Subsea 7 SA

OSE:SUBC

Earnings Call Transcript 2019-Q2

[Operator]

Hello and welcome to the Subsea 7 release of second quarter 2019 results call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Isabel Green, Investor Relations Director. Please go ahead with your meeting.

[Isabel Green, Investor Relations Director]

Thank you and welcome, everyone. 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. Please note that Slide 6 of the presentation has been updated since the initial publication this morning amending a footnote regarding PLSV backlog.Turning to Slide 2. May I remind you that this call includes 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 will now hand the call over to Jean.

[Jean P. Cahuzac, CEO & Executive Director]

Thank you, Isabel. Good afternoon, and welcome to our conference call. I will begin with our second quarter performance highlights before handing over to Ricardo, who will present our financial results in more detail. I will conclude with a summary of the market outlook, and then there will be time for questions at the end of the call. Starting with the highlights of the quarter on Slide 4. Our revenue for the quarter was $958 million, 17% less than prior year mainly due to reduction in revenue from renewables. Adjusted EBITDA was $171 million and our EBITDA margin was 18%, reflecting steady performance in our SURF and Conventional projects. Earnings per share was $0.09. 75% vessel utilization was in line with the prior year period, helped by higher utilization of our PLSVs and Life of Field services. We maintain a robust financial and liquidity position and made a significant cash returns to shareholders in the quarter. We completed a $200 million share repurchase program just after the quarter end in July. And today have announced a new program also for $200 million with a 2-year validity.New awards and escalation totaled $395 million in the quarter, with one new award announced. Our tendering and early engagement teams are busy with new projects. But as expected, these are taking time to convert into firm sign contract.Turning to Slide 5 to review some of our activities during the second quarter. The West Nile Delta Phase 2 project for BP off the coast of Egypt near completion. We deployed 12 spools and installed flying leads using our flex-lay vessels Seven Seas and Simar Esperenca. The PUPP project in the shallow waters offshore Nigeria reached an important milestone successfully completing a 20" pipeline beach pull-in using Seven Antares. The Snorre project, offshore Norway continued re-fabrication and preparation for its first bundle tow out which was completed in July just after the quarter end.Also offshore Norway, the first reel-lay campaign was completed on the Nova project. Nova is the first project to use our Swagelining liner bridge connector shown here in the picture on the slide. This technology has a significant cost advantage over CRE alternatives. In the Middle East, the Hasbah project neared completion with installation and hook-up. Seven Champion led the last 2 umbilical and a sub party vessel was used for spool installation.Seaway Seven commenced transport and installation of 20 monopiles and transition pieces on the Formosa 1 Phase 2 wind farm project, offshore Taiwan using our heavy lift vessel Seaway Yudin. Cable installation was completed on the Hornsea One wind farm project offshore U.K.In Life of Field, we commenced a new IRM contract offshore Australia, using an ROV for electromagnetic weld inspection. This was a first for our clients who had previously relied on diving services for this process. There was little change in demand for our ROV service for drilling rigs, which remained steady with 62% utilization of our world-class ROVs this quarter. In Brazil, our PLSV fleet remain very busy in the quarter with all 4 vessels performing very well. Moving to Slide 6, order intake was low in the quarter with $395 million in new awards and escalations including the announced Sverdrup project Phase 2, offshore Norway.We ended the quarter with an order backlog of $4.6 billion. Since the quarter ended, we have announced 2 more awards: the EHS bypass project, offshore Norway for Equinor and the cable lay for the Hornsea Two project, offshore U.K. for Orsted. The backlog related to this will be included in our third quarter order intake. We only announce a new award and add it to our order backlog when we have a firm signed contract from the clients. In addition to announced order intake, we have received a letter of intent of being selected as preferred supplier on several key projects. This gives us confidence that we are competitive and continue to announce our position as a partner of choice. When these projects are awarded we would expect our pace of order intake to increase and our book-to-bill to rise above 1x for 2019. As highlighted in the first quarter, we have seen an improvement in pricing for new awards compared to the prior year. We have not change our views and remain confident in the gradual recovery and our ability to win our share of the upcoming projects. I will now pass over to Ricardo.

