Saipem SpA

MIL:SPM

Earnings Call Transcript 2018-Q1

[Stefano Cao, executive]

Good morning, ladies and gentlemen, and welcome to our first quarter 2018 results presentation. I'm joined today by Giulio Bozzini, Chief Financial and Strategy Officer; and by Stefano, Maurizio, Marco and Francesco, the heads of our division, in order to provide you with an update of our first quarter performance and strategic actions.

As we continue to navigate the current trough in the cycle, we remain focused on securing new business, delivering projects for our clients through effective execution and enhancing our organizational efficiency. And of course, we are constantly alert to strategic initiatives as I will explain shortly.

Despite the declining level of revenues due to lower activity across all divisions, this approach has allowed us to maintain in the quarter a margin in line year-on-year with adjusted group EBITDA, in line with our full year guidance. This has been possible, thanks to healthy E&C Offshore and Offshore Drilling margins despite the significant revenue drop especially in Offshore Drilling year-on-year.

The E&C Onshore division is working to keep on improving its performance and positioning in current evolving markets. In Onshore Drilling, the difficult situation in Latin America is mitigated by ongoing cost-efficient initiatives. In this area, we started seeing a slight recovery of bidding opportunities.

We closed the quarter with a lowered intake of circa EUR 1 billion mainly attributable to the Duqm project previously announced in February, [ variation ] orders in E&C divisions and drilling contracts.

Book-to-bill ratio stood at just above 50%, and backlog coverage of 2018 revenue guidance has slightly improved to circa 84%. However, I can confirm that we are very active with bids and tenders and enjoy good visibility across potential future awards.

I am pleased to highlight that we have taken advantage of the current trough in the cycle to pursue a strategic goal with the move to acquire our newest vessel to be renamed Saipem Constellation. This new multipurpose vessel designed for deepwater rigid and flexible reel-laying operations gives us across (sic) [ access ] the brownfield tieback market where we had, until now, only a small presence. As a building block of our strategy, this acquisition will be a strong enabler for our integrated subsea project offering, and I will expand later on this.

As a result, our net debt and CapEx guidance have been updated to, respectively, circa EUR 1.3 billion and circa EUR 0.5 billion.

Let me now hand you over to Giulio.

[Giulio Bozzini, executive]

Thanks, Stefano. Looking first at overall group performances. Revenues amounted to EUR 1.9 billion, 15% less than in the first quarter 2017, mainly due to the contraction of E&C Offshore, E&C Onshore and Drilling Offshore activities.

Adjusted EBITDA amounted to EUR 214 million compared to EUR 256 million in 2017 mainly as a result of lower activity in Drilling Offshore and high first quarter 2017 margins in the Floater segment, now part of E&C Onshore.

Adjusted net result amounted to EUR 11 million versus EUR 54 million in 2017. The contraction is attributable to lower operating result and higher tax rate. With regard to tax rate, as commented in March, 2 factors are expected to continue to weigh on the group tax rate at least in the short to medium term: firstly, the limited recognition, if any, of deferred tax assets in loss-making subsidiaries due to the uncertain market scenario; secondly, the higher incidence of withholding taxes since they apply directly to revenues.

The 2018 first quarter reported result which includes special items relevant to the provision of EUR 13 million for our ongoing redundancy plan shows a loss of EUR 2 million. As anticipated in our last presentation, starting from this quarter, Floater results are no longer shown separately but included within the E&C Onshore division. [ XSIGHT ] results are also included in the E&C Onshore division because the business is still in the startup phase.

E&C Offshore revenues decreased by 18% versus the first quarter of 2017 mainly due to lower activity in Kazakhstan and in Central and South America, partially offset by higher volumes in Middle East. Adjusted EBITDA in this division was stable year-on-year as a consequence of healthy margin at 12.8% versus 10.8% in 2017, thanks to good operational performance.

E&C Onshore revenues decreased by 12% versus 2017 due to the lower activity in the Middle East and Far East and in West Africa, partly offset by higher volumes in Central and South America and in Azerbaijan.

E&C Onshore adjusted EBITDA margins confirmed the recent trend of gradual recovery. The decrease year-on-year is a temporary phenomenon attributable to the high marginality of the business line, Floater, in the first quarter of 2017.

Drilling Offshore revenues decreased by 28% versus the first quarter of 2017 since both Scarabeo 5 and Scarabeo 8 were idle during the fourth (sic) [ first ] quarter. This negative effect was only partly compensated by the full activity of Scarabeo 9, which underwent class reinstatement works in the first quarter of 2017. Adjusted EBITDA in this division decreased by 30% year-on-year with margins extremely resilient despite lower activity, also thanks to cost-savings initiatives. Results still partially benefited from long-term contracts negotiated in significantly better market environment. As rates are renegotiated, they will align to current market conditions.

