Subsea 7 SA

OSE:SUBC

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to the Subsea 7 Release of Q3 2019 Results Call. [Operator Instructions] Just to remind you, this call is being recorded. I now hand the floor over to our first speaker, Isabel Green, Investor Relations Director. Please begin.

[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. 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 included in our press release. As we announced in September, our CEO, Jean Cahuzac, is retiring at the end of this year, although he will remain on our Board as a Non-Executive Director. In the new year, the reigns will be passed to John Evans to take us forward into the next chapter of our journey. So now for the last time, I'll call -- turn 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 third quarter performance highlights before handing over to Ricardo, who will present our financial results in more detail. I will conclude with a comment on our early engagement and technology efforts and a summary of the market outlook. 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 $951 million, 12% less than prior year, mainly due to continued low level of activity in our renewables and heavy lifting business unit. This was partly offset by an increase in Life of Field and SURF activity in the North Sea and the U.S. Gulf of Mexico. Adjusted EBITDA was $181 million and our EBITDA margin was 19%, 1 percentage point lower than previous year. Earnings per share was $0.15. Vessel utilization was 78%, down 7% compared to the previous year with lower utilization on renewables and heavy lifting vessels, partially offset by high utilization rates for the Life of Field vessels and our PLSV. We maintained a solid financial and liquidity position with cash and cash equivalents of $367 million and net debt of $241 million, inclusive of lease liabilities. 6 new awards were announced in the quarter, contributing to $1.4 billion order intake and a book-to-bill of 1.4. The market for oil and gas projects continued to gradually recover and we have the right integrated and stand-alone solution to win our fair share. Turning to Slide 5 to review some of our activities during the second quarter. The Alligin project offshore U.K., made significant progress in the quarter with the completion of the main offshore installation campaign using our heavy construction vessel, Seven Arctic. Offshore Egypt, the Burullus 9B project successfully completed flexibles and flying lead installation using Seven Seas and the light construction vessel, Simar Esperança. The Snorre project, offshore Norway reached a significant milestone with its first bundle tow-out and installation completed. We are now preparing 2 more bundles for installation in the first half of next year. This project was 1 of 4 to use our new Swagelining LinerBridge connectors in the quarter. This patented technology enables less complex and lower cost installation of corrosion-resistant water injection line. Offshore Nigeria, our work on the conventional shallow water PUPP project was substantially completed. Activity in the U.S. Gulf of Mexico has increased for our Life of Field IRM vessels. Utilization was high for both our Jones Act Compliant vessel, Harvey Intervention and Grant Candies which is not included in our fleet count following an extension of our long-term charter agreement. For the Mad Dog 2 project, also in the Gulf of Mexico, fabrication works progressed in preparation for offshore campaign planned in 2020. In Taiwan, Seaway 7 completed the installation of 20 monopiles and associated transition pieces on the Formosa 1 project using our heavy lift vessel, Seaway Yudin. Our PLSV fleet in Brazil continues to perform very well, with high levels of utilization