Eneti Inc (NETI) 2023 Q1 法說會逐字稿

Hello, and welcome to the Eneti Inc. First Quarter 2023 Conference Call. I would now like to turn this call over to James Doyle, Head of Corporate Development and Investor Relations. Please go ahead, sir.

Thank you for joining us today. Welcome to the Eneti Inc. First Quarter 2023 Earnings Conference Call. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Hugh Baker, Chief Financial Officer; Sebastian Brooke, Chief Operating Officer of S.JX. Earlier today, we issued our first quarter earnings press release, which is available on our website, enetiinc.com. The information discussed on this call is based on information as of today, April 27, 2023, and may contain forward-looking statements that involve risk and uncertainty. Actual results and events may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release issued today as well as enetiinc.com. SEC filings, which are available at enetiinc.comsec.gov.

Call participants are advised that the audio of this conference call is being broadcast live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at enetiinc.com and on the Investor Relations page under Reports and presentation. The slides will also be available on the webcast. After the presentation, we will go to Q&A. Now I'd like to turn the call over and introduce our Chief Executive Officer, Emanuele Lauro.

Thank you, James, and welcome, and thank you for joining us today to all. In the first quarter, the company generated $13.8 million of revenue and a loss of $17.6 million. Our business is seasonal, and we optimized the seasonality in the first quarter to perform necessary maintenance of the fleet ahead of what's going to be a busy remainder of the year. Looking forward, revenue is expected to increase throughout the year as our vessels begin employment on several contracts. Our 2 largest assets, Scylla and Zaratan are contracted for the remainder of the year, and there is availability for additional employment on the MG2500s, which we're currently working on. We are now starting to actively market for sale the G500 whilst we are benefiting from higher day rates on these assets. Until now, we had opening said that we thought these were noncore assets to our fleet. More or less a year into the statement, the market has favorably developed, both on the rate and utilization side. And as I just mentioned, we have decided to actively market the vessels for sale going forward.

The outlook for WTI continues to strengthen, and we are optimistic about the opportunities for the existing seats as well as the negatives. Significant demand for offshore wind and constraints in the WTI supply creates tremendous potential for increasing day rates, increasing cash flows and increased returns. We have announced last week our MOU with Transocean to engage in offshore wind foundation installation services. This potential joint venture combined with active experience through CJX of installing over 500 foundation components in Europe and in Asia. Together with Transocean, 300-plus regears of experience in offshore drilling and convergence. There is no equity requirements from Eni, and we are excited about working with the best-in-class operator and owner in the offshore industry. Much of the progress we are making has yet to be realized, but benefit the company in the coming years, and we are excited to capitalize on these opportunities. On the good news ahead as well as our role in the transition to a cleaner and more sustainable future.

Thank you all for your support, and I will now turn the call to Sebastian. Sebastian, please.

Thank you, Emanuele. Slide 7, please. Just to introduce myself, I'm Sebastian Brooke, the COO and one of the founders of Ceja, which has been installing wind turbines for top-tier clients since 2009, and we're the operating platform of Eneti, and they are responsible for operating a contracting for 3 to 5 CJX vessels that are currently number water and the 2 next-generation new built installation vessels, which are scheduled for delivery in the second half of 2024 and the first half of 2020, respectively. We've been building backlog over the past 2 years, and you can see from the chart on the bottom left that we have not only been successful in building backlog, but also in increasing revenue through extensions of contracts beyond their original contractual duration. It was a very big in 2022 for CCA. So we used any idle time in Q1 for necessary maintenance on the fleet and to mobilize and reposition equipment for our contractual commitments in 2023.

During the first quarter, Seller transited from Asia to Europe, and after undergoing maintenance and preparation for our contract with an ore is now on higher. As of today, she can saw pre-wind turbines at Atlantic Coast West inform. During the first quarter, Vale dam completed maintenance at ST Marine in Singapore and finalized mobilization of turbine installation campaign at ilani farm located offshore Taiwan. All 3 MG2500s will begin worse in this quarter. The biotin is currently on contract and performing hookup and commissioning services of an offshore wind substation for a leading developer in Northwest Europe. Cracking is currently on contract performing repairs and maintenance at an offshore wind farm offshore France, and Hydro is facilitating decommissioning of oil and gas infrastructure in the Southern North Sea. There are also numerous conversations with clients that could lead to additional employment in 2023.