Drilling Onshore revenues slightly decreased by 5% versus the first quarter 2017 due to the devaluation of U.S. dollar. Adjusted EBITDA in this division slightly increased by 3% year-on-year, benefiting from cost savings and slightly higher rate -- utilization rate in Latin America.

Net debt at the end of March 2018 amounted to EUR 1.2 billion, confirming a declining trend from EUR 1.45 billion at the end of 2016 and from EUR 1.3 billion at the end of December 2017.

As we have previously flagged, our payables linked to the settlement in Algeria mainly relating to the LPG arbitration were paid in the first quarter of 2018. Nevertheless, first quarter 2018 net debt evolution continued to be positive, benefiting from the cash flow generated in the period, additional CapEx-optimization efforts and the working capital dynamic broadly in line with our expectations. It needs to be highlighted that the acquisition of the new E&C Offshore vessel is due to be completed shortly and will, therefore, impact CapEx and net debt in the second quarter of 2018.

As usual, this slide summarize our financial profile as at the 31st of March 2018 which presents no major changes versus December 2017, characterized by an average debt maturity of 4.1 years; limited amounts to be reimbursed on average in 2018, 2019 and 2020; available cash amounting to approximately EUR 1.3 billion; undrawn committed cash facilities totaling approximately EUR 1.8 billion. A portion of the significant amount of the available cash will be used to finance the acquisition of the new E&C Offshore vessel.

Thanks for your attention, and let me hand you back to Stefano.

[Stefano Cao, executive]

Thank you, Giulio. Let's move now to our business update. I would like to start by introducing our new fleet entry, the Saipem Constellation, the acquisition of which is being finalized. We have made this strategic move to complement our set of subsea development solutions with reel-laying capabilities. We will now become a full-fledged player in the tieback market, winning access to new project opportunities and expanding our client base and geographical areas of activity.

As you can see, we have decided to do it through a [ first-class ] vessel. She can lay rigid reel pipes up to 16 inches' diameter and with industry-leading reel-lay tension capability. She can lay pipes in both conventional water depth and deep frontier acreage. The vessel is endowed with 4 interchangeable pipe reels and 4 [ spare ] reels together with 3,000 metric ton crane and exceptional storage capacity. These confirm the vessel's flexibility to work for sustained periods in remote locations and logistically inefficient regions. The Constellation's configuration allows its deployment as a versatile and competitive one-stop shop, a multi-purpose vessel for brownfield projects as well as other offshore developments in combination with the rest of our fleet.

Over the years, we have been continuously evolving our fleet to best serve the industry with the safest, most effective and efficient ways. The acquisition of rigid reeling pipe-lay capacity will allow us to participate competitively in the market of brownfield subsea tieback. The developments are proliferating due to their lower level of investment, exploitation of existing infrastructure and shorter time to market by comparison to greenfield initiatives.

Saipem Constellation advances our subsea strategy. As discussed when we last met, we have innovative subsea solution and equipment under development aimed at reducing overall investment cost and unlocking new reserves. Their integration through the deployment of the Constellation capabilities will extend our services and provide added value to clients. These services include longer tiebacks enabled to enhance fluid transportation by means of local heating stations and electrical heated pipe-in-pipe, both technology under development. By pursuing this strategy and extending our areas of interest, we believe we are also setting the basis for a stronger position in the integrated SURF and SPS segments.

The subsea rigid tieback market enjoys a significant flows of opportunities in the North and Norwegian Seas and in the Gulf of Mexico, where the level of maturity of oil fields make them ideal candidates for brownfield development. These 2 geographies together account for the majority of the visible tieback opportunities globally.

As you can see, by targeting these new activities in the north regions, we consolidate our client base made of oil majors and a select group of local and independent operators. We also see a number of opportunities in West Africa where although the number of reeling-enabled project is smaller than the North Sea and Gulf of Mexico, they represent larger and more complex greenfield EPCI projects.

In conclusion, even though we have just commenced marketing the vessel, we see a strong pipeline of opportunities. We have identified several, which we believe represent a target for 2019 and 2020, potentially totaling circa $7 billion. The great versatility of the Constellation allows us to commit the vessel on ongoing projects in the Middle East in place of a third-party vessel.

In a persistently difficult market, we recorded lower level of our work into the quarter, although we feel a good visibility on future prospects. The chief one relates to Package 3, offsite facility for the Duqm Refinery project announced to the market in February. This valuable project was awarded to us in consortium with CB&I. The operations are expected to start during the second part of the year and to last for about 3 years. We are happy to return to Oman after many years of absence with the prospect of taking part in a new [ test ] program on the investment side.

In Offshore Drilling, we are seeing new short-term contracts materialize, in particular for our harsh environment semi-sub Scarabeo 8, as a result of our recent commercial efforts.

