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Edited Transcript of SBMO.AS earnings conference call or presentation 8-Aug-19 8:00am GMT

Half Year 2019 SBM Offshore NV Earnings Call

Schiedam Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of SBM Offshore NV earnings conference call or presentation Thursday, August 8, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bruno Y. R. Chabas

SBM Offshore N.V. - Chairman of Management Board & CEO

* Douglas H. M. Wood

SBM Offshore N.V. - CFO & Member of Management Board

* Erik E. Lagendijk

SBM Offshore N.V. - Chief Governance & Compliance Officer and Member of Management Board

* Philippe Barril

SBM Offshore N.V. - COO & Member of Management Board

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Conference Call Participants

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* Andre F. M. Mulder

Kepler Cheuvreux, Research Division - Analyst

* Edward Donahue

* Henk Veerman

Kempen & Co. N.V., Research Division - Research Analyst

* Luuk Van Beek

Banque Degroof Petercam S.A., Research Division - Analyst

* Michael Brennan Pickup

Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst

* Quirijn Mulder

ING Groep N.V., Research Division - Research Analyst

* Thijs Berkelder

ABN AMRO Bank N.V., Research Division - Equity Research Analyst

* Edwin van der Schoot

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for holding. Welcome to this SBM Offshore Half Year 2019's Earnings Update Call. (Operator Instructions) I would now like to hand the call over to Mr. Bruno Chabas. Please go ahead, Chairman.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [2]

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Thank you, Patricia, and welcome to all to join the first half 2019 earning update. I'm joined today by the full management board: Douglas Wood; Philippe Barril; and Erik Lagendijk; and obviously, myself. I will present the full year -- the half year results, in particular, the strategy update and the market positioning, and then Doug's going to run through the numbers and the outlook for the year. At the end of the call, like always, we're going to go through a Q&A session.

As always, the disclaimer page. You're welcome to read it and to tell us what you think about it. But now let's go through the more serious part of the presentation. And one of the point that we're seeing is that the industry is regathering pace at this stage, and we're seeing a lot of opportunity coming up. Those opportunity are linked with also some significant capacity concern in the industry. On this, we need to take stock of where the company stands in term of the implementation of the strategy, the strategy that we started to implement a few years ago. And [two] points here to look at. The first one is the shareholder returns. Over the first half of the year, we returned around USD 270 million to the shareholders through share buyback and dividend payment. Through the acquisition of the Mero 2 and Liza Unity project, we increased our backlog by $6.3 billion. Today, we have 4 projects, 4 major Turnkey projects under construction, 2 of which are under the Fast4Ward concept. We're positive on the market outlook, and we see opportunities coming up.

Having said that, we're going to be disciplined in our way [to -- under] the growth in the market. We're going to be disciplined and selective in the number of project we're going to go after. We're going to control our growth. And we're looking at this in the shortage -- due to the shortage in some of the key suppliers and key capacity in the market. Also what we're doing is we're keeping investing into the future. And the future for us would be in gas and renewable and different other aspect. If we look more on the short-term, we're looking at the financial results for the year, and the half year results are already in line with our expectation. The full year results are coming in better than what -- we're upgrading our guidance at this stage, and Douglas is going to give you more information on the subject.

So turning to our license to operate. Over the years, we have really furthered our license to operate in a lot of different aspect. We have developed a number of project with a target to excel in all the different aspects of our operation. Our aim is really no harm, no leak, no defect in our operation. Now we're monitoring this on a monthly -- on a weekly basis, and some of the key indicators can be seen in this page. In particular, the safety indicator on the total recordable injury frequency rate, which has improved year-over-year. It's really something where we need to work [up] every day where we cannot be complacent, and we'll try to make progress all the time.

We're putting in place also a number of programs. And one good example of this is really the annual Life Day program that we have that we have done for the past 6 years. The one of this year has been done on June 12 and is really applying to all the offices, all the facility, onshore and offshore for all the personnel of SBM Offshore but includes also suppliers or client, and it's really an event where people have the opportunity to discuss and to look at ways to improve our safety days after days.

Now part of license to operate is really our sustainability initiatives. As we mentioned to you at the end of last year, we selected 3 sustainable development goals for which we set a number of targets, which are ambitious for the year. We're monitoring those targets on a month-by-month basis, and we're going to provide results at the end of the year. But this slide is also providing you few example of some of the programs that we're working on.

On the human rights side, we joined the Building Responsibly consortium or group of companies in order to improve the ways of working in the construction industry. And we're developing a number of human rights programs for the company. Part of the sustainable development goals, we also set some stringent targets in terms of CO2 emission. Now we have the CO2 challenge activity, which is really a bottom-up activity whereby our people onshore and offshore are coming with initiative to reduce our CO2 emission. And really, we're seeing some improvement on tough target that we have set. Part of our investment program also is set to reduce emission, and I will give you 2 example. The seawater intake riser program, which is a development program done with Shell in Brazil, is really aiming at pumping some water in deep water in order to cool down the systems onboard of the FPSO and really reduce the need to use energy to do this and reduce the CO2 emission by that. And the investment into a renewable activity, also at one point in time, could be aim at helping our FPSO to reduce their CO2 emission in producing.

Now let's turn to the market. It's important at one point in time to look at what has been said over the year and how the market has been evolving. In 2016, we were starting to believe that the recovery was going to start to be gradual. And in fact, from 2014 to 2016, we maintained capacity in our company in order to preserve our know-how but also to develop new program like the Fast4Ward program. In the first half of 2017, we order the first hull for the Fast4Ward program, and we started to get some awards, like the Liza Destiny program. Now as we go about, we can see that there is an increase in activity. We have ordered 3 hulls for the Fast4Ward program. 2 of those are in projects which have been already sanctioned, and you know about those. And we're seeing really a lot of opportunity going up. So at the end of a day, what we're saying there is that the increase of backlog of $6.2 billion is really something that we have been in the making for some time. The investment that we have done as a company has been done in order to get ready for the increase in activity for the company and really to have a comfort growth and to be able to grow the company in a comfort manner and to deliver to our clients, also in line with their expectation. All of this means that we keep investing into the Fast4Ward program. It means that also we are furthering the lead that we have in spacing the market.

Now on the market outlook, we're still being positive. 7 FPSOs have been awarded since the beginning of the year, 2 of which to SBM Offshore. We're seeing some significant capacity constraints in the market, to be truthful, at this stage. If we look forward for the coming 2.5 years with still certified prospects to come, with 25 really within the sweet spot of SBM Offshore -- or 9 within the sweet spot of SBM Offshore. Now our capacity -- our producing capacity today is really the award of 2-plus FPSO per year. We expect that through the Fast4Ward program, we're going to be able to increase our productivity and therefore, capacity without increasing our breakeven point.

Now if we look from a worldwide basis where the projects are coming up, what is really striking when you look at this is that projects are coming in all the major oil basin -- offshore oil basin in the world. Obviously, Brazil is a big part of the demand going forward, with 12 expected FPSO to be awarded. But yet, there are projects which are really going to be coming throughout the world. Here we are discussing about FPSO but the same applies for looking about [tariffs] with opportunity in Asia Pacific, in the North Sea and elsewhere in the world.

Now in terms of total FPSO market for world, our expectation is that over the coming 3 years, we're going to see 10 FPSO on average being awarded per year. This year, as I already mentioned, 7 FPSOs have been awarded. We expect more to come. It's going to be anywhere between 10 to 12 for the year, and we're seeing the same trends for the coming 2, 3 year.