for all 4 vessels. Moving to Slide 6. I would like to comment on our PLSVs business in Brazil. PLSVs are heavy construction vessel that can also lay flexible pipes and umbilical. They're also capable of various installation activities within the project life cycle, such as spools and jumper installation pipes and Subsea substructure deployment, precommissioning support, just to name a few. On the long-term direct contract for Petrobras in Brazil, our scope is a combination of flexible installation on greenfield developments in and out of the pre-salt area, replacement and maintenance of 40 products as well as removal of lines for mature fields. We have seen recently an increase in replacement and maintenance activities associated with stress corrosion cracking issues that have impacted some of the flexible risers installed in the pre-salt region fields. Our PLSVs have been consistently high-performers of the Petrobras fleet with all 4 vessels being on the top 6 as run by Petrobras for the last 12 months. We expect Petrobras to come to the market with the next round of PLSV tenders in the second half of 2020. It's too early to give much guidance on the likely pricing of our volume of work. It will depend partly on the demand for these vessels on other projects worldwide. At this stage, our base case assumes 3 of our vessels will remain engaged and the fourth will be reassigned to support other projects worldwide. The rates are likely to be lower than the current contracts, which were agreed at the peak of the market in 2013. And our current contract have a further 2 years to run before expiring. Slide 7 shows global fleet in heavy construction vessel and the PLSVs currently committed to Petrobras in Brazil. 3 PLSVs are currently fitted with 100-ton crane, which is sufficient for Petrobras requirements. However, all 4 vessels were designed and built to accommodate the 400-ton crane. This means that with some very limited additional capital investment, these 3 vessels could be upgraded to be used in the global fleet on par with our other heavy construction vessels. We have 1 chartered heavy construction Flex-lay vessel in our fleet, Skandi Acergy, with commitments out to 2022. If necessary, after the next round of PLSV tender in Brazil, we have the option to return this vessel to the owner to balance our fleet and improve utilization. I will now move to Slide 8 to talk about our order intake and backlog. Order intake was strong in the quarter. We replenished our backlog in the Middle East with approximately $600 million of new work offshore Saudi Arabia and maintained our backlog with contracts awarded in both renewables and Life of Field. In Total, we announced 6 awards in the third quarter. In addition to the Marjan 2 and 28 Jackets project for Saudi Aramco, we also announced the Lapa North East project for Total offshore Brazil, the ACE project for BP in Caspian Sea, the Europipe II project for Equinor offshore Norway and the Hornsea Two wind farm project for Ørsted offshore U.K. We have had a strong start to the fourth quarter, with 2 more wind farm projects awarded offshore Taiwan and the Pierce project for Shell offshore U.K. We have also been awarded the cable-lay contract for Equinor's Hywind Tampen floating wind farm, although this fell below our size threshold for a stock exchange announcement. Our third quarter order backlog was $4.9 billion, of which approximately $700 million related to the PLSV. $2.6 billion of our book to work is scheduled for execution in 2020 and $1.4 billion in '21 and beyond, as is the PLSVs contribute approximately $320 million in '20 and $250 million in '21. So we are still on track to achieve book-to-bill of at least 1 for the full year. I will now pass over to Ricardo.

