Eneti Inc.
Q2 2021 Earnings Call Transcript

Published: 17 Aug 2021

[Operator:]

Hello, and welcome to the Eneti, Inc. Second Quarter 2021 Conference Call. I would now like to turn the call over to Hugh Baker, Chief Financial Officer. Please go ahead, sir.

[Hugh Baker:]

Thank you, Operator. On the call with me are Emanuele Lauro, Chairman and Chief Executive Officer; Robert Bugbee, our President; Cameron Mackey, Chief Operating Officer; Tim Sanger, Managing Director; David Morant, Managing Director; James Doyle, Senior Financial Analyst; and today we are also joined for the first time by Blair Ainslie, who is the CEO of Seajacks; and Sebastian Brooke, who is the Chief Operating Officer of Seajacks. Earlier today we issued our second quarter earnings press release, which is available on our Web site, www.eneti-inc.com. The information discussed on this call is based on the information as of today, August the 17th, 2021, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today as well as Scorpio, as well as Eneti's SEC filings, which are available on our Web site and at www.sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be available for two weeks on our Web site. If you have any specific financial modeling questions, you can contact me later and we can discuss them offline. Now, I'd like to introduce Emanuele Lauro.

[Emanuele Lauro:]

Thank you, Hugh. Good morning or afternoon everybody, and thanks for being with us today. Our second quarter press release largely illustrates our final steps of divestment from dry cargo. One year ago, we laid out our rationale and our plan to exit the bulk business. And the last several quarters reflects the execution of that plan. However, what we find most exciting today is our future. Our recently announced acquisition of Seajacks has now closed, and we're turning our full focus to the business of turbine installation and the compelling fundamentals of the offshore wind industry. We could not be more pleased with Seajacks as our platform to drive and deliver shareholder value. In its brief history, Seajacks has established the leadership position in turbine installation; first in the U.K., first in Taiwan, first in Japan, and first in the United States, all of these "Firsts" really represents a tenacity and a commitment to the highest standards of service that we respect, but that's more importantly are clearly respected by our customers. So, that being said, and as I mentioned on our call on August 5, announcing the transaction, our work really starts today. It's up to us to leverage on the features that both Eneti and Seajacks bring to the table to make this a success. Seajacks's large and versatile fleet will be further enhanced by the Eneti's high specification newbuilding announced previously this year. And together, this full integrated fleet will be able to install modern turbines anywhere in the world quicker, more efficiently than ever before. I'm delighted as Hugh has just mentioned in his introduction that Blair and Sebastian could join us for the call today. And we will do our best to answer questions. Please bear in mind that the Seajacks acquisition only closed a few days ago. So, keep that in mind when asking questions. But with that, I would now like to turn the call to Robert.

[Robert Bugbee:]

Thank you very much, Emanuele. Just like to echo Emanuele's words in all respect. Thank you for joining, and really great to have managed to do this merger with Seajacks. We're really looking forward to meeting all their groups, not just Blair and Sebastian in the near future. With that, we'd just like to open it out to questions. Thank you.

[Operator:]

Your first question is from the line of Greg Lewis with BTIG.

[Gregory Lewis:]

Yes, hi, thank you and good afternoon, good morning everybody. I guess just as we think about trying to start to build out our model assumptions for next year, any kind of color, and I believe I asked this on the last call, any kind of color on how we should be thinking about, however we want to think, however you guys want to talk about, maybe revenues or utilization for some of these smaller -- for the vessels that just have less contract coverage in later this year and in '22?

[Emanuele Lauro:]

So, I think it would be perhaps worthwhile to start with Sebastian, giving us an overview of those smaller vessels, what they do, and what their prospects are.

[Sebastian Brooke:]

Sure. So, the smaller vessels are primarily engaged in maintenance activities, obviously in the European sector, but their contracting horizons are typically quite short. So, the budget cycle starts at the end of each year. So, it's very difficult to be granular about what contracts will be in place next year. But based on historical utilizations and day rates, we'd expect those to continue going forward. And as the installed capacity of turbines and substations increases, we would expect utilization in following year to increase accordingly.

