term reinvestment needs of our fleet, but we’re very clear that shareholder returns are a priority and are underpinned by the commitment to return at least $1 billion in 2024 to 2027 as a minimum. And with that, we’ll be happy to take your questions.
Operator: Thank you. [Operator Instructions] First question today is from the line of Guilherme Levy from Morgan Stanley (NYSE:MS). Please go ahead.
Guilherme Levy: Hi, good morning. Thank you for taking my question. The first one on offshore wind. I was wondering if you could say a few words on the competitive environment for the different activities that the company does in this business. If you could say a few words on what you’re seeing on cables, foundations and wind turbines. And also, into the long-term, what type of margin profile should we see in these different segments of the market? That would be great. Thank you.
John Evans: I’ll ask Stuart to pick up the wind questions, Stuart?
Stuart Fitzgerald: Yes. So as you know, our – the segments that we participate in are cables, foundations and turbines. I would say in the cables, in the foundations segments, we see high barriers to entry, and we see high demand for our services. So active bidding and a relatively tight market, particularly as we head towards ‘27, ‘28 and beyond. Turbines, lower barriers of entry, I would say, more speculative capacity coming into the market, and I would say less tight market there. As you know, with the Ventus, we’ve equipped that ship or that vessel to be able to do either foundations or turbines, so we will allocate the ship into the segment where we see the best returns in 2025, that will be foundations. And beyond that, we’ll basically go after the segment that provides us the best opportunity.
Guilherme Levy: Thank you, and – sorry.
Stuart Fitzgerald: Yes. And then I think on the second point in relation to margin evolution, we’re basically seeing margins improving as the quality of the jobs that we take in improves. We’re selective in the bidding, making sure we have the right risk profile and the right pricing. So we see an upward trend in the margin delivery out of offshore wind.
Guilherme Levy: And a second one, if I may. The company acquired a new vessel for the conventional business recently. I was just wondering if you could also comment on other opportunities that you see, too, to expand the fleet from here. Thanks.
John Evans: Well, thank you. We always look at what is out there in the market. We are regular charters of challenger of this class, 250-ton construction assets are needed to support our big pipe layers. And as we’ve discussed many times, we are aware of every vessel in the world that can meet our needs. This happened to be a vessel that was owned by a company that got into financial distress. And the investment for us is not too dissimilar to the 3- to 4-year charter, and we ended up buying the asset for the same amount of money that we have spent on the charter. So for us, that was quite a speculative opportunity that came our way. But equally, we were in the market for a 3-year charter of an asset class of a similar capability as the African Inspiration, which will in the future be called Seven Merlin. So for ourselves, it’s about keeping a very close eye on what’s out there. And when the right opportunity comes, the strength of our balance sheet and our understanding of the market allows us to move relatively quickly to pick up on where we’re at, at the moment. So that’s the way to think about it is the cost of charter versus acquisition in an asset plan that we use quite regularly in the fleet.
Guilherme Levy: Perfect. Thank you.
Operator: Thank you. We will now take our next question. This is from Christopher Mollerlokken from Sparebank 1 Markets. Please go ahead.
Christopher Mollerlokken: Yes. Good afternoon. With the acquisition of Seven Merlin, will this result in a release of a chartered vessel? Or do you plan to add one additional vessel to your fleet? Thank you.
John Evans: At the moment, we have work allocated for the vessel that we just acquired, probably drags 2.5, 3 years. So at the moment, we would not be releasing anything that we have on the contract at the moment. Again, the flexibility of having quite a bit of charter tonnage in as we can flex up and down as we see. And we also have options on a number of those charters. So we will take it as we see in market, but the acquisition was backed by the work that we had for the asset.
Christopher Mollerlokken: Thank you.
Operator: Thank you. We will now take our next question. This is from Kate O’Sullivan from Citi. Please go ahead.
Kate O’Sullivan: Hi, thank you for taking my questions. The first one is on the subsea prospects slide. It indicates you’ve many more significant project opportunities in Brazil. So just wondering at what point could you see your exposure to Brazil being relatively full, that geographical exposure? And in terms of capacity to win new awards in Subsea and Conventional at the scale of the recent Brazil awards, could you help me understand how much capacity you have to do this? So, do they get added at the back of the queue for 2027 as such? And related to that, if you could just give an update on outlook for opportunities over the rest of the year for awards? Thank you very much.
John Evans: Okay. Yes. The prospect page that we show in the quarterly earnings release is looking very positive and looking very full. As you quite rightly pointed out that Petrobras have the large group of projects in the hopper at the moment, and they are in in-house for tender, a number of those as we speak. Again, some of these work sequentially. So, as we finish something like Bacalhau, we would be looking to start the new award that we have, Buzios 9. So, we need to remember that these projects cover multiple years. So, for us, at the moment, we are working our way through how they fit together in our capability and how does it fit in terms of asset allocation inside the group. So, for ourselves, we are in a good dialogue with Petrobras about the timing, which we are doing it. And also, we have a supply chain that needs to work behind us or our competitors also need the same supply chain. So, the timing of how the Buzios 10, 11, Atapu 2, Sépia 2 putting together is probably work in progress for the industry. But again, we are certainly putting our front foot forward there on those opportunities. I think in terms of between now and the year-end, one comment I would make, which is quite clear to everybody is that each quarter goes up and down in terms of volume of work that’s coming in. But we, again, see opportunities for Stuart to win business to bring some good quality backlog in before the year-end as well as some further Subsea opportunities coming into the market and will be awarded to the market by the end of the year. So, for ourselves, we are reasonably comfortable that we will replenish work that we burn off this year very clearly and that we will take work in that suits our profiles in the out-years in ‘26, ‘27, and some of this will go into ‘28 in the due course.