If you recall a few years ago, there were 6 vessels similar to the -- or the NG2500-class operating in the North Sea. But today, there are only 4, which has effectively a reduction in supply by FERC. We were optimistic that rates and utilization for these vessels would increase, and I'm pleased to report that they have. With regards to the NG2500 demand, we are seeing increased demand in all areas, all core markets as the smaller turbines approach 10 years in the water and require increasing levels of maintenance. The number of substations requiring hookup, commissioning and maintenance in the North Sea continues to increase in line with installed capacity the energy crisis has prompted utilities and operators to maintain the critical gas infrastructure in the region.

Slide 8, please. Offshore wind is a growth industry. And while the analysts may have different views on exactly what the growth rate is, they are all agree that growth is robust and any revisions to forecasts tend to be up rather than flat or down. This will lead to increasing demand for our installation vessels and create a favorable rate environment for our services. While the turbine installation work is a critical part of the offshore wind supply chain represented a relatively small portion of the overall cost for developers, around 2% of the total spend. So we do not believe that increases in vessel rates were jeopardize the overall viability of in farms.

Slide 9, please. As you can see from the graph, the WTIB market is forecasted to be undersupplied through the end of the decade. These fundamentals will provide opportunities not only to be enacting new build Meti and Cyren but also to Scylla and Zaratan. Eneti's newbuilding, Cyren and Meti, are scheduled to deliver in the second half of 2024 and first half of 2025, respectively. We have previously announced the initial employment contract for Meti, which is expected to be between 226 and 276 days and generate approximately EUR 60 million to EUR 73 million of net revenue after forecasted project costs. This would equate to a day rate of EUR 260,000 per day after project costs, which reflect the value capability and flexibility that our next-generation new bad assets provide our customers.

We've not yet announced a contract for Cyren but continue to work towards securing a made contact. For these new buildings, we continue to focus on finding the right contracts and high-cap vessels that will enable us to generate the most attractive returns to our shareholders. Contracting activity is high. We continue to see high levels of interest across our fleet, that works across all geographies with inquiries running from 2024 to the end of the decade as clients look to score capacity early in a market that is predicted to have a shortage of vessels as we move into the second half of this decade. We're in advanced discussions with clients about future work and are looking forward to announcing these to the market once finalized. With that, I'm going to hand over to James Doyle.

Thank you, Sebastian. Slide 11, please. Third quarter revenue was $13.8 million, a decrease from the fourth quarter as the fleet optimized off-hire time to perform necessary maintenance after a busy 2022 campaign. Quarter-over-quarter, daily vessel operating expenses declined for Scylla and Zaratan and were slightly higher for the NG2500. The safety of our seafarers reliable operations and delivering high-quality service to our clients remain our top priorities, but we are always working to manage costs as efficiently as possible.

And we expect a further decline in operating costs in the second quarter and we recommend using $45,000 per day for the Scylla and Zaratan and NG25,000 per day for the NG2500. Last quarter, we anticipated $16.1 million in project costs for the full year 2023 and as of today, expect $13.6 million for the year. The difference is primarily due to fuel savings from lower bunker prices, specifically on Colas repositioning voyage from Asia to Europe. Specifically, to Q1, we benefited from the timing of certain project costs, which were expected to occur in the first quarter and have moved to subsequent quarters.

Slide 12, please. To date, we have paid almost $100 million of installment payments on our new builds. And as previously announced, we have received an underwritten proposal for $436 million to finance our new builds, which we are focusing on finalizing. Net of newbuilding finance, the company has $120.3 million in remaining CapEx for new building program. To the right, you can see our CapEx schedule for our 2 newbuilding vessels.

Slide 13, please. As Sebastian mentioned, the initial contract on our first new build as is at EUR 250,000 per day or $280,000 per day. And as you can see from the sensitivity chart, assuming 85% utilization, this would translate to $70.4 million in EBITDA or a 21% cash-on-cash return. This day rate confirms our thesis increased demand for offshore wind and constraints in the supply chain, which have the potential for a higher rate environment. And with that, I'd like to turn it over to Q&A.

(Operator Instructions) Our first question comes from Ben Nolan from Stifel.

So I was going to -- I have a couple, hopefully, that's okay. The first relates -- I was hoping that maybe you could give a little bit more color as it relates to the Transocean JV. I know that you mentioned there was no equity requirement. Is this as you envision is this just sort of a services provided sort of thing? Or in the end of the day, I mean, will you have some capital invested in this. Just curious if you can kind of flesh out what -- how you envision it playing out to the extent that it moves into a formal agreement.

