Eneti Inc. (NYSE:NETI) Q4 2022 Earnings Conference Call February 9, 2023 9:00 AM ET
Company Participants
James Doyle – Head of Corporate Development & Investor Relations
Emanuele Lauro – Chief Executive Officer
Sebastian Brooke – Chief Operating Officer of Seajacks
Cameron Mackey – Chief Operating Officer
Hugh Baker – Chief Financial Officer
Conference Call Participants
Greg Lewis – BTIG
Liam Burke – B. Riley
Operator
Hello, and welcome to the Eneti Inc. Fourth Quarter 2022 Conference Call.
I would now like to turn the conference over to James Doyle, Head of Corporate Development and IR. Please go ahead sir.
James Doyle
Thank you for joining us today. Welcome to the Eneti fourth 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 fourth 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, February 9, 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 introduce our Chief Executive Officer, Emanuele Lauro.
Emanuele Lauro
Thank you, James. And welcome everybody to our fourth quarter and full year 2022 results. In the fourth quarter, the company generated around $46.5 million of revenue and around $12 million of net income, which is a significant year-over-year improvement. 2022 was a profitable year for Eneti. We’ve generated around $200 million of revenue and more than $100 million in net income. This includes a realized gain on the divestiture of the STNG investment.
It was also a productive year. We confirmed our thesis, significant demand for offshore wind and constraints in the WTIV supply create tremendous potential for increasing day rates, cash flows and returns in this space. In December, we’ve announced the initial employment contracts on our first newbuilding vessel, a leading day rate in our industry and one, we feel reflects the tightening market for our assets that we are experiencing. We are in discussion to secure the initial employment contract for our second newbuilding, which we’ll deliver in 2025. And at the same time, we continue to build our backlog, even on our smaller assets with the three NG2500s, which are experiencing an increase in both, utilization, as well as day rates.
Our balance sheet is in a much stronger position than it was at the beginning of — or a year ago. In 2022, we completed the restructuring of the Seajacks’ balance sheet, with a new loan facility, which reduced the company’s overall leverage, as well as its borrowing costs. Through strong cash flow from our existing asset base and the sale of our investment in STNG, we have maintained a healthy liquidity position. And today, with €130 million in cash and a conservative leverage, we feel well positioned to capture the opportunities that 2023 will present to us.
We are now focusing on closing our previously announced underwritten proposal for a €436 million loan facility to finance up to 65% of the purchase costs of our newbuilding assets at Daewoo. At the same time, as mentioned a minute ago, we’re looking at securing initial employment on our second newbuilding. And once these two milestones will be achieved, I expect the company to start looking at the next opportunities and focus on further development.
Much of the progress we are making today has yet to be realized, but it will greatly benefit the company in the coming years. We remain and are excited to capitalize on these opportunities, the good news ahead and our role in the transition to a cleaner and more sustainable future.
Thanks for your time. My opening remarks are over and I will now turn the call to Sebastian and James which will walk us through the slides material. Sebastian or James?
Sebastian Brooke
Great. Thank you, Emmanuel. Jay, if we could go to slide 7 please. As Emmanuel indicated, I’m Sebastian Brook, I’m the COO of Seajacks, which has been installing wind turbines since 2009. Seajacks is the operating platform of Eneti and is responsible for operating and contracting the fleet of five vessels that are currently on the water and the next two 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 busy building backlog over the past two years and you can see from the chart on the bottom left that we’ve not only increased revenues through new contracts, but also through extensions of contracts beyond their original contractual periods.
In Q4, we negotiated extensions for one NG2500 class vessel, which has resulted in additional revenue generation of €2.9 million over the fourth quarter of 2022 and first quarter of 2023. In addition, we extended the contract on the Scylla, which resulted in additional revenue generation of €2.6 million in the first quarter of 2023.
The Gantt charts on the right-hand of this slide, shows that employment has already been secured for our two installation vessels Scylla and Zaratan through the end of 2023 and we have numerous conversations going on about potential follow-on work in Europe, APAC and North America for 2024.
The outlook for the smaller vessels remains very positive. And while the NG2500s are no longer installing turbines the demand for turbine maintenance, hookup and commissioning of offshore wind substations and the maintenance and decommissioning of gas platforms continues to increase.
Case in point, during Q4 we signed two new contracts for one of the NG2500 vessels for between 75 days and 102 days of employment, which will generate between approximately $5.7 million and $7.1 million of revenue in 2023.