Now one other point which is important, and I will come back to this later on in the presentation, is that given the shortage that we're seeing in the industry, we're going to be extremely focused in targeting the project we want to go through, the clients with whom we're going to be working on, and we want, really, to make sure that we're going to be helping some of our key clients to capitalize on the opportunities that they have.

Now if we look at our clients, basically, what we're saying is that deepwater is a big part of their portfolio going forward. All of them are saying that they're going to be extremely disciplined in the way of developing CapEx initiatives. But if we look at deepwater opportunities, they are ranking well in terms of opportunity for development of their portfolio. The large deepwater field has basically a breakeven point of anywhere between $25 to $40 per barrel, which is remarkable and really in line with the main opportunity that we could see onshore in the shale oil, for example. Now the trick to deliver those is really for this project to be delivered on time and after the expectation that the clients [are]. And reliability is going to be key. And reliability is really what is behind the Fast4Ward program and the positioning of SBM Offshore.

Now if we look in terms of capacity in the market, what is striking is really the level of activity that we're seeing, which is in part with the level of activity we have seen in 2013 and 2014. Now this is coming, really, after 3, 4 years of downturn in the industry where the industry basically have been laminated and whereby a lot of the capacity has gone out to the market. So basically, today, with 5 FPSO of large capacity, the one that we're targeting already awarded, we believe that there is a shortage in the industry and that the industry is really coming -- is facing service capacity constraint.

Now in order to address this and to make sure that we're going to be able to grow in line with the market, again, we're going to apply a disciplined approach to our market. We're going to grow our workforce on a worldwide basis, not in one center but really on a worldwide basis and making sure that we have the right pool of fixed cost versus variable cost through a contractor or third-party working for us. We are also developing some capacity in India through a joint venture that we have with Nauvata, and we're aiming to grow this joint venture significantly over the coming few months and years. Now that's only one part of our disciplined effort to grow capacity. The other part is really through standardization. We already believe that through standardization, we're going to be able to provide greater reliability to our clients, and that's really needed in the industry. And that's really what I'd put the industry into a risk over the past cycle. So reliability for us is absolutely critical going forward.

We believe we're going to be able to increase the productivity of our engineering capacity, of our workforce in order to deliver the FPSO and also we're going to increase the flexibility of our workforce. By that, what we're aiming at is really to be able to benefit from the growth in the industry and to [gear up] the company, but we also recognize that we're in a market where there is a lot of fluctuation and a lot of volatility, and we're aiming, also at being profitable and in a good position in the downturn of the market.

Now if we looked more at the performance of SBM Offshore, it's really interesting to look at what we have done in terms of shareholder [or] return compared to the rest of the oil services industry. And for me, this chart is showing really what is different about SBM Offshore. Not only the technical capabilities or know-how or project management, but it's also our ability to have long-term cash flow and to deliver on those regardless of the part of the cycle where we are. And basically, what we're saying is that on average, the oil services industry has yielded 6% return to the shareholders over the period of 2016 to 2019. We have yield 3x this amount. And really, it's based on the nature of the business, the strength of SBM Offshore and the positioning and what -- the value we're delivering to our clients. And that's really something which is sustainable and something which is going to be growing over time. But it's really something which is remarkable and need to be noted.

Now let's discuss about our strategy. No big change there on our strategy. We're still under the 3 pillars that we have described over the years about optimize, what we are aiming at being best-in-class on the full life cycle of our activities in terms of producing today. We're producing 10% of the oil in the quarter, which is pretty remarkable. And the uptime we are having in our operation. So that's really being best-in-class in everything that we do.

In the meantime, we're transforming also our ways of working. And we're transforming the industry, like we have done over the year, by using the Fast4Ward program as a backbone of what we're doing using digitalization but using also sustainability as a different way of positioning ourselves in the industry. And last but not least is positioning ourselves for the future in the energy business through the energy transition by investing in renewables, the gas market and also the wave converter that I was going to discuss a bit later on.

Now under Optimize, really, our portfolio of projects -- of 4 major projects are being built and delivered in line with our expectation. The first project, Liza Destiny, she basically left the yard in Singapore at the -- sometime in July. She's in transit to Guyana at this stage. The Castberg project is in construction in Dubai and really working in line with expectation. The Liza Unity project, we have signed the first MPF hull that we started to -- that we order in 2017. That's why you're seeing such a big progress in terms of completion on the project. And basically, she's on track with our expectation. And last but not least is the Mero 2 project, for which we signed the LOI early sometime in July, and we are at the beginning of this project.

From an operational performance update, we are operating and yielding somewhere in the range of 99% of operation. Now all of this is not only virtual reality -- let me wake up this morning. And you can see few picture about what we're doing. The Liza Destiny FPSO on her way to Guyana. And the first Fast4Ward hull came out of the dry dock sometime in June and that you can see being built just now in China. And you look at the size of this, it's pretty impressive.

Now over the years, SBM Offshore has really transformed the industry, the offshore industry and started 60 years ago. But if we come closer to our time in 1997 with the Generation 1 FPSO; 2006, Generation 2; 2014, the Generation 3, all the time with SBM bringing its product management, operation and technical know-how to full in order to get to different place. Fast4Ward is really a leap forward and is built on a number of components. First of all, it's built on our license to operate of no harm, no leak, no damage. It's linked on the concept of Fast4Ward, of doing things faster, better, more reliably. It's built on the -- using the digital pillar also as a way to build on this and incorporating the sustainable goals of the company.

What I'm saying there, Fast4Ward is not only the decision to build some MPF hull. It's much more than that. It's a different way of working, it's a different approach. It's something which is taking time. It's something which is going to transform SBM Offshore for the long haul and, I believe, the industry also.

Now if I look at the digital solution we're bringing to the market, you can see a number of solution that we're growing in. The first part that we have done is really building a platform for the operation. And under this platform where we're gathering data from our offshore field and offshore FPSOs, we are building on a number of applications and a number of solution, which really are helping us to become better at our operation, to make sure that we are anticipating issue before they arise and really, to position ourselves differently. So our full life cycle, we're also applying the same approach to our project management and engineering activity. And we're doing a number of investment and a number of development there. The end product of all of this could be developing digital twins for everything that we're doing, could be the development of unmanned FPSOs. But what I'm saying is for the platform that we're doing, basically, the application that we're going to put in place are going to give us opportunity to evolve and to grow the company and to capitalize -- more importantly, to capitalize on the experience of SBM Offshore going forward.

Now if we look at the future and the innovate part of business, we have 2 legs on this. The first one is the floating offshore producing systems. And the expectation on this market to grow is fairly high. Now the expectation of growth in this market are going to depend on 2 aspects. The first one, having the right technical solutions, and we really believe that SBM Offshore through our 60 years experience of putting floating production system in place is extremely well placed in order to do that. The second aspect of it is really the economics associated to those development. And again, the philosophy applied under Fast4Ward of standardization, reliability, growing faster is being applied also in the development of solutions for floating windmill, and I think it's going to yield results in the years to come.

The second leg of our development in terms of innovation in the renewable business is the wave energy converter. Now this project is not a new project. It's a project that we started in 2009, which so far has been developed inside the lab where we have had some extremely pleasing results in lab, but now we want to take this to the next level. And taking this to the next level means that we're going to put a test program offshore. It's going to be offshore in 2021 -- in the beginning of 2021 with the aim of testing the program live. Now we're putting some money behind this. We're putting some money because we really believe that this program could be a game-changer in terms of the solution that we bring on the renewable market in a way -- utilization of a way. It's a program which is a nonmechanical program, it's a program where we can use manufacturing plants in order to develop the facilities and if being successful could be quite a huge leg of growth in the future for SBM Offshore.

