Saipem SpA

MIL:SPM

Earnings Call Analysis

Saipem Reports Significant Growth and Upgrades 2024 Guidance

Saipem has delivered impressive results in Q3 2024, achieving €6.4 billion in order intake and reaching a record €3.7 billion in revenue, marking a 23% year-on-year increase. EBITDA soared to €340 million, up 48% year-on-year, buoyed by strong offshore E&C performance. With an all-time high backlog of €33 billion, Saipem upgraded its 2024 guidance, now expecting revenue above €14 billion and EBITDA exceeding €1.3 billion. Operating cash flow is projected to surpass €760 million, with reduced CapEx below €400 million. The company continues to focus on maximizing efficiency in existing projects while cautiously navigating market volatility.

Strong Financial Performance

In the third quarter of 2024, Saipem achieved remarkable financial results, showcasing its recovery and growth momentum. The company reported revenues of EUR 3.7 billion, reflecting a 23% increase year-on-year and a 10% uptick from the previous quarter. This growth was largely driven by the Engineering & Construction (E&C) sector, with an impressive EBITDA growth of 48% year-on-year, reaching EUR 340 million. The EBITDA margin improved by 40 basis points to 9.2%, indicating enhanced operational efficiency.

Record Order Intake and Backlog

The order intake during Q3 was notably strong at EUR 6.4 billion, resulting in a book-to-bill ratio of 1.7x, a clear indicator of healthy future revenue. Saipem's total backlog has now reached an all-time high of EUR 33 billion. This robust backlog is expected to support the company's revenues through 2025 and 2026, providing a favorable outlook for continued growth in the coming years.

Revised Guidance for 2024

Given the strong performance and increased visibility, Saipem has upgraded its guidance for 2024. The company now anticipates revenues exceeding EUR 14 billion, an increase from previous forecasts. EBITDA is expected to surpass EUR 1.3 billion, largely attributed to advancements in offshore E&C activities. Additionally, free cash flow generation is projected to be approximately 20% higher than previous estimates, implying more than EUR 760 million post-lease repayments.

Operational Insights and Market Position

Saipem's robust performance is supported by its strategic positioning in core markets, particularly in the Middle East where the company has secured significant onshore E&C projects. The company has a well-established fleet in this region, allowing it to secure new contracts effectively. With a diversified geographical footprint, Saipem is not only focusing on the Middle East but also expanding into Latin America, further enhancing its market presence.

Challenges and Adjustments

Despite the positive overall results, Saipem highlighted some challenges, particularly due to temporary suspensions affecting operations in Saudi Arabia. This has impacted drilling activities, leading to a slight expected dip in drilling offshore revenues and EBITDA in the upcoming quarter. However, the expected margin for the fourth quarter could rise to nearly 10%, demonstrating a rebound as legacy projects are phased out.

Future Operational Focus

Going forward, Saipem remains focused on optimizing its asset utilization and ensuring robust cash flow generation. The company's strategic direction will also involve cautious capital expenditures, projected to be under EUR 400 million for 2024, with some maintenance activities pushed to 2025. This prudent approach is expected to strengthen financial stability while accommodating continued operational growth.

Promising Dividend Policy

Saipem has established a clear dividend policy, committing to distribute 30% to 40% of its free cash flow to shareholders after lease repayments. This emphasizes the company’s intention to enhance shareholder value while ensuring that cash generation remains a priority in its growth strategy.

Concluding Outlook

In summary, Saipem has demonstrated a strong recovery and growth trajectory amidst a challenging environment. With a solid financial performance, a robust order backlog, and an upgraded revenue and EBITDA outlook, the company is well-positioned for the future. Investors can take confidence in Saipem's strategic focus on strengthening its market position and enhancing shareholder returns.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Saipem 9 Months 2024 Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Puliti, CEO of Saipem. Please go ahead, sir.

[Alessandro Puliti, executive]

Good morning, and welcome to the presentation of the Saipem 9 months 2024 results. I'm here with Paolo Calcagnini, our CFO; and with the rest of the [indiscernible] management team. I will start with the key highlights, and then Paolo will cover the financial results in more detail. I will then wrap up with my closing remarks before starting the Q&A session.

Let's start with the key highlights. I'm pleased to report, in the third quarter of 2024, Saipem recorded an acceleration on all key metrics. In Q3, we posted the highest quarterly order intake since Q2 2019. The highest quarterly revenue ever, and the highest quarterly reported EBITDA since Q4 2015.

Revenue stood at EUR 3.7 billion, growing by 23% year-on-year and 10% quarter-on-quarter, supported by the performance of our E&C activity. EBITDA stood at EUR 340 million, growing by 48% year-on-year and 14% quarter-on-quarter again, supported by the E&C businesses. EBITDA margin stood at 9.2%, an improvement of 40 basis points compared to the previous quarter, supported by both our E&C business as well as drilling offshore. We generated EUR 115 million of net cash flow, exceeding the cash flow generation of each of the 2 previous quarters.

Net debt has decreased both on a pre- and post-IFRS basis, notwithstanding a net increase in lease liabilities of EUR 91 million. The order intake in the third quarter was very strong at EUR 6.4 billion, corresponding to a book-to-bill of 1.7x. The vast majority of the order intake related to offshore E&C. Our backlog currently stands at an all-time high level of EUR 33 billion. Considering the strong quarterly results and the increased visibility, we have now on the rest of the year, we have upgraded our guidance for 2024. I will cover this aspect more in detail in the closing remarks.

