Subsea 7 SA

OSE:SUBC

Earnings Call Transcript 2018-Q1

[Operator]

Hello, and welcome to the Subsea 7 Release of Q1 2018 Results Call. [Operator Instructions] Just to remind you, this conference call is being recorded. I will now hand the call over to Investor Relations Director, Isabel Green. Please go ahead.

[Isabel Green, Investor Relations Director]

Thank you, and welcome, everyone, to our First Quarter 2018 Results Conference Call. With me on the call today are Jean Cahuzac, our Chief Executive Officer; Ricardo Rosa, our Chief Financial Officer; and John Evans, our Chief Operating Officer. The results press release is available to download on our website, along with the presentation slides that we'll be referring to on today's call. Turning to Slide 2, I must remind you that this call may include forward-looking statements that reflect our current views and are subject to risks, uncertainties and assumptions. Similar wording is also included in our press release. I'll now hand the call over to Jean.

[Jean P. Cahuzac, CEO & Executive Director]

Thank you, Isabel. And good afternoon and welcome to our First Quarter Results Conference Call. I will begin with the highlights of our performances quarter before handing over to Ricardo who will present our financial results in more detail. I will conclude with a summary of the key industry trends and the related points on the market outlook. We will have time for questions at the end of the call.Coming first to the highlights on Slide 4. We reported revenue at $809 million, 10% lower year-on-year, with fewer last project active offshore in the period. Adjust EBITDA of $103 million and margin of 13% reflected lower activity levels, but were only partly offset by continued cost discipline and good execution. This resulted in a loss-per-share of $0.3. Tendering activity and awards to market continued to increase in the quarter. Our strong competitive position was affirmed with awards and escalations totaling $829 million in the quarter. This resulted in a book-to-bill higher than 1 and an increase in order backlog to $5.3 billion, but with competitive pricing on the awards. Offshore companies this quarter were reduced by the seasonality in the northern hemisphere. Active vessel utilization was 58% and total utilization, 52%. During the quarter, we released 3 owned vessels for recycling, 2 of these were already stacked. We also returned one chartered vessel at the end of this contract. We had a net cash of $730 million at the end of March. We have been using our strong financial and liquidity position to support targeted investment to grow and strengthen our business. In the quarter, we completed a strategic investment in Xodus Group, an independent early engineering contractor. We also announced the acquisition of Siem Offshore Contractors and 2 associated vessels, completing this transaction in April, just after the quarter ended. We are making very good progress towards our planned joint venture with Schlumberger. We remain on track or closer later this year, and we will continue to provide updates to market on the joint venture over the coming months. I turn now to slide 5 to look at some of our current projects and operation in more detail. In the first quarter, pipeline activities commenced on the West Nile Delta GFR Phase Two project, with the arrival of Seven Borealis offshore Egypt in March. In Australia, the Sole project began offshore preparations for 64 kilometers of pipe that have to be installed in summer for Cooper Energy. The integrated Mad Dog 2 project continued with engineering from our global project center, working hand in hand with OneSubsea Schlumberger. The Oda projects, which we're executing under our partnership agreement with Spirit Energy, progressed with fabrication at the Vigra Spoolbase in Norway. The Tyra project offshore Denmark completed offshore operation with Seven Borealis, laying 2 pipelines supported by SevenPacific. Our PLSVs remain active offshore Brazil, with 6 vessels working under our direct contract.In April, after the quarter ended, Kommandor 3000 completed its contract, and we leave Brazil to be recycled. In Renewables and Heavy Lifting, we're continuing in the steel fabrication that we have on the Beatrice wind farm foundation and half of the jackets are now being explored offshore.In i-Tech Services, we continue to win and execute work, including drill campaigns, inspection services and pipeline repair. Moving to slide 6. We ended the first quarter with another backlog of $5.3 billion, slightly higher than the level reported at the end of 2017 as we begin to see the impact of the gradual improvement in one activity, with a good level of activity secured for 2018 and a growing base of work for 2019. On slide 7, the chart show the increasing awards we have announced in the fourth quarter of 2017. There's 8 announced awards in the last 2 quarters compared to only 6 in the preceding 15 months. Tendering activity has been gradually improving over the last year. And in the last 6 months, we have seen more awards to market. We have been winning our fair share, although pricing remains competitive. In the first quarter, we were awarded the Johan Castberg project offshore Norway by Statoil and the Nova project by Wintershall. On the back of successfully completing the very cost-effective Maria project for them last year. The 3PDMs project offshore Saudi Arabia was awarded under the long-term agreement with Saudi Aramco. This convention shallow water project, which we're executing in consortium with Larsen & Toubro, was our first award under the LTA since acquiring ECS last year. We see future opportunities in the coming quarters. We were also awarded an IRM contract in the Caspian Sea offshore Azerbaijan. This is a region that we have not been present in for some time, and this long-term contract further expanded the diversity of our portfolio of projects worldwide. Momentum have continued into the second quarter, with the announcement of another 2 awards in April. The PUPP project offshore Nigeria is a shallow water conventional project and is the first new project to be awarded in this country for some time. Local presence was a key differentiator for this project, and it will be executed by NigerStar 7, our Nigerian Joint venture. The Alligin Project offshore U.K. is a two-well tie-back project for BT, which will use pipe-in-pipe flow line systems. Turning to slide 9. We are confident in the long-term outlook of offshore energy. Our strategy is to develop our presence in key markets worldwide. We have already made good progress on these through countercyclical acquisition and investments in organic growth.Before I hand over to Ricardo, I would like the opportunity to discuss our announcement on Monday of our interest in acquiring McDermott on its own. We see compelling industrial logic for the combination of our complementary businesses, consistent with our growth strategy. We believe that together, we could create long-term shareholder value through our strengths and capability, highlight -- highly visible synergies and expanded global reach. We reaffirmed our interest yesterday, and we want to confirm that the our proposal is still open, and that even if McDermott is not in a position to engage directly at the moment, we are ready for a discussion if circumstances should change. I'll talk about the outlook later on. But first I'll hand over to Ricardo to cover our financials results.