[Gregory Lewis:]

Okay. And so, as I think about the utilization for these vessels, it's kind of track similar to the oil and gas industry, where maybe when the weather is more harsher, and at the start of the year, that's when utilization is going to kind of be a little bit weaker. And then, as it becomes more of a -- more comfortable working environment, we expect a lot of that bulk of that maintenance and utilization to be more in periods of time when there's longer daylight hours. Is that kind of a fair way to think about it?

[Sebastian Brooke:]

I think that's a fair way to look at it. But I'd also caveat that with the fact that there are a number of longer term contracts out there for substation commissioning and also on the maintenance side. So, there has historically if you go back to two years, been longer term contracts available and open to market, but generally yes, it has been seasonal in recent years.

[Gregory Lewis:]

Okay, great. And then just as I think about this, I mean welcome to the team at Eneti, I mean this must be -- I mean it's going to be interesting to see how the two companies merge. But I guess a question for you is, as you think about Seajacks and really now that you're a public company inside and you're part of Eneti, what types, how should we think about that expanding Seajacks' ability to maybe be bigger, leverage the Seajacks existing platform through Eneti, i.e. should we be thinking about a lot more growth opportunities that may be previously Seajacks as a standalone private company weren't there?

[Sebastian Brooke:]

Yes, I think that the industry as a whole at the moment has gone from being a kind of single market in Europe, being a multi market industry, where you see a number of opportunities in Asia-Pacific, you see opportunities in America, as well as in Europe, and to be able to leverage off our operating platform with the kind of expansion plans or growth plans that Eneti have, I think, is a very powerful combination.

[Gregory Lewis:]

Okay. And then, understanding that maybe there is still things need to be discussed with the menu realizing Seajacks has done -- has had an existing relationship with Dominion prior to the merger with Eneti. Is there any exclusivity around Seajacks, the work you've done with Dominion, in terms of the company's go forward ability to do things in the U.S. market beyond Dominion, or is there some sort of exclusivity we need to be thinking about?

[Emanuele Lauro:]

Cameron, if you'd like to take that the U.S. story.

[Cameron Mackey:]

Sure.

[Emanuele Lauro:]

Go ahead, Cameron.

[Cameron Mackey:]

Yes, so obviously, our first priority is to sit down with Dominion and understand how we can fulfill their expectations and see where the potential may lie to work together going forward. I don't think that our destiny in the states is necessarily tied to Dominion. But obviously, it's a very important relationship that we're stepping into. And we certainly are going to give them every benefit of the doubt to understand, what their plans are and aspirations are and it's just very early to draw a line on where that exactly is.

[Gregory Lewis:]

Okay. Perfect, great, thank you all for the time gentlemen.

[Operator:]

Your next question is from the line of Turner Holm with Clarksons Platou.

[Turner Holm:]

Hey, good morning. Good afternoon, gentlemen. Thanks for taking the questions. I just wanted to follow-up on Greg's questions about just getting a better understanding of the Seajacks business. And I guess building out the assumptions and the model as we think about this going forward. With regards to the larger vessels, Zaratan and Scylla, how is the contract outlook shaping up for, I guess '23 and '24 where it looks like, you still have some open exposure?

[Emanuele Lauro:]

Yes, so with regards to '23, and '24, we have a lot of conversations going on about work over that period. All of our clients have different contracting strategies. So again, trying to work out, when they're going to award contracts, is challenging at best. But rest assured, there are a lot of conversations going on about work at that time. It's just difficult, if not impossible to gauge, when those contracts that we signed and awarded.

[Turner Holm:]

Sure. And I guess is a follow-up for that. I mean, we've seen some I guess, rates picking up a couple of publicly available data points in the high hundreds and in euros per day perspective, can you kind of walk us through the evolution of kind of the day rate picture for the larger assets over the last year or so and kind of where you think it might go in the near-term future?