Let's now go through the key awards of the quarter. The bulk of the order intake relates to upstream onshore E&C projects in Saudi Arabia and in Qatar, two core markets for Saipem. The main factor that allowed us to secure the sensible awards are, first, Saipem's strong track record in the Middle East; second, our critical mass in terms of E&C fleet already operating in the Gulf. Third, the know-how in the realization of [indiscernible] [ hydrocarbon ] production facilities; fourth, our [ yard ] in Saudi Arabia, which allow us to operate under the Saudi made level.

The strong offshore E&C order intake record post summer contributes to further increasing the visibility on the level of utilization of our construction vessels, which now extends well into 2027 and 2028. It is important to highlight that currently, our activity in the Middle East is mainly related to maintenance and optimization of existing offshore oil and gas fields.

As we said many times, maintaining an adequate level of production from existing fields requires a significant level of CapEx to counter the natural depletion. As such, this type of project represents a sizable and growing market for us.

Let's now take a step back and look at the key themes around our order intake this year. We are talking about more than EUR 15 billion of awards in the first 9 months. We are getting close to the record level of EUR 18 billion achieved in 2023. There are three key features in our order intake this year.

First, in line with our strategy, the order intake is mainly related to offshore E&C projects and integrated projects. We [indiscernible] we remain extremely selective in taking new stand-alone orders onshore.

Second, the geographical footprint of our order intake is very diversified. On one hand, we are consolidating our strong presence in the Middle East and West Africa. And on the other hand, we are expanding also in Latin America.

Third, the main awards so far are all related to upstream projects and more than half of them related to the optimization and maintenance of existing oil and gas fields, will [ lease ] the remaining 40% related to production capacity expansion.

We are currently working on the largest backlog ever for Saipem and more than 60% of our projects are in the offshore E&C. The execution of the current backlog will keep us busy for several years. In fact, out of the EUR 33 billion total backlog, almost EUR 13 billion is expected to be executed in 2025, and close to EUR 10 billion in 2026. And this gives us a substantial level of coverage of our expanded top line, expected top line for the next 2 years.

Our organization is running at full capacity. Our engineers will be very busy working on the current backlog for the next 2 years. Our main fabrication yards in Saudi Arabia, Angola and Indonesia, are currently running at more than 80% of their capacity. Our E&C fleet is fully booked until the end of 2026 and is getting pretty busy for 2027 and 2028. For example, the offshore campaign for the [ EPC 3] project we won in Qatar is expected to extend well into 2028. We are currently in the process of hiring more engineers, and we're also expanding our fleet on a [ charter ] basis.

As you know, the [ JSD6000 ] vessel that has entered the fleet in July is already fully booked until the end of 2026, and she has good visibility for the subsequent years. We are also looking to charter an additional core E&C vessel that should enter into the fleet early next year.

We have seen a volatile oil price environment post summer with investors trying to make sense of the impact of a weaker oil price on E&P investments level. The complicated geopolitical macro scenario is also not helping. Nevertheless, we still see sizable demand from clients. The pipeline has kept on growing in the last 3 years as well as in the last few quarters, and I believe that it is to a certain extent not correlated to oil price for the following reasons.

First, about half of our commercial pipeline is related to upstream gas projects. Second, about 1/4 is related to the energy transition and to other downstream activities. Third, only less than 30% is related to upstream oil projects, a segment that has suffered a massive underspending in the period between 2015 to 2022.

When I look at the composition of upstream oil and gas projects, I see that 40% of them relates to optimization and maintenance of existing fields. These projects normally carry better payout times and economics for clients compared to the new field development. And for this reason, they are intrinsically more resilient to volatile oil price.

Oil and gas fields typically deplete a significant trade each year. And as such, there is a substantial need for investments to offset the consequent production decline. Therefore, even in the most aggressive energy transition scenario, there will be still a massive need for investments in barrel of oil in the next decade.

Let me now give you an update on core sales. I'm pleased to report that the drilling machine has been tested successfully in August and after an extensive commissioning phase during September, October is now drilling the first socket. The first casing was successfully run and now only a few meters remain to reach the target debt. Several debarking actions were required to get there, leveraging on Saipem's extensive experience in drilling and offshore projects. We have a total of 64 sockets to drill and an equivalent amount of monopiles to install. So there is still quite a lot of ground to cover. The Saipem 7000 vessel is currently preparing the mobilization for the installation of the first [ monopile ]. We plan to keep you updated on a quarterly basis on the progress on core sales.

Moving to another key projects. I'm pleased to report that our pipeline vessel CastorOne has completed the installation of the 430-kilometer strength line that connects the Scarabeo offshore natural gas field with the [ Pluto ] LNG onshore facility. This is amongst the 5 longest offshore pipelines ever laid by Saipem. And this was achieved in one of the most complicated seabed [indiscernible] sharply dropping from very shallow water to a water depth of around 1,400 meters.

As the [indiscernible] transition to natural gas play a key role in supporting countries that still lack access to affordable and reliable energy, or they have an every reliance on coal to meet their energy needs. In this sense, we are proud having served the Scarabeo project with CastorOne.

And let's now spend a few words on drilling offshore. A key theme so far has been the impact of Saudi Aramco's temporary suspension on our [indiscernible] fleet. I'm pleased to report that we have mitigated to a large extent, the impact of the suspensions. And we are now done. So we are down -- and we have now done so mostly thanks to our capital-light asset vessel strategy.

For Perro Negro 7, the start of the suspension has been delayed to 2025 and it will coincide with a period of planned maintenance. The leasing of the Perro Negro 9 is expiring by the end of the year, and [indiscernible] will be returned to his owner. The Perro Negro 10 will be redeployed in the Gulf of Mexico.