In addition to the initiatives disclosed when we last met in March regarding the exercise of the option by Shell for a second well in Norway for Scarabeo 8, and the 5 wells -- last 5 optional wells contract with Total in Congo for the TAD which replaces the previous contract with them here.

We have also secured an additional assignment for Scarabeo 8 in [indiscernible] Norway. The first awarded in the first quarter is a 1-well project for Total to be executed following the completion of the operation under the Shell project expected during the fourth quarter of 2018. The second is a contract awarded by Aker BP during the second quarter, which entails 4 wells plus 2 of optional, to be drilled after the completion of the contract with Total expected around year-end, and employing the rig for activities at least until mid-2019.

These recent awards confirm an increasing demand in the area and the interest of the market for harsh environment semis like Scarabeo 8, one of the key assets of our fleet. Furthermore, we are very satisfied by the term of Total as a client also for the drilling division and to have established a new business relationship with Aker BP given its role in the Norwegian market. We are determined to extend our client place -- base and while focusing on the short-term commitment to retain the flexibility to capture the market recovery. As announced in the second quarter, Saipem has been awarded an Offshore E&C project by ConocoPhillips for the commissioning in the U.K. sector of the North Sea. This project is further enforcing our presence and solid expertise in the strategic businesses such as decommissioning.

Finally, Saipem Offshore Division has been awarded a new project in the Arabian Gulf involving engineering construction, offshore installation and commissioning of a new crude transmission pipeline. The contract has been awarded by a joint operation between Aramco Gulf operations companies and Kuwait Gulf Oil companies. In terms of prospects, among the various projects under tender, it is worth mentioning how the process of early engagement with clients or collaboration with other players is uncovering interesting opportunities. In this respect, we cited in our work of several fleets and licensing contracts, which opened for future potential EPC prospects the refining, fertilizer as well as LNG segments.

I'd like to highlight an interesting Project Framework Agreement signed with the Uganda government and a private investor group for the development of a refinery. The first step for this item would be the execution of a FEED contract which, in the event of a final investment decision in the longer term, may translate into an EPC contract.

Similarly, the Tortue Marin construction package for BP in Senegal, which we are pursuing in collaboration with [ afazh ], also involves an initial FEED contract, and in the event of final investment decision, an EPC award.

We closed the quarter with backlog at EUR 11.5 billion, down circa 7% from year-end. This reflects an overall erosion of circa EUR 0.9 billion following an intake of EUR 1 billion of contracts in the quarter, giving a book-to-bill ratio of circa 0.5. Thanks to the abovementioned Duqm Refinery, the Onshore E&C division shows a relatively stable backlog, while the reduction in Q1 is concentrated in the Offshore E&C as well as in the Drilling division.

Regarding the backlog fleet, by year of execution, throughout 2018 coverage of the revenue guidance for 2018 has slightly increased to 84%. On the back of awards were related to new orders, including variation orders on ongoing projects to be executed during the year.

The new Offshore Drilling contract are improving our vessel utilization. With our customer slide, we provide a summary of the contractual engagement of our Offshore Drilling fleet as of today. You will appreciate improvement in 2018 committed utilization driven by the work on Scarabeo 8 and TAD as mentioned earlier in the presentation.

Regarding the rest of the fleet that we should mention that 712,000 is close to completing the execution of an offshore well for Eni Morocco. We then plan to stack the vessel until the start of the well offshore Portugal, which following the delays in the Cyprus campaign has been postponed to the last part of this year. Meanwhile, we continue to market the vessel for possible initiatives in the Mediterranean and in East Africa before the Mozambique project in 2019. Scarabeo 9 has completed the first well in Black Sea and is now on standby, awaiting the possible start of a new well under its current contract. We are also exploring deployment of the assets as one of the opportunities in the Black Sea and Mediterranean. Scarabeo 7 is committed until around year-end and is currently completing the preparation for one well project for Eni in Vietnam, where it will remain until the beginning of December. We are also exploring options for future deployments.

Scarabeo 5 remains idle in smart stacking mode, ready to be reactivated in case we succeed in identifying new opportunities for the vessel. Regarding our jack-ups, we are marketing our high-specification Perro Negro 7 and Perro Negro 8 for opportunities in the Middle East. Perro Negro 2 remains idle and is a candidate for scrapping should no opportunity arise soon. We continue awaiting more tangible signs of a market recovery, remaining meanwhile focused on improving our fleet utilization level and cost base efficiency.

Next slide provides an update of the Onshore Drilling segment, where you can see that the overall utilization rate of nearly 69% in the quarter slightly improved from circa 62% recorded in the same period last year, as recalculated on a total fleet of 84 rigs on the back of recent short-term drilling awards.