Ben, Emanuele here. I'll start and then my colleagues can ask. It's not that we wanted to be cagey. -- just that we have started this cooperation, which we've been discussing for a number of months with Transocean at this stage, it's difficult for us to detail more than what we said because we are working on putting together a joint venture, and this is why we have started from the MOU. As I said, not wanting to take things away, but I wouldn't know what we say more than what we said already. So it is -- yes, it is services potentially and then see what the opportunity will bring. For the time being, that's what we have. I'm not sure if Sebastian or anybody answers anything to add to this.

No, I think that's Emanuele sums it up. It's -- it's a very good combination of like Emanuele I said before, kind of first-in-class floating foundation versal operator or floating vessel operator and as with our previous transport installation activities and there are no obligations to provide equity in any deal, but there will be lots of open doors in the future as and when we get a contract.

Okay. I appreciate it. We'll be watching for that. My second question relates to if you could maybe speak to the contracting market. I mean, obviously, we've seen even recently with some of your competitors' contracts where the day rates are consistently moving higher. And one of the things that I think often happens in markets where day rates are moving higher, is that you begin to see durations, contract durations lengthen. I'm curious if you're seeing that at all, is there any potential for the new build that it's -- you might possibly be able to get something that is longer than the traditional whatever 9 to 12-month duration.

It's a great question. I think that there's no doubt that the trend is towards longer contracts. It's just difficult to guess when those will hit. And it's driven by just the tightness of supply. The more we speak to our clients, the more that they are concerned about availability of vessels. And there are -- there have been discussions about longer-term commitments, which won't be securing tonnage on a project-by-project basis, but more to be able to execute a pipeline of projects. So without being more specific than that, you're actually right, the fair observation, the market tightens, they're going from short-term contracts and longer-term contracts. And I think from a contracting perspective, we're all aware of the benefits that brings. But the overriding method for me is that it's a tightening market, and that is going to help improve over time utilization rates and the general contracting environment.

Our next question comes from Vikram Bagri from Citi.

I understand the secrecy around the potential JV with Transocean, but I was wondering if you can frame the time line for this JV. How much time will you guys spend on looking for market potential and getting indications of interest from your customers when the JV could be -- could come into force. And I believe about -- it will take about 36 months off the bat to repurpose the vessels. If you can just like expand on the signposts we should look at the frame the time line for this year, we.

Yes. Sure, it's Sebastian here. So just from my perspective, the draw of the agreement is that there aren't actually any milestones. So it's -- we're currently speaking to all of the major clients and based on their response or an accept from any of these developers, then we'll move on from there. So it's very difficult to say that the floating foundation market is as tight or tighter than the turbine installation market. So our clients are very motivated to engage in those discussions and progress them as soon as possible. But again, it's very difficult to answer. I'm not -- again, using Emanuele later, but not trying to be cat, but it really is a kind of sequential process there. So we start with the MOU, then we work out what the specific requirements are from the clients. Once they're in a position to give us what we want, then we'll split the scope and then we'll see where -- what opportunities arise from there. So again, it's just a sequential process, so difficult to give a firm time line.

Understood. And then on the existing assets, can you talk about the M&A landscape and potential for M&A related to your 2,500 vessels. Does it make sense to -- if the market is robust to sell those vessels and focus on the key assets, how do you see the M&A landscape today.

Sebastian, you want to take it or should I? Thanks for the question. So you're referring specifically to the 2,500 on the M&A front or in general. Sorry.

2,500 in specific.

Okay. On the 2,500 there are a number of operators, mainly Middle Eastern players that given the tightening of the oil and gas markets and the amount of money invested in the area are actually looking at these vessels. We haven't been focusing to tell you the cut on potential M&A transactions on the 2,500. So it's a little bit difficult for me to tell you whether we would consider looking at business combination or using these assets for a potential entry into another -- or specifically the oil and gas. I do not think so though. I think that the beauty of -- and the reason why we would consider these assets to be noncore is actually because we want to keep the clean renewable side for MF and CX, and this is the reason why we will be looking at divesting from these vessels. So on the 2,500, I'm sorry to not be giving you an exciting answer, but I do not see much M&A activity possible there. I think a straight sale is what we will pursue.

Great. And then finally, on housekeeping. I saw the SG&A dollars went down sequentially. Can you talk about what the drivers were? And if this is going to be the run rate? Or there were some onetime items in first quarter or fourth quarter that led to the decline in G&A dollars?