[Ricardo H. Rosa, Chief Financial Officer]

Thank you, Jean, and good afternoon, everyone. Let's first look at income statement highlights on Slide 9. First quarter revenue was $809 million, 10% lower compared to the prior year quarter, with lower activity levels in all 3 business units. Adjusted EBITDA was $103 million, 60% lower year-on-year. As previously guided, we anticipate a significantly lower adjust EBITDA percentage margin for the full year compared to 2017. This, due to a reduction in offshore activity levels, fewer large projects in the final stages of completion and lower margins on projects signed in the downturn, partly offset by continued cost discipline and risk reduction through good execution.Our first quarter EBITDA percentage margin of 13% reflected these trends and was also impacted by seasonally challenging weather that affected our activities in the North Sea. We expect the second quarter to be sequentially better than the first quarter. Net loss of $18 million included a tax credit of $12 million and resulted in a loss per share of $0.03.Slide 10 provides more detail behind the income statement. Administrative expense of $74 million increased from the prior year quarter, mainly as a result of increased resources assigned to tendering and certain restructuring charges relating to acquisitions made in 2017. As our guidance indicates, we expected administrative expenses to reduce in future quarters. A net loss from joint ventures and associates of $7 million resulted from the settlement of a historical payable owed to Subsea 7 by one of our joint venture companies and is not expected to recur. Other gains and losses included a $22 million charge related to foreign currency movements due to a 28% devaluation of the Angolan kwanza against the U.S. dollar and dollar weakness against European currencies in the quarter. We reported a tax credit of $12 million in the quarter, which included certain discrete items. Excluding these, the underlying effective tax rate was 26%, in line with our guidance for the full year. Slide 11, shows the revenue and net operating income by business unit. In our SURF and conventional business unit, first quarter revenue of $584 million was down 3% on the same quarter in the prior year. Our fleet of PLSVs offshore Brazil achieved high levels of utilization, and good progress was made on most projects. Pemex in the U.S. Gulf of Mexico and OCTP SURF in Ghana are near the completion, and Hasbah and 4 Decks projects offshore Saudi Arabia were close to 50% complete. SURF net operating income of $13 million was significantly lower compared to the prior year quarter. The lower profitability reflected fewer projects in the final stages of completion, underlying margin pressure driven by lower pricing on new awards and lower offshore activity levels, which were exacerbated by the seasonally challenging weather in the North Sea. i-Tech Services revenue was $52 million, down 32% compared to the prior year, period with lower levels of ROV support and inspection repair and maintenance activities, reflecting the market environment and clients reduced investment in preventive maintenance. Net operating loss was $4 million for the quarter. Renewables and Heavy Lifting generated revenue of $173 million compared to $220 million in the prior year period. Revenue was generated mostly from the Beatrice and Borkum II wind farm projects. The net operating loss of $4 million was partly due, as expected, to the lower the slower progress on foundation installation offshore U. K. during the winter months. Slide 12, summarizes our cash position and the main cash flows reported in the quarter. Our financial and liquidity position remained strong. At the end of March, we held $1 billion in cash and debt of $277 million. In addition, we have continued access to a nonutilized revolving credit facility of $656 million. In the first quarter, we generated $6 million in cash from operations. Adjusted EBITDA of $103 million was partly offset by a $60 million decrease in net operating liabilities due to the timing of payments on certain large projects and by $23 million paid in tax. We expect working capital movements for the full year to be broadly neutral, although volatility is anticipated on a quarter-by-quarter basis. On capital expenditure in the quarter was $78 million, including $19 million on new-build reel-lay vessels, of which the first deal cutting commenced in the quarter. We invested $24 million in acquisitions, mostly related to the investments in the majority stake in Xodus, which is in the Hasbah early engineering capability. Xodus will be operated as an independent company and, being equity accounted for, will not be consolidated in our financial statement.Slide 13 shows we have established priorities for our available cash. Firstly, we will continue to invest in strengthening and growing our business. Secondly, we will maintain an investment-grade credit profile. And lastly, we will return any surplus cash to shareholders through special dividends and share buy backs. In addition to investment made in the first quarter, we have reported some material post-balance sheet items. At the start of April, we have spent about $8 million on the repurchase of 675,000 shares, under the authority of our existing repurchase program. Our activity was driven by our liquidity position and outlook, accompanied by a dip in our share price during a period of market volatility. On the 10th of April, we completed the acquisition of Siem Offshore Contractors, or SOC, and the 2 related vessels for an initial cash consideration of approximately $170 million. SOC will be consolidated in the group financial statements as a wholly owned subsidiary. On April '17, shareholders approved a NOK 5 special dividend, which will be paid in May with a cash outflow of approximately $210 million. Including this dividend, Subsea 7 will have returned close to $1.5 billion to shareholders since the combination in 2011. Slide 14 sets out on our guidance, which has been updated to reflect the acquisition in April of SOC. We continue to expect revenue in 2018 to be broadly in line with the revenue reported last year and adjusted EBITDA percentage margin to be significantly lower. Administrative expense is now expected to be between $260 million and $280 million, $10 million higher than previously guided, partly due to restructuring costs and increased tendering activities. Net finance cost guidance is unchanged and is expected to be no more than $5 million. Depreciation and amortization is forecast to be between $420 million and $440 million, increased by $10 million and includes the charges related to the recently acquired vessels. Our full year tax guidance is unchanged, with the effective tax rate forecast between 25% and 27%, in line with the underlying rate for the first quarter. Capital expenditure for the year is still expected to be between $250 million and $300 million and includes approximately $115 million to be spent on the new reel-lay vessel. I will now pass you back to Jean.

