Eneti Inc. (NYSE:NETI) Q2 2022 Results Conference Call August 3, 2022 11:00 AM ET
Company Participants
James Doyle – Head, Corporate Development and IR
Emanuele Lauro – CEO
Robert Bugbee – President
Cameron Mackey – COO
Hugh Baker – CFO
Sebastian Brooke – COO, Seajacks
Conference Call Participants
Greg Lewis – BTIG
Ben Nolan – Stifel
Turner Holm – Clarksons
Liam Burke – B. Riley FBR
Operator
Good day and welcome to the Eneti Inc. Second Quarter 2022 Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mr. 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. Second Quarter 2022 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 second 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, August 3, 2022. It 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 & Presentations. These slides will also be available on the webcast. After the presentation, we will go to Q&A.
Now I’d like to introduce our Chief Executive Officer, Emanuele Lauro.
Emanuele Lauro
Thank you, James. And good morning and afternoon to everyone. Welcome to Eneti’s second quarter 2022 results and the first profitable results as a wind turbine installation vessel company. Since November, we’ve increased our contracted backlog by almost $170 million. This is for 2022 and 2023.
In the second quarter, the company generated $61 million of revenue and in excess of $24 million of net income. This number excludes an additional $28 million quarterly unrealized gain in our investment in Scorpio Tankers. With the fleet fully contracted in the second and third quarter, the cash flow generation from these contracts further strengthens a conservatively levered balance sheet. In addition, this excludes the value and potential sale of noncore assets, which includes the NG2500 vessels. As far as our newbuildings are concerned, the construction in Korea is proceeding according to plan.
In addition, we have received proposals from several financial institutions about financing both newbuilding vessels, including a fully underwritten proposal, which leads us to believe that we will secure attractive terms aligned and comparable with our existing facilities. [indiscernible] will be more important. High global energy prices illustrate the risk of consistent underinvestment in energy. Renewable energy is critical to creating energy security and reducing global emissions. We expect the offshore wind market to expand to new markets and to accelerate, leaving us well positioned to capitalize on contracting our existing assets which are of high specifications and they are currently being built in Korea.
We are excited about the outlook for offshore wind and our role in the transition to a cleaner and more sustainable future.
I will now let Sebastian and James go through a brief presentation. Sebastian?
Sebastian Brooke
Thank you, Emanuele. Good morning, everyone. As mentioned by Emanuele, since November, Eneti has increased its revenue backlog by about $170 million for 2022 and 2023, taking into account all options. In November of last year, we did not have any contracted revenue [ by the ] NG2500s in 2022 or any contracted revenue for the Scylla and Zaratan through 2023. As previously disclosed, the company has now contracted 2 of its largest WTIVs, Scylla and Zaratan, through 2023; and is currently executing a significant pipeline of work for the NG2500s.
The Seajacks team has done a great job in securing employment of the existing fleet. And we’re happy to be able to report such positive news with regards to our project pipeline and that all 5 vessels in the fleet are currently employed in this third quarter. In February, the Seajacks Scylla arrived in Taiwan to start work on the very high-profile Greater Changhua project of Ørsted, where she’s installing 8-megawatt Siemens Gamesa turbines. She’s scheduled to complete the contract to Greater Changhua in Q4 of this year; and is then to mobilize from APAC to Europe, where she will commence its 2023 contract with Van Oord. Zaratan is currently working at the Akita Noshiro wind farm, where she’s making good progress installing 33 4.2-megawatt turbines.
After this, she’ll head to Taiwan to work on the Yunlin offshore wind farm. With regards to the NG2500s, Kraken is currently mobilizing for a previously announced contract to perform maintenance work on offshore platforms in the Southern North Sea, which start in the middle of August. Leviathan is currently performing accommodation services at an offshore wind substation and will then be mobilizing for a previously announced contract for decommissioning work in the Southern North Sea. Hydra is continuing its previously announced maintenance campaign for a major OEM in the Southern North Sea, which is expected to complete in Q3 of this year. It’s worth noting that Seajacks’ shore-based organization crews continue to conduct themselves in an efficient and, most importantly, safe manner.
