Subsea 7 : S.A. Announces Third Quarter 2019 Results

Subsea 7 S.A. Announces Third Quarter 2019 Results

Luxembourg - 7 November 2019 - Subsea 7 S.A. (the Group) (Oslo Børs: SUBC, ADR: SUBCY, ISIN: LU0075646355) announced today results for the third quarter which ended 30 September 2019.

Third Quarter highlights

• Adjusted EBITDA of $181 million and margin of 19% reflected good progress on certain projects but lower activity in Renewables and Heavy Lifting
• Order intake totalled $1.4 billion with six awards announced in the quarter; order backlog increased to $4.9 billion at the quarter end, of which $2.6 billion is booked for execution in 2020
• Solid financial and liquidity position with cash and cash equivalents of $367 million and net debt of $241 million including $368 million related to IFRS 16 lease liabilities at 30 September 2019
• New guidance: 2020 Revenue and Adjusted EBITDA higher than 2019 driven by a steady increase of activity anticipated in all our end markets

	Third Quarter		Nine Months Ended
	Q3 2019	Q3 2018	30 Sep 2019	30 Sep 2018
For the period (in $ millions, except Adjusted EBITDA margin and per share data)	Unaudited	Unaudited	Unaudited	Unaudited
Revenue	951	1,082	2,768	3,051
Adjusted EBITDA(a) (unaudited)	181	217	462	506
Adjusted EBITDA margin(a) (unaudited)	19%	20%	17%	17%
Net operating income	59	111	93	177
Net income	42	76	47	133
Earnings per share - in $ per share
Basic	0.15	0.23	0.17	0.44
Diluted(b)	0.15	0.23	0.17	0.44
			30 Sep 2019	30 Jun 2019
As at (in $ millions)			Unaudited	Unaudited
Backlog - unaudited(c)			4,917	4,594
Cash and cash equivalents			367	420
Borrowings			(240)	(246)
Net cash (excluding IFRS 16 'Leases' liabilities)			127	174
Net debt (including IFRS 16 'Leases' liabilities)			(241)	(221)

1. For explanations and reconciliations of Adjusted EBITDA and Adjusted EBITDA margin refer to Note 8 'Adjusted EBITDA and Adjusted EBITDA margin' to the Condensed Consolidated Financial Statements. IFRS 16 'Leases' was implemented on 1 January 2019 and comparative figures for 2018 have not been restated, as a result Adjusted EBITDA for the third quarter and nine months ended 30 Sep 2019 benefitted by $27 million and $81 million respectively.
2. For the explanation and a reconciliation of diluted earnings per share refer to Note 7 'Earnings per share' to the Condensed Consolidated Financial Statements.
3. Backlog at 30 September 2019 and 30 June 2019 is unaudited and is a non-IFRS measure.

Jean Cahuzac, Chief Executive Officer, said:

'Our capability in early engagement, engineering and integrated services is gaining traction in a market that continues to recover gradually. Despite the environment of sustained lower energy prices and disciplined capital investment by our clients, our order intake has been strong in recent months, with $1.4 billion of new awards and escalations in the third quarter. The tenders and studies we have engaged in are now converting into FEED and EPIC projects with creative and cost-effective solutions that utilise new technology and integrated SPS-SURF collaboration.

Our investments through the cycle, in assets, technology and selective consolidation have kept us firmly in the top tier. The recent acquisition of 4Subsea with its life of field expertise in integrity management, data and digital analytics, continues our strategy to lead the way in all our focus markets.

We are well positioned for our next chapter, supported by recovering oil and gas markets, growth in offshore wind and with an increasing focus on energy transition. As some of you may be aware, I will retire at the end of the year. I have great confidence that Subsea 7 has the right leadership in place to navigate the risks and grasp the opportunities ahead.'

Third quarter 2019 operational performance

SURF and Conventional projects progressed well in the third quarter. Offshore Norway, the first of three Pipeline Bundles was installed on the Snorre project. Also offshore Norway, the latest LinerBridge® technology was used in the largest pipe-in-pipe flowline installed to date on the Nova project and on the fast-track Askeladd project 42 kilometres of corrosion resistant alloy (CRA) pipe was installed using the pipelay vessel Seven Borealis. In the UK sector of the North Sea, the Alligin project completed tie-ins and commissioning.

In the US Gulf of Mexico, the Mad Dog phase 2 project progressed with fabrication ahead of the offshore campaign planned for 2020, and fabrication and welding activities continued on the Manuel project. Offshore Egypt, the Burullus 9B project was completed and first gas was achieved in October. PUPP, a conventional project offshore Nigeria, was substantially completed in the quarter. The four PLSV's operating on long-termday-rate contracts, offshore Brazil, performed well with high levels of utilisation.