So having said all of this, now we're going to go into the serious part of the presentation with Douglas going through the financial and the outlook. Douglas?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [3]

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Thank you, Bruno, and good morning, everybody. So as you've seen from the first part of the presentation, the anticipated growth is now materializing, and that's reflected in the overview of the numbers on this page. The increased activity we've seen in Turnkey drove an approximately 20% increase in revenue compared with the same period last year, up nearly $160 million to $965 million. Given the fact that the Liza Destiny project and now the Liza Unity project are build-operate-transfer or BOT projects, owned 100% with revenue and margin starting in the operating phase and that Mero 2 is currently also owned 100%, you don't yet see the impact of the growth of these projects in revenue or EBITDA. For EBITDA then, this was more or less stable on a comparative underlying basis at around $400 million. And just to note that we don't have any material nonrecurring items for this period.

Now the awards of Liza Unity and Mero 2 resulted in a very significant $6.3 billion order intake over the period. And as a result, the pro forma backlog increased over 35% to more than $20 billion. I'll cover later in the presentation how we see this growth and associated significant cash flow generation materializing in the future, and I'll also update on our plans for funding the growth and the progress we've made here.

And indeed, as our model is to finance BOT and lease and operate projects with debt, investment in the major projects currently underway is one of the main drivers of the increase in net debt, which has increased by approximately $600 million during the first half of the year.

And now to give you some more details on the segments, starting with Lease and Operate. Here, despite the fact some vessels left the fleet in the prior period, this impact was offset by improved performance in the fleet following maintenance activities last year. As a result, revenue and EBITDA remained flat.

Moving to Turnkey. Revenues grew in line with increasing activity levels on various projects, up $165 million to $319 million, driving the overall increase at group level compared with the same period last year. Then on EBITDA, Turnkey was slightly lower on a comparative basis, down $12 million to $5 million and so a few factors to mention here. First, we have some increased cost from higher sales activity from the positive market momentum. And then on a comparative basis, as you may remember, we saw a number of positive one-off closeout items for Turnkey projects during the first half of last year. As I just explained, you don't see the impact in Turkey of the Liza Destiny, Unity or Mero 2 projects. But to give you a sense of the stand-alone performance of Turnkey, if we included the associated internal margin, which is eliminated during consolidation, this would have taken EBITDA to over $50 million for the first half.

Now on to cash flow on a directional basis. So looking at cash in. Pretax underlying cash from operations was in line with expectations, noting that as we've been highlighting for some time this year, we start to see the impact of the fact that declining bareboat payments on a few vessels means that Lease and Operate EBITDA is higher than the associated underlying cash flow due to the release of deferred income. Notwithstanding this, you can see that this was sufficient to cover debt service tax and most of the full year 2018 dividend.

If we stay with cash out, again, as highlighted in February, a large portion of the significant positive working capital benefit we saw in 2018 in Turnkey from timing of milestone payments unwound as expected during the first half. And we expect to see some further impact from this during the rest of the year. And then we had investment in 3 major projects: Destiny and the 2 projects based on Fast4Ward, Unity and Mero 2; and then the investment in the remaining hull. Now obviously, the level of investment will be larger in the second half given the new projects.

Finally, we completed the share buyback in the period, and we paid Repsol their share of the Yme insurance proceeds. And you can look at the funding of the buyback and payment to Repsol coming from cash draw within the working capital and growth there mainly financed by the RCF plus some cash.

And now on to funding and where we currently stand. Starting with a reminder on the model. For pure Turnkey projects, we get paid in milestones so no funding required. Then for BOT and Lease and Operate projects -- and we've shown you the picture at the top left here before to emphasize we finance the value of the operational FPSO meaning that we can debt finance a significant portion of the cost, minimizing the cash equity requirement. So it's a very efficient model. We use our RCF to bridge the specific project funding, which goes nonrecourse post completion.

So then if we look at the breakdown of debt on the balance sheet, you see the approximately $430 million balance of the RCF, which we used to finance CapEx on Liza Destiny, Unity, Mero 2 and the Fast4Ward hull program. But the vast majority of our debt is nonrecourse.

Now regarding available liquidity, adding the committed $720 million project financing for Liza Destiny to the undrawn portion of the RCF and cash leaves us with more than $1.5 billion. So plenty of room to maneuver. And we'll start to draw on the Destiny facility in the second half, regenerating capacity in the RCF. It's important to note that we cash funded all the CapEx on Destiny up to March this year. So by drawing on the Destiny loan, effectively, we will recycle a large part of this investment to finance our equity share in Liza Unity and Mero 2.

Then if we look at the funding of these 2 new projects, for Unity, we have received debt financing commitments in excess of requirement and are now finalizing the documentation. For Mero 2, we've commenced the financing process, and we plan to sell down 35% initially, where we are currently working to finalize the shareholder agreements with partners.

So we are ready and able to finance the growth. And based on the new orders, we will, therefore, be adding more debt, but this is in order to materialize the increased backlog and associated cash and value. We've published this analysis before, but we've now updated it. And here, we're showing the gearing ratio to the backlog, which is a sensible way of looking at debt given that the debt is specifically tied to future revenues of individual projects in the backlog without recourse in the operating phase to the corporate. Since 2014, there's been a stable ratio of debt to backlog of approximately 15% to 20%, and that's how we see it going forward.

Now for the backlog. As I mentioned in the highlights, this has increased 35% to over $20 billion, driven by the addition of the Liza Unity and Mero 2 orders with cash flow visibility increased to over 25 years up to 2045. And we're continuing to show the backlog on a pro forma basis. So we assume that Liza Unity will be purchased by the client after 2 years, and this remains the assumption for Liza Destiny.

In the chart, we've now added 2 significant orange spikes representing the purchase of these 2 BOT vessels, which will be booked in Turnkey. For Mero 2, we are reflecting the assumption that we will successfully conclude the ongoing discussions to sell down 35%, as I just mentioned.

Now the new awards benefit from economies of scale as they are large projects, and they'll push the average conversion ratio of the lease revenue above 63%, and we'll give you an update on the precise number at the end of the year. The revenue shown in orange for the purchase of the BOT project will be 100% cash, from which the remainder of the associated project debt will be paid down.

On this next slide, we brought the elements of the pro forma backlog chart together to give you a picture of the net cash generation from the operating phase of projects in the backlog, putting the outflows for OpEx and debt financing next to the revenue inflows for both the long-term lease portfolio and the sale of the BOT projects. And note that in the chart, the debt servicing schedule for Destiny, Unity and Mero 2 is estimated with no project-specific debt currently drawn to these. And the conclusion of the chart is that you can clearly see the extent of the impacts from the sale of the BOT projects, in orange, in addition to the very stable significant cash flow provided by the lease portfolio and how this extends into the future.

We talked before about average net cash generation for the previous lease backlog through to 2036 of $250 million a year. And we've marked the same period here. But obviously, there will be an uplift from the new projects.

Now for the outlook. On the back of improving conditions in Turnkey and the positive market outlook, we're increasing revenue guidance from around to above $2 billion with around $1.3 billion coming from Lease and Operate and above $700 million from Turnkey.