We continue to benefit from the reduction of supply of NG2500s and similar units in the North Sea in recent years. You may recall that just a couple of years ago there were six similar vessels operating in the region, but this number has reduced to four. Improvements on the demand side stem from the fact that many of the smaller turbines are approaching 10 years in the water and require increasing levels of maintenance, the number of substations requiring hook-up commissioning and maintenance in the North Sea continues to increase in line with installed capacity and that the recent energy crisis has prompted utilities and operators to maintain the critical gas infrastructure in the region.
Slide 8 please. Eneti’s core market is wind turbine installation and based on industry fundamentals the outlook here is bright. Why is that? Firstly, we are operating in a growth industry. While analysts may have different views on exactly what the growth rate is they’re all agreed that growth is robust and the revisions to forecasts are up rather than flat or down. This will lead to an increasing demand for installation vessels.
Secondly, there are significant barriers to entry. So the increases in supply are relatively muted and typically limited to companies with an existing footprint in the offshore wind industry.
Thirdly, CapEx associated with WTIV installation is relatively low around 2% of the total spend of an offshore wind farm. So increases in day rate are not going to jeopardize the financial viability of the wind farm.
Eneti is well-positioned to benefit from these positive market fundamentals not only with Scylla and Zaratan, but also the two newbuildings that are scheduled for delivery in 2024 and 2025.
Slide 9 please. As we mentioned, Eneti’s two newbuildings are scheduled for delivery in the second half of 2024 and the first half of 2025, respectively. As Emmanuel mentioned, we signed the initial employment contract for a newbuild, which will start early in 2025. The contract will be performed by the company’s first newbuild vessel Nessie, which will be delivered in the fourth quarter of 2024.
The engagement is expected to be between 226 days and 276 days and generate approximately €60 million to €73 million of net revenue after forecasted project costs. This equates to an effective day rate of €260,000 per day after project cost. This contract confirms the value capability and flexibility that these newbuild assets provide to our customers.
We are obviously in contractual discussions for our second newbuilding and believe that market fundamentals will enable us to deploy Siren on attractive terms.
As for the longer term, contracting activity remains high for the newbuildings and we continue to see serious interest for work in Asia-Pacific, Europe and the US through to the end of the decade. Clients continue to 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 remain focused on finding the right contracts for these highly capable vessels and we believe that, this strategy will enable us to generate the most attractive returns for our shareholders.
And with that, I’m going to hand over to James Doyle.
James Doyle
Thank you, Sebastian. Slide 11, please. Fourth quarter revenue was $46.6 million, which was higher than expected and the result of optional days being exercised, as well as extensions of contracts that were set to finish during the fourth quarter. Given the additional operating days and the extensions, $5 million of project costs that were expected to occur in Q4 will occur in Q1 this year, as these vessels continue to work at the end of the year.
We expect $9.7 million in project costs in the first quarter. Q1 is a slower part of the year and we expect $9.4 million in revenue during the first quarter, which includes optional days that have already been exercised by the customer.
For the first quarter, we expect higher OpEx and would recommend using a daily OpEx of $65,000 on the Scylla; $52,000 a day on the Zaratan; and $30,000 a day on the NG2500s. The increase in OpEx is due to maintenance, which was postponed as a result of extensive work history on the vessels throughout 2022. As Emmanuel mentioned, 2022 was a profitable year.
Slide 12 please. The company generated almost $200 million in revenue, and $63.3 million in operating cash flow. Excluding, the realized gain on the STNG shares, the company generated $85 million and adjusted EBITDA of 42% EBITDA margin, and $49 million in net income. It was also a productive year.
Slide 13 please. From September 2021, the company refinanced all the legacy debt inherited from our acquisition of Seajacks. We reduced the leverage from $198 million to $66 million today, lowering our borrowing costs and simplifying the balance sheet with one loan facility. Our balance sheet continues to improve and we are pleased with the conservative leverage and a healthy liquidity position.
Slide 14, please. To-date, we have paid almost $100 million of installment payments at our newbuilds. On the financing side, we have received an underwritten proposal from Credit, Agricole and SocGen for a $436 million term loan facility or 65% purchase cost of the 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, the company has $99 million in CapEx payments this year.
Slide 15 please. December 2022, we announced the first employment contract on our newbuild, which equates to a day rate of €265,000 per day or $280,000 per day at today’s exchange rate.