Renewables and Heavy Lifting activity remained low compared to the prior year period reflecting the timing of awards and increased competition for foundation installation projects. Offshore Taiwan, installation of foundations and transition modules was completed on the Formosa 1 (Phase 2) project using the heavy lifting vessel Seaway Yudin and preparation continued on the Yunlin project prior to cable installation planned in 2020.

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In the Life of Field business unit, activity in the US Gulf of Mexico was encouraging in the quarter with increased operations for both the Harvey Intervention and Grant Candies IRM vessels. Utilisation of IRM vessels in the North Sea improved compared to the prior quarter.

Total Vessel Utilisation was 78%, seven percentage points lower than the prior year period with substantially lower utilisation of the Renewable and Heavy Lifting vessels. At 30 September 2019 there were 35 vessels in the fleet including seven chartered vessels, two stacked vessels and one vessel under construction.

Financial highlights for the third quarter 2019

Third quarter revenue of $951 million and Adjusted EBITDA of $181 million were 12% and 17% lower respectively compared to the prior year period. Adjusted EBITDA margin of 19% reflected good progress on certain projects and continued cost discipline, partly offset by low levels of activity in the Renewables and Heavy Lifting business unit. Diluted earnings per share was $0.15, a decrease of 35% on the prior year period, adversely impacted by a higher effective tax rate.

Order intake totalled $1.4 billion during the third quarter, not including an adverse foreign exchange movement of approximately $80 million. Following the completion of the offshore execution of the Hasbah project, backlog for the Middle East was replenished in the quarter with four packages of work awarded by Saudi Aramco, comprising the substantial Marjan 2 project and three packages relating to the 28 Jackets project. Other new awards included the Lapa NE project offshore Brazil, the Europipe II project offshore Norway, the Hornsea 2 wind farm project offshore UK and the ACE project offshore Azerbaijan. Order backlog at the end of September was $4.9 billion, of which $2.6 billion is expected to be executed in 2020. The book-to-bill ratio was 1.4 for the third quarter and 1.0 for the first nine months of 2019, and remains on track to achieve 1.0 for the full year.

Subsea 7 has a solid financial and liquidity position supported by cash and cash equivalents of $367 million at 30 September 2019 and a $656 million Revolving Credit Facility that remains unutilised. Cash and cash equivalents decreased by $53 million in the quarter partly due to $28 million invested in capital expenditure and $25 million spent on share repurchases. Cash from operations was $65 million, with a $112 million increase in net operating assets reflecting timing of milestones on certain projects. Net debt was $241 million, including $368 million related to IFRS 16 'Leases' liabilities.

Outlook

The steady increase in deepwater oil and gas market activity this year has supported improved pricing compared to 2018. Demand for Conventional services in the Middle East remains strong.

Demand for offshore wind farm installation services is growing at an annualised double-digit pace supporting the energy transition plans of host governments in Europe, Asia and North America to lower carbon sources of energy. Near-term, an increase in competition for heavy lifting services for foundation installation continues to negatively impact pricing, but this is expected to improve in the longer term as the market globalises and rebalances.

Guidance for full year 2019 has been revised due to the timing of progress on certain projects and we now expect revenue to decrease slightly compared to the full year 2018. Guidance for 2019 is unchanged with respect to Adjusted EBITDA being lower than in 2018 and net operating income being positive.

2019 is expected to represent the low point in the cycle for the Group's profitability. Revenue and Adjusted EBITDA are both expected to be higher in 2020, driven by an increase in activity in our key markets. The percentage margin will take longer to recover as projects awarded with low pricing in prior years progress to offshore execution. Looking ahead, demand for offshore wind farm construction services is expected to increase and, as larger greenfield oil and gas projects are sanctioned, a continued gradual recovery is expected for deepwater SURF activity.

2 Subsea 7 S.A. Third Quarter 2019 Results

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Date: 7 November 2019

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Special Note Regarding Forward-Looking Statements

Certain statements made in this announcement may include 'forward-looking statements'. These statements may be identified by the use of words like 'anticipate', 'believe', 'could', 'estimate', 'expect', 'forecast', 'intend', 'may', 'might', 'plan', 'predict', 'project', 'scheduled', 'seek', 'should', 'will', and similar expressions. The forward-looking statements reflect our current views and are subject to risks, uncertainties and assumptions. The principal risks and uncertainties which could impact the Group and the factors which could affect the actual results are described but not limited to those in the 'Risk Management' section in the Group's Annual Report and Consolidated Financial Statements 2018. These factors, and others which are discussed in our public announcements, are among those that may cause actual and future results and trends to differ materially from our forward-looking statements: actions by regulatory authorities or other third parties; our ability to recover costs on significant projects; general economic conditions and competition in the markets and businesses in which we operate; our relationship with significant clients; the outcome of legal and administrative proceedings or governmental enquiries; uncertainties inherent in operating internationally; the timely delivery of vessels on order; the impact of laws and regulations; and operating hazards, including spills and environmental damage. Many of these factors are beyond our ability to control or predict. Other unknown or unpredictable factors could also have material adverse effects on our future results. Given these factors, you should not place undue reliance on the forward-looking statements.