Finally, EBITDA guidance has increased from around to above $750 million. That's it for me. Now back to Bruno to open the Q&A.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [4]

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Thank you, Douglas, and thank you for listening. Operator, you can open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question is from Mr. Luuk Van Beek, Degroof Petercam.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [2]

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First of all, the question about your capacity. You always say that you have capacity for 2-plus FPSOs per year. And obviously, recently, you won 2 contracts, of which one was already in preparation for almost a year. How would you characterize your short-term capacity to take on new projects now?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [3]

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I believe the -- which is also something we have said in the past. The best way to look at the capacity is really to look at our 3-year period with 6 FPSOs under construction. So you need to have those FPSO at different phase in the cycle because you don't have the same person working in the same aspect. But today, we have 3 FPSO under construction. So it give us some spare capacity into the market. Now again, the capacity is driven not only by the internal capacity of SBM Offshore and [then all] the experienced people and so on, but also by the external capacity in the market. And what we're seeing that on the external capacity in the market on the yard fabrication, for example, and so on, that there is a lot of tightness there. And as such, we're going to be extremely prudent going forward.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [4]

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Okay. That's clear. And then regarding the contribution from Lease and Operate, you mentioned that the better performance of the existing vessels have offset the vessel leaving the fleet. Can you explain if that's mainly amount of bonuses? Or is it a sustainable improvement in performance?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [5]

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Yes. No, I mean -- It's Douglas here. So it's simply the fact that they were out of action last year. So we didn't see the normal revenue and cash flow that we would expect when we were doing the maintenance. We finished the maintenance. And now as you expect we're seeing the improved performance relative to last year.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [6]

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Okay. And regarding your guidance, does it include any impact of the sale of 35% in Mero 2 in the Turnkey side of the business for H2 of this year?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [7]

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Yes. For the revenue, yes, but relative to where we are in terms of project completion, BOT won't be many -- minimal impact, if any, on the EBITDA.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [8]

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Okay. And my final question is on the cash outflow from operating assets and liabilities, that was relatively high. Is there anything special that we should take into account for the second half of the year, like working capital or large payments?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [9]

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Yes. Well, I mentioned -- so we saw -- we had this big benefit the end of last year. We've seen quite a large chunk of that unwind in the first half. And as I mentioned, there is a bit more to come in the second half.

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Operator [10]

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Our next question is from Mr. Mick Pickup, Barclays.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [11]

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Thanks for having backlog out to 2045. I hope I'm still around by then. If I may, can I just talk...

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [12]

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You should have a lot of experience by then.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [13]

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I'm just thinking, I'll be in the 70s by then. It's a long time.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [14]

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I thought [you'll have seen] by then.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [15]

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Yes. Far too many. Can I just go on the capacity constraint side of it? Clearly, your clients are smart at this. Can you just talk about conversations you're having with them because typically, when we've seen this before, you get new competition, they look for new ways of doing it, they do something silly. Can you just talk about what benefits it could have with you, given you are at that premium? And any chance of pricing improvements or better terms, conditions, however it may be? Can you just talk through the whole [yes] moving parts in that?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [16]

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Yes. We should -- I mean you have gone through a few cycle in the industry like some of us here, and we kind of recognize some of the pattern now. I believe the last cycle in the industry was quite telling for the FPSO industry. Only 30% of the projects have been delivered on time. And basically, at one point in time, almost killed the deepwater industry. Today, we're in a different part of the cycle. The clients are more aware of the -- maybe, at one point in time, the decrease in demand for oil, and therefore, they are much more prudent in the way they're going about it. And they want to work with contractor, which have experience, who are reliable, and they want to book some capacity with this person. Now that's the type of clients we want to work with, and that's the type of clients we are being engaged with, that's the type of clients where we are finding solution together and to the mutual benefit of everybody. At the end of a day, when you are able to deliver a [FEED] a year in advance compared to the average -- I mean on average, the [point-of-sale] had been delivered [8 years] after discovery. Today, some of the FEED that was working on with some of clients are going to be delivered within 6 or 7 years. So releasing time to market by 1, 2 or 3 years. And I can tell you, from an NPV standpoint, it makes huge amount of difference. And on this, you can have some sensible discussion with the clients. And that's the type of clients we're targeting.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [17]

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Okay. And new competitions, any signs of them going direct to yards, trying to go more on a Turnkey basis, that sort of thing?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [18]

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When you look -- I think the chart that we presented in term of shareholder returns is quite telling. We have a return to our shareholder, which is 3x the average of the industry but which is even higher compared to the rest of the FPSO industry. What is certain in the FPSO industry is that if you want to become a millionaire, you need to go in the FPSO industry, but you need to start as being a billionaire, okay? What we have seen is that there are a lot of newcomers which have come in the industry and basically got burned by doing this because it's a difficult industry where experience matter, where the know-how matter, where the learning curve matters. And basically, yes, we're going to see some people trying to get there and to become millionaires.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [19]

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Okay. And then on a separate note. If I look at your Turnkey revenues for the first half, you've done $300-odd million. If I look at your backlog at the start of the year, it was only $400 million. Now I appreciate some of that's Mero 2. But is there a lot of fleet that is coming through your business, which is part of your confidence that you have in?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [20]

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Yes. So it's a number of things, mix, it's revenue we expect to see in offshore contracting from our [Emot Co. 4A] business. Then as you mentioned, yes, the engineering studies, we do fleet support. So that gets booked in Turnkey. And then as everyone, you've got projects going on (inaudible)

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Operator [21]

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Our next question is from Mr. Edward Donahue, One Investments.

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Edward Donahue, [22]

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Probably been around maybe longer than Mick, which is disturbing. I won't be here by 2045. In the meantime, he actually got to me head-on a particular question. Being around a long time though, I do remember, Bruno, that you've made comments in the past about your long-held view versus the sort of correct return versus the risk of value add -- the value added of the FPSO contractors. And I'm just trying to sort of marry that with your Slide 7, continued demand growth combined with limited market capacity. Do you actually think through this cycle and where you are positioned and looking at the capacity constraints? And going back to your comment just now where you can have a reasonable conversation with customers, that you are actually seeing an equitable return coming to the contractors that you haven't seen in previous cycles.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [23]

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It's -- it could be a long answer to that. But the first aspect is I already believe that the industry at large is much more aware of the reality of the cycles and the reality of the up and down and the competition that there is in shale oil. So that's one aspect to this. Based on that, the only way to be able to the ride the cycle is to make sure that we're going to be able to have a much more industrialized approach to the project. In the past, it was -- each project was different, everybody wanted to have his own stuff, and it was basically truly impossible to go through a learning curve and to be able to improve productivity. So today, the discussion we're having with the clients is really discussing about reliabilities, discussing about economy of scale, learning curve and the ability, basically, to increase our productivity significantly. Now part of this productivity gain, we're going to be able to -- we're going to transfer it to the client, but part of it, we're going to be able to retain. And that's where the added return is going to be coming in, in my view, going forward. But this added return for us is really going to give an overall benefit for the industry. Now the increase in productivity also is going to lead to something whereby I believe will come give us the output capacity of SBM Offshore higher than the 2-plus FPSO that we have. Time will tell, and we don't want to provide any guidance at this stage. I want to be able to give out the capacity of SBM Offshore, basically, without adding much of a fixed cost structure. And it means that we're going to be able to be -- to make -- to ride the market going up, but we're also going to be able, through the down cycle, to be in a position where we're going to be able to be successful with project and to make money even in down cycle. So at the end of the day, you need to look at this first cycle and the ability to be able to increase the productivity, to standardize, to become more reliable is going to have a benefit to the industry, is going to have a benefit to us and is going to help the industry to grow and basically helping us to have more meaningful discussion with a client. Now how is it going to turn? Some clients are willing to us -- this approach and a much more industrialized approach. And those are the clients with whom we engage. Other clients are not willing. But in this case, they will do something else.