[Emanuele Lauro:]

I wish I could be honest, but I can't give too much detail on that, because it varies between the markets. So the demand supply picture in Asia-Pacific is very different to the demand supply in Europe. So, there is a kind of quite a wide, but a wide range of outcomes. I would say that, generally the demand for big vessels is picking up. We all know what that macro picture looks like. And so, it's a strengthening market. And we think that the prospects for capable units like seller, and the newbuild are good.

[Robert Bugbee:]

David, you like to take that? David?

[David Morant:]

Yes, I think that's very comprehensive answer. I think the only thing I'd add to that is just that, we're very confident in projections we've outlined, Turner to the market around the base level of our expectations on the newer vessels. And we'd expect on the water tonnage to track that very closely. So I think we can see as Sebastian's referenced the tightening markets, and the direction of travel, both in terms of term and rates. And we certainly are very confident in what we presented to the market and Seajacks ability to perform in line or above those expectations.

[Turner Holm:]

Excellent. Okay, thanks, David. And then just thinking about Scylla, obviously it's one of the most capable assets in the market today. Undoubtedly, I guess at the same time, we've seen some of your competitors think with their class vessels, or even Fred Olsen, which has the smaller units upgrade is that something that you already even consider with the Scylla, or you think they're fully fitted for the future?

[Robert Bugbee:]

It depends on each of the requirements and contracts, different technical capabilities. We're always looking at the possibilities of upgrading all of our vessels or looking to make tweaks, kind of operating tweaks to them. There is capacity to modify booms and do some technical upgrades on Scylla, if or as required, but at the moment, we're happy with that configuration for the bulk of the 14 class megawatt turbines and sites going forward.

[Turner Holm:]

Sure, sure. And then just one last one for me, it's more on the financing. I guess the dry bulk sales are completed in the transaction is completed with Seajacks as far as I can tell, how would you all characterize the company's sort of financing structure, especially as you think about the next couple of years, and just kind of covering the CapEx schedule that you have with the newbuild?

[Robert Bugbee:]

I will discuss first and if anyone else like to add, that's fine, the first step is to done the actual merger. And I think we've got a structure here between the shareholders, the existing bank, IMG whereby we can do the merger, we can there's no pressure for us at this point to raise equity or to refinance. We have time to do that. But clearly, the company has ambitions to really take advantage of what we see as being some pretty exceptional returns going forward, whether that's in the international markets, or in the U.S. flag markets. And so, over time, we would expect to put in a more permanent debt financing position and we would also seek to take opportunity of that growth in the markets by increasing the equity capital of the company too, I mean we have strong shareholders and we have the actual Scorpio side, hasn't done this, just to stay at status quo. We're quite openly wanting to be a leader. We're a leader with Seajacks now in terms of operation and capability. And as Emanuele said, the Seajacks is being the first into many markets. And we think we've got that structure with the U.S. listing, et cetera with the shareholders we have to really take advantage of an industry that is going to have great growth, and most importantly have good cash flows and good returns on equity and total capital.

[Turner Holm:]

Perfect. Okay. Thank you, Robert. I'll turn it back.

[Operator:]

Your next question is from the line of Randy Randall Giveans with Jefferies.

[Christopher Robertson:]

Hi, this is Chris Robertson on for Randy, thanks for taking our call.

[Emanuele Lauro:]

Thank you, Chris.

[Christopher Robertson:]

I just wanted to ask following the Seajacks's acquisition, does this change the way you guys are thinking about exercising the option for the additional WTIV?

