SAIPEM SPA

SPM
Temps réel estimé Tradegate - 10:37:53 01/02/2023
1.411 EUR +0.21%

Transcript : Saipem SpA - Special Call

06/12/2022 | 10:00

Presentation Operator Message
Operator (Operator)

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Santorini Drillship Acquisition Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Alessandro Puliti, Saipem's CEO. Please go ahead, sir.

Presenter Speech
Alessandro Puliti (Executives)

Thank you, and good morning, and welcome to this brief presentation we have organized today to give you more details on the acquisition of the Santorini drillship that we have announced yesterday evening.

I'm here today with Marco Toninelli, CEO of Asset-Based Services; our General Counsel, Simone Chini; and Paolo Calcagnini, CFO, who is on the line.

As you saw, Saipem has exercised yesterday, a purchase option agreed with Samsung Heavy Industries and has acquired the 7-generation drillship of Santorini for $230 million to be paid by year-end 2022.

The Santorini was delivered by Samsung Heavy Industries shipyard to Saipem back in 2021. And it has been operating by Saipem under a lease contract since then. The vessel is operating with Saipem in the Gulf of Mexico. And the acquisition price includes all the [indiscernible] and the setup provided upon the delivery of the vessel back in 2021.

Santorini is currently working in the U.S. Gulf of Mexico for Eni until the third quarter 2023. The acquisition will be completed with the payment of the final consideration to Samsung, which will be funded with available cash and the effective transfer of the vessel ownership to Saipem is expected by year-end.

After having recently strengthened the drilling fleet with 2 new lease jack-ups, the acquisition of Santorini, a compelling investment, allow us to secure a superior state-of-the-art drillship to profit from the up cycle.

The next slide shows the main features of Santorini. It is a latest generation drillship so-called 7 generation, featuring the most advanced achievement for safe operations. It is equipped with two 7 cavities blowout preventers. The highest standard for ultra-deepwater drilling. It has the latest available drilling automation on board and is designed for the lowest environmental impact.

I won't go into a detailed description of all the technical characteristics of the vessel. But the message I want to pass is that it is a cutting-edge asset equipped with the highest standards available as of today.

Thus, she is positioned at the top end of the trading ship market, which is now in an expansion phase. We are positive on the commercial potential of our new vessel.

And now let's dive through the investment rationale. Offshore drilling market is tight. Demand exceeds supply, and there is limited availability, especially of most technological advanced vessels. We do not see operators ordering new builds and investing at least $800 million with the lead time of at least 3 years for a drillship of the same generation of Santorini. This dynamic is keeping the market tight with a demand more than offsetting supply. The rates are on the rise. Independent market research estimates an increase for 7 generation ultra-deepwater drillships average dayrate from around $400,000 per day in 2022 up to over $450,000 per day in 2025.

From a commercial point of view, we see plenty of opportunities in the deepwater and ultra-deepwater drilling segment, both in the Gulf of Mexico, where there is a very limited asset availability and where the Santorini is currently working, and in Africa and in Mediterranean, which are markets where Saipem has been historically present.

As I said, the vessel is already part of our fleet and is currently operating for -- in the U.S. Gulf of Mexico under the contract covering most of 2023.

Finally and most importantly, I want to highlight the double-digit returns we are expecting as we have been able to secure the asset at a very attractive price of $230 million. The expected internal rate of return is over 15% and payback period is estimated in around 5 years.

And then in this -- my final slide before handing over to Paolo to close on financials, provides a picture of the fleet engagement after the recent contract worth $800 million announced back in November. And that has brought our current backlog to a level of above EUR 1.5 billion, the highest level for drilling onshore -- offshore over the last 6 years.