The majority of these utilization improvements are in Latin America, confirming the slight signs of recovery we have detected in recent quarters, we surmise that the oil price trend is confirming a degree of comfort and a sense of greater stability for local NOCs and more independent players. In the region, our cost-saving initiatives are still ongoing, supporting our results. The Middle East remain strong, with full fleet utilization. And we view Algeria as a growth target for the future.

And now guidance. 2018 revenues and adjusted EBITDA margin guidance remain unchanged, backed by backlog coverage. CapEx, net debt guidance are updated to effectively EUR 500 million and around EUR 1.3 billion to reflect the investment in the new cycles.

Let me close today's presentation and leaving you with few key outcomes from this first quarter of 2018. Our persistent focus on execution and efficiency has delivered a solid operational margin. This is a good first step in the direction of meeting our full year guidance. The trend of tax reduction from previous years continued during this quarter. Thanks to good cash flow generation and CapEx discipline, despite the cash impact of the Sonatrach settlement. We expect this trend to be only temporarily interrupted by the payment of the purchase price for the Saipem Constellation. The order intake is a clear signal that the drop in our market continues. However, we are busy tendering and we have good visibility on a number of potential projects at an advanced tendering and assessment stage by operator, albeit not yet reflected in final investment decisions. We are excited by our new vessel. The Constellation brings Saipem both this strategic capacity to secure access throughout the brownfield buyback market and to significantly advance our position as a global subsea solution provider. In the near term, we are assessing the potential divestment to contribute on ongoing projects already starting from the -- this year.

And now I'll be happy to take questions together with my colleagues. Thank you.

[Operator]

[Operator Instructions] We will now take our first question from Maria-Laura Adurno from Goldman Sachs.

[Maria-Laura Adurno, analyst]

So the first question which I have is with respect to the Offshore Engineering & Construction vessel. I was just wondering if you could maybe give us some thoughts as to where the vessel's utilization stood in this segment and how you see that progressing in the year. And likewise, if you could comment on how you see the margins in this segment evolving? And then the second question which I have is with respect to the floater segment, which is now incorporated in the Onshore E&C segment. I was just wondering whether you could provide us with a status as to where the Kaombo project stands.

[Giulio Bozzini, executive]

So I'll ask maybe Stefano to quickly give you an update in terms of where we keep the project utilization for the new vessel.

[Stefano Cao, executive]

Okay. Thank you very much. Stefano Cao speaking. So first of all, for 2018, we have a ready plan of utilization of the Constellation. In some projects in Middle East, in order to replace a vessel that we were utilizing which is -- who is underchartered for the moment. So 2018 is covered. For the future, of course, the vessel would utilize mainly for the new market segment, the buyback segment, in particular, for the -- for her capabilities of reeling a rigid pipeline. So the area of interest, of course, will be the North Sea and the Gulf of Mexico. So we are in the process of bidding new standards about this market segment in these 2 regions, and we believe that the main utilization of the vessel will be [indiscernible]. On the other hand, we think that the vessel could be also utilized in other projects. You have the list of the projects that we are [ investing in ] and we consider commercial opportunities, and are, for example, also in West Africa.

[Giulio Bozzini, executive]

Okay. As far as the second question concerned, you are right, we had said recently that we were not reporting a floater, after a period during which we have shown the 2 segments separate, the Onshore E&C and floaters as declared, we are now reporting in together. As far as the specific question related to Kaombo, I would say that the project is progressing according to the new schedule which has been agreed quite some time ago. You know that the first FPSO is onsite in Angola and that the mooring operation are in progress. Once the mooring will be completed, then there will be the tie-up with the facilities and then obviously the setup operation will be initiated. As far as the overall situation, there are no new update. As I said, we are working in accordance with the schedule, which has been agreed with our client, Total. So the situation is pretty much in line with the -- what has been in the recent quarters.

[Maria-Laura Adurno, analyst]

And sorry, just coming back to my first question, which wasn't with respect to the vessel Constellation. I was actually talking about the overall Offshore E&C fleet which you currently have active. Just if we can get some thoughts around current utilization and how you see that progressing through the year?

[Giulio Bozzini, executive]

Okay. I think -- let's -- we'll give you the answer. We'll split the answer between myself and Stefano. I would say that, that is a premise. You know that we'll always provide you with a list of opportunities, a wide portfolio of projects on which we are concentrating our attention and from which we reckon that we will get the future -- the forthcoming new awards. This time, we have not provided the list, the specific list. However, Stefano, if you wish to comment where you see the most important opportunities going forward.

[Stefano Cao, executive]

I think that the question was about utilization of the vessel in 2018. I think that the utilization rate is stable compared with the previous year.

[Operator]

We will now take our next question from Alessandro Pozzi from Mediobanca.