[Robert Bugbee:]

Well, I'll just cover very quickly first, and then anyone else can chime in. I mean, certainly, certainly with the ways we said the market is developing, it certainly increased our options, and our ability, we think to win contracts going forward because we were working quite hard on contracts without on the Flagship without the presence of Seajacks. And so, Seajacks we're also being have their customers and their customer profile that they could look forward to and now we not only the Seajacks people, not only have a new product that they can put in front of customers, but and Eneti itself has zero questions as to its operating capability. Sebastian, Blair, Cameron, David, if you'd like to add, please go ahead. Yes, that's pretty well what the answer is and hasn't changed our view other than make us more confident being able to take the opportunities through there in the world.

[Blair Ainslie:]

Hey, Robert. Blair here. Maybe I could just add a little, and actually just a little bit of a general comment about the actual takeover and the merger of the two companies. It's very exciting for Seajacks, we've been through a period for the last say last four or five years where we haven't seen the update for growth from our current shareholders. But now we have Eneti guys on board and indeed, our company has grown straight away with the first class vessel coming out of Korea is exciting times for us here and it's very exciting times for all our stuff with onshore and offshore that are reinvigorated, and looking forward to a bright new future with Eneti.

[Christopher Robertson:]

Okay. Yes, thanks for that. I guess just following up, I know that you guys had talked about maybe some of the regional differentials here in terms of the earnings potential, but could you generally maybe describe the earnings differences between the 2,500 X vessels and then the larger asset classes, just trying to understand in terms of scale?

[Emanuele Lauro:]

Sebastian?

[Sebastian Brooke:]

Yes. Sorry, I'm not sure I totally understood the question. Can you run through that again?

[Christopher Robertson:]

Yes. So, earlier you guys had mentioned some of the regional differences between the Asian market and European markets, but I'm trying to understand the earnings potential differences between some of the smaller vessels, the 2,500 X vessels, the Kraken, Leviathan, and Hydra versus the larger vessels?

[Sebastian Brooke:]

Yes. It's really just that work scope. So, you have disparities between the markets, because the tonnage in Asia, it's not that easy to get the tonnage to move out of Europe and into Asia. So, demand and supply characteristics differ between those markets. With regards to the 2,500, the 2,500s are primarily in the maintenance market and in the accommodation and commissioning markets for the substations in the North Sea, and that has its own kind of rate and utilization dynamics, whereas -- and it's kind of almost totally unrelated in a way to the markets of Zaratan, which is a very tight market in Japan, which has some turbine installation geo-tech work, and what have you, and then at the far-end of that, you have Scylla, who is operating again in a totally kind of unique market depending on demand and supply of similar vessels in the region. So, they all have their different drivers for rate and utilization, but they all benefit from the continuing kind of uptick in the industry and the increase in installed capacity across all of the regions.

[Christopher Robertson:]

Okay. Yes, thanks for the additional color on that. I'll turn it back over.

[Operator:]

Your next question is from the line of Ben Nolan with Stifel.

[Frank Galanti:]

Yes. Hi, this is Frank Galanti on for Ben. I wanted to ask about the smaller vessels, so, thanks for walking through those different segments the vessel is operated, but can you give kind of some color on the supply/demand dynamics for those smaller vessels? And then, I guess if there is kind of growing expectations around the plug and abatement market for those, I guess, over the next couple of years?

[Robert Bugbee:]

I'll try to answer that. On the supply and demand for the analogous vessels, the NG2500s, the supply has actually decreased for those exact units over the last, I think, two years, 18 months from six to four. So, two of them have been taken out of the Southern North Sea market to the Middle East by GMS, who is a Middle East based operator. So, supply has gone down. I think on the demand side, it's been a strange couple of years, but for everyone obviously, and that has impacted the demand and the ability of crews to get around the North Sea both on the renewable side and on the plug and abandonment side. But lots of that demand is pent up. And so, we would see that as things normalize and stabilize around the world, we would expect to see a pick-up in demand over the next for the foreseeable future. I think as a general rule in the Southern North Sea, the plug and abandonment work, the trend is upwards in that demand for plug and abandonmentis generally accepted to be increasing with time. There's a lot of very old installations in the North Sea that need to be plug and abandoned as part of the energy transition. And we have participated in that in a fairly major way, and we would hope to continue to be able to do so in the future.