[Ricardo H. Rosa, Chief Financial Officer]

Thank you, Jean and good afternoon, everyone. Let's start on Slide 7 with the income statement highlights. Second quarter revenue of $958 million was down 17% from the prior year period. Adjusted EBITDA was 8% lower at $171 million with an 18% margin, including a $26 million year-on-year benefit due to the implementation of the new lease accounting standard IFRS 16. Net income of $24 million included a $6 million loss related to foreign currency movement compared to a net foreign currency gains of $25 million in the prior year period.The tax charge of $13 million reported in the quarter was equivalent to an effective tax rate of 35% in line with our guidance for the full year. Diluted earnings per share was $0.09 based on 308 million average shares in issue, compared to 327 million shares last year.Slide 8 shows the revenue and net operating income by business unit. In our SURF and Conventional business unit, second quarter revenue of $842 million was in line with the prior year period. This reflected increased activity, offshore Nigeria and Norway, offset by lower activity offshore Egypt and the Middle East.Net operating income for SURF and Conventional was $60 million, $2 million lower than the prior year. This reflected good execution on projects nearing completion, but fewer projects in the offshore phase compared to last year.In our Life of Field business unit, revenue was $66 million, 10% higher than the prior year period. Inspection, repair and maintenance activities increased with the addition of the new long-term contract for services, offshore Azerbaijan.Life of Field reported a net operating loss of $3 million for the quarter, due mainly to a small number of discrete items, including a $2 million adverse impact related to the implementation of IFRS 16, that will reverse in future periods. The business unit continues to face pricing pressure in an oversupplied market.Our Renewables and Heavy Lifting business unit generated $49 million in revenue compared to $257 million in the prior year period. This significant decline reflected the reduction in EPIC project activity, following the completion of the very large Beatrice wind farm project at the end of last year. And net operating loss of $10 million in the quarter, was mainly due to a competitive environment for the heavy lifting vessels.Slide 9 summarizes our main cash movements in the quarter. We have a robust financial and liquidity position. We had $420 million in cash and cash equivalents at the 30th of June, and our $656 million credit facility remains undrawn.Subsea 7 has generated cash through the cycle, and our second quarter cash from operating activities was $71 million. This included a decrease in net operating liabilities of $63 million, due to timing of milestones on certain projects and seasonal movements in tax and payroll liabilities.I wish to emphasize that our revenue recognition parameters are unchanged. Our working capital position in the Middle East improved, with the near completion of the Hasbah project. We are currently projecting our working capital position to improve in the second half of 2019, resulting in a slightly positive movement expected for the year as a whole.We invested $82 million in CapEx, mainly related to the timing of payments on the new build vessels Seven Vega which reached a key construction milestone in May. We returned $204 million in dividends and buybacks in the second quarter, taking the total returned year-to-date to $304 million when we include $25 million of buybacks in July. The re-balancing of our cash position has given us a more streamline balance sheet and has delivered on our commitment to return surplus cash to our shareholders.Turning to Slide 10. Our priorities are to invest in the business, maintain an investment-grade profile and return surplus cash to shareholders. Since 2011, we have modernized and enhanced our fleet with 12 new vessels. In addition to the 4 renewables vessels acquired as part of business acquisitions. As a result, we have one of the youngest and most