[Ricardo H. Rosa, Chief Financial Officer]

Thank you, Jean, and good afternoon, everyone. I will begin on Slide 9 with the key highlights from our income statement. Third quarter revenue of $951 million was $131 million less than the prior year period. This was primarily driven by a $97 million decrease in revenue from our renewables and heavy lifting business, following the completion of the major EPCI Beatrice wind farm project last year. Adjusted EBITDA was $181 million compared to $217 million in the prior year period. Adjusted EBITDA margin was 19%. Net income was $42 million, resulting in earnings per share of $0.15 based on a share count of 299 million. Slide 10 shows additional information from the income statement. Net operating income was $59 million. This included administrative expenses of $73 million, $9 million higher than the prior year due to the timing of certain costs recognized in the quarter. We reported a $16 million net gain within other gains and losses, which was mostly due to foreign exchange impacts. The tax charge for the quarter was $28 million, implying an effective tax rate of 40%, reflecting changes in jurisdictions where the group generates taxable income, together with the impact of increases in revenue-based taxes incurred compared with the prior year. Slide 11 shows the revenue and net operating income by business unit. Our SURF and Conventional business generated revenue of $826 million and net operating income was $62 million, both lower than the prior year period by 5% and 30%, respectively. Activity in the U.S. Gulf of Mexico and conventional work offshore Nigeria increased significantly compared to 2018, but this was not enough to replace the now complete West Nile Delta GFR project, which was in its offshore phase last year. We have started to see a positive impact from the better pricing on some SURF projects signed this year, but there is still some way to go before margins fully recover. Our Life of Field business generated $70 million revenue and $6 million in net operating income. The year-on-year increases of $4 million and $2 million, respectively, were due to improved market demand for inspection, repair and maintenance services. Renewables and Heavy Lifting revenue decreased to $55 million from $152 million in the prior year period. Net operating loss was $8 million, reflecting low levels of activity and a competitive market, especially for the heavy lifting vessels. I will now turn to Slide 12, which provides an overview of cash movements in the quarter. Cash and equivalents were $367 million at the end of September, a decrease of $53 million on the position at the end of June as we continue to invest in the business and return cash to shareholders. We generated $66 million of cash from operations despite a decrease in net operating liabilities of $112 million in the quarter. Even with improved collections in the Middle East this quarter, trade receivables and net construction contract assets have increased, reflecting the timing of certain project milestones. Trade liabilities have reduced as some older projects have neared completion and working capital positions have closed down. Looking ahead over the next 12 months, our working capital balance is expected to improve, but there will continue to be volatility quarter-on-quarter. Other cash outflows included $21 million in cash tax, $6 million in scheduled repayment of borrowings and $27 million for lease payments. We prioritize investing in our business, keeping an investment-grade profile and returning surplus cash to our shareholders. Capital expenditure of $29 million was a somewhat lower than anticipated and some payments relating to our new reel-lay vessel, Seven Vega were rescheduled to 2020. Construction is progressing, and the vessel is due to be completed in spring 2020, in time to execute the scheduled projects already booked in our backlog. We spent $30 million to early settle the contingent consideration related to the acquisition of Seaway Offshore Cables, resulting in a small gain recognized within other gains and losses. This cash cost was fully provided for at the time of the acquisition in 2018. In July, we repurchased shares totaling $25 million, thereby completing the $200 million share repurchase program announced in February this year. We also announced a new $200 million program at the time of our second quarter results, which we will use to return surplus cash to shareholders over the next 2 years. We have a solid financial and liquidity position. We have a $656 million unutilized revolving credit facility to give us flexibility to meet any short-term liquidity needs and an ECA term loan, of which $240 million remains to be repaid in quarterly installments through 2029. At the end of September, we had net debt of $241 million, including IFRS 16 lease liabilities of $368 million. Moving now to our guidance, which is summarized on Slide 13. The oil and gas markets are steadily recovering. Based on the assumption that Brent remains above $40 per barrel, our clients are progressing with their greenfield deepwater developments. These are being delivered, both as stand-alone SURF or integrated SURF SPS projects. We have seen an increase in early engagement studies, EPIC awards and project sanctions this year. The projected increase in offshore activity has helped to raise pricing from the very low levels seen during the downturn. Due to the phasing of activity on certain projects, we have revised our 2019 revenue guidance and now expect it to be slightly lower than that, which was achieved in 2018. Our guidance is unchanged in relation to lower adjusted EBITDA year-on-year, double-digit adjusted EBITDA margin and positive net operating income. With only 2 months to go to the end of the year, we have narrowed some of our guidance ranges for 2019. Administrative expense is now expected to fall between $265 million and $275 million and net finance costs to be between $10 million and $15 million. Depreciation and amortization is forecast between $480 million and $490 million, including an estimated $100 million charge relating to amortization of right-of-use assets associated with leases. We have raised our full year effective tax guidance to reflect changes in jurisdictions where the group generates taxable income, together with the impact of increases in revenue-based taxes incurred compared with the prior year. We now expect the effective tax rate to fall in the range of 39% to 41%. Our capital expenditure guidance for the year is now $20 million lower, ranging between $250 million and $270 million, including $80 million in expenditures relating to our new build vessel. Approximately [ $665 million ] remains to complete the Seven Vega as planned in 2020. We have $2.6 billion of work in our backlog for execution in 2020, which is approximately $400 million higher than the year ahead outlook for this time last year and covered 60% of the current market expectations. This solid starting position and positive momentum on projects pending FID, give us confidence that our revenue in 2020 will be higher than 2019 for all 3 business units. We expect absolute adjusted EBITDA in 2020 to be higher than 2019, reflecting increased activity and continued cost discipline, particularly in our renewables business. Our group percentage margin will take longer to recover as projects awarded with low pricing in prior years progress to offshore execution. I will now pass you back to Jean.

[Jean P. Cahuzac, CEO & Executive Director]