Vik, we would expect that G&A remains similar to prior quarters, somewhere in between this quarter and previous quarters.

Our next question comes from Liam Burke from B. Riley.

Sebastian, you mentioned in your prepared comments that there's a lot more interest in the smaller vessels, the NG 25 100s. Is that more interest on the oil and gas side? Or are you seeing a heavier interest in the offshore turbine maintenance?

To be honest, it's kind of across the board. I -- it's -- the number, like I said in that piece, I mean, if you look at what they're doing at the moment, we've got one which is hook-up and commissioning of an offshore substation. You've got one which is doing some maintenance work on transition pieces in France. And then you've got one vessel that's focused on the decommissioning of an oil and gas market and oil and gas field in the Southern North Sea. I think that actually the trend will be towards just increased maintenance as the installed capacity gets older. And there's also a big backlog of substations going in between now and the end of the decade, which are planned and will go ahead. So there's a split there, difficult to guess. And yes, and we just -- yes, and I expect that mix to carry on for the foreseeable future.

And on the new builds, you announced a 1 contract for the first new builds. Can you get any sense as to the degree of interest for additional contracts on the first or any interest on the second?

Yes. I mean I've got to say that it is from a contract point of view, it's a great market to be in. We had a number of years look 3 to 5, 6 years ago, which were, as I said before, but it's a very European-centric market. It was very competitive. And now just all of the fundamentals have changed. So there is very high interest in both vessels. We're talking to people about contracts throughout the end of the decade. We're talking about multiyear -- potentially multiyear maintenance contracts going forward. Everything is geared towards growth and kind of exciting years ahead.

So we have a lot of interest, both on Meti and Cyren and as we said before, we're really focused on finding the right contracts for those vessels, the contracts that we think give our clients the capabilities they require. So since the Changhua contract in Taiwan. And the reason we're doing that is because it's easy for them to justify a wait if it's being used to gate capacity, it's easier for them to just buy a rate that gives us an attractive return to our shareholders. So we haven't changed our philosophy. We're not waiting to be the last taxi cab on the rank, which is really focused on finding the right contracts for those vessels. That activity is very high, very high.

Our next question comes from [Rod Harvison from Clarkson Securities].

So first, I want to touch a bit upon the drillship conversions. So looking back at history conversions of older vessels could entail some risk of cost and tumors. And I know it's still very early, but can you elaborate a bit on how you're working with Transocean and potential yards in these early stages to mitigate these risks?

Sure. So it's early days in the MOU. So we're trying to -- before we get into that, we need to work out what the specific opportunities, what the timing is. The how they let Transocean speak themselves, but they have they've done a lot of investigation into shipyards and pricing, what have you. And the joy of having them as a partner to be really honest, is that they have built so many highly complex some date generation or seventh-generation drill ships and I don't see the shipyard portion as creating as much of an issue for them or even any issue, given their experience compared to people who are doing a one-off or aren't familiar with that market or what have you. So I totally take the point that historically, if you're taking a very old hull and converting it, primarily people do that into drill ships rather from drilling into construction. So I'd far rather be doing it from people or letting vibration work and drilling to construction and going from construction to drilling, as you see. So it's the right way around with the right partner. And I think that, that risk is mitigated by those measures.

And on -- again, I guess it's early, but on operational efficiency of converted to compared to a specialized new build, how are you thinking around that?

What I'm thinking is it's going to be one of the most capable vessels in the market. So I think it will speak for itself.

We have a question from Adam Forsyth from Longspur Capital.

Just slightly general one for me. Just obviously, the inflation Reduction Act is bringing a lot of interest in demand in the U.S. And I just wonder where your thinking is around that, particularly given your previous relationship with Dominion. And I think I'm right in saying your decision not to go ahead with the Jones at vessel about a year ago. How's your thinking changed in any way? And just how do you see that going forward? Thanks.

I think that we keep a close eye on the American market. I think that we've already got a toehold in there, as you referenced, is not bit a toehold. We've been looking at it for 7 years, 7 or 8 years. We've got a relationship through Dominion. We are very close to the dynamics in the U.S. market, and that allows us to keep us setting it for opportunities. And as and when the opportunity comes up, we'll look at developing it. But it's -- we're in it, we're close enough to it to understand it. And like I said, I think that's important to you can set the opportunities as and when they come along.

And this concludes our question-and-answer session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

Thank you. We don't have any closing remarks. I appreciate everybody's time and look forward to speaking with you all in the next few days or weeks. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.