Subsea 7 SA Executive Insights: Brazil, North Sea

On Friday, Subsea 7 SA (OTC:SUBCY.PK) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Brazil

Philip Lindsay – HSBC: A couple of questions if I could. First of all, just on Brazil. What are your likely thoughts on the next round of PLSVs in Brazil? I know in the past you’ve been skeptical about where are these vessels can be sort of built in Brazil in the timescales necessary? Are you anymore comfortable now then say three or six months ago in terms of building these vessels in Brazil? The second question is on Australia. Just a question really about your ability to execute in Australia quite specifically on the Gorgon, we’re now at a competitive market, we know the supply chain look stretched perhaps not dissimilar to Brazil. So, can you just talk about your experience to-date and how you’re managing the risks there?

Jean Cahuzac – CEO: First on the PLSV built in Brazil, I think the industry is aware of the challenges of the local content constraints and the challenges of building in Brazil. Last year, you may recall that we decided not to bid a newbuild PLSV in Brazil because at that time we were not comfortable that we had the solution which would allow us to manage the risk and the budget. We’re reviewing today what we’re going to do on this bid, but it’s clear if we were to commit to a newbuild in Brazil, there would have been – we would need two perquisites. We would need a solution that we’re comfortable with on the shipyard side, but we would also need some changes in the traditional Petrobras contract to balance better the risk between the contactor and Petrobras. We are working on that if we were to fulfill these two objectives, we’ll be in a position to bid, if not we will pass. Regarding Australia, I think you’re right, when you mentioned that there is a pressure on people resources in Australia and on supply chain. It has an impact on the cost of doing work there and something that we have taken into account when we bid at Gorgon and I think we have been in Perth for a while. We have a good team there, but we also, if I can say outsourcing some resources within Subsea 7, but outside of Australia to support this project. The project is going well. I’m comfortable where we are on this Gorgon execution.

Philip Lindsay – HSBC: A quick follow-up if I could. Do you have any more visibility or are you sort of closer in the process and some to gaining the permit for the (indiscernible) in Brazil.

Jean Cahuzac – CEO: I mean the permit, I wouldn’t guess when that can happen and based on the experience of the Guara Lula project, any project that we are bidding today is based on the assumption that we will not wait for license and therefore we are putting all the cost in our business to make sure that we are protected.

Simon Crowe – CFO: I mean we continue to hold the line, we do try and get that permit, but as Jean said all the bids are (accosted) with the assumption that we do not have that facility available.

North Sea

Frederik Lunde – Carnegie: Congratulations on the best North Sea results since before the times of crises in North Sea this quarter. First of all, look at the margins for the rest of this year in the North Sea, is Q1 a reasonable starting point or was that boosted to a large degree by these completions that slipped from last year, how should we think about pricing this year compared to say 2006, 2007, 2008?

Jean Cahuzac – CEO: When you look at the margins for the new jobs, I mean probably we have to say that we are back to the margin that we had seen in 2006, ’07 and ’08. What we said about what you said about the North Sea that we still have a number of project which were awarded in 2010, which will be executed in 2012 and we will phase out in 2012 and then we start to see the new vintage of project kicking in with improvement margin in ’12 and it will be a bit better in 2013. So, I think the North Sea market continues to show the momentum that we had seen last year and we are in a position to-date to be selective on the project we are bidding.

Frederik Lunde – Carnegie: I am looking at the combination of the North Sea and West Africa, should I say those two units to report higher revenue and higher earnings in 2012 and 2011?

Jean Cahuzac – CEO: What I think as we – as you said I mean what we said is that North Sea will balance West Africa when West Africa goes a bit down in the second part of the year, and that’s what basically lead us to the indication that we’re giving for the overall consolidated result to ’12 which we saw the progress from ’11. One of the thing in West Africa which you need to be contrast is that some of the revenue that we have in West Africa comes from procurement and on this large EPIC contract, the margin which are on procurement are lower than the margin on that we have on engineering project management and execution. So while, the overall margin in West Africa are started to improve or have started to improve for some time, on the new project which will be awarded to the market in the coming months. Overall there is on percentage margin, there is an impact of procurement.

Frederik Lunde – Carnegie: Final question on the North Sea, if you look at the chart showing the progression on the major project, it seems like you have a (quite good build) in this year, just wondering, how much available capacity you have to take on (small contract and spot subs)?

Jean Cahuzac – CEO: We have some available capacity at the end of the year. It depends what’s going to happen in Q4. Will we have a repeat of 2011 or not, it’s too early to say. But the other point to mentioned in the North Sea, that we expect some more large projects to come to market award this summer. To give you an example, I mean if you have BG Norge, you have the (Marathon Oil), they are all projects which are more than which are more than $300 million or $400 million, which obviously, I mean requires vessels that we would have to execute this project post ’12, if we were to be awarded this project, I don’t know if we will. But there is also the added value of the project that we have on the EPIC project which is going in the right direction, in addition to facility division. So, when I look at the North Sea, I mean there definitely positive signals.

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