Thank you, Ricardo. Turning now to Slide 14. In a gradually recovering market, early engagement, technology and digitalization are clear differentiators on the next slice of our -- phase of our journey. By engaging early with our clients, integrated solutions and new technologies can be introduced to projects at the outset, maximizing the economic potential of subsea developments from concept design and during the Life of Field. The acquisition of 4Subsea completed during October based on our strategy of moving towards a more digital subsea environment. In particular, it enhances our solution for Life of Field and asset integrity management, where digital offering are key enablers for future opportunities. We are confident that 4Subsea will help us to accelerate the pace of development of digital services across all our business segments. It already provides services to offshore wind farms as well as oil and gas fields. Another strategic acquisition completed in Australia recently was Greenlight Environmental Consultancy, which provides solutions to sustainable development and enhanced environmental performance reporting from within the Xodus Group. Moving now to Slide 15. As I mentioned, we believe early engagement is a key factor in today's market dynamic. Since the downturn, we have increased our focus on it by developing a flexible approach that gets you to a variety of clients. For clients seeking supplier-led engagement, Subsea 7 can provide standalone SURF solutions or through our subsea integration alliance with OneSubsea Schlumberger, we can deliver integrated SPS SURF projects. We also offer, through the Xodus Group, client-led objective and unbiased engineering solution, which are aligned to our clients' objective. Turning to Slide 16. We continue to see an increase in integrated greenfield tenders and early engagement studies. [ It's always ] to offer a total cycle solution that can unlock the full potential of the field, optimizing performance and future returns. Since we established our alliance with OneSubsea, we have been awarded 10 projects working in 5 different countries for 7 different clients. Our total life cycle approach begins with early engineering engagement that ensure that the client needs and key drivers are translated into the optimal solution for the field. A preferred solution is then selected and delivered throughout our project execution and technology portfolio. It is then supporting during the life of the field by leading aftermarket capabilities. Our superior early engagement proposition with large integrated greenfield projects has been evidenced by awards for the Mad Dog 2 in the U.S., SNE 1 in Africa, Scarborough in Australia and Ormen Lange in the North Sea. We are also tendering the integrated Carcará project offshore Brazil. This major project is expected to progress to fit within a few weeks, and FID is anticipated in 2020. Moving to Slide 17. This slide shows some of the key projects that we expect to be awarded to market in the near to medium term. As the market gradually recovers, we are seeing more demand and better pricing. However, the timing of project awards and FID can be uncertain, especially when projects are sensitive to external factors, such as project finance or licensing processes. The FID awards we have listed here pending FID are all making good progress and are expected to advance to EPIC projects in the near term. Demand for renewable energy continues to grow worldwide as society seeks to increase energy supplied by lower carbon solutions. In the short term, the foundation installation segment remains highly competitive with recent entry of oil and gas competitors into this market. However, we expect this imbalance to diminish as demand grows. To summarize on Slide 18. The gradual recovery of the oil and gas market continues to unfold. Year-to-date, we have seen an increased number of greenfield awards and expect more final investment decision for key projects in the year ahead. We remain optimistic about the future of the renewables market, which continues to grow at an accelerated pace, and we expect excess supply to be absorbed as demand grows. So to conclude, we are confident that Subsea 7 is well positioned and has the right leadership team to take the opportunities that the next phase of our business brings to us. With increased focus on energy transition, integrated solution and new technologies, Subsea 7 is ready to navigate the risk and capture opportunities ahead. John, Ricardo and I will now open the call for your questions.

[Operator]

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

[James Matthew Evans, Analyst of Oil and Gas]

Firstly, Jean, congratulations on the, I guess, semiretirement and all the best for the future. I just wondered if you could share some thoughts on what you think the greatest challenge you leave John and the team is for the next 3 to 5 years. And my second question, maybe slightly related to your answer. On renewables, you talk about increased competition and a tough pricing environment. Can you just help us understand that a little bit more? I mean, is this similar to the SURF market at the bottom over the last couple of years or maybe not quite that bad? And, I guess, given we've got an increased visibility on your work starting to come through with the projects you've won and have been selected for, when do you start to become a bit more selective on what you take in?

[Jean P. Cahuzac, CEO & Executive Director]

Right. Thank you, James. To answer your first question, I think the first point, I would say that the team over the last years has been -- has put Subsea 7 in a very good position in a new market, in an evolving market. I think we are -- the recipe of the past cannot be repeated today. Early engagement, the success of SIA, the success that we had recently on a number of technology projects, I think, is preparing the company for the future. So the challenges are still the same in our industry. We always -- we've always been in a cyclic business. We will keep the same approach or a prudent approach, from the balance sheet and everything else. So I see more opportunities than challenge, to be fair, and have absolutely no doubt that, A, Subsea 7 is very well positioned; B, Subsea 7 has the right management team under the leadership of John in the future to move forward.