As you can see, the strong market momentum and the limited supply of ability are clearly reflected in our vessel engagement. What you see in the chart is based on current contracts, which including -- includes a couple of options. For Saipem 10000 and jack-up Pioneer, those are already bringing the utilization of around 80% for the next year and already 60% for 2024. Please note that for this calculation, the new jack-up leased: Perro Negro 12 and Perro Negro 13 are considered engaged from the starting date of the leasing, resulting in 100% utilization in 2023 and 2024. The gray shaded area highlights that 6 leased vessels are present in our fleet, which represent 40% of the total. And this normal -- and this number as I said earlier, confirms our asset-light strategy.

And now I will hand over to Paolo for the last information on financials.

Presenter Speech
Paolo Calcagnini (Executives)

Thanks, Alessandro. Good morning, everyone. Just a few words on the guidance. We shared the guidance when we presented the 9-months results, and we confirm the guidance for 2022, especially for the net debt figures that I guess it's one of the aspects you may be wondering about. So this is possible due to 3 things.

Number one is the positive working capital dynamics which is mostly due to an accelerated invoicing with clients and the consequent credit collection. The second is the good business and operational dynamics that we have enjoyed in the last quarter of this year. And the third is the cash actions that we mentioned, and we listed in our business plan that are finally paying off and leaving the company in a position where we can buy the Santorini using the cash available by year-end, confirming the net debt expected position.

Now before handing over to the Q&A session, please do keep in mind that today's discussion is meant to provide information on Santorini acquisition and not on other -- either strategic on the financial aspects. This is because we will have a strategic update in end of February where we will give you the full year 2022 and the guidance for 2023. So please do avoid asking questions on aspects other than the Santorini acquisition or drilling offshore perspectives.

Thanks for the attention. I'll leave the time for Q&A.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions]

The first question is from Sasikanth Chilukuru, Morgan Stanley.

Question
Sasikanth Chilukuru (Analysts)

I had 2 related ones, please. The first one is regarding the strategy itself. I mean previously, it has been time -- highlighted that you would be looking to keep it asset light in the sense you would take the advantage of leasing the vessels and then and actually utilizing drilling as well. Just wondering what's changed primarily in that -- from that thinking and leading to the acquisition of drillship.

The second one is related to the schedule. It seems like you've highlighted U.S. Gulf of Mexico, Africa and Mediterranean. And looking at these schedules that you have provided, some of the ultra-deepwater environmental drillship seems to be available for a contract from 2023 to 2024 onwards. I was just wondering if you can give some commentary on that one that you're looking at in these regions, which would help utilize these vessels over and beyond the other 2 or 3 vessels that will be free.

Answer
Alessandro Puliti (Executives)

Thank you for your questions. So the asset-light strategy is really confirmed because you've seen most of our drilling rigs entry in our fleet that were based on the asset-light strategy. So on longer-term rental basis.

The case of the Santorini is different because we had a very interesting option that could be exercised. And as I said before, certainly to buy a new build vessel other than waiting 3-years delivery time for sure, where you have to spend at least $800 million -- $700 million, $800 million.

So the exercise of the option is, for us, a really compelling case. On the other hand, we have also to remark that at the end of the lease period, it was not possible to extend the lease period for the Santorini. So for us, to secure this vessel, basically exercise the option was mandatory, unless renouncing to the services and to the revenues that are generated by the Santorini drillship.

So definitely, this is a good case in which the asset-light strategy is confirmed, but on an opportunistic basis is accompanied by purchase of vessels, drilling ships when conditions are particularly attractive, both on the side of the price of the vessel to be acquired and on the market of the vessel itself. So we are in presence of this particular combination of the 2 positive things.

In terms of schedules of our ultra-deepwater activities, basically, we have Saipem 12,000 that is fully booked even beyond 2024. Saipem 10000 is fully booked in 2023 and there's options for 2024 that we do believe most likely they will be exercised. And Santorini at the end of his contract with Eni in the Gulf of Mexico in October 2023, is currently participating to different option, bids, tenders from several operators. So we have no doubt it will be fully utilized beyond this current contract end of 2023 and 2024.