On the deepwater side, I'm pleased to report that we had two positive developments in the last few months. [ AkerBP ] has extended its contract for Scarabeo 8 for an additional 12 months. Therefore, the vessel is now committed until the end of 2026. The daily rate for 2026 represents a substantial premium compared to the current rate.

Lastly, I'm pleased to announce that we are entering in [indiscernible] with Gulf. In fact, Gulf has hired the [indiscernible] ship taking advantage of a farm-out opportunity from E&I. [ Namibia ] represents a new strategic market for Saipem considering its potential in terms of exploration activity and future production.

And let me now hand over to Paolo to cover the financials in more detail.

[Paolo Calcagnini, executive]

Thank you, Sandro. Good morning, everyone. We'll start from Slide 13 with the financial summary for the first 9 months of 2024. Group revenues grew by 21% year-on-year, and our EBITDA rose by 41%, mainly thanks to our offshore E&C and Drilling businesses. We also saw an improvement in the EBITDA margin, reaching 8.9%, up from 7.7% last year, due to a more favorable business mix in our offshore E&C backlog. Our net result was EUR 206 million, nearly triple last year's amount.

Operating cash flow reached EUR 731 million, more than 3x delivering the same period of 2023. With cash flow conversion rising from 30% to 80%, showing the significant progress in delivering the legacy projects. Let's now go through the different business segments.

Starting from the asset-based services on Page 14, revenue reached EUR 5.5 billion in the first 9 months, a 34% increase from last year. This increase results from progress in traditional and subsea oil and gas projects offsetting the decrease in wind offshore activities. EBITDA was EUR 635 million, up by 54%, with an EBITDA margin of 11.5%, a rise of 150 basis points. Profitability has grown due to a better project mix, especially fewer wind offshore projects.

For last quarter of 2024, we anticipate continued growth in both revenues and EBITDA, increasing the EBITDA margin further. We'll now look at the drilling offshore on Page 15.

Revenues reached EUR 669 million, reflecting a 25% rise compared to the corresponding period last year, while EBITDA improved by 15% to EUR 258 million. This growth was driven by the start of operations for both the [indiscernible] and the Perro Negro 12, an increase in operating days for the Perro Negro 11 and higher day rate for one of our deepwater drillships. The strong operating performance was partially offset by the downtime for the Scarabeo 9 that underwent maintenance by the start-up cost for the Perro Negro 13 and by the impact of the temporary suspension in Saudi.

For Q4, we expect Drilling Offshore revenue and EBITDA to slightly decline quarter-on-quarter mainly due to the impact of the Saudi suspensions on Perro Negro 9 and Perro Negro 10, only partially offset by the positive contribution to the top line of Perro Negro 13 and Scarabeo 9.

Now we go through energy carriers on Page 16. Revenue increased by 6% year-on-year, reaching EUR 3.9 billion. The EBITDA margin improved this quarter as the third quarter saw an EBITDA of EUR 14 million, and this is a 1% EBITDA margin on revenues. As we said before, our main goal is to complete the remaining legacy projects whilst we remain very selective about taking on new onshore projects.

We anticipate that next year, recent awards and the expected the restart of the Mozambique LNG will lift energy carriers profitability, reducing the effect of the other projects. The complete group income statement is shown on Page 17, we can highlight some of the key items below EBITDA.

D&A stood at EUR 488 million, an increase by EUR 152 million compared to last year, mainly driven by the higher leases paid on the assets that we added to our fleet this year. As already mentioned in the Q2 call, for the full year 2024, we expect D&A of around EUR 700 million, mainly reflecting the growth of the fleet on a chartered basis. Financial expenses were EUR 104 million, down by EUR 29 million from previous year. This is mainly due to the lower financing costs, which declined EUR 11 million and more favorable FX differences for EUR 21 million, partially offset by the higher project hedging costs.

Income taxes increased by EUR 14 million compared to last year to EUR 131 million, implying a tax rate of 39%. As previously mentioned, we expect our implied tax rate to normalize towards a 30% level in the years to come. In the end, net result was positive for EUR 206 million, nearly tripling from last year's figure.

On Page 18, you can see the evolution of our net financial position. The cash flow we generated in the first 9 months improved our net financial position by EUR 293 million on a pre-IFRS basis, from EUR 216 million to EUR 509 million, more than compensating for the EUR 156 million increase in the lease liabilities. We achieved these results by generating EUR 731 million of operating cash flow, or EUR 588 million after repaying leases. And by generating EUR 514 million of free cash flow, or again, EUR 371 million after repaying leases.

As you can appreciate from the numbers, the strong focus on cash flows is paying off and allows us to upgrade our guidance for the year, Alessandro will expand more on this topic later. In the third quarter, our net cash flow was EUR 115 million, rising from EUR 110 in the second quarter and EUR 68 million in the first quarter of 2024.

On Page 19, you can see the breakdown of our net financial position. As you can see, we have a comfortable level of liquidity on our balance sheet, which was more than EUR 3 billion at the end of September. Our current level of available liquidity of EUR 1.3 billion fully covers our gross debt maturities up to the full year 2028. We plan to repay this EUR 275 million outstanding related to the January 2025 bond with the available cash.

Lowering both gross and net debt remain a key priority for Saipem with the aim of further derisking the company and facilitating future credit rating upgrades, both from S&P and Moody's.

Let me now hand it back to Sandro for some closing remarks.

[Alessandro Puliti, executive]

Thank you, Paolo. The consolidation of Saipem's performance continues at a steady pace. We are achieving a steady revenue growth and increasing profitability as our activity shifts to our offshore E&C projects and we make progress on the legacy backlog. Profitable growth is turning into a cash flow into strong cash flow generation. So far, in 2024, we have converted 80% of our EBITDA in operating cash flow, a material improvement compared to the last few years.

