Saipem SpA

MIL:SPM

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Saipem First Half 2018 Results Call. Today's call is recorded. And I will now turn the call over to Stefano Cao. Please go ahead, sir.

[Stefano Cao, executive]

Good morning, ladies and gentlemen. Welcome to our first half 2018 results presentation.

I'm joined today by Giulio Bozzini, our Chief Financial and Strategy Officer; by the heads of our divisions, Stefano Porcari for Offshore E&C; Maurizio Coratella for Onshore E&C; Mauro Piasere for XSIGHT; Marco Toninelli for Drilling Offshore; and Francesco Racheli for Drilling Onshore.

We will provide you with an update on our first half 2018 performance and take you through the new strategic changes recently approved by our Board of Directors.

When I spoke to you in March at the full year results, I provided the progress in the reshaping of our company through a divisional organization, allowing it to anticipate the market's evolution. As also agreed by the newly appointed Board of Directors, we have now taken a further step and reviewed our portfolio of businesses. Our intent, as before, is to improve each division's respective competitive position in the context of the dynamics of the current markets with the goal of unlocking further value. As a result, we have set goals and strategic priorities for each division, and we take the view that each division should decide for itself how to achieve these in order to compete most effectively with their respective peers. Therefore, we aim to further empower our divisional managers with full strategic, commercial and operational autonomy. We expect this process to be completed by year-end. This is vital in the current market context, where combining strengths between players and exploiting synergies have become increasingly important for each division to play a leading role and maintain a sustainable position. I will expand on this later.

Turning to half year performance. Our group EBITDA remains on track to meet our full year guidance. Our overall margin has improved year-on-year even as revenues have fallen in the downturn. This has been possible, thanks to healthy E&C Offshore and drilling operational margins registered in the first half. The margin in Onshore E&C was also in line with the recovery trend for this business. However, we should highlight this does not reflect the loss incurred from a project-related equity affiliate.

We have achieved another quarter of solid cash flow from operations, and this has offset the purchase of the new Constellation vessel, which gives us further comfort on full year net debt guidance. By incidence, Constellation is almost fully committed during the second half of the year for projects previously awarded in Middle East, replacing third-party leased vessels.

At the group level, adjusted net result was impacted by asset impairments, write-offs and accruals on legacy litigation and provisions for redundancies, resulting in a negative reported net result. The order intake during the quarter was solid, thanks to a number of sizable awards, on which I will expand later in the presentation. Combined with other minor initiatives and change orders, we took a total of EUR 3 billion. As a consequence, the book-to-bill ratio at the end of the year -- at the end of the first half was above 1x. We expect this commercial momentum to continue, and we anticipate an order intake in the range of EUR 4 billion or more in the second half. Finally, the outcome of the first half gives us confidence to confirm our guidance for the full year.

Let me now hand over to Giulio to expand on half year results by division and at group level.

[Giulio Bozzini, executive]

Thanks, Stefano. Looking first at overall group performances, revenues amounted to EUR 3.8 billion, 17% less than in first half 2017 due to the contraction of E&C Offshore, E&C Onshore and Drilling Offshore activities. Adjusted EBITDA amounted to EUR 483 million compared to EUR 524 million in 2017 mainly as a result of lower activity in Drilling Offshore. Adjusted net result amounted to EUR 6 million versus EUR 92 million in 2017. The contraction is attributable to a significant loss from an equity affiliate associated with the deterioration of a project executed in a jointly controlled company, higher tax rate and minorities.

Moving to divisional performances. E&C Offshore revenues decreased by 13% versus first half 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 decreased only by 6% year-on-year as a consequence of a healthy margin of 14.8% versus 13.7% in 2017, thanks to strong operational performance.

E&C Onshore revenues decreased by 19% versus first half 2017 due to lower activity in Middle East and Far East and West Africa, partly offset by higher volumes in Central and South America and in Azerbaijan. E&C Onshore adjusted EBITDA margin confirmed the recent trend of gradual recovery at 3.1%. However, adjusted EBITDA does not capture the deterioration of a project executed in a jointly controlled company, which accounts for almost all the loss from equity accounted affiliates recognized in the second quarter.

Drilling Offshore revenues decreased by 32% versus first half 2017 since both Scarabeo 5 and Scarabeo 8 were idle during the full semester. This negative impact was only partly compensated by the full activity of Scarabeo 9, which underwent class reinstatement works in the first quarter 2017. Adjusted EBITDA in this division decreased by 33 -- 32% year-on-year, with margins remaining extremely resilient despite lower activity, also thanks to cost-savings actions undertaken. Results also partially benefited from long-term contracts negotiated in a significantly better market environment. As rates are renegotiated, they will align to current market conditions.

Drilling Onshore revenues were stable versus the first half 2017. Adjusted EBITDA in this division increased by 22% year-on-year, benefiting from cost-optimization measures implemented in Latin America and slightly higher rig utilization.

With regards to tax rates, as I commented in March and in April, 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 still uncertain market outlook; secondly, the highest incidence of withholding taxes since they apply directly to revenues. First half 2018 tax rate was further impacted by a significant loss from equity accounted affiliates, which decreased pretax profits, leaving taxes unchanged. Net of this specific item, first half 2018 tax rate is around 55%.