[John Evans, Chief Operating Officer]

James, I'll take the question on renewables, if that's okay. The renewables question you asked there is the fact that we work in 2 different sectors in renewables. In the array cables, we have a good strong position there in the top 3 players in array cables, and we can see some very good prospects coming down the pipeline there. What we have seen in the last year, though, with the foundations business, which historically was for big dredging contractors and ourselves, we have seen Heerema move in on the T&I side, and we've seen Saipem move in on the EPCI side. So at the moment, we are seeing quite a lot of pressure in terms of the competitiveness of the bidding. And as Jean mentioned earlier, we will remain very cautious on our risk profiles, and that's a new and evolving market sector. So again, not only the pricing but the price and associated risk profiles is what's on our mind as to why we're being cautious about some of the foundation opportunities that are out there. But longer term, we think that directionally, there'll be far more renewable work coming and that market will balance itself out and everybody gets a good understanding of risk and reward.

[Jean P. Cahuzac, CEO & Executive Director]

I think one point I may want to add on the first part of your question and where Subsea 7 is very well positioned is taking opportunities. And on the medium, long term, improved the ROIC and the ROI. And basically, obviously, to go back to the targeted number that we are aiming for, we need the market to improve, and we are seeing this market improving today. But we have behind us -- the heavy CapEx is behind us. I think there will be limited CapEx in the years to come. And from that perspective, we should be able to recover on that with this parameter, too, in terms of returns -- I mean, the return on capital.

[Operator]

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

[Amy Wong]

I just had one question. It was related to your recent announcement or award of the Ormen Lange project. In the language used by yourselves and your partner there, the communication suggests that the project was awarded to OneSubsea and that the work for the installation was subcontracted to you, rather than being awarded to the Subsea Integration Alliance. So could you help us understand some of the subtleties -- differences between awarding a project directly to the alliance? What does that mean in terms of that early engagement and helping contracts materialize through to EPC phase?

[Jean P. Cahuzac, CEO & Executive Director]

John, do you want to take the question?

[John Evans, Chief Operating Officer]

Yes. Thank you, Amy. You're correct. It's -- the contract is awarded by our client to OneSubsea, but the OneSubsea contract has a full EPIC package to be negotiated and awarded at the back end post feed, and it will be the SIA that will execute the work. It reflects basically the flexible approach that we take towards our clients. Ormen Lange is a great opportunity for compression. And the pumping systems that OneSubsea have are industry-leading there. So the conversation that started initially around the benefits of putting compression into the Ormen Lange field, and that's how that conversation started with Shell. So in due course, it will be executed by the SIA members. And as you know, we're very flexible with our approach with our clients. We can take 2 separate contracts and then have an interface and bridging agreement which effectively allows them to get the full benefit of the SIA. So that's how that project came along, but has been executed with a full SIA team.

[Operator]

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

[Sahar Islam, Analyst]

I had 2, please. So firstly, on cost inflation in the supply chain and how healthy the subcontractor markets are, please? And then secondly, some of the IOCs recently have highlighted some cash flow tightness versus our own capital return plans. Has the outlook for 2020 CapEx in offshore slightly worsened? And I appreciate your point that you said $40 -- -- at $40, a lot of these projects still [ work ] but if you look at where we were earlier this year, have we seen a slight slipping in some of the projects?

[Jean P. Cahuzac, CEO & Executive Director]

I'm going to take first the -- I mean, your second question, and I'll let John answer to the first one. I mean, there have been -- I mean, we said last year, I mean, there's been some uncertainty on the timing of FID, but we have not seen changes really on the plans to date for 2020, when we talk about uncertainty, it's a couple of months, but there is no indication today that what we had on the radar screen as far as our new project in greenfield, in particular, will change. So we are, at this stage, confident that our plans and our estimates are right.

[John Evans, Chief Operating Officer]

In terms of the supply chain, it's a very good question, and the supply chain is an area that we keep a very careful eye on. In general, the supply chain is okay at the moment. There are 1 or 2 areas such as valves and stainless steel tube supplies for umbilicals, which can be constrained. And that really is a question of what the final timing of the projects -- some of the larger greenfield projects, will be. But again, I think the industry is very aware of those areas, and we work very closely with our clients around those areas.

[Jean P. Cahuzac, CEO & Executive Director]

I think it's also fair to say that over the last couple of years we have built a very strong relationship with some key suppliers with some partnership approach, which are being -- which are showing very good results and make us confident.