[Jean P. Cahuzac, CEO & Executive Director]

Thank you, Ricardo. Let's just now turn to Slide 15. Subsea 7 is officially the offshore contractor to the energy industry. Our expertise and experience includes project managing, engineering, planning and executing projects in all the major offshore energy locations. We have a wide range of offshore capabilities, including pipe-lay and construction in addition to diving, heavy lifting and ROV services. We are strategic partners to our clients on renewable energy developments as well as oil and gas field. Our track record of safe and reliable execution supports long-term collaborative relationships. We are enabling and cost-effective technology, which unlocks projects that might otherwise be impractical or too expensive to execute. This product differentiates us and help us to win the work. Projects of certain attributes that can impact the duration, complexity, scale and value of our awards such as water depth, region, market conditions, scope and technology, to name a few. For instance, the project in a remote location with challenging seabed topography and salt conditions may be more costly even if the lines of Pro-Line on a number Christmas trees, are relatively low. Likewise, and in this big project with a high proportion of procurement and fabrication will be significantly larger in size for the transport and installation project, although the vessels offshore campaigns might be similar. We have over 150 jobs and projects in our backlog today, some small and some large. The diversity of this work and the scale of our worldwide operations enable us to schedule our onshore and offshore operations efficiently, maximizing our profitability and enabling us to tender out more effectively.When we did found new work, each project's risk, value and contribution is assessed independently. Particularly, saline factor of portfolio is also important and influence our decision on the level of acceptable margin. The rate pricing on new award remains challenging, but when we look ahead to a recovery in offshore oil and gas activity, we expect this to improve. Turning to Slide 16. These 2 charts, sourced from Rystad, illustrate the market trends for oil and gas activity Capital expenditure approval by our clients reached us through in 2016. In 2017, we saw the first signs of recovery as lower project costs and the higher oil price encouraged project sanction. Looking ahead, we continue to expect a regular recovery in market activity, with around 70% of non sanctioned offshore resources breaking even at a $50 to $60 oil price. These [ stack ] graphs are encouraging and are backed up by the conversation we are having with our clients, who are keen to capture of the benefits from lower-priced supply chains and supplier availability at this point in the cycle. Moving on to Slide 17. I will conclude with our view of outlook for market awards by business unit. Starting with the SURF and conventional outlook. We continue to see positive momentum on tenders for large gas development, including the Mamba and Golfinho projects offshore Mozambique; the Gorgon Phase 2 project offshore Australia; and 98/2 project offshore India. The 98/2 project has only invited tenders on an integrated SURF and SPS basis, and we are building this together with OneSubsea. In the North Sea, we have seen a good level of activity, mostly on buyback projects, some of which can be enabled by our pipeline bundle solution and also heated by technology. The awards to market this year are likely to include the Penguins project for Shell and the Buzzard project for Nexen, both offshore U.K. Offshore Brazil, tenders for the first Libra project, known as Mero, have just been issued to market. This project required [indiscernible] steel capillary riser technology due to the pre-saltwater there, and cold sea production.The outlook for West Africa is slowly starting to improve. The Zinia project offshore Angola is expected to be awarded to market soon and our recent award of conventional work offshore Nigeria is encouraging. Conventional project tendering