Let's now move to the guidance. We are improving our guidance for 2024 to reflect the strong results achieved so far and the visibility we have on the rest of year 2024. We expect to achieve revenue higher than EUR 14 billion, a level which is above the top of the previous guidance range. This is mainly driven by strong evolution in our offshore E&C activities.

We also expect to achieve an EBITDA higher than EUR 1.3 billion which exceeds the midpoint of the previous guidance. This is mainly driven by the performance of offshore E&C, partially offset by the impact of the Saudi suspension on our drilling offshore activities. We expect to achieve more than EUR 760 million of operating cash flow post repayment of lease liabilities and we estimated the CapEx will be lower than EUR 400 million as some maintenance activities have been postponed to 2025. All in all, this will lead to a free cash flow generation, which is about 20% higher than our previous guidance.

Lastly, we confirm our policy of distributing to shareholders dividends equal to 30% to 40% of free cash flow post lease repayments. Needless to say, we are very satisfied with the progress made so far in 2024.

To wrap up our presentation before going into the Q&A, our backlog is at all-time high, and this provides us with a very good level of visibility on the utilization of our assets for the next few years. We have a very robust commercial pipeline, which is proving to be resilient to oil price volatility, being mostly focused on natural gas and on the optimization of the production of existing hydrocarbon fields.

As you have seen from our results and upgrade of our guidance, cash flow generation is accelerating. We also remain focused on reducing leverage. The next appointment will be February next year, where we will present our 2024 results and the updated strategic plan. Thank you for your attention, and we can now move into the Q&A session.

[Operator]

[Operator Instructions] The first question is from Alessandro Pozzi, Mediobanca.

[Alessandro Pozzi, analyst]

I have two on the guidance. It's good to see that you've upgraded revenues to above EUR 14 billion. I was wondering, can you give us probably a bit more color on made you increase the guidance? Was it just being conservative at the start of the year? Or you've seen a material acceleration in offshore E&C?

And also, when you look at the guidance for the full year, clearly, there is a big step-up in EBITDA in Q4. And I guess it's probably driven by offshore E&C again. If you can give us a bit more color on that because that's going to be quite important to pin down what could be the progression in 2025. And when I look at the offshore backlog has been a big increase for 2025 offshore on see backlog to, I believe, just over EUR 7 billion.

And also I was wondering if you can give us the split in the offshore E&C backlog for next year between conventional and subsea work that we have an idea of what could be the implied margin there?

[Alessandro Puliti, executive]

Okay. I will start the answer, and then I will I will then ask Paolo to enter into more details.

So the basis of the upgraded guidance, as we said, clearly, there is acceleration on the E&C offshore activities that are getting [indiscernible] there, and they are constituting let's say, the backbone of our backlog as we presented. So that's really the case.

This was -- this is the result of the activity we did end of 2022 and during the whole 2023, where we accelerated our order intake in the offshore activities and results are really coming visible, as you can see.

And now I will leave Paolo to give you more color on the Q4 and the split between 2025 between the conventional [indiscernible] in terms of offshore activity.

[Paolo Calcagnini, executive]

[indiscernible] Sandro. So starting from the Q4, there are two effects in Q4. The first one is the acceleration in revenues, especially in E&C offshore. This is -- it comes from the backlog that we've been building recently that goes into execution. And so it brings additional revenues the total. And then it comes to the higher expected EBITDA margin overall. If you run some numbers in the first 9 months, we did a -- almost 10% of EBITDA margin. And in order to get to the EUR [ 1.3 ] billion EBITDA, the Q4 should be making close to 10%. So it's a mix of the two things.

Then your other question was if we -- being a bit conservative when giving the guidance. Well, we don't think so. I mean we guided an EBITDA that could have been between EUR 12.7 billion and EUR 13.3 billion -- sorry, EUR 1.2 billion and EUR [ 1.3 billion-something ] of EBITDA. And by the end of this year, we will get there.

And you may argue that the first 2 quarters have been a bit slower than expected, but we have gone through the explanation a few times. There have been -- there's been the suspension in Saudi, there's been [indiscernible] Q2. There's been the incident in Q1. And that explains, as we said, in the first half presentation, the margins in the first half and the Q4 will be stronger than the previous 3.

And then in relation to the split between conventional and nonconventional at Page 33 of the presentation, there is a backup where you can find the detail of our backlog. Basically breaking down the backlog by conventional subsea pipe laying, et cetera. And that's a good proxy of where the revenues will come from in the coming years. Then the relative weight 1 quarter after the other will depend on the progress we will be making on one project versus the other. And it's a bit early to give you a detail on 2025, you will possibly get it from -- in February when we will present the business plan. But over the next, say, 4 years, that it's going to be the split.

[Alessandro Pozzi, analyst]

Okay. Maybe just a follow-up on CapEx, where you managed to reduce CapEx in 2024?

[Paolo Calcagnini, executive]

Well, there's -- it's a mix of different things. There is one which is obviously, the suspension comes with a good news when you refer to CapEx because it's -- it's 2 [ rigs ] less. [ Rigs ] come with [indiscernible] we will not be facing obviously. And -- and then there is a postponement of certain cyclical maintenance to 2025. When this -- the and third, there is a general saving on the maintenance that we have already gone through in the first 9 months. And all in all, it's 10% lower than the guidance we gave in February.

[Operator]

The next question is from Mark Wilson, Jefferies. We lost connection with the -- next question is from Kevin Roger, Kepler Cheuvreux.