capable fleets in the market. We have diversified our activities with the acquisitions of Seaway heavy lifting and Seaway offshore cables to create our renewables business unit and we bought ECS to accelerate our strategy to grow in the Middle East.We acquired technology and engineering expertise with the addition of Swagelining and Xodus. We continued to invest in our in-house technology, maintaining our investment in new products through the cycle. We have a healthy pipeline of new ideas to add to the 159 patents applied for over the last 8 years. Our confidence and capacity to invest through the cycle is a reflection of our solid financial and liquidity position. We have maintained an investment-grade profile and low financial gearing with a ratio of net debt including leases to adjusted EBITDA always within investment-grade parameters. Our financial strength gives our clients, alliance partners, suppliers and people confidence and is a commercial advantage when tendering new work. We have completed 5 share repurchase programs and paid 6 special dividends since 2011. We temporarily suspended cash returns to shareholders in the toughest years of the downturn to increase our financial security at a time when the outlook was uncertain. As the recovery began, we resumed dividend payments and this morning, we announced our sixth repurchase program.At our general meeting on the 17th of April, shareholders renewed our authority to repurchase and cancel shares up until October 2021. Today, we are canceling approximately 5 million shares representing 1.8% of the shares outstanding, confirming our commitment to capital discipline and shareholder returns.Slide 11 shows how our capital has been allocated in line with our priorities since 2011. The largest spend has been on growing and strengthening our business with $4.5 billion invested over 8 years. Most of this investment has been to renew and maintain our fleet with new vessels designed by our team of marine engineers to ensure the right balance of cost and capability. The investment reflects the challenges of working in deeper waters, and with more advanced flow line technology. Looking ahead, we expect a significant reduction in fleet investment required to meet the needs of our clients.The vessels we operate today have an average age of 10 years and the necessary capability to execute the projects planned for the foreseeable future. We expect to spend between $175 million and $225 million per year to maintain our fleet, but capital expenditure on new vessels should be substantially reduced. We've returned a total of $1.9 billion to shareholders through share repurchases and dividends since 2011. As we stand today, our balance sheet is healthy and our financial outlook is positive.We no longer have a significant pool of surplus cash, so we anticipate the new share repurchase program to be executed at a slower pace than the last one. We have spent approximately $400 million on business acquisitions since 2011, net of cash acquired. However, this does not include the borrowings assumed as part of the transactions, which were subsequently repaid, and if included, would increase the investment to approximately $600 million. Looking to the future, we will continue to target opportunities to grow and strengthen our business organically and by acquisition.Slide 12 sets out our 2019 guidance, which is unchanged from last quarter and already reflected in market expectations. Revenue is expected to be broadly in line with 2018, with 85% of this covered by backlog and revenues reported to date, slightly less than usual for this point in the year.Adjusted EBITDA is still expected to be lower year-on-year, after including the approximately $100 million uplift from the change to lease accounting with the introduction of IFRS 16. Net operating income is expected to be positive.It is too early to give guidance for 2020. However, with $2.2 billion of backlog already secured, and the gradually recovering market, we remain confident the 2020 results will show an improvement on 2019.I will now pass back to Jean.