activity is also going well in the Middle East, in Saudi Arabia, where we benefit from an LTA and also in Qatar. Renewables and heavy lifting tendering is ongoing for the transport and installation activity for both renewables in oil and gas as well as EPIC wind farm projects offshore Europe, Taiwan and the U.S. For i-Tech Services, tendering is focus on IRM activity in the North Sea and the Gulf of Mexico, as well as [indiscernible] in the North Sea and Asia. To summarize, as we look ahead, we remain confident in the gradual market recovery. Pricing on new awards is still competitive, but I'm confident that our cost discipline, enabling technology and strong relationship with clients and partner will help us to achieve at least our fair share of market award. Ricardo, John and I will now open the call and take your questions.

[Operator]

[Operator Instructions] And the first question is from the line of Amy Wong from UBS.

[Hin Kin Wong, Executive Director and Analyst]

I had a couple of questions, please. The first one relates to your bidding strategies, good to see orders turn in the corner here. But are you starting to build some cost inflation into your tendering, yet in -- when you're looking at 2019, 2020? And then my second question relates to your dividend. Subsea 7 has always had a fairly shareholder friendly capital return policy. But as you are looking into a big acquisition. Can you just give us some idea whether you would -- can also consider formalizing a dividend policy to give your shareholders a bit more guidance there?

[Jean P. Cahuzac, CEO & Executive Director]

Regarding the bidding strategy, I think what we have shown in the -- through the years is that Subsea 7 takes a very prudent approach when actually tendering the jobs. And we haven't changed that. So obviously when the market shows a gradual recovery, making some assumption in terms of cost inflation is part of this prudent approach. And when we bid jobs for the long term, that's what we take into account. Ricardo, do you want to take...

[Ricardo H. Rosa, Chief Financial Officer]

As you know, Subsea 7, traditionally, has always indicated that all dividend distributions are special dividend distributions. We have not, as a company, committed ourselves to a regular -- a policy of a regular dividend. And we do this because we have essentially 3 priorities. The first one is to continue to reinvest in the business for growth. We want to maintain an investment-grade credit profile, which we believe provides us with a profile that is attractive to our clients and gives us a certain competitive advantage as a result. And lastly, we will return cash to shareholders. So each year, we evaluate our cash returns in the light of the first 2 priorities. And we do that bearing in mind that we do operate in a volatile industry.

[Operator]

And the next question is from the line of Robert Pulleyn, Morgan Stanley.

[Robert John Pulleyn, Analyst]

Lots of questions, but I'll limit it to 3. So the first one, if i can, regarding the margins is, we're all trying to interpret exactly what significantly lower means to '18. So the margins in the first quarter is seasonally weak at 12.7%. Is that indicative for the year? Or should we see a seasonal pick-up, in which case, consensus of 18% is okay? Of course, that would imply the rest -- the remaining 9 months of the year would be about 19.5%. And the second question is, yourself and others have highlighted for the downturn, the McDermott has been quite aggressive in its bidding. So how comfortable are you with that backlog as you approach them for, obviously, this combination? And also, in terms of working capital, that working capital has increased from 2% of sales to around about 12%. Are you comfortable with the balance sheet risk there? And then, finally, if I can just end on slide that Jean talked to, Slide 16, it shows some pretty fantastic expectations for market activity, and yet the sanctions year-to-date by late April are pretty thin. Could you maybe talk to why the volume of sanctions in that opportunity set is not larger?