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Edward Donahue, [24]

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Okay. Great. A couple of other questions. Just on the -- your comment about the tightness of external capacity. I think -- what do you see with regard to that capacity constraints maybe in supplier change and therefore the impact of cost inflation coming through maybe early than was expected? And, yes, how do you look to handle that?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [25]

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The capacity constraint -- everybody has [said] that when we were starting this cycle that there was an endless capacity into the market because manufacturing plan was there because yields were there and so on. At the end of the day, the downturn in the industry that the industry has seen has been extremely dramatic in terms of the number of people getting out of the industry. And today, that is what is biting us or whether you're going to bite the industry.

Now yes, obviously we're going to see some inflation in the industry. That's clear. The way to mitigate the inflation is going to, again, through standardization, repeatability, looking at increasing the productivity for the supplier. And there, you really need to have industrialized approach of the market, like we're adding Fast4Ward. But the one not doing that, they're -- first of all, going to see capacity constraint and the difficulty to deliver their project. And second of all, a significant inflation. So part of our Fast4Ward project is really to engage with a number of key suppliers, to have long-term agreement, to secure capacity, to have different ways of negotiating with them. We need to be in a position of a win-win position like we want to be with our client. It's really a different approach for the industry.

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Edward Donahue, [26]

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Yes. And then the last one is just looking on your -- the slide with regarding new developments, how should one view the returns profiles of those new renewable areas? I mean it will be -- I know it's embryonic at the moment, and it's a long-term positioning, but how should one look at the returns versus the FPSO or Turnkey other projects that once involved in?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [27]

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So one point for us, and I'm not going to comment on the renewable industry at large because I mean I'm going to comment about the positioning that SBM Offshore wants to [add] we want to position ourselves into areas where we can add value and will basically can be pretty unique in what we're doing. And that's why we're focusing on the floating win-win market, whereby the technology of SBM Offshore that we have developed over the 60-year -- last 60 years is going to be a key enabling factor but also using the Fast4Ward approach on this, on adding an industrialized approach to this, I believe it's going to put us in a position whereby we're going to be able to go through the learning curve faster than anybody else and basically make a decent level of margin.

Today, can I give any guidance on the level of margin? Absolutely not. The market is nonexistent, it's already starting. There is too much uncertainty on this. But that's the positioning that we're aiming at, adding on the footing win-win.

Now the Wave Energy Converter for me is quite a different business proposition. It's really a business proposition whereby we have a technology that we have developed over the year, which is truly unique. And this technology could be basically developed and manufactured with a large economy of scale. Now I'm not saying that we're going to go into the manufacturing business. That's not at all what I'm saying. But what I'm saying is that we can give up this technology and basically capitalize this technology in order to develop this business on a worldwide basis. Now to tell you the truth, one of the most exciting development that we're seeing in the company going forward, this is really this technology. And once we're going to test it offshore and see how it was. It could be already a huge enabler in terms of growth and value for SBM Offshore, far greater than what we have seen so far.

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Edward Donahue, [28]

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Okay. Now my final question, having done all the upbeat stuff. Can you just take the Brazilian situation off the table and give us a time line on the core proceedings, which I'm assuming is a red tape process, no more than that.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [29]

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Yes. And for this, I'm going to give you the -- our Chief Governance and Compliance Officer, Erik, to tell you all about this. Erik?

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Erik E. Lagendijk, SBM Offshore N.V. - Chief Governance & Compliance Officer and Member of Management Board [30]

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Yes. Thank you. Obviously, we're keen to have that removed. But to put it a bit in perspective, we have a leniency agreement with Petrobras and the authorities as of summer of last year that is full and final. It enables us to be fully operational in Brazil. Originally, the MPF was part of that agreement as well and for all kinds of reasons, then we had to separate the agreement with the public prosecutor office and that was then concluded shortly after the main agreement where the MPF joined. This is a formality where the public prosecutor has the authority to start proceedings, but when it wants to end proceedings and take this from the docker sort of court register, as it is called, there is a test by the judgment folks where basically they look at is there any concern of the public interest. Now that has led to some confusion with this particular judge. We have filed papers together with the MPF because we're fully aligned on this matter that you clarify the issue, and we are obviously as I mentioned, we're keen to see it resolved. But as in other legal proceedings, we have seen that predicting the time line is not easy. But again, let me remind you, there is no other impact that we continue to hold the payment back of the final agreement with the MPF. In that sense, there is a mutual interest to have this resolved, but all of these underlying proceedings are fully dormant. So it's not a major concern, but obviously, we would begin to see it, the final results.

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Operator [31]

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Our next question is from Mr. Andre Mulder, Kepler Cheuvreux.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [32]

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A number of questions. Firstly, looking at here the statement that -- which was -- saw a minority stake in Mero 2, the 35%, how do you set such a minority stake? I think in the past, it used to be closer to 50%. So I would like to know how that process is? Secondly, your country manager in Brazil, as I see, is optimistic about one more award before year-end. Would you share that optimism?

Third question on MODEC. We have seen they have also come with a shoebox-type of [heel]. It seems a bit like a mirror image, I have not seen the dimension [shed]. But to what extent is your Fast4Ward protected by that? Do you aim to take on MODEC as sort of a copycat of your design?

Next question would bid on (inaudible). You've seen some articles, I'm not saying that you are looking at that Chinese company for topsides production and integration work. SWS seems -- ought to be in the race there. To what extent, if you look at those 2 companies, is it the choice for price quality? Or do you not want SWS to have to learn the trick, put all the [ash] in a basket in that respect?

Question on the...

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [33]

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[Stick with] your questions. Can we answer the first? Otherwise, we're going to get lost.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [34]

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Yes, okay. Okay. Answer them first, and there are another 3 coming.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [35]

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3 more?

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [36]

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Yes.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [37]

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Oh, [there's something] about that, but okay, fine. So any case, Douglas is going to take the answer on Mero 2. Philippe is going to take the answer on the (inaudible) and Brazil and the rest of it. And let me just give a few word on Fast4Ward. Fast4Ward is not only a shoebox that we built in China with a new builder. It's not what it is. That's part of it. But the biggest part is really changing the ways of working. It's really looking at standardization in everything that we do. It's already getting through the learning curve. Now if you remember, we started this program in 2014. That's, I think, when we made the first announcement to the market or maybe 2015 but internally in 2014. So it took a lot of time for us in order to find the best way to develop this, the best way to do it, and we did it during the downtime when we had a lot of spare capacity. Today, we're using all the work -- the good work which had been done during the downturn in order to capitalize to keep learning and to evolve. And really, we believe that this is pretty unique to SBM Offshore and is not linked only to a shoebox.

But having said that, I propose that Philippe tell you more about the new deals and the capacity of building in China and Brazil so with all the country manager in Brazil.