[Jean P. Cahuzac, CEO & Executive Director]

Thank you, Ricardo. Turning now to Slide 13. Market conditions are gradually improving, as we recover from one of the toughest industry downturns most of us have ever experienced. Tendering and engineering studies that increased in 2017, drove an increase in tieback and field expansion awards in 2018. We are now seeing large greenfield projects awarded to market. The number of new FEED and early engineering studies that we are asked to perform today is a positive indicator of future growth. We expect availability of key construction vessels in the markets to tighten from mid ‘20, resulting in better pricing on new work, but are not yet back to mid-cycle margins on these new awards.Slide 14 shows some of the large greenfield project that we expect to be awarded to market within the 12 months -- the next 12 months. This is not intended to be an exhausting list. It's just some of the key market awards we anticipate. Many of the greenfield tenders and early engagement studies we are working on integrate the SURF and SPS work scopes. Our alliance with OneSubsea Schlumberger is strong and enable us to deliver market-leading integrated solution. On some large projects, our clients are awarding sole supplier feed or early engineering contracts 6 to 12 months ahead of final investment decision. Early engagement drives better solution for our clients, with greater certainty on cost and time to first oil or gas and enables us to plan well in advance for associated increase in capacity and procurement. Subsea 7 specializes in projects and services for offshore energy developments. Several of the large project awarded to market this year have been for work outside of our operational scope but we expect awards relating to our focus market to increase in the second half of the year, which should continue into 2020. We have been selected as a preferred supplier for several projects that are waiting final investment decision or other conditions to be met, before the contract is formally awarded. This includes greenfield project as SNE 1 and Scarborough as well as HKZ in renewables, [ margin 2 ] in conventional and several smaller brownfield projects. Once signed, order intake on this would be in excess of 1.6 billion. In addition, we have a significant amount of potential work in our tendering pipeline for clients with whom we have long-term exclusive partnership and alliances.Moving to Slide 15. Most of the oil and gas projects awarded in the recovery have good incremental return on investment for our clients even at prevailing oil prices. We have seen a steady level of activity in the North Sea and U.S. Gulf of Mexico with fast track tieback projects and IRM services to maintain and enhance production. The first wave of brownfield projects awarded in 2018 are mostly offshore this summer with further campaign scheduled for 2020. Our market-leading flow line technology has been instrumental in our success to capture opportunities. For example, we have applied electrically heat traced flow line technology for the first time in project in the North Sea and U.S. Gulf of Mexico and we have 3 project in progress using our cost-effective pipeline bundled solutions. In U.K. and Norway, the pace of the works are temporarily slowed down since the first wave of activity, partially due to a transfer of ownership of fields in the North Sea from all majors to small, or smaller operators. Shallow water conventional projects have a lower breakeven price. We have many years of experience in conventional, and in Nigeria supported by well-established joint venture in [ country ] fabrication and locally flagged vessels. In the Middle East, Saudi Aramco is executing large program investments and we expect significant awards to market to continue over the coming quarters.Slide 16 shows the outlook for our renewable business Seaway Seven. We have entered into new markets with awards in Taiwan and the U.S and trends for globalization of offshore wind and larger wind turbines are expected to continue. We have recently seen increased competition for foundation installation services with competitors from the SURF market moving into renewables. This increased supply has led to more competition on recent tenders but we believe the structural growth in demand will rebalance the market in due course. At the moment, wind farms are being installed with fixed foundation in shallow water, but longer term, we expect advances in technology and engineering to enable floating wind farms to become more economic. We are part of this innovation journey having installed the cables on Equinor high wind projects and through a minority interest in technology for floating offshore wind foundations.So to conclude on Slide 17. The offshore oil and gas market is gradually recovering. Around the world, offshore projects makes sense at the prevailing oil price or even at lower oil price and the demand for energy continues to grow. Encouraging progress is being made on greenfield SURF with more awards to markets and final investment decision. This is leading to a gradual improvement in pricing and better visibility of future work. Demand for inspection, repair and maintenance services is steady and there is a robust outlook for conventional works in Middle East. Offshore wind farms are projected to grow at a double-digit pace, which in time should absorb the excess capacity caused by recent new entrants. Subsea 7 is a global leader in markets with high barriers to entry. Our differentiated capability and integrated solution position us very well for competitive success and we look forward to 2020 and beyond with confidence. Ricardo, John and I will now open the call to your questions.

[Operator]

[Operator instructions] Our first question comes from the line of James Evans from Exane BNP Paribas.

[James Matthew Evans, Analyst of Oil and Gas]

Simple one for you Ricardo. Could you just help us understand a little bit up the bridge that revenue guidance? I think you commented that the coverage level is a little bit lower than in the past, so why do we get there? Is there more short-cycle projects to come in the second half of the year, for example? And then secondly, I guess maybe one for, Jean, you mentioned obviously the prospects that you have, 1.6 billion-plus for intake and I guess there's just been a little bit of concern from investors recently that some of these projects where you have been selected are at a little bit of risk of delay for various reasons, be it financing or costs and I know you can't comment on any specific project from a client point of view, but can you just maybe give us any idea or if there is anything that you see that could reassure us on the likelihood of these projects reaching FID as expected?

[Jean P. Cahuzac, CEO & Executive Director]

I can maybe start with the second question and let Ricardo answer the first one. I have listed some of the project which are today a little bit on the markets. The reason why we are confident on our comments of book-to-bill for 2019 above 1 is in fact there is no question that this project makes sense at present oil price or even lower oil price. We don't see any question from the clients about the viability of the projects. There are also some uncertainty on the timing of the project award, in particularly in Africa but to actually reach our objective, we don't need all these objectives to materialize. So I would say, good confidence that our estimates will materialize.