[Jean P. Cahuzac, CEO & Executive Director]

Yes. A lot of questions there, Robert. Let me try to answer. I mean, regarding our guidance, we haven't changed our guidance to what we communicated before. If we are not happy with consensus, we would say it. And we think that Q2, Q3 would be better than Q1, and we will see some seasonal effect in Q4, so not surprising there. Regarding our proposition for McDermott, as you can imagine, I cannot comment in detail at this stage as to where we are. I would just say that we know the business pretty well, we know what -- we did it, but we know what McDermott has been doing on a number of projects that we bidded ourselves. I can tell you that the combination of the 2 company allows to executive the project by mitigating the risk and the size of what we are doing that would bring some efficiency there. I cannot comment on the financial resource of McDermott at this stage. Regarding the timing of project awards to the market, we are definitely seeing an improvement there. In the future, we have more visibility about the timing, more tenders, and we expect more projects to be awarded to market in the quarters to come.

[Robert John Pulleyn, Analyst]

Okay. And just on the slide, to follow-up. Why haven't the awards thus far been higher? We're about 1/3 of the way through the year, and that opportunity, that's not really be eaten to. Is there something oil companies, your customers are waiting for.

[Jean P. Cahuzac, CEO & Executive Director]

I think the timing of the award is, I would say, in line with our expectation.

[Operator]

And next question is from the line of Kevin Roger from Kepler Chevreux.

[Kevin Roger, Research Analyst]

Three questions on my side, please. The first one is related to the i-Tech Services business because this is largely based on day rate basis. We have seen, over the past 2 quarters, a net operating income margin close to minus 7%. How should we think about the next quarter, that it's based on the day rate and you should have quite good visibility on that? The second question is related to the provision, we had a strong increase this quarter by around $100 million, if you can explain it please. And last one, on the Beatrice project, if you have some update for us related to the discussion on the exact cost that you recognize in Q4 with the client.

[Jean P. Cahuzac, CEO & Executive Director]

Yes, I will take the question on i-Tech. Ricardo will take the question on provision, and John will answer on Beatrice. Regarding the i-Tech Services, I mean, we are seeing additional volume of activity, but there is pressure on margins which have been there for a while. But more activity, but still pressure on margins. Just as a reminder, we have announced the intention to create the joint venture with OneSubsea Schlumberger, which is going to bring i-Tech Services and the IRM on both sides, the OneSubsea and our side, to the next level, driven by technology and the model stuff. So the i-Tech business is challenging today. It's one of the business line of Subsea 7 which, for me, is quite promising on the medium to long term through the joint venture with Schlumberger. So I see future there. Regarding the...

[Ricardo H. Rosa, Chief Financial Officer]

With regards to provision, Kevin. The fact is from the first of January this year, we implemented the IFRS 15. And as a result of that, we have reclassified our onerous contract provisions to the approximately $90 million from current contract liabilities to other provisions in the balance sheet. All of this, we've discussed at reasonable length in our 2017 annual report, and we also refer to it in Note 3 of this quarter's condensed financial statements. So if you need to know more about that, I suggest you have a look there.

[John Evans, Chief Operating Officer]

And Kevin, just on Beatrice. So we are half way through the offshore jacket installation, so just over 44 of them are being installed. As you might have seen in the press, the fabricating that had some financial difficulties in Quarter 4, BiFab in U.K. now has new ownership, has been secured. So we feel pretty comfortable that the work is going well for us as well. The other 2 fabricators are doing okay for us. Coming to your question regarding the discussion about the duration about the re-sequencing of the work, that is underway, but I do expect us to take quite a few months for us to reach conclusion with the client latest this year on that one.

[Operator]

And next question is from the line of Frederik Lunde from Carnegie.

[Chr. Frederik H. Lunde]

Congratulations on, as we speak, a very successful strategic developments last year. And on that note, I'm not sure you can answer this, but do you expect to make any moves before the AGM at McDermott next week? Or is that kind of next events to prepare, to expect the news on?

[Jean P. Cahuzac, CEO & Executive Director]

Well I think, as you can imagine, we're not communicating on our strategy there. I think we expect the rationale of the proposal. We -- I think that's all I can say. I would say that Subsea 7's priority is to invest on new business, but at the same time, we are very cautious on the investments that we make. We make investments when it makes sense.