The 2018 cash-out related to income tax payment will 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. As long as the market improves, the group tax rate should return to normalized level of around 30% on the basis of the corporate income tax in the large majority of the countries where we operate. There is room for a further decrease in the event we are able to utilize the significant losses not yet valorized.

First half 2018 reported results included the following special items: write-down associated with impairment test totaling EUR 256 million mainly as a result of a reduction of long-term rate after plan period in Drilling Offshore as well as of the revision of the discount rate applied to future cash-generating unit cash flows for the impairment test exercised as a consequence of the new strategy and organization; write-offs and accruals totaling EUR 51 million relating to some litigations pending for a long time on projects already completed resulting from the periodic activity of legal monitoring of the overall litigation; provision for redundancies totaling EUR 22 million. Consistent with the above, first half 2018 adjusted profit is EUR 6 million with a reported loss of EUR 323 million.

Net debt at the end of June 2018 amounted to EUR 1.33 billion, broadly in line with December 2017 EUR 1.30 billion. First half 2018 was impacted by the payment for the acquisition of the new E&C Offshore vessel and by the settlement in Algeria, which mainly relates to the LPG arbitration. Taking these factors into consideration, first half 2018 net debt evolution was extremely positive, benefiting from the cash flow generated in the period as well as continuous efforts on CapEx and working capital optimization.

As usual, our next slide summarizes our financial profile as at 30 of June 2018, which presents no major changes versus December 2017 have seen and is characterized by an average debt maturity of 3.9 years; limited amounts to be reimbursed on average in 2018, 2019 and 2020; available cash amounting to approximately EUR 1.1 billion; undrawn committed cash facilities totaling approximately EUR 1.8 billion. We are finalizing an amendment and extension of our revolving credit facility due to expire in December 2020. The deal aims to extend the maturity date, reduce the amount in consideration of the current and prospective liquidity and improve economic terms. The remaining EUR 0.3 billion undrawn committed facilities has been extended to 2019. The recent renewal for 1 year of the program for issuance of nonconvertible notes, EMTN program, is aimed at granting additional flexibility.

With respect to our credit rating, last May, Moody's confirmed its Ba1 rating with stable outlook; while in July, Standard & Poor's reaffirmed its BB+ rating with negative outlook.

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

[Stefano Cao, executive]

Thanks, Giulio. Before moving to the business update, I would like to spend some time on our renewed approach to strategic goals and priorities as well as on the further steps to deliver a group structure of autonomous divisions.

As we all know, the market is still going through the longest and toughest crisis since the end of the '90s. Many players have reacted by seeking or realizing M&A opportunities in order to maximize their potential through complementary combinations and synergy exploitation. Both vertical and horizontal combinations are being tried, and further initiatives are to be expected. As in the past, we believe we have the capability and the standing to play a role in this consolidation process. To this end, each division shall be empowered to define and realize autonomously its own strategies and plans, leaving group portfolio strategy to be decided at the corporate level.

Let's look into our business portfolio in more detail. As I mentioned in the past, our E&C Offshore is a core activity in our portfolio. We believe that we shall further strengthen our leading competitive position in this business. The division is now ready autonomously to pursue and further strengthen its partnership strategy, looking at new investment and growth opportunities with a selective but proactive approach. Looking ahead, this business enjoys first priority in group capital allocation.

The turnaround of E&C Onshore is continued with the goal of improving margins and to be a leader in the sector. Performance recovery must come from further enhancement of operational processes from business mix repositioning in more complex and less oil price-related segments, such as LNG, petrochemicals and refinery infrastructure; and from a broader business diversification to include the renewables segment, mainly biofuel plants and solar, thermal power. E&C Onshore will require only minimal levels of investment going forward.

Our Drilling Onshore and Offshore divisions still enjoy very resilient margins despite the reduced volume of activity, which is penalizing results. Margin strength is evidence of our effectiveness and efficiency in running this very competitive business. We shall proactively assess combination opportunities to capture the Drilling division's value potential in the current market, where critical mass, synergies and financial firepower to maintain the fleet are becoming increasingly important. Our broad geographic coverage and presence in strategic countries, our strong relationships with selected clients and our long-term backlog for certain assets gives us confidence that we can explore the available strategic options.

Consistent with the strategic goals and priorities just illustrated, we have also revisited our organization by launching Phase 2 of the divisional program with the aim of empowering our divisions through full autonomy over commercial, procurement, operational, technology and investment strategy with group financial controls. This new approach shall allow the best exploitation of each business potential with significantly greater responsibility and accountability for each head of division to deliver business performance in line with long-term targets and positioning.

Building of an emerging company culture of divisional independence with a group identity, we intend to complete the empowerment process for our heads of division by year-end. I will retain oversight of group portfolio strategy, exploring the strategic options together with the heads of divisions in line with our main goals and strategic priority. In order to avoid inefficiencies, the current structure of legal entities for each division will only be subject to change where specific strategic options are identified on a division-by-division basis.

Let's now turn to the business update. Let me start this business update by reminding you of our recent award successes.