And in spite of all of the challenges to the global supply chain of this year, Scylla and Zaratan continue to operate on their respective jobs with minimal disruption. Slide 8, please. One of the most interesting parts of the industry is the macro outlook, as offshore wind is expected to grow at a compounded annual growth rate of 14% through 2027. This growth is reflected in the high tendering activity that we continue to see across multiple regions involved in offshore wind, particularly the APAC, Europe and U.S. regions; and supports the view that demand for offshore wind services will continue to increase through the end of the decade and beyond.
Slide 9, please. While the demand for offshore wind continues to increase, additional supply has remained relatively subdued, which implies that the future is bright and that the market will continue to tighten in the coming years. While we believe that the best years are still ahead, we are very pleased with the contract coverage we have secured for ’22 and ’23 and note that we’ve been able to do so at increasingly attractive rates. We remain optimistic about the future, especially with regards to activity and how pricing will develop in light of the increasing demand; and the fact that we’re taking delivery of our 2 newbuilds, which are among the most capable planned or under construction, in Q4 2024 and 2025, which will set them up well for the forecasted growth of the 12-plus-megawatt turbines.
And with that, I’ll hand back to James.
James Doyle
Thank you, Sebastian. Slide 11, please. First quarter revenue was $61.2 million, an increase of [$43.1 million] from the first quarter. In addition, the company generated its first profitable quarter with $24.2 million in net income excluding unrealized gains. Revenue came in ahead of expectations as part of the Zaratan contract extension was recognized in the second quarter, in addition to payments related to previous claims from projects completed in 2021, additional [optional days] declared on the NG2500s and higher reimbursable costs such as fuel to customers.
The contracted revenue for the second half of the year now stands at $84.8 million; and $94.9 million, including options. Daily vessel operating expenses decreased on the Zaratan and NG2500s but increased on the Scylla due to higher COVID-related crewing and travel costs as well as fuel costs. We recommend using daily OpEx of $50,000 a day for the Zaratan and Scylla and $22,000 per day for the NG2500s in the third quarter. At this time last year, we announced our acquisition of Seajacks; and are pleased with the professionalism, commitment and expertise the Seajacks team has brought to Eneti. Next week, we expect to file an S-3 related to shares issued to the sellers of Seajacks as required by the acquisition documentation.
We do not have any information related to the future plans of the sellers regarding their remaining shares in Eneti. Slide 12, please. Our new $175 million loan facility completed the restructuring of the Seajacks balance sheet. During the quarter, we drew on our new credit facility and repaid the ING facility and company’s redeemable notes. Through the new loan facility, increased cash flow and a growing contractual backlog, the balance sheet continues to strengthen.
As Emanuele mentioned, we have received the fully underwritten proposal from financial institutions related to our newbuilds and feel confident that we will secure attractive terms similar to our current credit facility. To the bottom right, you can see the expected CapEx payments on our 2 newbuilding vessels by year as well as the expected drawdown on the vessels upon delivery. We expect the newbuilds to be financed at 60% of their contracted value. With that, I would like to turn it over to Robert Bugbee.
Robert Bugbee
Hi. Good morning, good afternoon, everybody. Thanks very much for your interest. I’d just like to point out a couple of things here. It’s that obviously we can look at this.
And we could look at the cash flows, et cetera. And we can look at the opportunity of the actual market growing in terms of the demand and the expected contracts that we’re ultimately going to get on the 2 Daewoo newbuildings. Another way we would be able to look at this is not necessarily through EBITDA or cash flow but a balance sheet that is — got a lot of liquidity in it and has a lot of — there’s not that much leverage in the balance sheet at all. And the company itself and the management itself is prepared to sell things when we have a situation as we have now where you’ve got an enormous discrepancy between the actual [steel] value of the assets and the actual share price. And I think, under the analysts that we’ve whether — that we’ve seen, read, net asset values tend to have a range anywhere between $13 and $17, $18.
So I’d just like to point that out. And with that, we’d just like to open up for questions, please.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from Greg Lewis with BTIG.
Greg Lewis
I guess I did want to touch on a little bit about the announcement around the NGX vessels, if you could provide us some color how you’re thinking about that. Robert, you mentioned the NAV comment, but also I guess I’m kind of curious how that market has developed just given — I realize that they don’t directly — aren’t viewed directly as oil and gas assets, but from a derivative perspective, that absolutely impacts them. Just kind of talk about the decision to kind of classify those as noncore and, I guess, look to monetize them. Any color around that would be helpful.