[Chr. Frederik H. Lunde]

Great. And also can I get some more clarity on what assets you will put into the joint venture with Schlumberger?

[Jean P. Cahuzac, CEO & Executive Director]

In fact, the assets -- I mean, we are putting the ROV on i-Tech Services, but the Subsea 7 vessels stay with the parent company, stay with Subsea 7 and will be chartered to the Life of Field vessels, to the Life of Field business. It's an asset-light joint venture, and we keep control of our fleet, which give us more flexibility and make it more comfortable.

[Operator]

Question from the line of Anne Gjøen from Handelsbanken.

[Anne Gjøen, Head of Equity Research]

I got a couple of questions. Firstly, when it comes to seasonal quarterly differences for the rest of 2018, could you indicate, for example, how much you expected the vessel utilization to increase within second and third quarter compared to what we have seen so far. And secondly, when it comes to the corporate segment, is it possible to give some indication of a fair run rate over time, and incorporate EBIT.

[Jean P. Cahuzac, CEO & Executive Director]

[indiscernible]

[John Evans, Chief Operating Officer]

Yes. So what we're seeing in the market today is the return to the seasonality we saw 5 or 6 years ago, where the North Sea was relatively quiet in Quarter 1 and Quarter 4. It's reasonably straightforward that the weather conditions are particularly extreme in those periods, and therefore, then clients are not looking for the work to be performed during those periods. During the high point in the market, we work right the way through those periods and clients will prepare to pay the additional cost to get their first production online faster. Our aim is that we will see in Quarter 2 and Quarter 3, our active fleet and it will be back towards a reasonable level of utilization in line with previous percentages for active fleet utilization. But then, we expect to see again the core North Sea market going relatively quiet in Quarter 4, so that's what we really see in terms of seasonality first. Ricardo?

[Ricardo H. Rosa, Chief Financial Officer]

With regards to your question on the corporate segment, the way you should think about it is, in general, is the impact on the consolidated group's results should be virtually 0. However, in corporate, we do tend to -- we do have the results of the discontinued joint ventures [indiscernible], so to the extent that there's commitment there, it would be reflected in corporate. And in addition, if we have unusual restructuring charges, we will occasionally take -- we would normally take those charges at corporate level along with any impediments of goodwill. I hope that helps you in your future model.

[Operator]

And next question is from the line of David Farrell from Macquarie.

[David Richard Edward Farrell, Oil and Gas Research Analyst]

Two questions from me. John, you talked significantly about pricing pressure in your prepared remarks. Obviously, second quarter, third quarter margins will be out. But do you think that has become the old awards roll-off in 2018, we should really think about continued margin decreases into '19. And if that's the case, what can you do to you offset that from a kind of corporate angle in terms of cost savings? My second question relates to the phasing of work. It looks like about 44% of what you won in the first quarter is actually for execution in 2018. Is the kind of historic backdrop coverage levels that we -- kind of what you'll use to forecast revenue, going forward? Is that changing so that you need less work upfront because actually, more of the work is happening in the next couple of months of the projects that you win.

[Jean P. Cahuzac, CEO & Executive Director]

Regarding -- I'll make a comment on the pricing pressure and then we'll let John comment on your second question. I think what we are seeing today is what we were expecting to see last year, the gradual increase of activity, increase of the number of tenders, and you need to reach a certain level before you actually see a change on the margin for the short- to medium-term jobs. So I think the -- regarding the pricing pressure, we see it -- we still see it today, in particular, for the short- to medium-term jobs. When we look at the longer-term job, we actually take into account our view on an improvement -- improved market in the future and that's how we price a job. There are jobs today, where we grow on the regular margins and, in some cases, cash objective to optimize the fleet utilization, in particular, during the winter period in the North Sea.

[John Evans, Chief Operating Officer]

I guess, answering your question about the type of projects we get. If you look at where we are today against consensus as a sort of testing place, we're about 90% covered for '18. So we feel reasonably comfortable with our '18, and we're about a 1/3 covered for '19. I guess, the mixture of work, EPCI contracts generally have a much longer running period because we are responsible for engineering procurement as well as the execution of the works. So those projects will be more towards 2020 execution. Some of the transport and install contracts, where the materials and engineering are already being done, will be on a shorter fuse and therefore will be more likely to be done in '19. So it's the type of projects that mean [indiscernible] for us in terms of execution period.

