Earnings Transcript for NETI - Q1 Fiscal Year 2023

Operator: 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.

James Doyle: 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 Seajacks. Earlier today, we issued our first quarter earnings press release, which is available on our website, eneti-inc.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 risks 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 Eneti Inc.'s SEC filings, which are available at eneti-inc.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the Internet, and it 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 eneti-inc.com 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.

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 optimize the seasonality in the first quarter to perform necessary maintenance of the fleet ahead of what's going to be a busy reminder of the year. Looking forward, revenue is expected to increase throughout the year as our vessel begin employment on several contracts. Our two largest assets, Scylla and Zaratan, are contracted for the reminder of the year, and there is availability for additional employment on the NG2500s, which we're currently working on. We are now starting to actively market for sale the NG2500s whilst we are benefiting from higher day rates on these assets. Until now, we had openly said that we thought these were non-core assets to our fleets. More or less a year into this 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 WTIVs continues to strengthen, and we are optimistic about the opportunities for the existing fleets as well as the new buildings. Significant demand for offshore wind and constraints in the WTIVs 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 indenture combines an active experience through Seajacks of installing over 500 foundation components in Europe and in Asia. Together with Transocean's 300 plus rig years of experience in offshore drilling and conversions. There is no equity requirement from Eneti and we are excited about working with a best-in-class operator and owner in the offshore industry. Much of the progress we are making has yet to be realized, but we will benefit the company in the coming years. 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.

Sebastian Brooke: Thank you, Emanuele. Slide 7, please. Just introduce myself. I'm Sebastian Brooke, the COO and one of the founders of Seajacks, which has been installing wind turbines for top-tier clients since 2009. And we are the operating platform of Eneti and we are responsible for operating, contracting, the fleet of five Seajacks vessels that are currently on the water and the two next generation newbuild installation vessels, which are scheduled to deliver in the second half of 2024 and the first half of 2025, respectively. We've been building backlog over the past two years, and you can see from the chart on the bottom left that we've not only been successful in building backlogs, but also in increasing revenue through extensions of contracts beyond their original contractual duration. It was a very busy 2022 for Seajacks, so have 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, Scylla transited from Asia to Europe and after undergoing maintenance and preparation for her contract with Van Oord is now higher. As of today, she's installed three wind turbines at Hollandse Kust West wind farm. During the first quarter, Zaratan completed maintenance at SG Marine in Singapore and finalized mobilization for the Siemens turbine installation campaign at Yunlin wind farm located offshore Taiwan. All three NG2500 will begin working this quarter. Leviathan is currently on contract and performing hookup and commissioning services of an offshore wind substation for a leading developer in Northwest Europe. Kraken is currently on contract performing repairs and maintenance at an offshore wind farm offshore France. And Hydra is facilitating decommissioning of oil and gas infrastructure in the Southern North Sea. We are also in numerous conversations with clients that could lead to additional employment in 2023. If you recall a few years ago, there were six vessels similar to the or the NG2500 class operating in the North Sea, but today there are only four, which is effectively a reduction in supply by a third. 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, and 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 analysts may have differing views on exactly what the growth rate is, they are all agreed that growth is robust and any revisions to forecast 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, it represents a relatively small portion of the overall cost for developers around 2% of the total spends, so we do not believe that increases in vessel rates will jeopardize the overall liability of wind farms. Slide 9, please. As you can see from the graph, the WTIV market is forecasted to be undersupplied through the end of the decade. These fundamentals will provide opportunities not only through Eneti newbuilds Nessie and Siren, but also with Scylla and Zaratan. Eneti's newbuilding Siren and Nessie 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 Nessie, which is expected to be between 226 and 276 days and generate approximately €60 million to €73 million of net revenue after forecasted project costs. This would equate to a day rate of €260,000 per day after project cost, which reflects the value, capability and flexibility that our next generation newbuild assets provide our customers. We've not yet announced a contract for Siren, but continue to work towards securing her maiden contract. For these newbuildings, we continue to focus on finding the right contracts for these highly capable vessels that will enable us to generate the most attractive returns to our shareholders. Contracting activity is high and we continue to see high levels of interest across our fleets. We work across all geographies with inquiries running from 2024 to the end of the decade as clients look to secure 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.

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 higher 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 NG2500s. The safety of our sea fairs, 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 would recommend using $45,000 per day for the Scylla and Zaratan and $25,000 per day for the NG2500s. 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 Scylla's 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 newbills, and as previously announced, we have received an underwritten proposal for $436 million to finance our newbuilds, which we are focusing on finalizing. Net of newbuilding finance the company has $120.3 million in remaining CapEx for its newbuilding program. To the right, you can see our CapEx schedule for our two newbuilding vessels. Slide 13, please. As Sebastian mentioned, the initial contract on our first newbuild Nessie is at €260,000 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 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: We will now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Ben Nolan from Stifel. Ben, please go ahead.

Ben Nolan: Thank you. 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'd mentioned there was no equity requirement. Is this – as you envision it, is this just sort of a services provided sort of thing? Or in the end of the day, I mean, will you have some – 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?

Emanuele Lauro: Hi, Ben. Emanuele here. I'll start and then my colleagues can add. It's not that we want it to be cagey is just that we have started this corporation, 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 to say more than what we've 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 else has anything to add to this.