[Kevin Roger, analyst]

Yes. I would have three questions, if I may. The first one, just said, if I'm not mistaken, that you are expecting to lease a new vessel for the E&C Offshore, and you said that's going to be one of the key vessels. So can you provide us a bit of visibility on what type of vessel is it pipeline, heavy lifting, subsea field development? So some information, if possible on this new vessel to enter the fleet?

And then sorry for being the bad guy, we just focus on two projects that could represent some risk again in the next few months. But the first one is Mozambique. On the EUR 4.2 billion of work to be executed next year in the energy carriers, what's the scope related to Mozambique in the backlog currently? And if you make a worst-case scenario with Mozambique is suspended for the entire year 2025, what would be the financial impact for you in terms of revenue and EBIT, please?

And the last one on [indiscernible], so you provided a lot of detail, if you can provide now some color on the execution time line, you said that you expect to complete the project by H1 2025. On the paper, if we can say that, the [indiscernible] foundation, how long does it take to drill and install -- to drill the hole and install the foundation? Basically, what's the scheduled time work that you have on the project, please?

[Alessandro Puliti, executive]

Okay. So I will answer -- I will answer the first and the last questions and then the details on -- I will give you some details on Mozambique and then Paulo will complete on Mozambique and the second question.

So the vessel we're expecting beginning next year will help us in the activity of laying flexible and [ umbilicals ]. So this is the kind of vessel. It's not pipe layer for regions like the [ GST ]. So it will complement our fleet, especially in the activity we have in West Africa and Latin America. That's the -- and it's taken again with our asset-light strategy. So it's on a rental basis.

Now, Paolo, if you want to give the second question.

[Paolo Calcagnini, executive]

No, no. I mean, the expected margins on our worst case on Mozambique, and these are numbers we [ can't ] share, numbers on a single project. We don't normally share numbers on projects. What we can share is that we keep working on maintenance activity and on pre restart activity and that is agreed with the clients. As we said a few times, and it's not a big thing, I mean, in our numbers. It's not something that can dramatically change the either the revenues or the margins of the onshore business.

In fact, the numbers you're seeing on the [ Q9 ] results come mostly from a mix of the legacy projects and likely the new ones that are going as they are expected to go. And Mozambique wouldn't change the picture dramatically if it's delayed by an additional quarter of -- then the margins. I'm sorry, Kevin, you are a bad guy and I need to play the bad guy as well. I can't tell you the numbers of a single project. This is something we never do.

[Kevin Roger, analyst]

Yes, I understand totally, just to understand the impact on the top line in the sense that in the EUR 4.2 billion to be executive, if the project continues to be suspended, how much is the compensation fees or whatever, if you can give -- help us to understand if the project is 100% responded with just the maintenance, et cetera, what will be the backlog to the [indiscernible]

[Paolo Calcagnini, executive]

Okay. So the project overall at still more than EUR 3 billion of remaining revenues to completion. So you can do some rough calculations, say that the 3 years would be needed if the project restarted full steam from January 1, you can account for possibly EUR 1 billion of revenues.

[Alessandro Puliti, executive]

Let me now complete the answer. So we are now working under the scope of work of getting ready to resumption. And this is including also finalization of engineering remaining orders to be placed. So all this activity is continuously going on. As we said in the previous call, and we are constantly in dialogue with total energies during the suspension period because here, the overall scope is to be ready to restart full steam when the client give us the green light.

So in this period, we are -- our remuneration comes from these activities that are carried out on a reimbursable basis. Security on-site is constantly improving, constantly improving. And so as soon as the client give us the red lights, we -- let's say, we are ready to restart. That's the status of the Mozambique.

And as Paolo described, yes, if there is a substantial delay even in the next year, there could be some top line in terms of revenues or reduction, but where we are making, let's say, our [ leading ] [indiscernible] been touched because we will continue the activity of preparation and readiness that are going on the background.

Core sales, as I said before, finally, we have almost completed the first socket. And time-wise, yes, we need to add some months to my previous estimation because as I said, it took almost the entire month of September and October to carry out the commissioning and the bagging of all the drilling machines. So some more months will be required.

[Operator]

The next question is from Mark Wilson, Jefferies. We have lost connection with Mr. Wilson. The next question is from Daniel Thompson, BNP Paribas.

[Daniel Thomson, analyst]

Congratulations on the good results. Two questions, please, both on the Offshore or the [ ABS ] division. Firstly, just a sort of market question. Could you talk about sort of the trajectory of leading-edge pricing in the tenders in the [ ABS ] division. Maybe you could sort of separately address Middle East conventional work and then as well as [indiscernible] subsea work?

And I sort of ask that in the context of we've seen some customers expressing concerns about the lack of competition in subsea supply chains and that some of them are looking to broaden the contractor base by including more non-Western companies. So just sort of wonder on the trajectory of pricing there, we sort of hit a peak level at all or if there's still some more to come there?

Secondly, just on Brazil. You obviously had some good news from the courts there, although there's still some administrative proceedings to come. Just sort of wonder -- we've seen reports that there's sort of 4 major serve tenders underway with [ Petrobras ]. One is very advanced. But do you think you'd sort of on the time line you expect the proceedings to complete? Do you think you'd be able to sort of bid on 3 of those 4 or maybe just the final 2? And does it change any sort of projects that you bid on in the area not with [ Petrobras ]?

[Alessandro Puliti, executive]

So okay. Thank you for the question. It's very, very difficult to comment on the trajectory on pricing. What we can say and what we said is that the our fleet is completely fully booked for 2025 and 2026. And these are within contracts that are already closed. So pricing there is defined.