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Philippe Barril, SBM Offshore N.V. - COO & Member of Management Board [38]

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All right. Starting by the capacity, I think Bruno was quite specific that we were all seeing some constraints coming. If we are going to cut net fees would be -- which obviously we are not doing because we are delivering a full FPSO for the full life cycle. And starting by (inaudible) -- I think we refer [to as the] U.S. I think we have, currently, agreements [with SWS] and CMHI, all ferries [observed]. We currently have [sanction 3] because we are discussing multiple opportunities in accordance with all the agreements and the [slot fare book] and align them with the opportunities we see on the market. Likewise, we took a prudent approach on the tough side, we've removed some capacity in our vow to support their wealth and typically, there was one of Mero 2, which was just a recent concession.

I want to stress as well that we did the same with the suppliers and somehow you are seeing some of our spending in the only tendering [early] engineering in [order] to develop not just a final agreement but as well a solution that can integrate into the Fast4Ward program because it's a program, and we are working and a way to [break down] the [mergers].

Now coming back on the Brazilian market, the way we look at the market is more, as Bruno has mentioned, on a 3-year basis. So we are confident, and you see that in the slides, with the number of positives, at least they're going to be sanctioned in the 3-years period, and that we should be the best place. I want to stress that we've been very disciplined, and discipline is what we have been targeting in Mero 2. This was a top priority, and I'm very happy to assist you all day.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [39]

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And on Mero 2 on the financing, Douglas?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [40]

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Yes. So as I mentioned -- as we've been mentioning, we have, overall, a very efficient financing model. We can finance a large portion of the cost with debt. And then when it comes to the cash equity component, it depends where we are in the cycle, how we're positioned on liquidity. We look at that, and we are able to mitigate then some of the -- of cash equity with the sales partners. We talk about around 50%, can be a bit lower, can be a bit higher. So we've taken a look at that, also considered the financing options that particular partners bring. And in the round, decided here, at this point in time, 35% is about right given where we are. Obviously, we maintain flexibility to sell a bit more if we decide that makes sense in the future.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [41]

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Okay. Shall I leave the other questions for the IR or...

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [42]

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Well, you can go ahead now.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [43]

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Okay. Then on the margin, you mentioned some small statements on that. The margin on total portfolio over 63% on average. The statement was that it will be lower, 2019 and '22. And in fact, we now see it higher. How should we model that going forward?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [44]

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What I said is it's the average upgrade. So the average will be above 63%, but as we've been guiding -- what we said before, relative to the average of 63%, that was the '19, '20, '21, '22, it will be below 60% and then actually goes above 65%. So that's how you get the average of 63% overall. Now that average will go up as a result of the new project. And as I said, once we have a better view on things like partnering, et cetera, on Mero, we'll update you with a more firm number.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [45]

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Okay. And then one last question. [And you receive 12] who you spoke about active contractors. Who would you view as active contractors, and what would you see as major [focus]?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [46]

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Active contractors in the [competition]?

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [47]

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Yes.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [48]

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The normal competitor that we have seen so far. I mean at the end of the day, the market capacity is fairly well-known in the industry, and the competency is fairly well-known also. You need to look at the history over the past 10 to 15 years to see which contractors have been able to deliver on time. And it's already limited to 2 fingers on one hand, and that's it.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [49]

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Okay. And in terms of major, you're talking about 150-plus?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [50]

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Of FPSO yes. FPSO is more than 100,000 barrels a day. Those are large-size FPSO. When you go above 100,000 a day, the complexity of this is such that if you don't have the experience, there is a huge amount of risk to deliver those things on time and financial risk also. That's my comment of -- if you want to become a millionaire, you [stop] a billionaire in this business.

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Operator [51]

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Our next questions are from Mr. Thijs Berkelder, ABN AMRO.

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Thijs Berkelder, ABN AMRO Bank N.V., Research Division - Equity Research Analyst [52]

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Congratulations with the results. Coming back on the question from -- on the margins in Lease and Operate on the short-term. In 2019, to get back to a margin below 60%, your second half margin should be something like 55%. Can you explain how you will reach 55% margin only in Lease and Operate in the second half versus 65% in the first half?

Second question is on your communication on, let's say, free cash flow. At the Capital Markets Day, you indicated you see a net cash contribution of $250 million per annum, up from $220 million which you communicated at year-end. If I now look at the picture, it more looks like $350 million, $400 million per annum. Is that correct? And should I conclude that dividend, this will go up in the same proportion?

Final question on net debt to backlog. Historically, this move between 15% and 20%, you're now at 14% only. So you have an extremely strong balance sheet despite all the cash out in H1. What is your ambition level, is that 20%?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [53]

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Okay. Is that your questions?

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Thijs Berkelder, ABN AMRO Bank N.V., Research Division - Equity Research Analyst [54]

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Yes.

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [55]

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Okay. Very good. All right. So when you talk about 65%, I think you're looking at the EBITDA to revenue margin, but the cash margin is different. Yes, as I mentioned, you need to take off the deferred income. And we give you what that is in the note in the financial statements, but it's $100 million for this year. So you got to factor that into account. Then I think you talked about the $250 million, the $220 million, what's going on there. The $250 million was the average of the backlog through -- previously through to 2036. So that's the average. So some years, it's higher, some years, it's lower. Specifically, because of the deferred income or the declining thereabout impact in the year -- this year and the next 3 years, we see it being a bit lower. So that's why we said it was $220 million. Regarding -- you talked about the dividend. I mean let me just say, our policy on capital allocation remains unchanged. So we're prioritizing growth and the dividend, noting we've got a very efficient financing model where we have excess cash, yes, we've got the options for the buyback. The way we look at this is we're going to be updating our plans and forecasts at the end of this year, and that's when we look at shareholder returns and how we handle that for the following year.

Indeed, we -- then moving, I think, to your next question, we do have a very strong balance sheet. As you can see, most of the debt is nonrecourse, tied to the individual projects. Yes, the ratio is 15% to 20%. So that's the sort of guidance going forward, but we don't have a particular ambition as it regards getting to a certain level. But obviously, we're very motivated to add more projects to the backlog. So that will mean more debt, but then the ratio is what we're saying will stay within that kind of bandwidth.

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Thijs Berkelder, ABN AMRO Bank N.V., Research Division - Equity Research Analyst [56]

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But coming back on maybe share buyback program, you've done $180 million of $200 million. Why not initiate a second buyback program or enlarge the current program?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [57]

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Yes. As I said, what we do is we review our plans and forecast at the end of the year, then we decide what we want to do. So that's the position on that.

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Thijs Berkelder, ABN AMRO Bank N.V., Research Division - Equity Research Analyst [58]

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Okay. Well, you know that around year-end, you will add another 1 or 2 contracts and probably, you will have to buy back at a much higher share price.

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Operator [59]

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Our next question is from Mr. Quirijn Mulder, ING.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [60]

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This is Quirijn. Can you hear me?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [61]

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Yes. Yes, [we can].

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [62]

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Perfect. A couple of small questions on the Liza Destiny. You planned to deliver in 2020, if I look at your -- and then for 2 years to operate for Exxon. What's then the reason to have a BOT in at the end of 2021 and not 2022?

The second question is about the 35% from the -- probably by the Japanese stepping into Mero 2. Any idea about the planning of that, the timing of that?

Then about the bonuses. Given your utilization rate goes up in the first half 2019 against the last couple of years, did it have a positive impact on your EBITDA in the first half of 2019, given the leverage of bonuses with higher utilization rate?