During the quarter, we have been awarded sizable projects in the E&C division totaling nearly EUR 2.6 billion. The Barzan project in the Offshore pipeline segment is a great achievement, enabling our return to Qatar after many years of absence. The scope includes the replacement of 2 export lines and other ancillary activities for a total consideration of circa EUR 1.3 billion (sic) [ $1.3 billion ]. Although works will start this year, the majority of the project contribution is expected next year. The project is challenging as it concern a sour gas field with similar feature to those experienced in Kashagan. Our reliable welding technology for clad pipes and our track record clearly played a key role in securing this project.

After an extensive investment authorization process, this -- the Cepav due consortium, which Saipem leads with a 59% stake, was awarded the second section of the Milan-Verona high-speed train from Brescia to Verona for an overall amount exceeding EUR 1.6 billion by Rete Ferroviaria Italiana. Saipem's interest in the project is around EUR 1 billion. The contract includes option to be exercised within 12 months from the effective date for an additional value of circa EUR 0.5 billion. Certain preliminary activities of the project, including engineering, land acquisition and surveys, have already started. We have taken advantage of our presence in the area, having recently completed the first section of the railway as part of the same Cepav due consortium.

The last major project announced in the quarter is the Nong Fab LNG regasification project in Thailand awarded by PTT, a well-known client with whom we have collaborated on many initiatives in the past. We are pleased to return to the country and to begin a constructive dialogue with PTT in a strategic segment like LNG. The project will be executed in partnership with a local player, and our scope of work is for circa $0.5 billion. Just for the sake of clarity, the value of Barzan is $1.3 billion, not euros.

Moving to backlog. We closed the quarter with a backlog of EUR 12.6 billion, slightly ahead of our position at the end of 2017. Thanks to the good order intake in the quarter amounting to nearly EUR 3 billion, we closed the first half with a book-to-bill ratio slightly above 1. As a result of the previously mentioned high-speed train in Italy and Nong Fab regasification project in Thailand, the Onshore E&C division backlog shows an improvement as of the first half 2018. The other division have closed the half year at a slightly lower level since revenue absorption during the period was only partially compensated for by the awards of the Barzan pipeline project in Offshore E&C, the new wells of Scarabeo 8 by Aker BP in Offshore Drilling and other smaller contracts in Offshore Drilling. Regarding the backlog split by year of execution, the coverage of the revenue guidance for 2018 has slightly increased to circa 92%. This is slightly higher than the average historical level for this point in the year. Looking at next year, the level of commitments booked for execution in 2019 increased by circa EUR 0.9 billion, especially in Offshore E&C, thanks to the contribution of works planned on Barzan.

Coming to our next slide, we will remember that in the same period last year, we looked at near-term opportunities as we thought it was appropriate to provide the market with greater visibility on anticipated near-term awards. A year later, despite the oil price significantly improving, the pace of new final investment decision in the oil and gas sector remains slow, especially in the offshore sector. Only a few initiatives are expected to turn into real developments due to the persistent focus on cash flow generation, CapEx discipline and return to shareholders by the majority of oil and gas companies.

In a context where organic reserve replacement is not yet perceived as a priority by our clients, in this slide, we intend to provide you with further visibility on the level of order intake we are confident to achieve in the E&C divisions in the second half of the year. We are currently tendering in various regions on a selected number of E&C project opportunities, which are diverse in terms of geographies, business segments and clients. We believe that this project, with an aggregate value in excess of EUR 9 billion, could be essential in the near term. And on these initiatives, it is worth reminding you of projects like the second phase of Zohr still under discussion with our client, some packages falling under the LTA program in Saudi as well as the Marjan development still in Saudi, the Zabazaba project in Nigeria and various renewables projects. Naturally, we do not expect to be awarded all of them, but we expect to collect an overall amount in excess of EUR 4 billion, leading to a yearly book-to-bill ratio above 1.

In terms of prospects, amongst the various projects under tender, it is worth mentioning how the process of early engagement with clients and collaboration with other players is uncovering interesting opportunities. In this respect, XSIGHT has been awarded several smaller FEED and licensing contracts, which give potential access to tender for future EPC prospects in refining, fertilizer plants as well as LNG initiatives.

Let me spend few moments now on the LNG segments with our Onshore E&C division, which holds our utmost attention in terms of future opportunities. This slide provides some color on our exposure to a segment which we believe will play a role in the recovery of our Onshore division and for our company's future success. As you know, only few investments were sanctioned during the downturn, just one actually in 2017.

Contrary to previous expectation, the LNG market is now experiencing improvement in demand, supported by stronger imports, especially in China, other Asian and European countries. Steady growth is now predicted over the next few years in a tightening market suffering pressure for -- from insufficient supply. Environmental requirements and decarbonization future targets are also playing a role in driving this trend. Under this context, we recently have seen clear signs of acceleration in investment decisions, with some of our clients been much more vocal on their intention and advancing certain initiatives, which have been under scrutiny for quite some time.

Among these, there are a number of developments are the focus of our attention. And specifically, Anadarko Petroleum and partners had been revising their 10 million per -- tonne per year LNG project scope. Relevant costs have now reached an overall investment amount estimated around $8 billion. And the sponsor now appear to intend to move forward with the final investment decision in the first half of 2019.