That's the -- our ultradeep water fleet, Scarabeo 8, that is now working in very deep water, but nevertheless, it's working in deepwater activities as contracts well beyond 2025. And Scarabeo 9, again, is participating to multiple tenders' opportunities. So we see it being soon fully booked as well because situation is the market that we see more bids than participants. This is where we are now.

Question and Answer Operator Message
Operator (Operator)

The next question is from Guillaume Delaby with Société Générale.

Question
Guillaume Delaby (Analysts)

Yes. I think it is clearly a great investment. As you know, sell-side analysts are lazy. So thank you for presenting us a 5-year payback and the 15% internal rate of return. But in order to make our life even easier, so we understand that the option price is $230 million, but I guess there was some prior investments? Or maybe could we have an idea about the total investment for this unit? So the $230 million option but also maybe the cash or the previous investment you made in order to have a rough idea of the total investment in the unit.

Answer
Alessandro Puliti (Executives)

Thank you for your question. Yes, there were some prior investments to get the vessel ready to operate. But this basically they were done already end of 2021 when we took the vessel from the shipyard, and they've been already paid out by the current contracts.

So therefore, really for the evaluation of the investment of the exercise of the auction, the $230 million are exactly the total amount that has to be considered for the valuation of the auction.

Question
Guillaume Delaby (Analysts)

So maybe a follow up. So if I want to have -- sorry to challenge you a little bit, the total investment, should I have a look maybe at the 2021 annual report having a look at how much you spent in offshore drilling CapEx and make an assumption?

Answer
Alessandro Puliti (Executives)

If you want to consider the entire investment we did since we took over the Santorini on a lease basis, you can add $26 million for the warehouse inventory buildup.

Question
Guillaume Delaby (Analysts)

Okay. That's very clear. This is $256 million.

Answer
Alessandro Puliti (Executives)

At the beginning of the contract to, let's say, have the vessel ready for startup with all the inventories of spare parts and so on, main equipment.

Question and Answer Operator Message
Operator (Operator)

The next question is from Massimo Bonisoli with Equita.

Question
Massimo Bonisoli (Analysts)

I have 2 questions. One is regarding obviously Santorini. So if you can provide the breakeven derisk leverage for the vessel going forward. I understand clearly, the price of the dayrates are increasing in -- quite interesting right now. But just to understand the level of the breakeven for these assets now that you own them, right?

And the second question is on the net financial position guidance. Just to put in the perspective since Algerian courtroom against [indiscernible] just to understand if you're on your net financial position, you also include some payables for Algeria, or they are still included in the provision?

Answer
Alessandro Puliti (Executives)

Okay. I will provide you information regarding the breakeven. And then for the financial, I will ask Paolo to give more color.

Sure. breakeven dayrate is not different from the breakeven dayrate of the other vessels that we have been -- that we have in our fleet. So it is very robust. And we sure -- we are pretty confident that we can make the 5-year payout time we are projecting. So on this, really, we consider a very interesting investments. Also because the capital that we have to put on the table to acquire the option is very limited compared to the value of a new build of the same kind of vessel. So this is what is making us confident that the breakeven is not an issue.

On the other hand, regarding our financial position, what I can say now is that we do not expect any disbursement within year 2022.

Regarding the Algeria situation, but I will leave Paolo to give more color on our -- on this subject.

Answer
Paolo Calcagnini (Executives)

Thanks, Alessandro. That's correct. We are not expecting a cash out from the Algerian situation by year-end. And if I can send out an information on the breakeven rates. It depends on the useful life of each vessel. But the breakeven in most scenarios is way below 2022 rates. So there is a lot of headroom in maintaining a positive return even if rates should go down, which, by the way, is not the market expectation as we speak.

And in addition, we see clients asking for long-term rentals at risk that are way higher than the breakeven.

Question and Answer Operator Message
Operator (Operator)

The next question is from Haris Papadopoulos with Bank of America.

Question
Haris Papadopoulos (Analysts)

Two questions on my side. Firstly, I appreciate you mentioned that the net debt guidance is confirmed partly due to favorable working capital dynamics. But I was wondering whether you could elaborate a bit more on this and perhaps how it can impact the 2023 movements with credit collections this year potentially being less cash next year.

