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Subsea 7 Announces Second Quarter 2020 Results

Source: www.gulfoilandgas.com 7/29/2020, Location: Europe

Subsea 7 S.A. announced results for the second quarter and first half of 2020 which ended 30 June 2020.

Second quarter summary

• Order intake totalled $2.0 billion, equivalent to a book-to-bill ratio of 2.7, with six awards announced in the second quarter including orders worth $1.7 billion in the Renewables business unit

• Order backlog increased to $7.0 billion at quarter end, of which Renewables represents 31%, with $2.1 billion expected to be executed in the remainder of 2020

• Negative Adjusted EBITDA of $9 million for the second quarter of 2020, reflecting a $104 million restructuring charge, the impact of Covid-19 and low vessel utilisation in certain markets

• Impairment charges relating to property, plant and equipment and right-of-use assets of $229 million and goodwill impairment charges of $578 million adversely impacted net operating income in the quarter

• On track to deliver approximately $400 million in annualised cash cost savings by the second quarter 2021. Active fleet reduced by four vessels to 28 from 32. Employee consultation processes to reduce headcount underway

• Strong cash flow from operations, active working capital management and disciplined capital expenditure resulted in an increase in cash and cash equivalent of $144 million

• A two-year extension to September 2023 of the $656 million revolving credit facility. Both the revolving credit facility and Euro Commercial Paper programme remain undrawn

John Evans, Chief Executive Officer, said: In the second quarter of 2020 Subsea 7 reported a negative Adjusted EBITDA of $9m, reflecting reduced activity within the SURF and Conventional business unit, the impact of the Covid-19 pandemic, and the recognition of $104 million of restructuring costs related to the Group’s resizing programme. Nevertheless, the quarter was marked by several notable achievements including $1.7 billion of new orders in Renewables, strong cash generation and progress on the previously announced cost reduction measures. Each of these played a part in enhancing the Group’s resilience to the current downturn in oil and gas while enabling us to capture opportunities in the offshore wind market and extend our ten-year track record in renewable energy.

Success in Renewables
Subsea 7 ended the second quarter with a robust backlog of $7.0 billion, including a record $2.2 billion in Renewables. New orders recorded in backlog during the quarter included Seagreen, an integrated EPCI project offshore Scotland, Kaskasi, an integrated contract offshore Germany, and Hollandse Kust Zuid, an integrated contract for the first planned subsidy free wind farm project offshore the Netherlands. In total, Subsea 7 is currently executing contracts for projects representing 4.8 GW of offshore wind power, enough to power approximately 5.3 million homes.

Strong cash generation, a robust balance sheet and enhanced liquidity
Despite the headwinds of the quarter, the Group increased cash and cash equivalent by $144 million and increased its net cash balance, excluding lease liabilities, to $262 million. During the quarter lease liabilities decreased to $292 million from $367 million. This was achieved through a combination of robust operating cash flow, active working capital management and disciplined capital expenditure. Subsea 7’s access to liquidity was reinforced in the quarter by a two-year extension of the existing $656 million revolving credit facility (RCF) to September 2023. The RCF and Euro Commercial Paper programme remain undrawn. These facilities together with a cash balance of $483 million represent access to diverse sources of liquidity of over $1 billion.

Cost reduction plans on track
In May we announced planned measures to reduce our cost base in anticipation of a sharp downturn in oil and gas activity driven by low oil prices. The employee consultation process to reduce the Group’s headcount by around 3,000 (approximately 1,000 employees and 2,000 non-permanent personnel) is underway. Progress is also being made to reduce our fleet by up to ten vessels. At the end of June, two chartered vessels had been released and two further vessels had been stacked, reducing our active fleet to 28. An additional net reduction of six vessels is currently planned for the coming twelve months, corresponding to the phasing of the projected workload. We remain on track to meet our target to reduce annualised operating costs by $400 million by the end of the second quarter of 2021. As a result of implementation of the cost reduction plan, a restructuring charge of $104 million was recorded in the quarter.