[Alessandro Pozzi, analyst]

Just wanted to go back to the acquisition of the new vessel, and I was wondering if you can maybe take us through the [indiscernible] of buying the vessel right now. Is it more a function then of the price that you could get the vessel at? Or the size of the market? Or is it the relay market that you see right now? Or just to increase the flexibility of your fleet? And the second question is the usual, on the backlog, I think 2019 is still a little bit on the weak side, I think, especially in the Offshore E&C. Just wondering how you think about 2019 coverage and potentially, if you can maybe talk about the -- potentially the key [ or that connects ] key order that you can win in the Offshore E&C, that will be great.

[Giulio Bozzini, executive]

As far as the vessel concerned, we have consistently referring to one of the gaps which we intended then, we needed to close was the segment of tiebacks, the tieback market. So the vessel ought to be seen in light of the strategic decision to fill that specific gap. Then there was an opportunity coming from a bankruptcy. As I said, it's quite a recent vessel, was built in 2013. We made an in-depth analysis on the capability of the vessel. We made a business plan. We thought that the terms and conditions for the acquisition were attractive, and all in all, that was an opportunity which we could not afford missing. So that is the underlying reason for the acquisition. That is, in simple terms, the process which we have followed. In terms of backlog, Stefano?

[Stefano Cao, executive]

Yes. Okay. I believe that you are aware, you know the list of the projects we have that -- which are considered by us [ financial ] opportunities. In particular, the major ones. As you can see in [ round one ] of these major projects has been awarded in the first half, their first quarter. We believe that some of them could be awarded in the second and third quarter of the year. Well, overall, I think that there is still the, let's say, opportunity to build up, if anything, a solid backlog in the next periods.

[Operator]

We will now take our next question from Amy Wong from UBS.

[Amy Wong, analyst]

I had a more macro question here. There has been some comment about irrational bidding by certain contractors, and yesterday, there was also news flow about a couple of competitors -- one of the competitors looking to bid for another contractor. So can you give some thoughts on how you feel about offshore installation pricing? And how that -- more consolidation can affect the pricing? And thirdly, how we should think about what actually needs to improve? Is it the supply side or is it the demand side in order to get pricing -- improve pricing in the offshore installation industry?

[Giulio Bozzini, executive]

In the macro picture, I would say that -- both. On the one side, certainly, the rationalization of the market will help improving the particular segment. On the other hand, we need to see more final investment decision be taken. And so more projects to come to fruition. So in simple terms, I would say that it is a combination of the 2 things that you mentioned in your questions.

[Amy Wong, analyst]

Perhaps a follow-up to that, then. If rationalization of market capacity is needed to improve pricing, would you take it into your own hands potentially to look to consolidate some of the smaller players?

[Giulio Bozzini, executive]

Consolidation is something which, conventionally, comes with the recovery of the market. We have seen it in the past and so there is no reason why it should not happen again in the future. Then you know that this time, I think, the alternatives are either a consolidation of contractor with similar feature in order to extract synergies or it can be a consolidation, sort of a vertical integration like we have seen with TechnipFMC. These are the 2 type of integration. I think in a way we consider -- as far as the accomplishment of our strategic target, the acquisition of the vessel as sort of -- although not in a large scale -- as sort of a rationalization of the market.

[Operator]

The next question comes from Vlad Sergievskiy from Barclays.

[Mick Pickup, analyst]

It's not Vlad, it's Mick here. A couple of questions, if I may. Can I go back to Constellation and firstly, just say she looks great. Couple of questions operationally, just to clarify, where exactly are you going to do the spooling is the first point?

[Giulio Bozzini, executive]

Okay. Stefano?

[Stefano Cao, executive]

Okay. It depends on where the project will be. As spooling -- as you know, now we have a different, let's say, process. We're just spooling vis a vis our competitors -- we could have a spooling barge potentially, or we put the whole [ vessel spool ] directly on the vessel. We have [ multi possibility ] because of the capacity, also the crane on the vessel. And the spooling bay would be -- I mean, located where it's necessary to have this facility. In the past, we have been working in this segment, in the subsea segment in the North Sea and we [ have for that phase ], spooling bays [ half full ], for example. So we can always do the same process in the future.

[Mick Pickup, analyst]

Okay. And secondly, clearly, more established players in the spooling rigid railway market had a look at this vessel and decided to go ahead and build a newbuild instead. Is there any requirement for CapEx to expand the capabilities of this at some stage, given we're going towards electric heat trace, wider pipelines, longer pipelines, et cetera?

[Giulio Bozzini, executive]

Well, I would say in general terms, I think every tool needs to be adapted to the capability of the company. And I think we consider ourselves a fully-fledged subsea contractor with all the necessary capabilities. That [ address ] is also, I would say, the -- your second question, obviously, we take a judgment on the additional investment, which may be required by the execution of specific projects and then, obviously, we'll plan for those. As far as 2018, we are not considering any major -- then, obviously, [ both are not ] but any major CapEx expenditure on the vessel.