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

Ben Nolan: 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 newbuilds that it's – you might possibly be able to get something that is longer than the traditional whatever 9 to 12 month duration?

Sebastian Brooke: It's a great question. I think that there is 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 a 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, more to be able to execute a pipeline of projects. So without being more specific than that, you're absolutely right, a fair observation. The market tightens. We're going from shorter term contracts to longer term contracts. And I think from a contracting perspective, we're all aware of the benefits that brings. But the overriding message 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.

Ben Nolan: Okay. All right. Well, I appreciate it. I'll turn it over. Thank you.

Emanuele Lauro: Thank you.

Operator: Our next question comes from Vikram Bagri from Citi. Vikram, please go ahead. Vikram, are you muted?

Vikram Bagri: I apologize for that. Good morning everyone. I understand the secrecy around the potential JV with Transocean. But I was wondering if you can frame the timeline 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 after that to repurpose the vessel. If you can just like expand on the signposts we should look at the – frame the timeline for this JV.

Sebastian Brooke: Yes, sure. It's Sebastian here. So just from my perspective, the joy 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 when we get an acceptable contract from any of these developers, then we'll move on from there. So it's very difficult to give you a timing. But I can 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 – I'm – again using Emanuele's words, not trying to be cagey, 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 the – what opportunities arise from there. So again it's just a sequential process, so difficult to give a firm timeline.

Vikram Bagri: Understood. And then on the existing assets, can you talk about the M&A landscape and potential for M&A related to your 2500 vessels? Is – 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?

Emanuele Lauro: Robert, do you want to take it or shall I?

Robert Bugbee: I will. Thanks for the question. So you're referring specifically to the 2500s on the M&A front or in general, sorry?

Vikram Bagri: 2500 in specific.

Robert Bugbee: Okay. On the 2500s, 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 truth on potential M&A transactions on the 2500s. 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 non-core is actually because we want to keep the clean renewable side for Eneti and Seajacks and this is the reason why we will be looking at divesting from these vessels. So on the 2500s, 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 would pursue.

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

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

Vikram Bagri: Thank you. That's all I have.

Emanuele Lauro: Thank you.

Operator: Our next question comes from Liam Burke from B Riley. Liam, please go ahead.

Liam Burke: Thank you. Sebastian, you mentioned in your prepared comments that there is a lot more interest in the smaller vessels NG2500s. Is that more interest on the oil and gas side? Or are you seeing a heavier interest in the offshore turbine maintenance?

Sebastian Brooke: To be honest, it's kind of across the board. It's the number, like I said in that piece, I mean, if you look at what they're doing at the moment, you've got one which is for hookup 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 in – oil and gas field in the Southern North Sea. I think that 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 – then and we just – yes, and I expect that mix to carry on for the foreseeable future.

Liam Burke: Great. Thank you. And on the newbuilds, we have – you announced a one contract for the first newbuilds. Can get any sense us to the degree of interest for additional contracts on the first or any interest on the second?

Sebastian Brooke: Yes, I mean, I've got to say that it is from a contractors' point of view, it's a great market to be in. We had a number of years, start to look three to five, six years ago, which were as 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 multi-year, potentially multi-year maintenance contracts going forward. Everything is geared towards growth and kind of exciting years ahead. So we have a lot of – we have a lot of interest both on Nessie and Siren. 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 for instance, like the Changhua contract in Taiwan. And the reason we're doing that is because it's easy for them to justify a rate. If it's being used to its greatest capacities, it's easier for them to justify 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. We're just really focused on finding the right contracts. For those vessels the activity is very high, very, very high.

Liam Burke: Great. Thank you, Sebastian.

Operator: Our next question comes from [indiscernible] Clarksons Securities. [Indiscernible] please go ahead.

Unidentified Analyst: Hi, thanks for taking my questions. So first I want to touch a bit upon the drillship conversions. So looking back at history of conversions of older vessels could entail some risk of cost and time overrun. 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?

Emanuele Lauro: 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 opportunity is, what the timing is that has or let Transocean speak themselves, but 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 eight generation or seventh generation drillships. And of – I don't see the shipyard portion has creating as much of an issue for them or even any issue given their experience compared to people 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 haul and converting it, primarily people do that into drillships rather from drilling into construction. So I'd far rather be doing it from letting translation work from drilling to construction and going from construction to drilling, if you see what I mean. So it's the right way round with the right partner. And I think that that risk is mitigated by those measures.

Unidentified Analyst: And on again, I guess, it's early, but on operational efficiency have sort of converted drillship compared to a specialized newbuilds, how are you thinking around that?

Emanuele Lauro: All I'm thinking is it's going to be one of the most capable vessels in the market. So, I think, it'll speak for itself.

Unidentified Analyst: Okay. Thank you and that's it for me.

Operator: We have a question from Adam Forsyth from Longspur Capital. Adam, please go ahead.

Adam Forsyth: Good morning, slightly general one from me. Just obviously the Inflation Reduction Act. It's bringing a lot of interest in demand in the U.S. And I just wonder where you – where you're 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 Act vessel about a year ago. Has your thinking changed in any way and just how you see – how do you see that going forward? Thanks.

Sebastian Brooke: 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, so it's not even a toehold. We've been looking at it for seven years, seven or eight 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 a setting it for opportunities. And as and when the right 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 so that you can assess the opportunities as and when they come along.

Adam Forsyth: Yes. Thanks very much.

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

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

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