An update on Covid-19
During the second quarter, the Covid-19 pandemic adversely impacted EBITDA by approximately $30 million. Operational impacts due to Covid-19 in the second quarter included three weeks’ downtime on Seven Sun in Brazil and the temporary closure of certain onshore facilities. Our project teams were quick to adapt to new work practices and to date have minimised disruption to our clients’ projects. While the challenges persist, we have had no further significant outbreaks on vessels and our onshore facilities are now operational, albeit with higher costs and reduced productivity due to quarantine and social distancing measures.

Second quarter financial review
Second quarter revenue of $754 million was 21% lower than the prior year period, but broadly in line with the first quarter of 2020, reflecting continued low activity levels in the North Sea, an absence of conventional activity offshore Africa and the Middle East, and the rephasing of some recently awarded contracts due to low oil prices and Covid-19 restrictions. A negative Adjusted EBITDA of $9 million was adversely impacted by the restructuring charge of $104 million, incremental costs associated with Covid-19 of approximately $30 million and relatively low levels of vessel utilisation. Impairment charges totalling $807 million were incurred in the quarter, including $229 million relating to property, plant and equipment (predominantly vessels) and right-of-use assets and $578 million relating to the impairment of goodwill. The net loss for the quarter was $922 million.

During the quarter, net cash generated from operations was $219 million including a favourable movement in working capital due to reduced receivables. Capital expenditure was $33 million. Cash and cash equivalents increased by $144 million. The Group ended the quarter with net cash excluding leases liabilities of $262 million, equating to net debt of $30 million including lease liabilities of $292 million.

In the second quarter of 2020, Subsea 7 was successful in a number of tenders and booked new orders totalling $2.0 billion. The level of escalations in the quarter was not significant. Backlog at the end of June was $7.0 billion, of which $2.1 billion is expected to be executed in the remainder of 2020. The backlog for execution in 2021 of $3.4 billion is up 70% since the end of the first quarter.

Second quarter operational review
The SURF and Conventional business unit made good progress on several projects in the second quarter. Fabrication of the Electrically Heat-Traced Flowline for the Manuel project in the Gulf of Mexico was completed and pipelay operations began for Mad Dog 2. In Norway, Seven Oceans completed the installation of three pipelines for the Johan Castberg project, while Seven Arctic completed the installation of a bundle for the Snorre project and began offshore operations for the Ærfugl project. In the UK, diving activity was lower than usual, however, good operational progress was made on the Arran project with Seven Borealis.

The Renewables business unit completed the offshore scope of the Virginia Coastal Wind project during the quarter and preparations began for the Yunlin project, with vessels in transit to Taiwan for the offshore scope. An incident on Seaway Strashnov impacted progress on the Triton Knoll project. The vessel returned to the field in June and, along with a third party vessel, is now making good progress towards meeting the original schedule. Overall, utilisation of Subsea 7’s active fleet was 71% in the second quarter, compared to 80% in the prior year period, reflecting a subdued market in the UK North Sea, low conventional activity in Africa and the Middle East, and downtime on Seven Sun and Seaway Strashnov. At 30 June 2020, the active fleet comprised 28 vessels.

Outlook for 2020
Since March, the operating environment has stabilised to some extent, with a partial recovery in the price of oil and new work practices relating to Covid-19 now well-established.

In SURF and Conventional, clients’ capital expenditure budgets have fallen by 25% to 30% since the beginning of the year and, as a result, some contracts have been rescheduled and tendering activity for new awards remains low. To date, we have experienced no contract cancellations. Our plan to resize the fleet and the cost base is progressing and will help to mitigate the impact of the expected reduction in activity levels.

In Renewables existing projects have been largely unaffected by the challenging environment and tendering activity remains robust. Competition for offshore wind turbine foundation installation work remains high, but the Group continues to differentiate itself through its integrated approach encompassing both foundation and inner-array cables, and through a lump- sum turnkey contract offering that leverages our strengths in the management of large, complex projects. In April, we withdrew guidance for the full year given low visibility on several factors influencing our business including the pace of new awards, rescheduling of existing work and the impact of Covid-19. While there remains a significant degree of uncertainty, including the potential impact of a new wave of Covid-19 cases on both our activities and, more broadly, the macro environment, visibility on our project workload for the remainder of the year has improved. At present we anticipate that revenue for the full year 2020 will be broadly in line with the prior year, while Adjusted EBITDA, excluding restructuring costs of $104 million, is expected to be in line with current market expectations.

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