[Ricardo H. Rosa, Chief Financial Officer]

In response to your question about revenue and revenue coverage in backlog, I think what you need to factor into your assessment of our future growth in revenues is not just what's in backlog, but also the potential for spot work in particular in the North Sea where you do tend to have a number of smaller projects coming through that don't necessarily meet the threshold of $50 million per contract. We also perform a fair amount of early work on larger projects which to an extent is built and I think John has referred to this already in his earlier comments. And lastly, another area where we do see potential upside is in conventional and in particular in Nigeria, we have seen, in a number of cases, examples of scope growth throughout the year. So I think those elements are the main drivers for our confidence with regard to 2020.

[James Matthew Evans, Analyst of Oil and Gas]

Okay, understood. And I don't know if you could help me with this, how big is that West Africa conventional business expected to be for you this year, obviously a little bit less visibility on it than we do on maybe some of the Saudi work. So I know it used to be $1 billion business, where are we today?

[Jean P. Cahuzac, CEO & Executive Director]

Oh, it is significantly lower than what it was -- what it used to be prior to the downturn. So it's a gradual recovery mainly driven by ExxonMobil in particular, but [ also ], so it's gradual recovery, but I would say a reasonable size, but below what we had seen prior to downturn.

[Operator]

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

[Chr. Frederik H. Lunde]

Very happy to see the new buyback mandates. I was just curious you had previously indicated that you were considering a new build vessel for a potential down to 3,000-meter water depth. Is that still sort of on the horizon? Or is that less likely as you see the market now?

[Jean P. Cahuzac, CEO & Executive Director]

I think the consideration of a new deepwater vessel is new to me. We are delivering the Vega in 2020 which is well advanced if it's what you are referring to. But what we have in the fleet today is 100% suitable for the years to come.

[Chr. Frederik H. Lunde]

That's great. Also on the renewable segment, could you give an indication of how much depreciation you have? And what I'm getting to is EBITDA in that business unit because, I guess, it's quite heavy on depreciation.

[Ricardo H. Rosa, Chief Financial Officer]

Frederik, we don't usually disclose those figures on a quarterly basis. So I think you'll have to wait until we provide that sort of information as part of our annual report.

[Operator]

And the next question comes from the line of Vlad Sergievskii from Bank of America.

[Vladimir Maximovich Sergievskii, Research Analyst]

Two actually. First, if I can start talking about 2021 conceptually, looking at your backlog composition, you currently have almost $1 billion low backlogs for 2021 compared to what you had at the same time last year for execution in [ '20 ]. Are you still confident in the ability to improve vessel utilization in 2021 and how much time do you have left to feel this 2020 fund vessel utilization with large offshore greenfields particularly around Africa? That's the first question and second, more housekeeping one. On the balance sheet, your provisions have reduced by about $34 million during the quarter? Would you be able to comment to what extent it has had a positive impact on your reported EBITDA during the quarter?

[Jean P. Cahuzac, CEO & Executive Director]

I will answer to your first question. I mentioned earlier that we are expecting higher order intake in the second part of this year, from the indication we have from our clients and [ LOIs ] that we have received. A number of these projects will be for execution in '21, so no reason at this stage to be concerned with '21 forecast. Ricardo?

[Ricardo H. Rosa, Chief Financial Officer]

With regard to the balance sheet movements, I think, well -- certainly we are not in a position to disclose the impact that these provisions would have on the EBITDA for the quarter. I mean, I would say that this is an account that moves on a reasonable basis up and down throughout the year, and on a year-to-year basis, not had a significant impact.

[Vladimir Maximovich Sergievskii, Research Analyst]

That's great. And if I can squeeze another last one very quickly. On the PLSV pricing, according to the recent media reports Subsea 7 is a front runner on some of the new projects for PLSV specifically [ a lot ] in Brazil. I appreciate it's still ongoing tender, so you won't be able to give a lot of color, but just some color on what you see on the pricing front for new tenders versus some pricing which you still enjoy with Petrobras, directionally what's going on there would be very helpful.

[Jean P. Cahuzac, CEO & Executive Director]

Yes, I think you will understand that especially because we are very close to client decision and know that I cannot really comment on commercial matter in Brazil. [indiscernible] by the way, I mean it's a sensitive information.