Eni and ExxonMobil have recently submitted their Rovuma LNG development plan to the Mozambique government, consisting of 2 LNG trains of circa 7.6 million tonnes per annum each, with production expected in 2024. According to very preliminary estimates, the overall project could be worth approximately $10 billion. Final investment decision is expected within 2019.

The partners of Nigeria LNG have also accelerated their investment process to expand the current production by 1/3 on the Bonny plant, which Saipem previously contributed to the development. Dual FEED contracts were recently assigned to 2 consortia, of which Saipem leads one with Chiyoda.

We should also mention the Arctic LNG 2 project, which entails the realization of 3 LNG trains with an overall capacity in excess of 18 million tonnes per annum, that Novatek is developing in the Gydan Peninsula in Russia, adjacent to Yamal. Saipem is currently executing a FEED contract for 3 GBS and storage facilities and will join forces with a strong partner to participate in the subsequent EPC tender.

We are among the global players throughout the LNG value chain from liquefaction, with access and expertise in all licensed technologies and proprietary patented development; through transport, with solution for carriers and conversion of floaters; to regasification, with innovative schemes, large storage tanks, execution capabilities and standardized products for the emerging small-scale market.

Currently, we are working on the large Tangguh liquefaction train EPC project and for BP. And we have started the Nong Fab regasification terminal, which has been just awarded.

Turning to our regular slide on Offshore Drilling. The slide provides a summary of the contractual engagement of our Onshore Drilling (sic) [ Offshore Drilling ] fleet as of today. We opportunistically continue to pursue short-term contracts, aiming to improve our fleet utilization in 2018 and '19.

We wish to remind you of the contract awarded in the second quarter by our new client, Aker BP, for Scarabeo 8, which had been anticipated when we met in April. We are in close discussion on a number of initiatives, some of which we believe should mature during the third quarter.

Regarding Saipem 12000, we are negotiating on 2 wells to be drilled in the Indian Ocean and Arabian Sea in continuity after completing the well already scheduled in Portugal at the end of 2018.

Scarabeo 9 is now on standby in Cyprus, having completed the sail away from the Black Sea. We are in negotiation for possible activities in Mediterranean Sea through the first quarter 2019.

Scarabeo 7 has completed its campaign in Vietnam and is expected back in Indonesia in August to drill an exploration well. We are discussing a potential contract extension beyond the end of 2018.

Scarabeo 5 remains idle in the smart stacking mode, ready to be reactivated if we identified new opportunity.

Regarding our jack-ups, we are marketing our high-specification Perro Negro 7 and Perro Negro 8 in the Middle East. Although market demand seems to be slightly improving, this segment is still under pressure, with rates expected to remain low in the short term.

Consequently, we continue to focus on execution and cost savings, improving our fleet utilization and pursuing short-term opportunities. Overall, we retain flexibility to capture the market recovery when it arrives.

Following slide provides an update of our Onshore Drilling fleet. The weighted average utilization rate in the first half was nearly 67%. Utilization rate has slightly improved from circa 63% in the same period last year on the back of new short-term drilling contract. While the Middle East remains strong with a full fleet utilization, the situation in Latin America remains challenging. Although the oil price trend is [ conferring ] a higher degree of comfort and a sense of greater stability to local NOCs and small independent players, we have yet to see signs of improvement in the region turning into a tangible recovery. Geopolitical factors are also at play. Our efforts continue to be focused on cost saving, supporting our results while maintaining good relationships in the area and waiting for signs of clear improvements. We are confident that the future business prospects in Algeria will contribute to the divisional growth and rigs fleet exploitation going forward.

Let me now refer to the 2018 guidance. The trend of solid performances delivered so far and the level of project awards feeding our backlog during the first half of the year are consistent with our 2018 guidance as updated during the first quarter following the acquisition of the Constellation and underpin our confidence in meeting the yearly targets we have set.

I will close today's presentation with a few key remarks. Firstly, our strong focus on execution efficiency has generated another good quarter at the adjusted operating margin level across the group.

Secondly, cash flow generation continues at a healthy pace. This has allowed us to maintain net debt in first half 2018 at the same level of last year and in line with the targets set for this year despite the Sonatrach settlement and the acquisition of the Constellation.

Furthermore, we expect our effective tendering activity translated into substantial order intake in the second quarter, rebuilding the backlog to above its full year 2017 level. These elements, together with visibility on emerging near-term opportunities, further strengthens our confidence on future revenues.

Finally, we have completed the review of our portfolio business, defining revised goals and strategic priorities for each division. We have also granted heads of division full autonomy to pursue their objective to a reorganization process to be fully operative by the end of -- by the year-end. Our divisions are now best positioned to address the dynamics of the current market and to capitalize on future opportunities.

And now together with my colleagues, I'll be more than happy to take your questions. Thank you very much.

[Operator]

[Operator Instructions] We will now take our first question. Please go ahead Roger Kevin (sic) [ Kevin Roger ] from Kepler Cheuvreux.