[Operator]

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

[Chr. Frederik H. Lunde]

Just one question on 2020. You've mentioned and commented that you expect book-to-bill exceeding 1 for 2019. Would you dare to, say, maybe 1.5x being within reach for 2020?

[Jean P. Cahuzac, CEO & Executive Director]

I'm not going to comment on the number. I think it's a bit premature. But I would just say that we are seeing the gradual recovery of the market continuing. So future will tell, but I think the trend is going in the right direction.

[Chr. Frederik H. Lunde]

And thanks for a very good service over the last 11 years now.

[Jean P. Cahuzac, CEO & Executive Director]

Thank you. It's been fun.

[Operator]

Our next question comes from the line of Anne Gjøen of Handelsbanken.

[Anne Gjøen, Head of Equity Research]

I have also a question or a couple of questions related to 2020. I wonder if you could elaborate a little bit on the tax rate also then, is it likely that it could come below 30% or also more closer to 40%? And when it comes to CapEx in 2020 and 2021, is it likely that it's going to be significantly lower than in 2019?

[Jean P. Cahuzac, CEO & Executive Director]

Ricardo, do you want to these 2 questions?

[Ricardo H. Rosa, Chief Financial Officer]

Yes. With regard to the tax rate, as we've indicated in our press release, it is sensitive to the change in mix of jurisdictions, and also the extent to which we are operating in jurisdictions that have revenue-based taxes as opposed to those that are directly linked to the profitability of our operations in those countries. As a result, when you go through a period of relatively low profitability, the effective tax rate tends to increase. Going forward, as we've indicated, we're expecting an improvement in absolute terms of profitability in 2020. And assuming the cycle continues, we would expect that to continue into future years. And this should have a positive effect on our effective tax rate, which, as you know, has in the past tended to be between 25% and 30%. And I think there's no reason at this stage to believe that, that -- based on what we know today, that, that should change. As far as capital expenditure is concerned, and I'm -- I'll leave Jean to back me up if I don't give you the full story. I think we've highlighted that on a run rate basis and with particular regard to the existing fleet, we don't expect capital expenditures to exceed the range of $170 million to about $230 million in any 1 year, remaining significantly below our depreciation levels. Of course, there are the occasional one-off items of particular investment that's required, potentially an opportunistic acquisitions, such as the Pegasus that we had earlier this year. But as Jean has highlighted, we don't foresee the same level of capital intensity as we've seen in the last cycle. So our expectation is that CapEx will remain below depreciation for the foreseeable future and a source ultimately of cash flow.

[Jean P. Cahuzac, CEO & Executive Director]

And we will continue to look at opportunity to invest on technology and digitalization. And 4Subsea is a great example of the way forward, but it's a relatively low limited CapEx. So it doesn't change the overall picture that Ricardo just described. But we will continue to invest on technology in a prudent but proactive manner.

[Operator]

Our next question comes from the line of Erwan Kerouredan of RBC.

[Erwan Kerouredan, Assistant Vice President]

Erwan Kerouredan from RBC. So 2019 is expected to represent the low point in the cycle for group's profitability. What are the risks of this low point to linger into 2020? And my second question on renewables. You mentioned increased competition in -- especially, you mentioned oil and gas players entering into the game. So I guess my question is what's Subsea's competitive advantages against those kinds of players?

[Jean P. Cahuzac, CEO & Executive Director]

Yes, I will let John answer the second question. Regarding the risk of 2020, I mean, we -- during the presentation, we gave you the high level of already committed -- sorry, firm revenue that we have for 2020, 60%. I think the risk on not to meet our guidance on increased absolute EBITDA is limited.

[John Evans, Chief Operating Officer]

And I think on the renewables, to answer your question there, we have a very long track record in the renewable sector and a good reputation with key clients. We also have the main experience of doing some of the largest EPIC-type contracts in the sector. So again, we believe that, that does give us an advantage in terms of how we position ourselves in a very competitive area at the moment. So we do expect that over time, our competitors, both our traditional and nontraditional competitors, will really understand the risk profiles, and therefore, then the relevant returns that are needed for taking these type of projects on.