[Mick Pickup, analyst]

Okay. And then just a quick segue somewhere else. You mentioned Onshore Drilling and opportunities in Algeria. And after your settlements in-country, are we fully clear, no impediments to go back into Onshore E&C in Algeria?

[Giulio Bozzini, executive]

No. It was an interim part of the settlement, which obviously closed a long litigation with Sonatrach and obviously eliminated the -- all the problems related with our access to projects. So the moment we have finalized that deal, we can pursue all opportunities in Algeria, Onshore E&C, Onshore Drilling, as well as potentially there are opportunities in the Offshore Drilling as well.

[Operator]

We will now take our next question from David Farrell from Macquarie.

[David Farrell, analyst]

One question for me. I'm sorry to belabor the point on the Constellation, but I'm just wondering, given this is -- appears to be kind of a new capability for you, how do you actually break into the market? Is it a case of, the first couple of contracts you take, they're going to be relatively small and more competitively bid in order that you build out track record with your client base?

[Giulio Bozzini, executive]

Stefano?

[Stefano Cao, executive]

[ Mac ] look, first of all, we have been [ in the veer of ] this kind of project, so the utilization of the vessel will not be to 2018 -- in 2018. And for sure, there is a large opportunity of business and in the [ capital ] we're talking about billions of dollars of opportunities. So the market is interesting for us and I think that we're targeting 2, 3 projects for the next year, of course, yes.

[David Farrell, analyst]

But I guess, kind of why would someone go with Saipem rather than the more established player, given that there's probably more execution risk around you doing it, for the first few projects at least?

[Stefano Cao, executive]

First of all, I think that as I was saying earlier, we have done this kind of projects in the past with a vessel called at the time Helix Express, that we chartered from [ Condanyo ] in the past, that way we prove to clients like Conoco Phillips and Total our capability also to manage this kind of [ technology ]. Of course, we have the capability to manage even more complex projects in the subsea. So I think that there is a guarantee of quality and safety from our side. I think that we have the same level of [ gathers compared to someone we know ]. I'm not...

[Giulio Bozzini, executive]

As well as we have full knowledge of our clients and our clients have full knowledge of our capabilities and the quality of our portfolio of capabilities.

[Operator]

We will now take our next question from Mark Wilson from Jefferies.

[Mark Wilson, analyst]

Just a question on one of your projects. You said Duqm will start up in the second half, so -- but can you confirm that project has got financial closure? And is there -- I think at full year results, you said that you'd expect that in the next few weeks?

[Giulio Bozzini, executive]

Look, can you say again? Sorry. We didn't catch what was the project you are referring to.

[Mark Wilson, analyst]

Referring to the Duqm project in Oman.

[Giulio Bozzini, executive]

Ah, Duqm, yes.

[Mark Wilson, analyst]

Has that project achieved financial closure? You said it will start up in the second half. At full year results, you said we expect financial completion in the next few weeks, notice to proceed. So has the project been complete?

[Giulio Bozzini, executive]

No, I think this is one of the things which is ongoing at the moment but we don't receive any sign whatsoever of possible delay.

[Mark Wilson, analyst]

But surely, second half '17 is a delay.

[Giulio Bozzini, executive]

No. If you remember, we never announced the -- we never had the backlog, the project in '17. [ It was not us ]. We added the backlog this year in the -- to the backlog this year of the project.

[Mark Wilson, analyst]

Sorry, yes, I meant second half '18 in terms of the -- I mean, has there been a delay in starting that project this year?

[Giulio Bozzini, executive]

There has been a delay, yes. You're right. There has been a delay, but we don't see reasons why there should be additional delays.

[Operator]

We will now take our next question from Michael Rae from Redburn.

[Michael Rae, analyst]

The first one, just looking at the order for the run rate for the first quarter. Did that play out as you expected in terms of award timing? Was it just quite a quiet period for awards? And in terms of the major opportunities for the rest of the year, where do you see them landing in the year? Will they be weighted towards the second half? Or should we go back to a more normal order run rate in the second quarter? And then the second question, just with respect to your tax rate. Should I extrapolate the current level for the rest of the year? I think you mentioned before that there's a withholding tax impact this year, but could you just remind me of the magnitudes of that?

[Giulio Bozzini, executive]

As far as the first question, you know that in our business the awards they come when they come. When the client decides to award are the factor. First quarter of last year, we only managed to get EUR 500 million. EUR 0.5 billion of new awards. Having said that, obviously, we don't consider EUR 1 billion awards as a satisfactory level. We have -- we need to have much more, which is coming from the opportunities, we are highly focused at the moment. As far as the timing of the award as well as the timing of the final investment decision, that is obviously something which will strongly dictate that whether the recovery will be recorded in 2019 or maybe later.