What is coming from 2028 and 2027 and 2028 is what it is, let's say, under negotiation with the clients in these days. And we need to always to find the right balance. It's true that the market is tight. And this is proved by the fact that several clients are willing to pay booking fee because they may not fully ready to take their own final investment decision, but they want to secure the vessel. So they have a clear feeling that there is a tight market for vessel in 2027, 2028.

On the other hand, as on the contractor side, clearly, this is nice to know, but we also have to be careful not to be too greedy because at the end of the day, we cannot impair the economics of our clients expressing to too high prices, because at the end of the day, then we may enter into the risk where the client just declined to do the job. If it's costing too much and exceeding its own spending capabilities. So that's a matter of finding a balance.

Certainly, what it is looking good is that clients are willing to pay booking fee for 2027, 2028. And I repeat that this is a clear sign that the market is tight.

Regarding Brazil, clearly, we welcome the decision of the court, the [ core ] decision is yet to become fully effective. So clearly, but this clearly opened us the possibility to participate again to bidding with [ Petrobras ]. As you know, the decision of the court, the previous decision of the court was not affecting our ability to work with the international oil companies in Brazil when they when they are operator of the field. So this has no impact on the short-term activity we have in Brazil, but clearly opens up further opportunities.

[Operator]

The next question is from Kate Somerville with JPMorgan.

[Katherine Somerville, analyst]

Just one on the guidance. I'm just trying to make sense of some of your changes. So the margin, even though absolute EBITDA is obviously above where you were before, the margin seems quite a lot lower. You can explain that by the Saudi suspension, but we didn't know that before. So I wonder if part of that margin decline is actually maybe related to CapEx, moving into OpEx, especially given your lower CapEx forecast now?

And then maybe a follow-on from that. You sort of said that maintenance activity may be moved into 2025, should we therefore be increasing our 2025 CapEx assumptions by that delta?

[Alessandro Puliti, executive]

Okay. So margins looks lower. And the explanation is partly agree with you is because we lost some margins or reduced drilling activity in Saudi Arabia, and that's a factor. But the other main contributor is the fact that we are progressing very well on our anchor activity on legacy projects. So this is bringing a huge amount of revenues that are on legacy projects, so with very low margin. And that -- so this is the reason why the overall margin looks lower.

But as Paolo explained before, the fourth quarter -- in the fourth quarter, we plan to record almost near 10% margin. And so this is clearly signed that our target is not disappeared. It's just moved by a few months to the right. And this is mainly because we are progressing on the of the legacy project. And this is a good news on its own because it means that this backlog will close.

Now maybe, Paolo, you have something to add there?

[Paolo Calcagnini, executive]

On the CapEx, the difference between the guidance and the new guidance is around EUR 50 million -- EUR 40 million, EUR 50 million less, which is roughly 10%. And part of it would be -- part of those CapEx will be postponed in 2025. And the part is just saving from the CapEx spending that we've been making so far. And if it -- if the difference would have been 5%, we will not be discussing the difference is 10%, and it's not a big thing. I mean -- and then you should also keep in mind how the increase in the lease liabilities because we call them these bids and they're in the net debt, but in fact, there are CapEx because it's all about bringing new capacity into the fleet. And in fact, if you look at the Q3, and there has been a massive increase in leasability because of the of new vessels, especially the GSD entering into operations this quarter or last quarter, Q3. And...

[Katherine Somerville, analyst]

Can I just follow up just on the margin point. Would you say that in terms of your asset-based services, margins are progressing as you expected before? So as you just said, you have the mix effect from the legacy contracts, but actually on the asset-based services, it's as expected?

[Paolo Calcagnini, executive]

Well, on the asset-based services, the let's say, in the offshore to put it in broader terms, obviously, the fact that we had the suspension, it brings some extra costs and also having to account as cost -- as operational costs rather than CapEx, the investments that we have made on the units and so decreasing the margins. And the second reason is that in the first 6 months of this year, the offshore activity has suffered some margin reductions, what I say, one-off effects mostly coming from the incident in Australia. And -- but it was already accounted in the first in the first 6 months.

In fact, as Alessandro said before, in Q4, the EBITDA margin will be already around 10%, not including the one-off that we had to pay for in the first 9 months.

[Operator]

The next question is from Mark Wilson, Jefferies.

[Mark Wilson, analyst]

Here are my questions. I'd like to follow up on that Onshore E&C margin point. you said, Paolo, that Mozambique in its current state isn't affecting the margin, and you've made very good progress on legacy projects. So would we expect, therefore, to see from the 1% margin you've got to that were very close to getting a step change towards what has historically been a 3% or 4% margin even without Mozambique starting up? That would be my first question.

[Alessandro Puliti, executive]

So on Onshore margins, we are really striving to achieve what you just said. Because this 1% looks little in this quarter, but really, it testifies all the effort we are putting to make this business right, and there is only one way to close the backlog of the legacy backlog. And this is why we are pushing so much and we did lots of progress, for example, on the [indiscernible] projects in Saudi Arabia.

That is where it's coming let's say, also the increase of revenues on the Onshore activities you can see in the quarter. So by doing that, we cleared the backlog.

On the other hand, you see the small positive. And clearly, the small positive, it's the effect of the new projects that we started acquiring are in a very selective manner starting from 2022. And so as soon as we clear the backlog, the new projects are entering, we see really changing slope of the cure of the margins for Onshore activities. So we are expecting getting better on that.

And Mozambique is not that affecting the margin because we are making a margin on a suspension as well as we'll be making margin on the restart. So on margins, Mozambique doesn't have a big impact. Here, the big impact is to close as quick as we can the backlog of legacy projects.