[Frank Galanti:]

Okay, great. That's really helpful. I think that's all I had. I appreciate the time. Thank you.

[Operator:]

Okay. Your final question is from the line of Liam Burke with B. Riley.

[Liam Burke:]

Thank you. Good morning. As you mentioned earlier, the assets are pretty much committed to each geography once they're deployed. As you add new assets, where in the world do you think is the best long-term opportunity to get the highest return from these investments?

[Robert Bugbee:]

It's again slightly difficult to answer that, because the demand and supply dynamic is also -- it's not just a function of the kind of long-term opportunities that come up a year or two years ahead of execution, but it's also where the acceleration capacity is required. So, in a tight market, say, in Asia-Pacific, if a project has been delayed for whatever reasons, maybe the foundation's application has been delayed, or the foundation's installation has been delayed, if you are the only vessel in that region actually taking that acceleration capacity or taking those acceleration requirements might be kind of commercially a more positive situation than trying to book the tonnage -- trying to book these contracts way out in the future. So, there isn't a clear answer there. I wish I could give you a clear answer, to be honest, but that'd be not that easy. I mean, I think that Asia-Pacific has its own kind of nuances, and there is a lot of work going on over there, and there is limited supply of high-end vessels, but equally you might find that there are longer term contract opportunities in Europe. So, it's sadly not a clear answer, but I apologize for that.

[Liam Burke:]

No, no, that's very fair. I was just thinking in terms of the context of the newbuild that's slated down the road, and then potentially the second newbuild that's slated?

[Robert Bugbee:]

I think we will keep our options open, and bid into all markets until we find the right fit.

[Liam Burke:]

Great. Thank you very much.

[Robert Bugbee:]

Liam, I think that Blair, when I first talk to him about this subject and I asked him exactly the same question. I think Blair, if you'd like to tell me the answer you gave me it was really short and sweet.

[Blair Ainslie:]

I think that you need to cover all the basics with simple thought. We look at every opportunity that comes out. It doesn't matter where in the world it is. And you match that up with your availability of your vessels. And if you're fortunate enough at some point in time to have all your vessels contracted, then that tells you that the market conditions are right to order new vessels, and that's what we'll continue to do; always have done that.

[Robert Bugbee:]

And I think that's a very simple way of seeing the commercial advantage. We feel we have received -- because we have got this proven wide experience in many different markets and have not been afraid many times to be the first into those markets. So, at the end of the day, that really allows us to judge everything on a commercial basis, and the net is able to be spread pretty wide too.

[Liam Burke:]

Great. Thank you, Robert. Thank you, Blair.

[Operator:]

Okay. Your final question is a follow-up from the line of Turner Holm.

[Turner Holm:]

[,:]

[Robert Bugbee:]

Well, we're obviously -- we've been -- first thing Dominion was back in December 2018, so it's a relationship that's been unforced over quite a period of time. We brought them, I mean, they were coming up this call, but as you know, they have a large 2.6-gigawatt field that they need to install for themselves. They're also keen to bring to the U.S. market as U.S. residents and citizens and create jobs there. We provide for them the vessel design as such, the specification, the expertise, and knowledge of what it takes to build a wind farm and what the vessel needs to look like. How to operate it? So we will assist them to build an operating organization, which is Jones Act-compliant. At the yard in Texas, we have a team of people there managing their construction supervision to ensure that we deliver their vessel ready to work on time and on budget. So, it's a kind of consultancy type arrangement, but it's got quite a significant scope of work involved. And post-delivery, we will advise them on operating the vessel as well.

[Turner Holm:]

Sure. I mean, do you think that if you do decide to pursue further growth in the U.S. that it will give you a head start on everyone else?

[Robert Bugbee:]

I'd like to think so.