[Kevin Roger, analyst]

Maybe if I can ask a question on your guidance for 2018. You say that you will have an EBITDA margin above 10%, which includes, from what I understand, the project, the loss from the project-related equity. I was wondering if you can give some color on this project and if you can give the guidance excluding this project. And the second question is related to the difference between the reported top line and the adjusted top line in Q2. I was wondering if you can explain it, please.

[Stefano Cao, executive]

The second -- can you repeat the second question? You came garbled.

[Kevin Roger, analyst]

It's related to the top line for the Q2. Because when I sum the top line of each business line, I have a top line which is above the 1 reported, so I was wondering if you can explain to me the EUR 41 million of revenue that's referred in the total group line for the Q2.

[Giulio Bozzini, executive]

Okay, so Giulio Bozzini speaking. With respect to the guidance, the guidance that we have given is a guidance of an EBITDA above 10%, which, as you properly say, is including the loss deriving from an equity affiliate which we recorded in the first half of this year. So this guidance is already including this loss. We are not giving a guidance without this loss. For the second question, the difference is relevant to the fact that the partial write-off of a legacy litigation trigger a EUR 41 million reduction of revenues. That's the reason why adjusted revenue, which do not include such a reduction, are EUR 41 million higher than reported revenues.

[Kevin Roger, analyst]

Okay, understand. And is it possible to have a bit more color on the project where you have a loss this quarter?

[Stefano Cao, executive]

Yes, it is an affiliate which has been created on purpose for a specific project. The project is getting close to the -- to its completion. And in order to guarantee the date of -- the completion date, we had to incur additional cost related to an acceleration, which, for the time being, they account for the losses we have there.

[Operator]

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

[Michael Rae, analyst]

Just a follow-up on the EUR 49 million loss that you mentioned there. So are you comfortable that that's the extent of the loss of that project? Or is it still in progress? Or what's the kind of potential outcome there for the rest of this year? Second question is it looks like 2019's going to be another year of falling revenue based on what you've got in hand at this point of the year. Does that seem like a reasonable assumption, just taking into account the target for 1x book-to-bill in the second half? And then finally, just on the offshore rigs, it looks like you're still marketing quite a lot of capacity for next year. You've given a bit of detail in the presentation there, but are you comfortable that you can firm up utilization for those assets over the coming months?

[Stefano Cao, executive]

Yes, Maurizio will spoke with you. [Foreign Language]

[Maurizio Coratella, executive]

[Foreign Language]

[Stefano Cao, executive]

Okay, I think as far as the EUR 49 million loss, which is the -- what we call the affiliate -- the equity affiliate company, as I said, the project is coming to an end, so it is related -- largely related to the acceleration cost which we decide in order to incur -- in order to maintain the delivery date. And this is basically -- as I said implicitly, the concept is that we are getting to the end of the project, so we do not expect to have additional losses from -- deriving from the project. I think there were 2 more questions. And I will say the -- I mean, the level of confidence on the coverage, I think from the way we have been presenting the opportunities, and I think it is, I would say, rather -- I mean, logical, from our point of view, to consider that we see a sufficient pipeline of opportunities, out of which we reckon we shall derive our other addition to the backlog to maintain the targets in terms of backlog evolution for the coming years. In terms of offshore rigs, yes, we have tried to give you some color. But I think I would ask Marco Toninelli, who's the Head of the Offshore Drilling division, to provide a bit more color on this -- on the substance of these opportunities.

[Marco Toninelli, executive]

Marco Toninelli speaking. So of course, if you look at page -- Slide #22 and you look into 2019, it's quite worrisome at first look, but I can assure you that we are very confident that we can close the gap for the biggest rigs. And in particular, for Saipem 12000, we are very close to a negotiation, and we are very confident to close that. Scarabeo 9 as well, negotiation are very advanced to cover the activity until well beyond 2000 -- beginning of 2019; and as well as for Scarabeo 7. These are ongoing for the Perro Negro 8 and Perro Negro 7. As we speak, they are not closed yet. We hope to occupy them in the Gulf area. So we are confident that we will close the gap in the third -- in the next quarter in order to assure a high level of utilization for 2019 and partially 2020.

[Stefano Cao, executive]

Again, just coming back to the -- this follow-up on your second question, I will hand you over to Stefano Porcari to give you a bit more color on the forthcoming opportunities -- commercial opportunities since they are largely related to the Offshore E&C business. Stefano Porcari?

[Stefano Porcari, executive]

Stefano Porcari, yes. So regarding the Offshore division, I think that our targets are very clear. One of the targets is the project of Zohr with Petrobras in Egypt. And this project we are discussing with our client, and we have an ongoing negotiation. And therefore, we have quite a target also Zabazaba for Eni Nigeria, which is one of our typical core projects, being a subsea project. Then of course, we have our traditional market, which is in the Middle East, in Saudi Arabia, where we have a long-term agreement with Saudi Aramco for the call-offs, and therefore, we are bidding certain number of call-offs in this respect. Of course, we are expecting projects which are important, like the development of the subsequent phases of Liza in...

[Stefano Cao, executive]

Guyana.