[Operator]

And the next question comes from the line of Michael Alsford from Citigroup.

[Michael J Alsford, Director]

I just got one question, if I could, on renewables. I was just wondering if you could perhaps translate your view around the kind of the market growth opportunity, you sort of talked about double-digit growth over the medium term and how that would translate into where you would see Subsea 7's revenue opportunity in terms of maybe quantum relative to historical levels, and all the percentage of the overall business in terms of revenues for that renewable heavy lift business.

[Jean P. Cahuzac, CEO & Executive Director]

Just an initial comment, and then I will let John elaborate a bit more on how we see the market. The double-digit growth that we are referring to comes from outside sources and market analyst, and we fully concur with this view, it's not only us who see that, but John, you want to comment on the market?

[John Evans, Chief Operating Officer]

Yes. So I think as Jean says, the overall market is due to growth and the information there can be collaborated pretty well, that we can see growth in Taiwan, we can see growth in the U.S you would have seen last week that Orsted were awarded some very big offshore fields in New York and New Jersey. So we're seeing the sort of expansion from what was traditionally northwest European business to being a more globalized business. The main impact for us is whether the clients take the work on transport and install or they take it on EPIC and as Jean mentioned in his narrative, we are seeing a number of our SURF competitors entering into the business. So we're seeing quite a competitive environment there at the moment and on some of the very larger projects, we are not very comfortable with the margin and the risk profile on some of those. We do expect the market to normalize and sort itself out in the next 18 months or two years with an underlying growth pattern of expanding around the world. So, at the moment we're taking some T&I projects with a lower risk profile. But we think that the market will definitely grow in due course and we'll have a place in it.

[Michael J Alsford, Director]

Okay. And then just a follow-up on the PLSVs. It sounds as if that obviously the high utilization there helped the margins in the quarter in the SURF and Conventional business. So I'm just wondering whether we should expect to that similar effect to go into 3Q .e. margin -- EBITDA margins being supported by high activity there.

[Jean P. Cahuzac, CEO & Executive Director]

Well, I think what I could say about the PLSV, that they are good contract and we -- our operation are very,very good. And we are -- we have -- we are optimizing revenue from these PLSVs. As you know these PLSVs contracts are to be renewed '21, '22, so we'll see what happen at that time. But, quite a good operation for us.

[Operator]

And the next question comes from the line of Amy Wong from UBS.

[Amy Wong]

Two quick questions from me please. The first one is, Jean, in your prepared remarks I see you made a comment, you said that some of the work awarded to other players in the market were outside the scope of Subsea 7, can you just elaborate on that comment whether that precisely relates to the SURF business or the offshore wind or, and what kind of scope are you referring to one that it's outside of Subsea 7. And then my second question is just on the Life of Field business, back in February '18 you announced the intention to form a joint venture with Schlumberger, I don't think we've heard much from there yet. So can you just give us an update on what's happening there, please.

[Jean P. Cahuzac, CEO & Executive Director]

Yes, I mean your first question, we were in fact referring mainly to work in the Middle East where our competitors are on onshore LNG and fabrication etcetera where we are not really in this business and very large volume of their order intakes come from there, we're not really competing on that.Regarding where we are with OneSubsea Schlumberger, I think in a nutshell, I mean, very pleased with what we see today in terms of the engagement, the relationship with OneSubsea and Schlumberger [ the world ]. You may have seen that we went successfully through the antitrust, which allow us to put the joint management organization in place, and this joint organization in place is now able to get involved, not only on the early engineering, but the winning stage of -- the winning of the project and the execution of the project in a fully integrated approach.So that's very well received by our clients, we are getting very positive feedback on where we are. Significant number of -- significant volume of the contracts that we expect to get in the second part of the year or early '20 will be integrated project with the alliance. So altogether, very encouraging and continue to go in the right direction with lot of momentum.

[Amy Wong]

And just to confirm, will there be any changes to the accounting after the formalization of this entity.

[Ricardo H. Rosa, Chief Financial Officer]

Amy this is Ricardo. No, we don't expect any change to the accounting that will derive from this closer integration between the 2 parties.

[Operator]

And the next question comes from the line of David Farrell from Credit Suisse.