Robert Bugbee
Cameron, would you like to take one?
Cameron Mackey
Sure. Thanks, Greg. Obviously the market conditions for those assets, which have a fair bit of employment in oil and gas-related work, has tightened significantly over the last several months, so we’re seeing increased inbound inquiry not just for employment but for longer-term employment and also sale, but I revert back to what Robert mentioned, which is there’s such a discrepancy between the share price and what the vessels can earn and that we are currently in the early stages of evaluating either selling or putting out on a longer-term business to try and capture that spread. We don’t expect this to happen overnight. It’s the early stages of a process and we would be in a position to report back as and when we have something to say.
Greg Lewis
Okay, great, okay. So this is — okay, so it’s [indiscernible], okay. So it’s going to have to be a little bit of wait in the year. And then clearly I think one of the drivers is that people are waiting for — we’re always — investors and analysts alike are always looking for potential catalysts. I guess more recently there’s been some contracts for — in out-years for vessels that are under construction.
Could you provide some color around how that market is developing? And any kind of thoughts around when we could see whether it’s Eneti contracting some of their newbuilds or other newbuilds out there being contracted? Any kind of overview of that activity in market you could give us, I think, would be pretty helpful.
Hugh Baker
[Do you want me to take that], Sebastian? [Or do you want to take this]?
Sebastian Brooke
[indiscernible] — yes. I think that the fact that you are seeing a number of contracts being announced on newbuildings so far out in time prior to their delivery just shows that there is a tightening in that market; and there’s a concern about available supply as we move through kind of delivery of our vessels and into ’25, ’26 and what have you. With regards to timing of when we may be awarded a contract, that really remains down to the procurement processes of our clients on our — kind of the — on the projects that we are most kind of focused on trying to get signed up, so I wouldn’t give a time frame on it, but I would say that activity continues to be high, which is obviously shown by the number of contracts that are being announced. And I think that our clients are expecting to announce kind of material contracts towards the end of this year and the beginning — through the beginning of next year. I’m not going to say that that’s when we expect to make an announcement, but it does give an indication of when we expect some of these processes to close.
Operator
The next question will come from Ben Nolan with Stifel.
Ben Nolan
Maybe if I could follow on a little bit with respect to Greg’s questions and the reclassification of the 2500s. And Robert, maybe going to what you had said that you believe that there’s a discrepancy between where the shares are currently being valued by the market versus where you believe that value to be. First of all, is your thinking here entirely, call it, an arbitrage-related thinking? Or are there other things that you would look to be able to redeploy that capital into? I don’t know, ordering other vessels or something like that if you were to sell assets. And then lastly, as part of that, is it fair to think that the STNG shares are part of that same asset base that might be available?
Robert Bugbee
I think that the — I think we’ll take the last one first. The STNG shares are obviously ultimately available, but the STNG shares are proving and we continue to believe will — are just an incredible investment. And STNG reported last week. And they — that market is very, very strong. It continued to move stronger since.
And we think that the — we don’t need the cash at the moment inside NETI for any reason. There’s no immediate opportunity of redeployment. Or then there’s no immediate requirement to have any liquidity. And the opportunity costs of selling STNG could be quite high. It’s you — of course, mathematically you could say, well, you can sell STNG shares and you can buy NETI.
I’m not quite sure that, that — NETI isn’t that liquid. It’s taken us ourselves quite a long time as insiders to buy the percentages that we have. So you have a situation where the stock is trading low, but the actual volume isn’t that high. So it’s not necessarily looking it that way. The actual idea of the NG2500s is that increasingly I think you’re going to get and we believe you’re going to get — investors that want to see a fully renewable company isn’t necessarily going to want a company like NETI going forward to be doing things in [ carbons ].
And so that will be a benefit as well. And then structurally, going forward after that, yes, we would hope for growth opportunities. And I think that now we’ve seen the offshore. We’ve seen the gulf — both gulf, like the Middle East gulf, the U.S. gulf, other areas in offshore, develop.