[Stefano Porcari, executive]

In Guyana. So I think that, currently, there is a lot of potential projects for our company. And don't forget that we are also diversifying our activities. So we have a look -- we are looking at projects horizontal in the offshore renewables, in particular, north of France with different clients, EDF, Engie. So I think that even if these projects may slip in 2019, I mean, the next, let's say, 6 months, 1 year, we will have some interesting opportunities for our company.

[Operator]

We will now take our next question from James Evans from Exane.

[James Evans, analyst]

I've got 2, please. Firstly, can I ask a little bit about the core Onshore E&C business and the path to kind of recovery in terms of margins there? We've seen significant portfolio turnover in terms of your backlog over the last 12 months, and the mix is from much newer projects. So do we now have the mix in hand to see a recovery back to your medium-term target level of about 5%? Or do you need to do more work in terms of execution efficiencies and winning other projects on top of what you've already got? And that was my first question. My second question is maybe just a little bit on the strategy in cash flow allocation. Stefano, do you see additional opportunities for investment in Offshore E&C, selective investment, as you talked about as a possibility?

[Stefano Cao, executive]

Okay. To give you some color on the Onshore business, I will hand you over to Maurizio Coratella for a comment.

[Maurizio Coratella, executive]

Yes, this is Maurizio Coratella speaking. So the E&C Onshore division is implementing an important change in terms of its organization to implement flexibility, the ability to deliver the projects more efficiently. It is to adapt to the new demands and needs of customers and markets. We are organizing the division, centering the attention on the project and the project management in terms of project control, cost and efficiency. Moreover, managing the project very complex, it is becoming of the essence in order to deliver to customer [ success to such ] project and respond better to their needs of shortening the time to market. So that's the effort we are taking very seriously, looking at digitalizing some of the workflows within our division organization.

[Stefano Cao, executive]

So in a nutshell, we continue aiming at getting at least the 5% target in terms of margin. I think you asked the second question to Stefano, so we -- there are 2 Stefanos here. So on the...

[James Evans, analyst]

It was more for you, Stefano, yourself because, obviously, you're controlling the capital allocation decisions.

[Stefano Cao, executive]

Okay, I will address the question. As you have seen, we have decided to jump on the opportunity, which was deriving from basically bankruptcy. And that fitted so well with the strategy of complementing a line of capabilities where we have been, for a number of years, lacking of operators. And this is tiebacks, it was in general; but in particular, the tiebacks typology of contracts. That was, in a way, an opportunistic situation, but it was well within the frame of the overall strategy for the Offshore. I think if I have to think of a line of strategic evolution, I would mention first the improvement in terms of the integrated capabilities, integrated referring to self, and that, yes, we are currently working very efficiently and very well with Aker Solutions and in parallel on projects, so on project opportunities. And in parallel, we are also devising -- jointly devising whether there is something more structured which we can do. So to -- in a nutshell, I would say that at this stage, the focus and attention is on the strategic developments not necessarily related to assets.

[Operator]

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

[Amy Wong, analyst]

It's Amy here. I had a couple of questions, please. The first one is sort of go back to the loss from associates income. I mean, if we look back at the last few years, the level of profit from there is actually quite low, so to see a EUR 49 million hit in the quarter seems like a pretty outsized number. So can you give us a bit more color on, geographically, where this project is and what had actually gone on up to this point and why decide to take the hit now? And are there any other projects within -- you're executing under your joint ventures which potentially have had issues as well? And other than that, my second question relates to your Lewek Constellation. Understand that you've allocated that vessel to work on previously won work, but what's the prospects of have you won more new work for execution in the future?

[Stefano Cao, executive]

[Foreign Language]

[Giulio Bozzini, executive]

Okay, Giulio Bozzini speaking. In terms of equity affiliates, yes, historically, we have a number of companies which are accounted for with the equity affiliates method. These are normally companies that are physically present in some areas in which we operate and for which we account our share of results. As you stated before, normally, this was not a huge amount in terms either of loss of profits or this was quite stable situation. The -- why we have accounted this in the second quarter, we have accounted this in the second quarter because the deterioration of the project was recorded and was stated by the businesses and by the joint venture in the second quarter. So that's the reason why. So effectively, this is not a permanent company but is only a project-related joint venture that, due to the accounting methodology since being a jointly controlled company, has to be accounted for when -- with the equity method. And that's the reason why we have this loss, which, once again, is a loss pertaining to a company which is project related. So once the project will be finished, the company will be wind down.

[Stefano Cao, executive]

Amy, just in terms of not additional color, but obviously, the reason why we are not disclosing the name is, obviously, we have commercial negotiation ongoing, and we have to recognize the loss in the quarter, but we continue, obviously, pursuing the possible recovery of those costs. Probably the only additional color is that the project was awarded in 2013, and as I said, we are very close to the -- we are at the completion of the project. The other question was related to other commitments, so I would ask Stefano Porcari.

[Stefano Porcari, executive]

Stefano Porcari speaking. So as you rightly said, the Constellation is currently in Middle East, and she's going to start a work for our client in Saudi Arabia. And this work is going to take her just until the end of the year. For next year, we have a different plan. We have current projects which are ongoing where the vessel can be utilized, and so we are discussing with our clients how to utilize the vessel in these projects. And we are, at the same time, feeding other projects. In particular, the area are Gulf of Mexico, North Sea and West Africa. There are also some opportunities, of course, in Brazil, but [ the gap ] in Brazil [indiscernible] they are still ongoing, therefore, I mean, I would like to stick on these opportunities that I mentioned earlier.