Kate O’Sullivan: Thank you very much.
Operator: Thank you. We will now take our next question. This is from Victoria McCulloch from RBC (TSX:RY). Please go ahead.
Victoria McCulloch: Hi there. Thanks very much for taking questions. First one on the Subsea and Conventional business, how much of – you talked about this being a mix shift in getting a higher margin sequentially, how much do you consider to still be lower margin work within the portfolio of backlog that the Subsea business is working on? And the second one, maybe a certainly bigger picture for John, what was the biggest challenge in managing this at record backlog? And how do you plan to mitigate that for the business on a medium-term basis? Thanks so much.
John Evans: So, Victoria, I think your second question was one that was asked at the Vigra Investor Day that we did last month. As I mentioned then, I think supply chain, managing a supply chain is very important. And as we answered the question a month ago, we have decades long relationship with our supply chain. We have long-term relationships with each of these vendors that are important to us. And we also very much bring them involved during the tender and in the run-up to these tenders to make sure we understand their capability, their capacity, their ability to meet the specifications. So, again, working our supply chain closely with us, having a clear understanding of what drives them and what drives us. In terms of assets, we own the last bulk of our assets. So, therefore, that asset allocation of our own fleet is within our gift to do that. So, a very strong relationship with a good supply chain is the key. And we continue to find that, that long-term investment in relationships and alignment of objectives is what’s good for us and good for our clients and good for our suppliers. So, for us at the moment, that’s how we view the supply chain and the biggest challenge there for us. Could you just repeat your first question again for me, just to make sure I answer it correctly?
Victoria McCulloch: Sure. Just on the Subsea and Conventional business, you talked about the mix shift and on moving margins higher, how much of the remaining work in that portfolio do you see as lower margin, or is it simply an evolution of incrementally moving higher?
John Evans: Well, just to give you a sort of rough indication out of our $12.5 billion of backlog, only $0.5 billion was awarded to us before 2021 and before that. So, again, we are starting now. The vast bulk of our backlog is ‘22, ‘23, ‘24 vintage. And as we have discussed quarter-on-quarter, the quality gets better as each new slice of work comes in.
Victoria McCulloch: Thanks very much.
Operator: [Operator Instructions] This is from Richard Dawson from Berenberg. Please go ahead.
Richard Dawson: Hi and thank you for taking my questions. And just following up on that margin comment, when you look at the new projects that are coming into your backlog now and then also on the bidding prospects, are you still seeing those margins increasing? I am just trying to get a sense of sort of how high margins can just go as given, obviously, guidance of margins above 20% in 2026. Is there still sort of further we can go on these new projects? And then maybe just a question on the order intake, obviously, very strong for the quarter. Escalations maybe took a bit of a dip lower. I appreciate this has been discussed in prior calls, but if you could maybe give us some sort of color on what was driving those margin – that escalation is a bit lower for this quarter. And is that sort of a more normal level going forward? Thank you.
John Evans: Every bid that we submit is effectively an opportunity for us to understand the pricing in the market, and that’s what we do. Every project is looked at individually. We put our margin expectations into every discussion we have with the client. And it allows us to understand the way we go. At the moment, we still are in a place where the three very large players in this sector, and each of us are taking on substantial group in the market as we see and we will continue to explore that. We have seen a couple of projects recycled, but equally, as you have seen in the first part of this year, some of the projects that were put to recycle are now back with such integration alliance such as this and then Bay du Nord, to again, see if we can get those to sanction now with a very firm supplier involvement through Subsea integration alliance. So, I think the answer is every opportunity that we have to understand what our pricing abilities are. It is what we will do, and we will continue to do so. In terms of escalations, in our escalations, is about timing on different projects, different mechanisms we have in contacts to get inflation indices to kick in and such like, and they generally land on the anniversary of different contracts and such like. So, I am not unduly concerned about they will always be a bit lumpy as to how those come through, and they are generally contractual mechanisms or changes that we agree with clients as we go through. So, for ourselves, we don’t look at that too tightly each quarter because it’s just the facts and circumstances of the particular quarter that we are in allows us then to either conclude those escalations or not.
Richard Dawson: Okay. Helpful. Thank you.
Operator: [Operator Instructions] There are no further questions at this time. So, I will hand back to the speakers. Thank you.
John Evans: Well, thank you very much. I know today is a very, very busy day with all three of us announcing our figures today, and I am sure there is a lot of activity from the analysts and our shareholders today. But thank you very much for joining Subsea 7 for our Q2. Most of you also joined us at our Investor Day last month. So, thank you again for making the time to join us. That was an exciting and interesting day for all of us to share our plans and what we can deliver for this market. We will again talk to you in Q3, and give you an update of how we are seeing both our markets, which we see as being very strong, continue to develop. So hopefully, you have some time off this summer, and we will talk again in our Q3 figures. Thank you very much.
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