[Stefano Cao, executive]

Okay. With respect to tax rate, I would remind that in the normal context of market and marginality, group tax rate would be lower than 30% on the basis of the corporate income tax of the large majority of the countries where we operate. However, in recent year, this was never the case, mainly because of a conservative approach in recognizing deferred tax asset in loss-making companies and higher incidence of withholding taxes since they apply to revenues. And we expect these factors to continue to weight on the group tax rate, at least in the short to medium term. So effectively the reply is, yes, you can extrapolate these for the full year. As long as the market will improve, the group tax rate should normalize close to the above indicated normal tax percentage or even below in case of utilization of the significant losses not realized. Just a final remark on 2018, the cash out related to income tax payment is expected to be lower than the profit and loss charge due to the utilization in some countries of previous year tax losses for which a deferred tax asset has been recognized.

[Operator]

We will now take our next question from James Thompson from JPMorgan.

[James Thompson, analyst]

Just a couple of questions for me. The CapEx run rate in the first quarter was obviously very light. I know you adjusted for the acquisition, but could you maybe talk about potential for capital -- say, CapEx savings during 2018? And then the second question is really around drilling. Obviously, we're starting to see a step down in top line there in terms of utilization, but margins seem to be holding up pretty well. Could you give us an indication of where you expect margins in Offshore Drilling particularly to trend through the rest of 2018?

[Stefano Cao, executive]

Can you be -- you are referring to the debt level under your first question? Can you simply repeat it?

[James Thompson, analyst]

No. It's just in -- sure, sure, Stefano. Just in terms of CapEx, I mean your CapEx level in Q1 was very light. Just wondering how much of an indication that is of opportunities to save on capital expenses through the remainder of the year on an underlying basis. Clearly, obviously, the vessel cost will factor into that. But underlying, is there any chance to save money during the year?

[Stefano Cao, executive]

But with respect to CapEx, first of all, our normal CapEx, I would say, so excluding the acquisition of the Constellation, we had indicated previously that was in the range of EUR 300 million. Then clearly, since this applies mostly on class activities, this is also dependent upon the timing within the year that these kind of activities are done. So effectively in the first quarter, it was extremely low. In the remaining part of the year, I think it will be consistent with indication of EUR 300 million that we gave before. And in addition, we have the Constellation, which will be basically impacting the second quarter of the year. Can you repeat the second question as well?

[James Thompson, analyst]

Of course. Just in terms of drilling, we're obviously looking for a step down in revenues in Offshore Drilling as expected but margins continue to hold up very well. Clearly, it's a tougher pricing environment, so I was just wondering how we should think about the trend on EBITDA margins in drilling through the rest of the year.

[Stefano Cao, executive]

Marco, would you address the question?

[Marco Toninelli, executive]

Okay. Yes. I think the margin can be resilient due to the ongoing long-term contract that we're now securing the [ fiber ] markets, the condition was better. And especially due to the fact that we are strongly marketing our vessel to improve our -- to reduce our idleness, which is its main cause of reduction in margin right now, and we are currently, we are [ positive ] in that respect due to negotiation ongoing. On top of that, we are -- implemented a strong cost reduction program, which has proven results, so we are confident the margin will keep being resilient.

[Operator]

We will now take our next question from Rob Pulleyn for Morgan Stanley.

[Robert Pulleyn, analyst]

So first of all, given the Constellation comes with some backlog and you mentioned is utilized for 2018, I was just wondering why revenue guidance hadn't changed. And secondly, if I could just revert back to the question on the Kaombo project in Angola, obviously costs have been in excess of the plan, but could you talk about the risk of liquidated damages given your customer has obviously had a delayed to production startup?

[Stefano Porcari, executive]

It's Stefano Porcari speaking. Maybe there was a misunderstanding. What I said is that -- I didn't say that there was a backlog attached into the Constellation. We are utilizing the Constellation in some ongoing projects in Middle East and basing that, and that we have chartered it for this use.

[Stefano Cao, executive]

Okay. As far as Kaombo is concerned, we're now saying earlier on that there is no change. There is -- refers to the fact that we have made some time ago and we confirm it now that we made an assessment between the risk of incurring liquidated damages and the opportunity related to recognition of the change orders with the client. The assessment which we made was sort of a balance between the 2 risks, so at this stage we maintain that, that is the situation.

[Robert Pulleyn, analyst]

Okay, that's very clear. And if I could just have as one final question for me, if I could maybe just have a bit of an update on how you see the 2 bit drilling businesses within the strategic role of Saipem going forward. In the past, you've communicated that you've been looking at disposing of noncore assets, certainly the bid/ask on drilling assets seems to be improving. Is this still something we could look forward to? Or have you revised your thinking about the role of drilling in the business?