[Turner Holm:]

Sure, sure. And then…

[Robert Bugbee:]

I've been working on the -- personally, I've been working on the U.S. stuff since 2014. So, it doesn't happen overnight. And I'd hate to think that the seven years of work that I've put in personally doesn't give me some kind of head start.

[David Morant:]

I hope so. I hope so…

[Emanuele Lauro:]

And then on the Japanese asset, -- no, go ahead -- David, if you're going to jump in, please.

[David Morant:]

Sorry, I was just going to add, Turner, it really don't relates all to the question that Chris asked earlier on this call around the option and the growth opportunities. I think there's a really healthy competitions capital within the organization. And there we are, as I think you're referencing with the U.S., as Chris mentioned, with the option that we have at the SME, some significant growth opportunities for our capital in this business. And I think that's the primary thing to take away, but we have a platform here with the expertise that Blair and Sebastian have. And also the newbuild expertise that the broader group had to really build this business very quickly, and take advantage of what we think is being in the right place at the right time in terms of the growth opportunity that the industry is providing us, whether that's the Jones Act, whether it's exercising options, whether it's additional newbuilds, I think we very firmly believe that we have a very valuable incumbent position right now along with the ability to attract institutional capital in terms of debt and equity, and very, very strong shareholders. And that puts this business very quickly into a growth trajectory at a very important moment in the evolution of the industry. And that's really the basis, I think, in which we'd like you to see both the U.S. opportunity, which we're excited about, but also the option profile at the newbuild yards that we think are .

[Turner Holm:]

Well said. I just had -- I would almost hesitate to not end on those good words, David, but I had one question on the on the Japanese asset, I guess it's the Zaratan. It's a bit smaller than the Scylla, but it has this Japanese flag. Can you kind of tell us how that works? I mean, do you expect this asset to basically remain in Japan for the foreseeable future?

[Robert Bugbee:]

So, I'll take that one. Yes, Zaratan is smaller than the latest generation of assets, but we look at the Japanese market based on its demand and supply basically. So, it's a very closed market because you can only operate there if you have Japanese flags. There's a limited supply of vessels that able to assist with almost any type of offshore wind farm-related work. So, that includes geotechnical works of every wind farm that every wind turbine that has to go in; you have to take a call at each location on the site. So, there's quite a lot of kind of preparatory work that that would suit Zaratan. And there's also such limited number of vessels in operation over there. And the demand is anticipated to grow so much that you need -- each of these wind farms isn't installed by just one vessel. You can have ancillary vessels that work they may install TPs or may help with commissioning work or whatever it is. So, really we look at the Japanese, or Zaratan in Japan is being a capable asset in a very closed market, which has set in a very closed market, which has a number of different work streams that it can perform, even if it is not with the largest installation of the largest turbines and foundations, if that makes sense.

[Turner Holm:]

So, it's comparable to the Jones Act situation?

[Robert Bugbee:]

Yes, it's like a very…

[Turner Holm:]

For the foreseeable future, yes.

[Robert Bugbee:]

Yes, it's a closed market. We have Japanese cruise, Japanese flag. And while there are a couple of larger newbuildings under construction by some of the big Japanese EPCI contractors, it's not enough to be able to, in our opinion to satisfy the amount of work that's coming down the pipeline, so Zaratan -- which will create opportunities to Zaratan.

[Turner Holm:]

Thank you, gentlemen.

[Robert Bugbee:]

Thank you. Unfortunately, we have David's words recorded. So, there won't be lost . Thank you ever so much. Are there any other questions?

[Operator:]

I am showing no further questions at this time.

[Robert Bugbee:]

Great. Emanuel, would you like some closing remarks or should we wrap it up there?

[Emanuele Lauro:]

No, I think we can wrap it up, thanking everybody for their time and looking forward to being in touch as things develop. And we will be in touch. Thanks a lot for being with us today.

[Operator:]

Okay. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

[Robert Bugbee:]

Thank you.