[Mark Wilson, analyst]

Very good. And then one more, please, just to go again on [indiscernible] You present the slide on it very early. So clearly, high profile, you've spoken to it already. And obviously get the first hole drilled.

Could I ask about the contingency you have in that project as we move into '25? And also if the -- if it is important, if there's a backup to the drilling concept, you're using there or the equipment?

[Alessandro Puliti, executive]

I will leave Paolo the question on contingencies. But back up on the drilling. The drilling is working. So there is no need of a backup. And we did commission the machine. We did the debugging, we drilled the first part of the first socket that is the more complicated one. Now we will sort out to get to the target debt that is less complicated that run in the first [ casing ] because does it require them [indiscernible] to be utilized.

So we are entering into a situation in which I don't see the reason why we should have a backup for the drilling. What we are getting organized is instead since the time will be getting longer, clearly, we are getting organized to secure the vessel availability around the drilling. This is what we are doing. But the drilling concept is not a state. This has to be -- and I want to be very clear on this point.

Normally, when you drill for, let's say, oil and gas, you take a rig, but you do not take another rig as a backup. And that's the concept. Why we are getting organized for ensuring all the support vessel ability. That's true. Now Paolo can elaborate.

[Paolo Calcagnini, executive]

Mark, the efforts you put to connect to the call, I would deserve a full question today. The provisions, but I'm afraid we can't share the precise number. Now we were expecting to complete the project in 2025. So there is still provisions that come from the profit warning on [indiscernible] and it's a big number. It's a big number. I can't share the precise number, but it's a big one.

I can give you some indications if you go to our annual report or even the first half results and you go to the provisions for losses on projects. There is a total number. And keeping in mind that most of the other legacy projects have are very well advanced. Obviously, the remaining amount, you can say it's entirely [ core sell ], but a significant part of it.

[Operator]

The next question is from Massimo Bonisoli, Equity.

[Massimo Bonisoli, analyst]

One regarding Namibia, which is a new important geography for you. Can you already provide Offshore E&C services there given your current setup and fleet utilization, or maybe you need a new vessel to exploit that region in the future?

The second question is just correctly on the legacy project, if you can provide the remaining amount outstanding there? And if you haven't already provided during the call.

The third question, very quick, just a guidance on financial costs for the fourth quarter.

[Alessandro Puliti, executive]

Okay. I will I will give you an answer on Namibia and then Paolo will cover the other.

So Namibia, it's a new country that is coming to the exploration and production seen is very close to Angola, where we are plenty of operation there. And therefore, it is very interesting for us to start to work. Clearly, we start work for the very beginning. So we will serve out with the [ Santorini ] [indiscernible] in exploration activity. So this brings you directly to the answer of your second part of the question.

Clearly, if we are doing exploration in 2024, 2025, then fleet for development activity will come in [indiscernible] in 2027, 2028 at the earliest. Therefore, we do not need new vessels to serve there in case we get the development contract. This can be done with our existing vessels in the tail of the utilization in end of 2027, 2028. So this is why it is very important for us strategically to be there and to start work in [indiscernible] because at the end, the exploration from what I'm understanding is promising. So sooner or later, a development project will be sanctioned. And it is extremely deep water. We have all the expertise, skills, vessels to serve the development projects on Namibia on Namibia Waters. Paolo?

[Paolo Calcagnini, executive]

Yes. On the legacy projects, I mean, the remaining backlog is less than EUR 0.5 billion, so EUR 500 million. We're not including possible change orders or extra activities on the project. So at the end, it could be bit higher revenues as we agree with clients, either extra works or new claims. But if you refer to the total on the backlog is roughly EUR 500 million on the total. So it's a significant decrease in the first 9 months of this year.

And for the financial expenses, well, I think that there are two effects that will be -- will continue in Q4. One is the decrease in the financial -- in interest expenses on our debt also because of the liability management that we made last year, but also -- but an increase in the lease, in the interest payments coming from the new leases. All in all, I think that EUR 50 million, EUR 60 million of financial expenses for the 3 months remaining this year, it's a fair assumption.

[Operator]

Next question is from Guilherme Levy, Morgan Stanley.

[Guilherme Levy, analyst]

I was interested on the commentary regarding the fleet utilization over the coming years. It was quite nice to see the company using the wording largely booked. But I was wondering if you could translate largely booked into numbers for 2027, '28. I think that in the 2Q presentation, we had a 30% figure for 2027. So just wondering how that changed recently? And how quickly do you think that we could start discussing bookings and also in 2029?

And my second question, if I may. Of course, the company is deleveraging quite quickly. And even though we should -- if you see an increase of leases as the new vessels coming the net debt, including leases, is quite close to the ambition of being [indiscernible]. So I was wondering if you could perhaps provide some color in terms of the cash uses once the company gets to that [ 0 ] net debt figure. We should see next year, but I was just wondering if next year is also the year in which the company gets to the target leverage, what is the plan for the excess cash to be generated?

[Alessandro Puliti, executive]

Okay. So I will take your first question and the second will be addressed by Paolo.

So fleet utilization, as we said, we fully booked 2025, 2026. If you want more color in numerical color, we can say that we are, all in all, in average, 50% booked in 2027, 2028. So that's the -- and we do expect in the next few months, so by the first half of 2025 to cover that the remaining 50%.

We have -- we are working close to awards that are coming that will complement that clearly that area. And that's very, very interesting. As I said before, some of those will come from booking fees already paid by client that will turn into effective contracts in that area. That's the reason why I'm confident because we are getting booking fees that are just waiting final investment decision from the clients to turn into fixed booking for those periods. Paolo?