[Stefano Cao, executive]

So I think the starting point goes a few years back, just before my recruitment. At that time, it was a process which were -- have been launched to dispose the Onshore Drilling business. So then all of a sudden, in conjunction with the collapse of the market, the old process was stopped. The reference to the strategic view, which I've mentioned a number of times is that the Onshore E&C business, it is a business for which we can now consider and arguably now refer to the recovery of the market situation. And now it refers to the fact that in Latin America, we have still a major issue as far as the market concerned while we continued reducing our cost structure and improving our efficient, the Onshore Drilling might be a candidate for operation which can be -- can see combination with other operators in the same field, obviously with the target of creating additional value through the combination.

[Operator]

[Operator Instructions] We will now take our next question from Luigi De Bellis from Equity SIM (sic) [ Equita SIM ].

[Luigi De Bellis, analyst]

Three questions from me on the E&C Offshore division. Do you think the level of profitability reached in Q1 could be a good proxy for a full year? And the second question, how do you expect the backlog to develop over the next couple of quarters or when you see the inflection point for this division? And last question, could you quantify or qualify the short-term opportunities that you see in the tendering phase for both Offshore E&C and Onshore E&C?

[Giulio Bozzini, executive]

With regard to the first question, yes, we think that the marginality which we reached in the first quarter is, at the moment, a good indication also for the full year.

[Stefano Cao, executive]

Okay. As far as the second and third question, I would tend to lump the 2 answer together. As far as obviously for us, it's not possible to project a specific timing for all the -- for our work, what we are carefully monitoring and what we are trying to sense from our clients is whether there is what you define right -- quite rightfully define an inflection point. That inflection point will be related to a substantial change in the CapEx program of the oil companies. So far, what we have seen are all the timid signs, we heard what Exxon has announced, but all in all, I think we are still waiting for more substantial signs. There are a lot of projects, both onshore or -- and offshore, which are at different stages of development, which might get a final investment decision and in some cases, those projects are already awarded so we would move straightaway to the execution phase. And we have named some of these projects in our presentation.

[Operator]

We will now take our next question from Guillaume Delaby from Societe Generale. [Operator Instructions]

[Guillaume Delaby, analyst]

In 2017, you reduced headcount by 13% and we can see that impact on your staff cost in Q1, it's EUR 362 million, if I remember correctly, it was EUR 386 million in 4Q 2017. Just would like to know if we can take this Q1 number and extrapolate it for the rest of the year? Or should we expect, I would say, further a second sure reduction in staff cost?

[Stefano Cao, executive]

Your voice come broken. Unfortunately, we need to ask you to repeat.

[Guillaume Delaby, analyst]

So basically in 2017 you reduced headcount by 13%. And this -- and in Q1, when I look at your staff cost, it is EUR 362 million, which is down 6% versus Q4 2017 when it was, if I remember correctly, EUR 386 million. What I would like to know is whether we could extrapolate this Q1 number of EUR 362 million for the remaining of the year? Or if we could maybe expect good news or so on that front in the coming quarters?

[Stefano Cao, executive]

I think we have specifically highlighted and mentioned throughout our recent communication that the target for the reduction of the headcounts and we have got to the additional 1,250 full-time equivalent. I think that, that is -- remains the target as it is -- as we have said. Already -- just going quickly through, I don't know whether I'm addressing your question, but in 2017, we have achieved a headcount reduction of 450. We have increased -- we are increasing to -- in 2018 to more than 1,000. And in 2019, we project a further increase of 1,200 and this number has been updated recently. So these are the best reference you can make to the evolution of the headcount.

[Operator]

We will now take our next question from Daniel Vonz (sic) [ Daniel Butcher ] from JPMorgan.

[Daniel Butcher, analyst]

I think most of them have been answered. I guess the last one was just -- we've got the IFRS 16 implementation coming in -- I believe in January of next year. The initial expectation was that leverage was going to creep up from about 1x to just over 2, but I understand that was based on your very early estimates from the Capital Markets Day. Do you have any more of an update for credit investors on that?

[Giulio Bozzini, executive]

No. We do not have any update. With the respect -- as I said before, this was a sort of educated guess which we had at the end of last year. For example, it was mentioned previously by Stefano due to the fact that possibly the new vessel will replace one vessel which was previously leased could change the number. So it was, I guess, based on the situation at the end of 2017, and so it would have to be recalculated at the end of 2018.

[Operator]

As there are no further questions in the queue, I would like to turn the call back to your host for any additional or closing remarks.

[Stefano Cao, executive]

Okay. Thank you very much for your attention. I look forward to meeting you soon. Thank you.

[Operator]

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.