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Third Quarter 2019

Revenue

Revenue for the quarter was $951 million, a decrease of $132 million or 12% compared to Q3 2018. This reduction was driven by lower activity levels in the Renewables and Heavy Lifting business unit, primarily due to the completion of the Beatrice wind farm project. Revenue in the SURF and Conventional and Life of Field business units was in line with Q3 2018.

Adjusted EBITDA

Adjusted EBITDA and Adjusted EBITDA margin for the quarter were $181 million and 19% respectively, compared to $217 million and 20% in Q3 2018. Adjusted EBITDA in Q3 2019 benefitted by $27 million, compared to the prior year period, from the implementation of IFRS 16 'Leases' on 1 January 2019. Adjusted EBITDA margin in Q3 2019 reflected good execution within the SURF and Conventional and Life of Field business units, offset by lower activity levels within the Renewables and Heavy Lifting business unit.

Net operating income

Net operating income for the quarter was $59 million, compared to net operating income of $111 million in Q3 2018. Net operating income in the SURF and Conventional business unit was $62 million in Q3 2019 compared to $93 million in Q3 2018, reflecting lower pricing on projects awarded during the downturn. The Life of Field business unit recorded a net operating income of $6 million. The Renewables and Heavy Lifting business unit recorded a net operating loss of $8 million driven by significantly lower activity levels and a competitive market environment.

Net income

Net income was $42 million in the quarter, compared to net income of $76 million in Q3 2018. The reduction was primarily due to:

• the decrease in net operating income partially offset by:
• net foreign currency gains of $12 million in Q3 2019, compared to net foreign currency losses of less than $1 million in Q3 2018.

The effective tax rate for Q3 2019 was 40% compared with 31% in the prior year period, reflecting changes in jurisdictions where the Group generates taxable income, together with the impact of an increase in revenue-based taxes incurred compared with the prior year period.

Earnings per share

Diluted earnings per share was $0.15 in Q3 2019 compared to $0.23 in Q3 2018, calculated using a weighted average number of shares of 299 million and 328 million respectively.

Cash and cash equivalents

Cash and cash equivalents was $367 million at 30 September 2019, a decrease of $53 million in the quarter. The movement in cash and cash equivalents during the quarter was mainly attributable to:

• net cash generated from operating activities of $65 million more than offset by:
• payment of contingent consideration in respect of acquisitions of $30 million;
• payments related to lease liabilities of $27 million;
• repurchases of shares at a cost of $25 million; and
• purchases of property, plant and equipment of $25 million.

Borrowings and lease liabilities

Borrowings decreased to $240 million at 30 September 2019 from $246 million at 30 June 2019 due to scheduled repayments. Lease liabilities decreased to $368 million at 30 September 2019 from $396 million at 30 June 2019, the decrease being mainly driven by scheduled lease payments.

Nine months ended 30 September 2019

Revenue

Revenue for the nine months ended 30 September 2019 was $2.8 billion, a decrease of $0.3 billion or 9% compared to the equivalent period in 2018. The year-on-year decrease was primarily due to significantly lower activity levels in the Renewables and Heavy Lifting business unit, partially offset by an increase in the SURF and Conventional business unit.

Adjusted EBITDA

Adjusted EBITDA and Adjusted EBITDA margin for the nine months ended 30 September 2019 were $462 million and 17% respectively, compared to $506 million and 17% in 2018. The nine months ended 30 September 2019 benefitted by $81 million compared to the prior year period due to the implementation of IFRS 16 'Leases' on 1 January 2019. Adjusted EBITDA margin in 2019 reflected lower pricing on projects awarded during the downturn within the SURF and Conventional business unit and significantly lower activity levels within the Renewables and Heavy Lifting business unit.

Net operating income

Net operating income for the nine months ended 30 September 2019 was $93 million, compared to net operating income of $177 million in 2018. The SURF and Conventional business unit recognised a decrease in net operating income reflecting lower pricing on projects awarded during the downturn. The net operating loss in the Renewables and Heavy Lifting business unit in 2019 reflected a competitive market environment combined with significantly lower activity levels compared with the prior year period.