[Jean P. Cahuzac, CEO & Executive Director]

I didn't answer one point, which was the cost savings. I think, we, today, are at a point where we have reduced the size of our organization to size it to the full swing operation. We kept the expertise, and that's absolutely key for me. The future cost saving will be through even further optimization in the way we work to lower the cost of the project, and that will have an impact on the bottom line. Efficiency and different -- we're working, in particular, in partnership with some of our clients will trigger cost saving in the way we do a project and therefore have impact on the bottom line. That's where I see it.

[David Phillips, Global Head of Resources and Energy Group]

And just a quick final question in terms of McDermott takeover. Have you been surprised about how attractive to clients McDermott, the big issues offering it? Is it kind of one of the strategies you carried to take out one of your key competitors from an integrated perspective and really leave it to yourselves and TechnipFMC to dominate that market.

[Jean P. Cahuzac, CEO & Executive Director]

I mean, the way we look at this combination is how to improve our business and be more efficient. I mean, there is -- we are not doing that to taking competitors after the market. We are building something, which is more efficient and, therefore, bring additional advantage. I think we need to move to the next question.

[Operator]

And next question is from the line of Mark Wilson from Jefferies.

[Mark Wilson, Oil and Gas Equity Analyst]

Quite some interest this morning on the market outlook slide you show on the Slide 16. So I'd like to ask your perception on that profile, given that oil is really sitting at $75 a barrel. What do you think those projections miss in terms of the dollar amount of sanctions projects that can come. I mean, compared to 2011, 2013 the idea of the amount of sanctions being higher than that, do you feel projections missed the cost deflation that is coming through, given the high number it shows on our projection with a higher than $60 projection?

[Jean P. Cahuzac, CEO & Executive Director]

Yes, I think what -- the reason -- when we showed these slides, it was actually to show the breakeven point for the project to be sanctioned. We're not completely unable to predict the price of oil. But what we are saying here is that at $50, $60, we'll see the significant number of project which can be sanctioned. And I think the sanction to that reflect the oil price journey and the confidence that the oil operator has the evolution of the oil price. And I think the decision of the operator today are based on a prudent approach on oil price that can be outside compared with this scenario.

[Mark Wilson, Oil and Gas Equity Analyst]

Okay. And then just a small point, just to check the Siem Offshore acquisition spend that is outside of the CapEx guidance this year.

[Jean P. Cahuzac, CEO & Executive Director]

That is correct, Mark.

[Operator]

And next question is from the line of Victoria McCulloch from RBC.

[Victoria McCulloch, Analyst]

Just a couple left for me. First of all, is there any impact on the proposed midterm acquisition on the OneSubsea joint venture? And maybe more interestingly, have they expressed an opinion to you on this whether you can see which way it is? And secondly, maybe following on from Rob's question. On the outlook for contract work you're bidding on at the moment, is this more 2019, 2020 longer-term EPCI opportunities ? Or are you still -- are there still near-term opportunities coming across the work.

[Jean P. Cahuzac, CEO & Executive Director]

I think on the second question, it's both. And we are seeing both short-term and longer-term project opportunities, in line with our expectation. Regarding the impact of McDermott combination, if it was to happen, the conventional water, the shallow water is not part of the joint venture with Schlumberger. There's no Subsea 7 operation there. And everything else is compatible with what we have agree in the past with Schlumberger. So if any impact, positive, but no negative impact.

[Victoria McCulloch, Analyst]

Okay, have they reached out to you on this at all?

[Jean P. Cahuzac, CEO & Executive Director]

We're not discussing that with anybody.

[Operator]

And next question is from the line of Nick Green with Sanford Bernstein.

[Nicholas James Green, Senior Analyst]

John, you said a few minutes ago, we make investments when it makes sense. And clearly, the McDermott proposal, it would appear to be a tradeoff, a tradeoff between fairly materially margin-dilutive acquisition in return for a larger order book and some geographical diversity. Can you please set out why that's a good tradeoff for your investors? The second question relates to Brazil. It would appear to me that you've invited to bid in the Mero SURF tender from Petrobras. Now you had said after Guará-Lula that you weren't keen on doing lump-sum projects in Brazil ever again, actually, on those terms. Can you please just clarify for us? Are you willing to be bidding in Brazil on a lump-sum contract basis? Or do you retain your previous position, which is that you wouldn't enter the market on that basis again.