[Paolo Calcagnini, executive]

Yes. On the cash generation and possible uses of cash, you're rightly wondering what we would be doing with the cash. And if you remember, we shared in February a dividend policy saying, look, out of the EUR 1.6 billion of cash, we would be paying at least EUR 600 million to the shareholders. There's still a remaining [ under EUR 1 billion ] of cash. And we said, "Look, let's deliver on the cash targets and then we may come with a more precise financial policy", which is precisely what we are discussing in these weeks as we are updating the business plan.

And your curiosity will be satisfied in a few months because in February, we will likely come up with a financial policy, which will go a bit more into the details of what uses we are foreseeing for the cash generation.

And let's take the good news. So we came up with the dividend policy the first time for this company in February, and we are progressing at a very nice pace in terms of cash generation. So we will be, in a few months, in a position to be more precise on were the EUR 1 billion of cash post dividends that will possibly go.

[Operator]

The next question is from Kate O’'Sullivan with Citi.

[Kate O'Sullivan, analyst]

Just a couple left. You've previously talked about selling down a stake in the offshore drilling business, which was delayed somewhat by the Saudi suspensions. Could you update us on the outlook and time line for this considering [ 5x ] impact has been limited to the 3 jack-ups announced in April. And does the longer-term margin target assume a sell down in the high-margin offshore drilling division?

Secondly, an accounting question for Paolo perhaps. Could you help me reconcile the difference and reason for the change in working capital numbers reported on Page 18 of your presentation, so the net debt evolution chart and the one in your IFRS cash flow statement, that would be really helpful.

[Alessandro Puliti, executive]

Okay. Coming to the offshore drilling. Clearly, what we presented is a very good situation for all the deepwater fleet. For [indiscernible], yes, we can confirm that we [indiscernible]. They were the only one that has been affected by the request of suspension on the contract.

As I said during the call, we were expecting the Perro Negro 7 to be already under suspension, while the client has asked us to extend the working period to the end of the year. And so we postponed the maintenance period in 2024. And this is a very good news because it's giving us cash flow in 2024 and is postponing the CapEx for the new maintenance in 2025. So is a double positive effect.

For the rest, we confirm Perro Negro 9 will be returned to the owner. So we do not have the liability of keeping the vessel idling there into during 2025. While the Perro Negro 10, as we are almost closing a relocation possibility in the Gulf of Mexico. So that now I would say, most likely, will happen. So -- and therefore, we'll find another, let's say, another client. So that's the status of the situation as of today.

And now I will leave Paolo.

[Paolo Calcagnini, executive]

Yes. I have -- 100% sure of the question on the working capital. So you're referring to Page 18 of the presentation. Is that correct? Or...

[Kate O'Sullivan, analyst]

Yes. Page 18 of the presentation, you had the change in working capital of negative [ EUR 37 million ]. And if I compare that to just to find a page of your accounts, you've got your cash flow statement, positive [ 124 ]. So just looking for the kind of reason and the reconciliation between...

[Paolo Calcagnini, executive]

Okay. Got it. So do you mind to take this answer off-line after the call and we'll give you the details. So I don't have all the statements in front of me.

[Kate O'Sullivan, analyst]

Okay, sure. And just following up on my first question. I think the question was also around the sale process, which has obviously been delayed. You've talked previously about that stake sale in the offshore drilling business. Are you seeing kind of renewed activity there now that you've been limited to those kind of 3 jack-up impact?

[Alessandro Puliti, executive]

Yes. The delays are over. They were regarding the beginning of the operation in the years where it took slightly longer than expected coming out from the 5-year maintenance of Scarabeo 9 and it took also slightly longer than expected to put in service Perro Negro 13 in Saudi Arabia. But this is now -- those parts are now over.

[Operator]

The next question is from Richard Dawson, Berenberg.

[Richard Dawson, analyst]

My first question, and this might be a bit premature to ask. But given the upgrade to 2024 guidance, do you expect any changes to the medium-term target out to 2027? Or can we expect to update more in February?

And then the second question is, do you see any bottlenecks in the supply chain, just given the organizations running at what you said is essentially full capacity? It sounds like you're hiring all engineers, for example. But do you have any other issues with the supply chain?

[Paolo Calcagnini, executive]

Well, as a matter of fact, the demand from the market remains very strong and possibly higher than expected and [indiscernible] from the from the acquisitions this year, but also from our commercial pipeline. So we can agree on the fact that the market is possibly still better than the assumptions underlying our medium-term targets. To what extent this environment will be incorporated in the medium-term target?

So well, I guess we will become clear when we will update the business plan in February. And I think the fact that we updated the guidance reflects both commercial and operational and financial performance is ahead of our expectations. And so we remain very optimistic about the future. To what extent is it going to be -- this is going to go into the medium-term numbers, we'll see it in a few weeks.

[Alessandro Puliti, executive]

Okay. Regarding your first part of the question and the supply chain. The supply chain is pretty stable. We don't see any major -- any major, let's say, problem unless very specific area. Basically, there could be some supply related to electrical equipment or valves. This is something that can arise in the future. But for the time being, supply chain is stable. It's true that our industry is working hard, but it's also true that other industries around us that are utilizing the same supply chain has not at best. And this is something that has to be taken into account as well.

I repeat myself, the most tension area in the supply chain we see is in the fleet and vessel utilization. That's the -- that's where there is the major tension in the broader supply chain. But for the rest, we don't see we don't see it as a problem that we cannot manage.

[Richard Dawson, analyst]

That's clear. Thank you for the color.