Net Income

Net income was $47 million for the nine months ended 30 September 2019, compared to net income of $133 million for the prior year period. The reduction was primarily due to:

• the decrease in net operating income;

4 Subsea 7 S.A. Third Quarter 2019 Results

• net foreign currency losses of $18 million for the nine months ended 30 September 2019, compared to net foreign currency gains of $3 million in 2018; and
• increased finance costs in 2019 due to the implementation of IFRS 16 'Leases' from 1 January 2019.

The effective tax rate for the nine months ended 30 September 2019 was 40% compared with 27% in the prior year period, reflecting changes in jurisdictions where the Group generates taxable income and an increase in revenue-based taxes incurred compared with the prior year.

Earnings per share

Diluted earnings per share was $0.17 for the nine months ended 30 September 2019 compared to diluted earnings per share of $0.44 in 2018, calculated using a weighted average number of shares of 308 million and 328 million respectively.

Cash and cash equivalents

Cash and cash equivalents were $367 million at 30 September 2019 compared to $765 million at 31 December 2018. The decrease of $398 million during the period was mainly attributable to:

• repurchases of shares at a cost of $250 million;
• purchases of property, plant and equipment of $170 million;
• payments related to lease liabilities of $81 million;
• dividends paid to shareholders of the parent company of $54 million partially offset by:
• net cash generated from operating activities of $195 million.

Borrowings and lease liabilities

Borrowings decreased to $240 million at 30 September 2019 from $258 million at 31 December 2018 due to scheduled repayments. Lease liabilities were $368 million at 30 September 2019, following their initial recognition on the balance sheet as of 1 January 2019, on implementation of IFRS 16 'Leases'.

Business Unit Highlights

Third Quarter 2019

SURF and Conventional

Revenue for the third quarter was $826 million, a decrease of $40 million or 5% compared to Q3 2018.

During the quarter, the West Nile Delta GFR field development, offshore Egypt, the PUPP and Asabo Flare Restoration projects, offshore Nigeria, the Hasbah project, offshore Saudi Arabia, the Storr and Alligin projects, offshore UK were completed or reached near completion. Work progressed on the Burullus 9B project, offshore Egypt, the Zinia project, offshore Angola and the Mad Dog 2, Katmai and Manuel projects in the US Gulf of Mexico, the Snorre, Nova and Oda projects, offshore Norway and the Arran and Penguins projects offshore UK. In Brazil, there were high levels of PLSV utilisation under long-term contracts with Petrobras.

Net operating income was $62 million in the quarter, a decrease of $30 million or 33% compared to Q3 2018. The decrease in net operating income reflected lower pricing on projects awarded during the downturn.

Life of Field

Revenue for Q3 2019 was $70 million, an increase of $4 million or 6% compared to Q3 2018. The increase was primarily driven by greater levels of Inspection, Repair and Maintenance activities.

Net operating income was $6 million in Q3 2019 compared to $4 million in Q3 2018, reflecting higher activity levels.

Renewables and Heavy Lifting

Revenue was $55 million in Q3 2019 compared to $152 million in Q3 2018. The reduction in revenue was primarily due to reduced activity on the Beatrice wind farm project, offshore UK, which is operationally complete. Net operating loss was $8 million in Q3 2019 compared to net operating income of $17 million in Q3 2018, reflecting lower activity levels compared with the prior year period and a competitive market environment.

Nine months ended 30 September 2019

SURF and Conventional

Revenue was $2.4 billion for the nine months ended 30 September 2019, an increase of $123 million or 5% compared to 2018. The increase in revenue was driven by higher activity levels.

During the nine months ended 30 September 2019, the West Nile Delta GFR field development offshore Egypt, the PUPP and Asabo Flare Restoration projects offshore Nigeria, the Hasbah project offshore Saudi Arabia, the Storr and Alligin projects offshore UK and the Sole project, offshore Australia completed or neared completion. Work progressed on the Burullus 9B project, offshore Egypt, 3PDMs project offshore Saudi Arabia, Mad Dog 2, Katmai and Manuel within the US Gulf of Mexico, the Snorre, Nova and Oda projects offshore Norway and the Arran and Penguins projects offshore UK. In Brazil, there were high levels of PLSV utilisation under long-term contracts with Petrobras.

Net operating income was $126 million in the nine months ended 30 September 2019, a decrease of $41 million or 24% compared to 2018. The decrease in net operating income reflected lower pricing on projects awarded during the downturn.

Life of Field

Revenue for the nine months ended 30 September 2019 was $196 million, an increase of $18 million or 10% compared to 2018. The increase was primarily driven by increased Inspection, Repair and Maintenance activities offshore Azerbaijan and Norway.

Net operating income was less than $1 million for the nine months ended 30 September 2019 compared to $5 million in 2018. The decrease in net operating income reflected lower pricing on projects awarded during the downturn partially offset by increased activity.

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