[David Richard Edward Farrell, Research Analyst]

Hi, Amy obviously just asked my question on the Life of Field, but I'll follow up and just ask, whether you think the change in management at Schlumberger will impact that business at all either positively or negatively. And then I also wanted to follow-up in terms of the renewable business and the entrance by the SURF competitors. Are they providing T&I only or are they also trying to provide the EPIC capability as well?

[Jean P. Cahuzac, CEO & Executive Director]

I will take the first question and John will cover the second one. I think Olivier Le Peuch has been driving with us the implementation of the alliance and [ SIA ]. I think we can say that we are 100% fully aligned on what we're trying to achieve together, and today the fact that he is now the CEO and we're working on some very well [indiscernible] replace him. So I would say, no change there maybe even more momentum.

[John Evans, Chief Operating Officer]

On renewables we are seeing both [indiscernible] and Saipem move into the business. [indiscernible] are working on transport and install only. As you know they exited the SURF business a couple of years ago, but now they're focusing on renewables. Saipem though are offering a fully EPIC capability.

[Operator]

And the next question comes from the line of [ Julien Roger ] (sic) [ Kevin Roger ] from Kepler Cheuvreux.

[Kevin Roger, Research Analyst]

Just one follow-up regarding the renewable segment, please. Jean, if I remember, maybe one year ago you said that the objective was to sign one major EPCI renewable project every two years. Am I right today to understand in your communication that basically for the next 18 months to 24 months, you will focus yourself just on the transport and installation because the pricing environment is not attractive on the EPCI.

[Jean P. Cahuzac, CEO & Executive Director]

No, no, there are prospect on the EPCI, I think there is more competition with the arrival of other [ EPM ] in particular, but we will continue to focus also on winning EPCI contract. It's just that the market is presently a bit more challenging, I'm convinced we will win our share.

[Kevin Roger, Research Analyst]

And so from that maybe a follow-up. Last year you did not get any major EPCI contract. Now we are, let's say, half of the year, would you say it's still possible to see Subsea 7 securing one major EPCI renewable project by the end of the year regarding your communication, discussions with clients?

[Jean P. Cahuzac, CEO & Executive Director]

It's possible, but I would be cautious that these -- when we are -- when these contracts are awarded sometimes subject to permits. So, in fact the contract can be signed up to a year later. So that's -- it's -- there is some lag time there. John, you want to comment?

[John Evans, Chief Operating Officer]

I think there's just one other thing. There is a contract for difference auction around in the UK in September of this year. And that will then decide then which are the next batch of projects, which are available. We are bidding a number of those at the moment, but they're all subject to contract with differences being awarded to the operators in the first place. So we should see at the end of September, who is successful in the contract for difference auction and then from that point onwards, then we will continue to bid for those. But as Jean says, we are being cautious on the risk profile on some of those bigger projects.

[Operator]

And the next question comes from the line of Sahar Islam from Goldman Sachs.

[Sahar Islam, Analyst]

Can I start off with asking about cost inflation, what you're seeing today and what you're baking into your tendering process, please?

[Jean P. Cahuzac, CEO & Executive Director]

Yes, regarding cost inflation I think the -- you have to look at it from 2 perspective. One is the internal cost and second one is supply chain, supply chain costs. Talking about internal cost, I think it's something that we are controlling very well. What we are going to see some cost increase for -- from a compensation perspective for instance, in a reasonable manner, however, that is compensated by efficiency and what we are doing in short-term and digitalization in medium term.So I'm confident that Subsea 7 will remain a very cost-effective and cost-competitive company in the future. Regarding supply chain, I think our supplier are seeing the same thing as we are seeing, which is a gradual improvement of this market, so it's sometimes more difficult to get firm commitment for project which will be executed in 2 or 3 years, something that we are taking into account in a very disciplined way in our bids.It's something that we are also discussing with our clients and there is different formula on the commercial side to be able to compensate for that. However, that's always a risk for the industry, when the market picks up, there is always a risk of not controlling your cost properly from a supply chain perspective, and that's why we really need to remain prudent with tenders and we are.