So this market is tightening, and so it would — could quite possibly represent a good time to sell. I think it’s as simple as that. And I think you would establish real worth in the company as well. So it’s more that rather than waiting. As Sebastian has said, you’re not quite sure when the opportune moment is to fix the 2 Daewoo ships, but rather than an investor having to wait for that as a catalyst, the sale of the NG2500s themselves could become a — like a catalyst before that time.
Ben Nolan
Okay, that’s helpful. I appreciate that color, Robert. And then for my second question, just to switch gears a little bit: You talked about 60% financing on the 2 newbuilds. First, does that assume contracts, or is that on an uncontracted basis? And when you are thinking about financing, does it make sense to wait until you do have something firmly in place? Because — or would it meaningfully impact the availability of [ debt financings ] [indiscernible] costs of that capital?
Hugh Baker
Ben, it’s a very good question. I think, firstly, we are running a finance process that is not reliant on a contract in place. We are obviously expecting the vessels to be employed. And certainly the lenders are expecting the vessels to be employed, but the nature of that employment is not specific and it’s not set in stone. I think we are — the proposals that we’ve received have been around 65%, and we’re looking at some of those proposals very seriously.
And those proposals don’t require specific long-term contracts. They do expect the vessels to be employed for their lifetime, and obviously the vessels need to make money during the period that they’re under finance. In terms of timing, I think — in terms of timing, our expectation is that the — by the — it’s going to take probably a year to get a ECA, export credit agency, financing of the vessels put in place. And certainly, within that time, we expect — and Sebastian has indicated that we’re certainly comfortable that the vessels will have employment.
Operator
The next question will come from Turner Holm with Clarksons.
Turner Holm
Congratulations on the first profitable quarter. I just wanted to — I wanted to check in on the newbuilds, maybe a question for Cameron here. Could you just give us an update and some color on construction progress and a little bit more on the delivery times? I guess the yard has had a few financial struggles, but kind of where are you all in terms of the newbuilds? Any color on that would be great.
Cameron Mackey
Thanks, Turner. Not much to report actually that — I’m not sure it’s fair to say the yard has had financial troubles. What they have experienced, of course, are some well-publicized labor disputes for some of their subcontractors; some uncertainty about their combination with one of their chief competitors, a business combination, but obviously, like the whole Asian shipbuilding complex, they are awash in highly profitable orders from conventional ship types like containers and tankers, so we aren’t concerned about their financial stability at all. We are much more focused on the on-time and on-budget progress of our vessels. And being highly specialized offshore vessels, they take on a certain, first of all, separation from the conventional shipbuilding docs and processes; and a higher status.
And also we are conveniently alongside and aligned with some major clients in oil and gas bespoke projects, so we feel actually quite confident in the progress, so far, the schedule and the ability of the yard to deliver these vessels as planned.
Turner Holm
Okay, good. So I guess, everything going to plan. And then Sebastian, perhaps I — just on the contracting outlook for the newbuilds, I guess, is we’ve been bidding into tenders for projects a couple of years out. Maybe up until most recent quarters, you were bidding against, let’s say, potential newbuilds wherever there is still time to build ships for these contracts, but I imagine now, just based on the most recent orders that we’ve seen, it’s probably 2026 or at least late 2025 type delivery times. Kind of how are the dynamics shaping up for the kind of time frame that you’re looking at around 2025?
And I guess, relevant to the projects that are looking to go into offshore execution in that period, like how does the sort of supply-demand balance look given that the order book for that period seems now pretty fixed?
Sebastian Brooke
Yes. I think — you’re right. I think, on the supply side, that time has basically run out to increase supply for those earlier projects. I think, on the demand side, it’s materializing in multiple regions kind of at different paces. So we’ve obviously had some announcements in Europe.
There are some additional projects that require vessels there, but also you start looking at the projects in Asia Pacific. As a local regional kind of hub, there’s very limited supply over there, Turner. And we’ve seen that from that Zaratan has benefited from that on the [ human ] side, but that — by extension, there are obviously opportunities there for the newbuilds, so I think that you have to look at the markets on a region-by-region basis. I think that the dynamics are different in each region, and I think the dynamics are positive actually in each region, obviously Europe more developed, Asia Pacific very limited demand. We’re obviously coming out of a yard in Asia Pacific, so could be well positioned for those projects.