The second question is not 100% related to this transaction, but it is relevant to your overall liquidity. I was wondering whether you could give us an update with respect to the new RCF. If I remember correctly, this was contingent on the capital raise, which is now completed. Could you please tell us on what stage we are in the process?

And then very last one actually with respect to your '23 bond maturity. Given the current state of the high-yield market, is it fair to assume you will repay this with cash on hand rather than [indiscernible] to come to market?

Answer
Alessandro Puliti (Executives)

Okay. Paolo, please provide the answer. Thank you.

Answer
Paolo Calcagnini (Executives)

Yes, sure. So in relation to your last question regarding the 2023 bond, yes, we expect to use the cash already available to repay the bond. And as we speak, we are also negotiating new credit lines with a pool of banks. But we -- as you see, we are sitting on EUR 1.4 billion of available cash. So we are very relaxed about repaying the bond expiring next year. This is not to say that we will not exploit any opportunity that the market may offer [indiscernible] but we also need to be aware that the credit markets have been particularly high this -- especially in the third quarter. And so we will do it if market conditions are such that we are not overpaying for issuing new bonds.

And now back to your first question on the cash. So I think it's too early to give you a guidance or any indication of 2023 because you may understand that our backlog has been moving positively very recently. And so it's too early to share what the cash flows will be for the next year. The fact that we are doing better by year-end. And we can afford buying the Santorini using the cash available, does not have an direct impact on 2023. So we're not just addressing numbers. It's just the explanation I gave you with acceleration in working and good operational performance.

Then I think there was a third question that I missed. If you can please repeat it again.

Question
Haris Papadopoulos (Analysts)

The other question was on the RCF. If I remember correctly, this was contingent on the capital raise being completed, which is now behind us. So I was wondering whether you could tell us what the state are in the negotiations in which we expect the new line to be announced. And perhaps like could this be super serious to the bonds? Or should we expect something [indiscernible]?

Answer
Paolo Calcagnini (Executives)

We expect something to pass with the other 3 lines, and we expect to close the RCF by year-end. The reason why it took a bit longer, you can understand the capital increase left a few banks with a big stick. And obviously, process-wise, it makes the approval of the RCF a bit more time consuming rather than if banks were not also shareholders. It's just a process complexities, but we are almost there.

Question and Answer Operator Message
Operator (Operator)

The next question is from James Thompson with JPMorgan.

Question
James Thompson (Analysts)

The line is a bit crackly. So apologies if some of these questions are somewhat repeated. The first one is, was this the only point in the bareboat charter where you had the option to purchase the vessel? Was this sort of an ongoing open option or whether there's another opportunity perhaps at the end of the 2-year charter? Just to try and understand the sort of rationale for taking the decision now versus maybe later as the drilling market evolves.

And then the second question was around just to try and help us understand the kind of the profitability of the vessels you could say. How kind of accretive is owning it versus the bareboat charter? Can you provide any sort of granularity or dynamics around that? And then obviously, this is the high spec vessel in the fleet now. I mean, in terms of the kind of 400,000 leading-edge dayrate, I assume that, that would be incremental to the 36% EBITDA margin the division reported in 3Q. So if you just provided some color around the kind of dynamics there, and then just about the decision process, that would be great.

Answer
Alessandro Puliti (Executives)

So to give you another, Paolo?

Answer
Paolo Calcagnini (Executives)

I can, Alessandro. I can take it.

Answer
Alessandro Puliti (Executives)

Okay. Go ahead, Paolo.

Answer
Paolo Calcagnini (Executives)

Okay. So the option for Santorini expired in this December. So from a rational standpoint, we waited until the last moment possible to exercise the option, which we did. And, in fact, we have options to buy other vessels that now are under lease contracts. And we are waiting or extending the options as much as we can. I mean, you made a good comment. The longer you wait, the clearer is the market perspective. So we always wait until the last second where we had the option to wait longer, we are waiting longer. For the Santorini, the option expired in December. And so we have to decide what to do basically.