And my final question is about the [Forest Hill]. Do you consider to have a Forest Hill to be ordered in next couple of months? Or are you saying we are still waiting for more news from our clients with regard to potential projects?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [63]

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Okay. So thank you for that. And Douglas is going to take all the financial question, and Philippe is going to speak about the next part of the program for the MPF.

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [64]

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Okay. So you asked about the timing of the sell-down, as I mentioned, we're in discussions with the prospective partners at the moment. Hopefully, aim targeting to finalize the negotiations by the end of the year. And yes, you talked about the bonuses. Was there a big boost? I mean I would say, nothing particularly out of the ordinary on that.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [65]

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Philippe?

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Philippe Barril, SBM Offshore N.V. - COO & Member of Management Board [66]

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Yes. Regarding the health programs. So the 2 first ones are -- been allocated to project our [NFID]. Third one, we continue to progress with engineering. We've identified customer for specificity of this project is not yet to FID. We have the frame agreement with [both Laos] and the intent is really to develop (inaudible) with (inaudible) and we are engaging with them in [personal] whenever we're going to be a [default concession realm], we'll inform the market.

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [67]

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And then I think -- sorry, there was the question around the timing on Liza, why wasn't it yet 2022 and not 2021? Yes, I think it's important to note, actually, that this is -- it's an assumption that we have based on the current expectation. Still, the formal contract is for -- it's for 10 years, but it's just we expect the client to buy it sooner. And as we've said, after 2 years and basically, what we -- I think that then implies kind of right at the end of 2021.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [68]

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So -- and what's the reason that it -- for Exxon to make up his mind on this project?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [69]

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Well, the -- we're going to -- we'll start-up the project. We'll see how the operations are going. And it gives them some -- it basically just gives them some flexibility. It's obviously going to be the first vessel. So they'll have a bit of flexibility as to when they -- [back at --] earlier than this, could be later than this, but it's a sort of P50 estimate, we've said 2 years.

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Operator [70]

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Our following question is from Mr. Henk Veerman, Kempen.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [71]

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I have 2 remaining. Firstly, on the Turnkey sales year-on-year, it seems to have more than doubled, yet EBITDA is underlying approximately flat, which seems to imply a sharp increase in the OpEx. Doug, as you already mentioned, higher marketing costs. But could you maybe give a little bit more color on what OpEx did then year-on-year? And there is $300 million backlog for the remainder of the year in Turnkey. I assume that Mero 2, I mean just given the early stage, doesn't have a large benefit in the $300 million. So what kind of margin should we expect there? Could you give a little bit more color on, let's say, the mix into the second half of 2019?

Then the second question. During the C&D and before, we have heard quite some bullish statements on the floating LNG market. I understand that you also have a dedicated team on there. Are you still actively tendering for projects there? And could you give a little bit more color on how those markets have developed in the last months?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [72]

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Okay. Let me start kind of on the -- on Turnkey. So yes, the revenues are -- have increased. EBITDA didn't increase. But let me just explain a little bit more on the reason for that on a comparative basis. So yes, we definitely had more margin in Turnkey, although it's really important to note as well that as of the first half, there's nothing in there from the Liza projects or Mero 2 because we own them 100%. But things like Castberg, for example, some of the other projects that was Turnkey margin. But on a comparative basis, this was about the same as we had some quite reasonably significant one-off items in the first half last year. So those 2 kind of offset each other. And then we had some things bringing it down. You mentioned OpEx was really pre-sales. So this is the work that we're doing, stepping up to work on new projects, tenders, that kind of thing. So that explains the difference there. Yes, we're expecting an increase in further growth in revenue in Turnkey for the rest of the year, should see some margin benefit but not hugely significant.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [73]

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Thank you. On the gas market, we continue to be active on the FLNG market. I think what -- now if we are looking at FLNG and whatever it's competing in LNG-established province and then we have similar competition in deepwater on Shell oil, we'll have the LNG in the U.S., which is very big. Many LNG on thought prints are being sanctioned. When you are comparing project and then FLNG cannot be competitive against LNG, especially if those are expansion. We're a strong believer there is an opportunity in import of FLNG. But primarily when you're talking about associated gas in established deepwater province and then where there's no [really long] solution to [otherwise], the LNG. So yes, we continue to be bullish that there is a position for FLNG, and we're working with partners, and we can continue to inform when there are some real opportunities.

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Operator [74]

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Our next question is from Mr. Edwin van der Schoot, Telegraaf.

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Edwin van der Schoot, [75]

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I would like to start off with a question for Mr. Wood on -- your predecessor was pursuing the credit rating in order to be able to issue bonds. Afterwards, he looked at a possibility of an MLP IPO in the U.S., but this morning, I hear you say you're actually quite comfortable with your balance sheet. So can I conclude from that, that SBM no longer pursues a credit rating?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [76]

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Yes. Thanks for the question. So yes, we indeed have a very strong balance sheet. We have a very efficient financing model. But what I would say is regarding the type of debt and equity that we use in that financing model, we are continuously exploring other sources, other options of, yes, reducing the cost in those regard or just increasing the optionality that we have in different sources. So it's -- we're not standing still there. We're looking at other sources of equity, potential different partners. We've talked in the past about this platform that we've set up under which we intend to put all of our FPSOs, and that will give us the option to access different sources of debt and equity in the future. I mean right now, we're not pressing the button on anything like that, but very much, we still continue to look at value-adding financing opportunities. And yes, in that regard, if it did ever make sense to have a rating, we would look at that. I'm not going to rule that out completely. The MLP market itself isn't looking so attractive right now, but there are other pools of liquidity that we're positioning to be able to tap into in the future.

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Edwin van der Schoot, [77]

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All right. Another question about capacity in the market. So as usually, you see a lot of M&A in a downturn cycle. So I guess now we're in upturn. So you wouldn't expect much M&A, but still, I would be able to think M&A might provide you with an opportunity to ramp up capacity. So any thoughts on that?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [78]

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Yes. On the M&A, we -- it's something that we do not exclude, but for us, M&A would be already more to strengthen some of the key points of the company, to have access to new technology. So we might not be looking for large M&A, but we're already looking at some targeted M&A. But again, our strategy really doesn't need an M&A in order for the company to develop. If the right opportunity presents itself and is in line with our strategy and our development, we're going to look at it. But that's really the full extent of it.

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Edwin van der Schoot, [79]

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All right. And then a couple of years ago, I guess it's 2 or 3 years ago, you mentioned that Mexico was possibly the new Brazil. Now when I look in your presentation and all the FPSOs coming up expected, I do not see anything in Mexico. So what's going on there? Why is there any concrete...

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [80]

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Your point is valid. The Mexican market, some drilling is going to start or starting now and will increase by next year in deepwater. So let's assume that there is some discovery, the project would be -- will start to be developed by 2022, 2023. So which is really outside the 3-year window that we have provided, which is 2019, 2020 and 2021. So that's the only reason why nothing is mentioned. The other part is in the chart that you're making reference to, we're only making reference to projects which are identified today and for which we have high degrees of certainty in terms of development in FID. So there's going to be other opportunities, even in the market, which are highlighted in the chart, of further development. So it's not an overall increase, in short. It's really, first of all, over a 3-year period. And second of all, only the notified project.

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Edwin van der Schoot, [81]

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But in my comparison of Mexico being possibly somewhere in the faraway future in the [new] Brazil, is that a bit overspeculated or would you say that as...