And equally there are requirements coming out of the U.S. as well. So the market is tightening. And we just continue to see that kind of grow through the — right through to the end of the decade. I mean we’re bidding on stuff in ’28 at the moment.
And it’s not even on the supply side, but there are — it doesn’t even sound like there are people stacking up to build. They don’t have the operating platform, and that really matters. So yes, supply, relatively muted. And I think positive dynamics in each of the major hubs, but each of them have their own dynamics and could be stronger based on just limited supply. Did that make sense?
Turner Holm
And then if I just could circle back real quick to the potential sale process or the ongoing sale process for the NG2500s, just looking at the balance sheet. You all have about a little over $500 million in vessels, so PP&E on those vessels, excluding the newbuilds. Can you give us some sense of scale of what these NG2500s are in terms of that, a little over $500 million of asset value you have on the balance sheet?
Hugh Baker
Turner, I’m afraid we don’t break down the sort of book values of the individual assets, so I’m afraid I’m not able to do that.
Robert Bugbee
I’m not — yes, I’m not sure. I’m not sure that we would — I also don’t think it would be good for us to. You’ve got a market that’s changing, that prices are moving around. And I don’t think that we would want to start to, let’s say, [ put a price out there to bid ] against ourselves.
Turner Holm
Of course. And maybe I’ll just ask it in a simpler way. I mean, if you look at the market…
Robert Bugbee
And I’m fairly sure that Clarksons themselves would be able to provide a range. [indiscernible].
Turner Holm
Sure, but I guess it’s maybe just — okay. I mean, just very simply, I mean, I guess, relative to the market cap today, is it fair to say that any potential sale is significant?
Robert Bugbee
Any of the assets that we [indiscernible] are significant . The 3 NG2500s are [indiscernible] the stock in Scorpio Tankers is significant. That’s what I’m — that’s in simple terms what I was trying to explain earlier, that you’ve got a huge dislocation. I know that in the industry conventionally renewals are based off multiples related to EBITDA or future earnings, et cetera, et cetera. And that will come, but it’s partly explaining why as insiders we’ve continued to buy the stock on a very, very regular basis.
It’s we’re sitting here, saying to ourselves, well, we’re fairly confident with what Sebastian is saying, that Emanuele was saying that the market is improving, that the — actually supply and demand for the assets is strong over time. So those ratios will come, but in the meantime, what’s, let’s say, underpinning our own investment is a very, very unusually wide spread to NAV with a company that — you normally might, would see if a company has financial issues, not a company that has such a lot of liquidity.
Operator
The next question will come from Liam Burke with B. Riley FBR.
Liam Burke
You had some claims in the quarter from work on the NG2500s from 2021. Is this normal, or is there some anomaly? Or is that something we can expect in the future where you will realize revenue and then you get an additional pass-through or additional claim?
Hugh Baker
Liam, I mean, I think I can answer that as sort of straightforward as I can. It is pretty normal. And what we’re seeing is that we obviously enjoy contractual revenue. And we win business and we win contracts, and those contracts evolve over time. And they have longer durations and there is different rebilling, et cetera, so the various items that we’ve reported in this quarter are — certainly they’re not — they’re individually not repeatable, but they’re — as a trend, it is repeatable and not unusual.
Liam Burke
Great. And on the longer-term outlook for demand on the offshore wind turbines. A lot has happened, especially in Europe, with the supply disruption of natural gas and the increased use of coal. Since you began the move to offshore wind turbine installation, do you think Europe’s commitment to offshore wind has increased or decreased? Or how do you look at that change?
Sebastian Brooke
Can I just take a stab at that? I’ll just say that it’s one of the very few industries where the kind of macro revisions go up each time they’re republished, so I would say, over time, the market is strengthening. There’s a real commitment to offshore wind in Europe. And actually, on a fairly regular basis you read about established countries announcing that, in the next 5 or 6 years, they want an additional X gigawatts of capacity. So I think the trend was positive, anyway, and then with the recent disruptions, I think it strengthens further.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Emanuele Lauro for any closing remarks. Please go ahead.
Emanuele Lauro
Thank you very much, operator. We do not have any closing remarks at this stage, so thanks [ again for ] taking the time to be with us today. And we look forward to speaking to you all soon.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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