Now in terms of effects of buying the Santorini, obviously, we will not pay the lease installment anymore, which you can understand is more expensive than the amortization of the vessel, even accounting-wise. In addition to the fact that the cash flows become better afterwards because you're not paying the installments anymore.

And the yield, cash-on-cash also improves over the next 5 years because the leasing contracts have an implicit cost, which we will not face anymore.

So from a financial standpoint, it was an easy decision. So it's never easy, but it was an easy decision because numbers were really strong. And in the next 5 years, the outcome cash-on-cash is better than it would have been even assuming an extension of the lease contracts, which in any case was not possible at this time.

Question
James Thompson (Analysts)

So okay. I mean just a follow we can assume that the kind of leading-edge rates that the margin is going to be stronger than what you reported in the third quarter of '22, yes?

Answer
Paolo Calcagnini (Executives)

It's a fair assumption, yes. It's 1 vessel out of 15. The second fleet is not 1 vessel. A bit more, so yes.

Question and Answer Operator Message
Operator (Operator)

The last question is from Mark Wilson with Jefferies.

Question
Mark Wilson (Analysts)

Just a couple of points from me. You mentioned on the call, the expected cost to build a new vessel these days, 7th generation so it takes 3 years, but I just missed the price, the expected price on that. If you could just clarify that again? And then the second point, in terms of the broader market. If current dayrates are at $400,000 a day and expected to grow to $450,000, two points around that. I just wondered if you could comment on where your dayrates sit versus the $400,000?

And then secondly, why or what is restricting the expected increase to just 12% out to 2025 if the market is as tight as you see.

Answer
Alessandro Puliti (Executives)

Okay, sure. So just to provide you clarity, yes, we can confirm that to build a brand new vessel like Santorini, will take at least 3 years. And certainly, you cannot build it for less than $700 million or $800 million, considering also all the [ achievement ] that is present onboard the Santorini. For example, they -- just the double 7 [ clarities ] BOP, Bowout Peventer. Their both value only themselves is $100 million value, just the 2 BOPs. So this gives you an idea on how opportunistic it has been exercised in the auction.

Second, market price. Clearly, what we presented are not data that are elaborated by us, but our data that are elaborated by a specialized company that are analyzing the market. And this is what we see. Certainly, we see today for 2022, a market that is around $400,000 and forecast are for a market that is picking up. This also depends really on many factors, whether you will contract the vessel on a long-term contract or on a very short-term exploratory activity where certainly you can even ask more than these numbers. But if you enter for example, a long-term development campaign for sure, you cannot be in the very high end of the projected rates.

So what we presented is a fair expectation, also because our expectation of the Santorini rig that it is also keep with cleans and opportunity to work on -- positively on the development actions are more in line with long-term contract or very short term opportunistic dayrates, maybe on a well-by-well basis. So this is what we do expect.

Question
Mark Wilson (Analysts)

Okay. That's really helpful. Maybe I could just ask 1 follow-up. Currently, based on your market outlook, how many 7 gen newbuild vessels do you think are entering the fleet -- the global fleet in the next few years? And that's my last question.

Answer
Alessandro Puliti (Executives)

We don't see many because I believe that Santorini is one of the latest being built. And as I said before, I do not believe that those part of the series of vessels that were built on speculation by many shipyards between 2013, 2014, 2015, and then they remain unsold because of the market drop. So the Santorini is one of the latest of this venture drilling ships that were there waiting for a client. But I believe that there is no really appetite to invest more -- to invest in brand new because the cost of investment is very high and delivery time is very long. So we don't see that much competition, especially on these specs because the specs Santorini are really top notch. And so we are pretty confident that on this market segment, there are no other many competitors.

Question and Answer Operator Message
Operator (Operator)

This was the final question. And if you have any follow-up, please contact Saipem's Investor Relations team. Thank you for joining and now you may disconnect.

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