[Jean P. Cahuzac, CEO & Executive Director]

I'm going to start with Brazil, and we've seen an improvement from the terms and conditions with Petrobras. We are comfortable with that. If we are to evaluate on the given project that the commercial -- the operational risk and the commercial risk was not acceptable, we would not bid. But today, we see things going in the right direction with the open discussion with Petrobras. So I'm -- we're not -- we will not increase our risk profile in Brazil in the future, but we believe that with our risk profile, we can win work there. Regarding the McDermott, I don't want -- I don't want this call become a McDermott discussion. What we are saying is that, when we look at the potential acquisition, what we start to look at is, is it in line with our long-term strategy? And we have different ways to achieve this strategy. You've seen that we've been successfully, starting in Saudi Arabia and the Middle East, that's one route. The combination with McDermott, we believe, could be an advantage for both the shareholders group, and that's why we took something that we've been proposing and considering. But I can't elaborate more at this stage on numbers. I think it's not really the time as we said at the discussions. I think we need to move to the next question.

[Operator]

And next question is from the line of Haakon Amundsen of ABG.

[Haakon Amundsen, Lead Analyst]

Two questions for me, please. First of all, I'm just wondering if there's anything in your backlog in terms of terms that has changed, which give you more weather risk or more exposure to the seasonality, for example, what we saw in Q1? And secondly, if it's possible, on the McDermott potential combination, is the entire McDermott business portfolio what you would consider, kind of, core growth for Subsea 7? Or are there areas, which you would not characterize as core for Subsea 7.

[Jean P. Cahuzac, CEO & Executive Director]

I think talking about McDermott, and again, I don't want to elaborate too much in the -- on this possible combination. What we are talking about -- what we would be talking about, if it was to materialize, would be the -- only the McDermott business, not the CB&I acquisition. If it was to happen, that would not allow us to go ahead. Regarding the backlog, I think one of the things I'm very confident with, is that during the downturn, we've kept our prudent approach, and maintaining the right risk on it is a job. We haven't changed our philosophy, and we evaluate this risk of sullen weather on a project by project basis in a prudent way. I don't see that our risk profile has increased. And I think we can take the last question.

[Operator]

And the final question comes from the line of Michael Alsford from Citi.

[Michael J Alsford, Director]

I've just got 2 questions to finish off, please. Just firstly, following up, I guess, on Ricardo's comments on the balance sheet and maintaining an investment-grade sort of credit rating. I guess before McDermott, I'll visit the view that you would always stay a very healthy net cash position on the balance sheet. And now I'm a little more unclear . So I'm just wondering, absent McDermott, where would you be comfortable running the kind of balance sheet at over this medium term? Should we say, it should still be a decent net cash position, or actually, could we see you even moving towards a more net debt position? I guess, I'm just thinking in the context of potential returns to shareholders.And then just secondly, on utilization, I was -- apologies if i missed it, but I just wonder whether you can give us a bit of indication if fleet utilization was, what, 58% in 1Q? Could you give us some sense as to where we should see that coming into second quarter and third quarter? I'm just trying to understand what was seasonal and what was more environment.

[Jean P. Cahuzac, CEO & Executive Director]

Michael, I'll pass on the first question for you. With regards -- I mean, we are, as you know, as I've indicated we are in a strong net cash position at the moment. But I guess , the way we look at it is that we have a certain amount of cash that we need for operating our business, you'll see our working capital if you will, and a portion as well which we allocate for strategic opportunity. As I indicated earlier, our main priority is reinvesting in the business for growth. I do want to clarify, we don't have a credit rating. As such, we have an investment-grade profile, and that investment-grade profile would allow us should be want to raise additional debt, whilst it's not in any way undermining it. I'm not implying by that, that is -- I'm not implying by that, that we intend to raise the debt in short term for the purposes of returning the cash to shareholders. As i indicated earlier, it is the -- it's one of our 3 top priorities, but it's just third, and we don't have any plans to change that approach.

[John Evans, Chief Operating Officer]

And regrading your question, regarding utilization, I think i answered the question to Anne Gjøen earlier, but I'll repeat again. Quarter 1 and Quarter 4, we expect to see the effects of North Sea seasonality coming in to our fleet utilization. We do expect Quarter 2 and Quarter 3 to be getting back to more of the average utilization for our active fleet, and we're seeing that take place today.

[Jean P. Cahuzac, CEO & Executive Director]

So with that, I'd like to thank everybody to -- for the participation to this call, and looking forward to talk to you again at the next earning call. Again, at the end of Q1, we are on-track of where we want to go, and I'm -- that's all i have to say at this stage. I think it's working well.

[Operator]

And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.