To the right is a newbuild sensitivity analysis, at 85% utilization for the year a day rate of $280,000 per day would equate 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 have the potential for a higher rate environment. We are both excited and focused on securing the employment contract for our second newbuild.
And with that, I’d like to turn it over to Q&A.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]
The first question today comes from Greg Lewis with BTIG. Please go ahead.
Greg Lewis
Yes. Thank you and good afternoon and good morning, everybody. And congratulations on the contract for the first newbuild the Nessie. Sebastian, I was hoping you could talk a little bit more about potential opportunities for the second vessel and really kind of looking for an overview of what that newbuilding market looks like. Clearly Eneti has a vessel. There’s a couple more but not a lot. Could you kind of like give talk a little bit about the broader strokes of how the offshore market is shaping up for 2025 and how you’re thinking about that?
Sebastian Brooke
Yes. Thanks for the question. So I think we’re in part of a structural change where as I said previously we’ve been in this kind of two-dimensional European market for the prior decade. And we’re now seeing demand coming from kind of numerous regions, Asia Pacific, multiple regions in Asia Pacific, the US, Europe, and every month we hear about another country that has kind of aspirations in offshore wind.
And I think as part of that the longer-term kind of macro top-down picture is very positive. And so the level of inquiries that we see continues to increase. And again, just from a top-down approach, I think that the fundamentals are very, very strong, and that manifests itself by clients looking to secure capacity earlier, because they may be concerned that they won’t be able to meet their own time lines and again, just strengthening fundamentals for us.
Greg Lewis
And just under that backdrop and I think Emanuele talked about the future opportunities. As we think about the ability to add capacity realizing it’s early 2023. Could you talk a little bit about if one were to order a newbuild WTIV, clearly the prices you paid were pretty attractive. Could you talk a little bit about maybe where current pricing is on newbuilds today? And then where we should think about those delivery windows potentially being.
Emanuele Lauro
Sure Greg. Cam, do you want have a go or shall I?
Cameron Mackey
Happy to Emanuele. Greg, since sort of the start of the pandemic and all the inflationary pressures around shipyards, you would have expected to see prices increase by somewhere between, I don’t know, 20% to 25% and the delivery positions move out now to somewhere late in 2026 or even 2027.
Greg Lewis
Okay. Okay, perfect. Thank you for that. I guess, I will turn it over. Thank you, guys for the questions.
Cameron Mackey
Thanks, Greg.
Emanuele Lauro
Thank you.
Operator
The next question comes from Liam Burke with B. Riley. Please go ahead.
Liam Burke
Thank you. Your three smaller vessels are seeing improving utilization rates, especially looking into 2023. In terms of their strategic value as assets, is there any change on how you currently view them?
Hugh Baker
Hi. Thanks for the question, Liam. There is no change from what we have discussed before. We remain open to explore alternatives on the assets. The good news is that in the — whilst we are doing that the market fundamentals have improved and so utilization and day rates have. So directionally the market is going up and this enhances and gives us more flexibility in the way we’d like to — or we will be able to look at divesting from these assets which we have identified as non-core.
Liam Burke
Great. And on the macro front, in Europe it seems that permitting had been a big gating factor in the development of some offshore wind farms. There was some discussion that the EU is now streamlining that process and making it a little faster to get permitting. Do you see that as pulling in or providing additional opportunity on European offshore wind?
Sebastian Brooke
Should I take a go at that Emanuele?
Emanuele Lauro
Please Sebastian, thank you.
Sebastian Brooke
I think, generally, from a macro perspective, the amount of activity that we see at the moment kind of underpins not our story but our industry as installation vessel owners. So there’s significant demand for the foreseeable future.
And that for every decision such as the used decision on accelerating the permitting you’re just looking at kind of increased demand. So what’s already an attractive market for us in a way becomes even stronger. And I know that permitting has been an issue for actually many countries.
There’s, some people making sure who are trying to streamline theirs as well. But again, that’s just a process and that’s a process of making their permitting more efficient and to get these wind farms online quicker. But again, that’s incremental demand. So to my point of view even regardless of that we see robust demand for the foreseeable future and that just layers on additional demand.
Liam Burke
Great. Thank you, Sebastian.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Emanuele Lauro, for closing remarks.
Emanuele Lauro
Thank you, Operator. I do not have any closing remarks. I just would like to thank everybody for your time today. And look forward to being in touch separately. Thanks a lot. Goodbye.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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