[Sahar Islam, Analyst]

Okay, so If we pay that with -- if we assume that you're not going to get significant price increases on the supply chain, and you've got better pricing, particularly on some of the longer tie back vessels. So should you be able to get -- sorry

[Jean P. Cahuzac, CEO & Executive Director]

Sorry, I think we could see material increase on the supply chain. The question is, how do we translate this increase of supply chain in pricing our project to our customer and how do we continue to optimize the way we plan this job and execute this job? So at the end, the project are cost-effective at less than $50 a barrel. That's a challenge, but it's something that I think is achievable and I'm confident that Subsea 7 is very well-positioned to face this challenge successfully.

[Sahar Islam, Analyst]

What I was going to ask was when you made the comment about mid-cycle margins earlier, were you talking about the current tendering pipeline or what you see for the medium-term recovery?

[Jean P. Cahuzac, CEO & Executive Director]

I think what we said in the past, that we believe that the mid-cycle margin are achievable, but we are in a gradual recovery. So it's over time, and I'm not going to -- I cannot today give you an answer with a pre-sales base. It's going in the right direction. Depending upon the timing of [ the ] project it may go faster or a bit longer, but it's going in the right direction.

[Operator]

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

[Mark Wilson, Oil and Gas Equity Analyst]

Thank you for the clarity on global alliance OneSubsea earlier. I'd like to follow up on that and ask since it's been formed in 2015, your global alliance with Schlumberger, has the -- have you actually brought on first oil from any field yet, just wonder if you could give us an update of where that stands and will Mad Dog Phase II be the first.

[Jean P. Cahuzac, CEO & Executive Director]

John, I'll let you answer.

[John Evans, Chief Operating Officer]

Now we have 2 fields which are working today where we've completed the projects Dalmatian for Murphy in the U.S where we put a pumping system in there to enhance the recovery of that field is working, and in the U.K [indiscernible] was again a similar type of pump installation to improve recovery. So both of those fields were completed earlier this year and are fully in production. And as Jean says, very good positive feedback from the clients at where we're at. Mad Dog 2 we go offshore primarily next year to install the bulk of Mad Dog 2 next year.

[Operator]

And the next question comes from the line of James Thompson from JPMorgan.

[James Thompson, Analyst]

I just wanted to [indiscernible] that you see a reduction in fleets required and vessels required by clients in the long term. And obviously, you've given some somewhat medium to long-term CapEx guidance which looks to be structurally lower.I just [indiscernible] right does that mean you are planning to -- or you're taking an active decision to reduce the size of your fleet through time or are you expecting to sort of maintain the fleet at its current spec.

[Jean P. Cahuzac, CEO & Executive Director]

I'm sorry. James, may I ask you to repeat your question because the line was pretty bad? And I think that will be the last question for the call, but if you could repeat the question, please.

[James Thompson, Analyst]

Sure, Jean. I don't know -- sorry, it is a bit cracking in my end as well but my apologies for that. Just going back to Ricardo's prepared remarks, I think you said you expect in the longer term a significant reduction in fleets and vessels required by clients obviously also you've given us a medium to long term CapEx outlook which looks to be lower longer term. I just wondered if this was you taking active decision to reduce the size of the whole fleet in terms of [ drives the pricing had been long-term ] or do you expect the fleet to stay the same size [indiscernible].

[Jean P. Cahuzac, CEO & Executive Director]

I think let's clarify what we said on that. John, you want to comment?

[John Evans, Chief Operating Officer]

I think we have the right-sized fleet for Subsea 7 for the future. I think the main point that Ricardo was making there is that we will not be building new assets in the same pace as we did over the last five to 10 years, over the next five to 10 years. So we do believe that our ability to generate profit against the free cash that we generate will be different in profile over the next five years to where we were in the last five years.

[Jean P. Cahuzac, CEO & Executive Director]

And the clients will need more vessels to execute the project when -- with more projects coming on and that's why we are saying that we see better, I mean, we see a higher demand for vessels from late 2021 which will go together with a gradual improvement of profitability.Well, thank you. I would like to thank everybody for participating to this call and for your questions and look forward to the next earning call. Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.