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [82]

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No, I think there's still the opportunity. I mean when you see some of the blocks which have been bought by a number of operators, the size of the blocks, the fact that they're in adjacent to oilfield, which has been discovered in the U.S. side of Gulf of Mexico, the potential of development in Brazil -- in Mexico is quite significant. On top of this, compared to the U.S. Gulf of Mexico because the legislation is different in Mexico and because the infrastructure is quite different in Mexico compared to the U.S. side of the Gulf of Mexico and see so how going to be the way to develop those project. So I'm still extremely hopeful that Mexico is going to develop, and it's going to develop to a sizable market.

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Edwin van der Schoot, [83]

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All right. Now there was some [lost rebounds] in 2045 Mero lifespan that you projected. But it is even excluding a possible decent extension. I wonder would you see your [all] projects in the chart, we refer to all projects that come on stream in the next couple of years to have a lifespan horizon at around 2045, maybe 2050?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [84]

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I mean the projects which are being developed today in deepwater are usually large project in terms of reservoir, in terms of capacity of -- production capacity. So most of those project are going to have a long life of 20 to 30 years. Now the contract that the operators are going to assign can be truly different. They can do a Liza Destiny, which was the first program, the first FPSO on the ExxonMobil project is quite selling. They started with a 10-year lease and operate project initially, simply because of the level of uncertainty in the reservoir and so on and so forth. So not all the contracts are going to be for lease and operate for 20 years or more. You could see 10 years, you could see a Turnkey project and so on. So -- but having said that, the field which are going to be developed are going to be large field and field with a long life.

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Edwin van der Schoot, [85]

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All right. And then my final question would be on shareholder engagement. We see [big] oil, predominantly European oil companies like Shell and Total being kind of, to say so harassed by shareholders on their -- on the things they do regarding the Paris Climate Agreement. How is your dialogue with your shareholders? I mean is renewables, the Paris Agreement? Are those topics that are increasingly coming up? Or is it just [unknown eyes] before your shareholders?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [86]

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Those are definite topics which are important for shareholders and the production investor that we're meeting. Now the way we're addressing the SBM Offshore is, first of all, to take into consideration the reality of the energy market. The population is growing significantly throughout the world and the wealth is increasing significantly. So by 2040, we're basically going to have to increase the energy supply by more than 50%. In order to do that, the world is going to have to find the best solution to do so. Oil is going to be part of it, gas is going to be part of it. Renewable is going to be part of it and so on and so forth. Our approach to this is, today, SBM Offshore is really concentrated in the old market, which has been -- where historically we have been. And we're trying to develop ways to reduce our impact on the environment significantly. So to give you some idea today, we are around 12- to 13-kilogram of CO2 per barrel produced, and we're aiming at decreasing this by 30% over the coming 2 years. And we're basically trying to reduce the impact that we have in producing energy like other reducing impact by having better insulation and so on and so forth. So that's one leg of our approach.

The second leg of our approach is already developing the capacity into the energy market, into the renewable market and so on and so forth. We need to be ready for the energy transition. And this includes also the gas market because one of the things today -- 80% of the energy worldwide is linked to carbon energy, and the majority of this for the electricity production is actually linked to coal. So the transfer of coal to gas or the transfer of coal to renewable is something that we're going to see in order to increase the electricity output. And we want to be positioned on this market where there is opportunity and basically reducing the impact to the environment. But it's a question which is being asked, definitely.

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Operator [87]

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Next question is from Mr. Andre Mulder, Kepler Cheuvreux.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [88]

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Remaining question on (inaudible). Normally, the effects contract rolls over into options. According to Upstream, that was -- aims to hand the [upcoming summer] over to you after the end of the contract. Can you comment on that?

Secondly, on the other ones that come off contract, like Deep Panuke, it's early days, would they be center the scrappage? Or do they have remaining life? And last, I came across a statement in Upstream that there's an impairment on Thunder Hawk of $16 million. Is that right? I could not find it back.

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [89]

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Okay. So Thunder Hawk [ordered us] to give you the information and [why] is looking for the information. I'm going to give you the -- on the extension of project, there are some opportunity of extension on different project if the field is there, if the upgrades to the equipment, which needs to be done makes sense and so on and so forth. So that's -- we're looking on a case-by-case basis. And if there is the right opportunity presenting itself, we're obviously going to negotiate with the client. Now having said all of this, our policy has been for years and still is not to take any risk with regard to the extension. So basically, what we're doing is all the accounting of an asset is depreciated fully through the life of the contract. If the life of a contract is 1 year, it's going to be depreciated over 1 year. If it's 20 years, it's going to be over 20 years. So that's one portion.

There is no risk associated to that. Then if you look, I think you had a question on Deep Panuke. So I mean the field today [stopped]. So we are basically running down the contract according to plan, in line with the request of clients and looking at if there is opportunity. But the statement that I made before in terms of asset value and risk for the companies that we made. Now Thunder Hawk is a different case in point, and Douglas will give you more of the detail there.

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [90]

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Yes. So I was just checking exactly where in the financial statements we disclosed this. So if you -- Page 38, note 13, we indeed disclosed that we've impaired Thunder Hawk by $16 million. And the reason for that is that Thunder Hawk is very unique in our portfolio because the charter has some linkage to production profile. And what happened during the first half is that the operator has revised downwards the forecast of their production profile. So mechanically, that means from an accounting perspective, we need to make an impairment. And what I would say, though, that can go the other way. So to the extent they upgrade the production profile in the future, we've reversed the impairment or indeed, if they have tiebacks, which would be part of the strategy, one would assume, and you could have a reversal from increased volumes. And actually, that happened in the past when we had a tieback onto the platform. So that's the story of Thunder Hawk.

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Operator [91]

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Following question is from Mr. Edward Donohue, One Investments.

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Edward Donahue, [92]

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Very, very simple back of the envelope. Any reason why you shouldn't take H1 EBITDA of $399 million and just times that by 2, listening to the entire presentation so far?

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Douglas H. M. Wood, SBM Offshore N.V. - CFO & Member of Management Board [93]

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Yes. That's an approach you can take. I would note, we've increased the guidance from around $750 million to above $750 million. As we see how the rest of the year goes, we'll update our guidance as necessary.

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Operator [94]

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We have another question from Mr. Mick Pickup, Barclays.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [95]

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Just hopefully, 2 very quick ones. Firstly, just on the new Fast4Ward, what proportion of top sides are of standardized catalog basis?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [96]

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Really depends on the units, but it's anywhere between 30% to 60% at this stage and going.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [97]

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And that's -- you're seeing that progression through the 2 you've signed?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [98]

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Yes, definitely. Definitely. Because the more you build, the more you capitalize on this and the more you learn. So it's only going to go in increasing, obviously. But then you have some specificity associated with gas treatment, for example and where there is some specific on this, but we have some module, which are already to be well mature and basically are coming from the catalog, yes.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [99]

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Okay. And then second one, on the Wave Energy Converter, you've made that first investment decision. Is that a stand-alone Wave project? Or is it integrated into a wind farm to take advantage of the infrastructure [per se]?

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Bruno Y. R. Chabas, SBM Offshore N.V. - Chairman of Management Board & CEO [100]

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No, it's a stand-alone project where we are planning to -- we're looking at the usage of the electricity insight in a local grid, but it's a stand-alone project.

Okay. So I believe that's the end of all the questions. Thank you very much for attending this call. We wish you a good day, and you can now resume a normal activity. Thank you very much.

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Operator [101]

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Ladies and gentlemen, this concludes this SBM Offshore event call. Thank you for attending. You may disconnect your line.