[Operator]

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

[Robert Pulleyn, analyst]

Just one question around sort of the strategy and the capabilities you are looking to develop in Saipem. I was just wondering, with reference to the Curtiss-Wright strategic partnership you announced sometimes, is this done to really accelerate Saipem's organic development of its own subsea equipment offering? Or is this consistent with that Aker Solutions relationship that you talked about and talked about maybe becoming more structural? I was just wondering how that relationship and that technology fits into the existing strategy or whether it's a different avenue.

[Stefano Cao, executive]

Stefano Porcari. The mic doesn't work.

[Stefano Porcari, executive]

Stefano Porcari. Okay, let's put it this way. First of all, we needed a pump for our SPRINGS, so we have to find a partner to develop this system. And so we collected between all of the partner which have the capabilities and the track record for this kind of [ equipment ] and the one that we thought -- that we think is the best for our solution. So we selected Curtiss-Wright. Let's put it this way. Aker, at the moment, has no equipment that's similar, that can fit in our equipment, in our solution. So for us, there is no contradiction of what we are doing and developing with Aker at the moment. With Aker, we have an alliance. As Mr. Cao said, we are trying to strengthen the alliance with Aker for the future, and we also are planning to work with them for new technological solutions. Of course, there are synergies between our system and Aker's system, and we will take the best of the 2 companies to develop this kind of subsea solution for our clients.

[Robert Pulleyn, analyst]

So -- okay. So if I may, so you would then end up essentially sharing the development of this with your Aker Solutions partner. As you said, an alliance seems to be what you're saying. And therefore, I presume this is a recognition that versus the 2 other integrated offers in the market, the capability of Saipem and Aker Solutions at this moment is lacking in a few areas, and that's what you're seeking to bulk up, to which the question, obviously, is what else do you feel you need to add to these capabilities to compete versus those 2 competitors?

[Stefano Porcari, executive]

For example, if we are bidding an integrated EPCI project for subsea, of course, everybody has to bring the best technological solutions. And like an example, if there is [ potential subsea ] project where we need to involve our SPRINGS, it's obvious that we will take advantage of this Encana capability. At the same time, if there is a boosting or a compression, and Aker Solutions have their [ equipment already of vertical technical migration ], I think that it will be the best for our clients to have these capabilities integrated in our offer. So I think that there is value in developing these solutions in each part of the alliance and then put them together to offer to our client.

[Robert Pulleyn, analyst]

Okay, very interesting. I'll turn it over, but I'm sure we'll hear more about this as time goes by.

[Stefano Cao, executive]

Feel free to get in touch with Stefano for additional details.

[Operator]

We will now take our next question from Mick Pickup from Barclays.

[Mick Pickup, analyst]

Probably a follow-on from Rob there. I think previously, you've talked about in the Offshore that joint ventures have been able to deliver what you've offered to these integrated projects. I'm just wondering what's causing you now to be more formal or move forward with this process? Is this the next wave of bids are coming through on the more integrated basis, having gone through the recycled bids? Or what is actually just driving that necessity to get this a bit stronger?

[Stefano Cao, executive]

No, I think it is Stefano Cao addressing the question. Mick, quite frankly, I think in the relationship, there is a sort of engagement period. And then after the engagement, you may decide as whether you get married or not. I think we have seen a similar process followed by other competitor of ours, such as, for instance, Subsea 7. So we consider the alliance as the natural entry point. At the moment, you realize that there is room for improvement in the relationship, then you decide to move forward. And this is the indication which we are providing. Obviously, we will make the market aware of this evolution. We don't really think it's the moment we move forward together with our partners, and we do not expect that to take too long time.

[Mick Pickup, analyst]

Okay. But you only move forward to marriage once you think that's the long-term future.

[Stefano Cao, executive]

Absolutely. Absolutely.

[Mick Pickup, analyst]

So you are saying that integrated projects are the way forward?

[Stefano Cao, executive]

No, no, that's a different statement. This is a stronger statement. I would say that the markets will tell us going forward whether integrated will be the Solution, with a capital S. I think you heard me referring to the comment already in the past, whereby we see -- I mean, for the time being, we still see the major and super major has been a bit shy in following the integrated approach, whereby they think rightly or wrongly, we are not giving any judgments, but they are the best integrator of the various components. Certainly, talking about the independents, of smaller or national oil companies, that is an approach which is logically will be pursued in the future. So I think we need to develop the capability, and we are -- we have decided to go with Aker Solutions in that respect.

[Mick Pickup, analyst]

Okay. And a follow-up, if I may. Just on a sidetrack into the LNG. On that Mozambique Anadarko LNG plant, are you still the preferred contractor if that goes ahead?

[Stefano Cao, executive]

Yes, we are. We are still developing some engineering. And do we have any update, Maurizio?

[Maurizio Coratella, executive]

Yes, it's Maurizio speaking. On the Anadarko, of course, we are working following the request of Anadarko to some improvements of prices that we have submitted. And we are looking, as Stefano Cao has said in the opening speech, that Anadarko would eventually be in the position to award the project by the first half of 2019. As far as ExxonMobil, we are engaged in another exercise, an engineering exercise, which is looking at providing to them a price in 10 months' time starting from June this year. This will definitely bring this project award in the second half of 2019 as well. So that's the current status. We are engaged in both process in Mozambique.

[Mick Pickup, analyst]

Perfect. And just while I've got you then, Arctic LNG 2, you are doing the FEEDs in the 3 gravity-based structures. Is that for the structure itself with the storage facilities in it? Or does that include the trains on the top of it as well?

[Maurizio Coratella, executive]

No, that's -- we are in both. As you may know, for a FEED at this stage, which is a subcontract received from a Technip-led consortium, Saipem is just involved in the 3 gravity-based structures. And this is what we are working at this stage on.

[Operator]

[Operator Instructions] We will now take our next question from Michael David from ECITI (sic) [ Michael Alsford from Citi ].

[Michael Alsford, analyst]

It's Michael Alsford from Citi. Can I ask you a couple of questions, please? So firstly, my interpretation of the Offshore Drilling business was that you offer, obviously, some synergies when looking to win work in decommissioning. But in reality, is that true? Or really, could you actually look to perhaps even divest of Offshore Drilling as well as Onshore Drilling if the right opportunity came along and then not really prevent you from winning work in that area? And then secondly, just on Mozambique and following up from the previous question, in reality, can you do both? Obviously, you're bidding on both to try and win some work. But in reality, is it capable of -- to actually do both projects in the region on a go-forward basis?

[Stefano Cao, executive]

Okay, as far as the integration, you probably are referring to the previous statement I've made in terms of value integration because everybody keeps talking about vertical integration, and the point I was making earlier is that there are other form and shape of the integration. For instance, the management of the end of life of the field, it is an opportunity of integration for our business. And the reference was made in the possibility of developing a new scheme, whereby we take the responsibility of [ duty holder ] of the facility. And then while managing the facility without designing the removal of the facility itself and the plug and abandon. And I think in that respect, we are one of the few capable -- probably the only one capable of the integrating all the capabilities and providing a single service. As far as do we have the capability, Maurizio?

[Maurizio Coratella, executive]

Well, as you correctly pointed out, it's Maurizio Coratella speaking. Of course, there will be a workload that will definitely be considered, in particular, for the Mozambique project in case the projects will be launched in parallel by both Anadarko and Exxon. Of course, there are some facilities that have been considered already as optionally combined between the 2 projects. Nonetheless, we'll definitely have to look at the workload of Saipem, and definitely our technological partners show them as well.

[Stefano Cao, executive]

Okay, just for the sake of clarity, I mean, consider also that we are pursuing the train 7 in Nigeria. I mean, allow me to make a final comment. These are problems nice to have. We have for so long the opposite problems that -- the problem of managing the [ approvals ], something which would be dreaming for.

[Michael Alsford, analyst]

No, it's nice to have a few options certainly. And then, sorry, a follow-up, if I may. Just on the -- kind of the risk in the backlog, clearly, you've obviously executed a lot of the legacy projects. But clearly, a worry or concern obviously from the market perspective will be that there are other projects like the one that you've announced on the [ comments ] runs today that are still there. But can you give any sense as to how you're looking at the backlog and really, yes, what remaining risks do you worry about, I guess, in terms of execution?

[Stefano Cao, executive]

You see the E&C business is, by definition, it's a quite risky business, both Onshore and Offshore. I think what matters at the end of the day is the overall quality of the portfolio of projects. There will be ups and downs in the portfolio of projects as well as touching the -- in the present instance, we have situation which we cannot cover with the ups on the portfolio. So this is why we have to then transparently and openly announce and declare the problems which we have incurred. But overall, I would say that the derisking process of the portfolio has been pursued very aggressively. We are moving towards a portfolio of projects which, over time, they will become more and more balanced in terms of risk and opportunities. But that is the final comment. It is a bit implicit in the level of risk of our overall E&C business. So there will be a situation which will cause losses as well as -- and hopefully, that will prevail, over time, a situation where we have much more important opportunities.

[Operator]

We will now take our next question from Luigi De Bellis from Equita SIM.

[Luigi De Bellis, analyst]

Yes, just one question for me on the Offshore E&C margins. You reached a very high level in Q2. How do you expect divisional margins to evolve over the coming quarters?

[Giulio Bozzini, executive]

Yes, Giulio Bozzini speaking. We think that, clearly, margin on quarters, we always said that they are less significant than margin over a broader period. I think that the margin that we achieved in the first half of the year for the E&C Offshore, we have actually estimated for the second half of the year a slightly decrease, but then it will be dependent upon the evolution of the projects.

[Operator]

There are no further questions over the line. I will now pass the call back to your host.

[Stefano Cao, executive]

Okay, thank you for your participation. We'll be in touch periodically later. Thank you very much.

[Operator]

Thank you, ladies and gentlemen. That will conclude today's call, and you may now all disconnect.