[Operator]

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

[Vladimir Maximovich Sergievskii, Research Analyst]

A question on the backlog phase in place. Obviously, you mentioned you already have a solid footing -- a solid base already for 2020 execution. If I compare 2021 plus backlog you have today versus what you had 12 months ago for 2020 plus, it's probably $400 million, $500 million lower. In this regard, how do you see the risks to revenue recovery continuing beyond 2020? This would be the first question. And the second one, I would say, housekeeping, on the working capital side. Last quarter, you mentioned you expected that positive move in net operating liabilities in the second half. Can you update us on this guidance, please, and therefore, give an explicit probably idea of what we should expect in Q4?

[John Evans, Chief Operating Officer]

So, Vlad, if I take your first question, and Ricardo will answer the second on the working capital. The backlog beyond '21 will be affected by the PLSVs. And as Jean mentioned in his prepared remarks, we expect the PLSV renewal cycle to take place in 2020, and we've given you a view of what we expect that to look like. So we would expect that the backlog will build during 2020 off the back of greenfield projects and the PLSV replacement cycle that will take place and rebidding next year.

[Jean P. Cahuzac, CEO & Executive Director]

And -- John. We have already announced a number of projects that we won, where we won the [ feed ] subject to FID. And that's large projects and an indication for the market is that FID should be in 2020 also.

[John Evans, Chief Operating Officer]

And that accounts for roughly about $1 billion-worth of projects where we are the fee contractor solely subject to the FID taking place.

[Jean P. Cahuzac, CEO & Executive Director]

And there are more projects to come in the near future to be awarded to market.

[Ricardo H. Rosa, Chief Financial Officer]

Vlad, regarding working capital, as we have made no secret of the fact that our working capital needs have increased during the downturn mainly as a result of the growth of our Middle East business, and we hope to continue growing it. I would draw your attention to Note 13 on cash flow from operating activities, which is part of our condensed financial statements. It shows that the adverse movements year-to-date, this is much more pronounced on operating liabilities than on operating assets when you compare it with 2018. This indicates that our receivables profile has largely stabilized, while movement in operating liabilities sort of reflects closeout of older projects. So I guess, I mean, this being said, in the short term, we're not expecting a very significant improvement in our working capital. We're not expecting a deterioration either. And if you're looking at some sort of guidance in the -- for the fourth quarter, I am hopeful that we will see an improvement, although potentially not quite as much as some might have expected. It's a feature of the sector that clients have been less ready to fund our working capital needs. And although we're expecting this to improve over time, we do expect variability quarter-on-quarter to continue.

[Operator]

And our next question comes from the line of Haakon Amundsen of ABG.

[Haakon Amundsen, Lead Analyst]

Just a question on margins. You mentioned in your 2020 outlook that it will take some time before your margins recover. At the same time, you have some drag from PLSVs likely rolling over at lower rates. So could you give some color on what kind of margin expansion one could see beyond 2020, given those moving parts from better pricing but at roll off of PLSVs, please.

[Jean P. Cahuzac, CEO & Executive Director]

Yes, I'm not going to give you exact figures, but what -- as we said, I mean, we are forecasting that the absolute EBITDA will be higher in 2020, and we are seeing today, and we expect to continue to see, a gradual recovery of the oil and gas market. It will take time for margin to come back to historical levels, but the margins are going in the right direction.

[Haakon Amundsen, Lead Analyst]

All right. Is it possible to kind of consider the assumptions in the market where you actually see a meaningful margin expansion in '21 and '22 over 2020 given the roll offs? Or will it take longer?

[Jean P. Cahuzac, CEO & Executive Director]

We have to look at the timing of the execution of the project. And clearly, a number of projects that we are securing or going to secure in the near term, will be [ in the ] execution in '21, '22 so that should have a positive impact.

[Operator]

Our next question comes from the line of Mark Wilson at Jefferies.

[Mark Wilson, Oil and Gas Equity Analyst]

Okay. A couple of questions, if I may. The first is on Brazilian PLSVs, there's 4 projects you'd point to in the outlook and you spoke to Carcará. I was just wondering if any installation part of those projects is covered by current or to be bid long-term PLSV contracts. The second question is on short-cycle book and turn revenues. Clearly, this year a few hundred million of revenue hasn't come through and, hence, the revenue for '19 guided down slightly. I was just wondering if that effect on capital discipline may be linked to oil price from clients. Or is it more a market share effect of competitors taking some of that work?

[Jean P. Cahuzac, CEO & Executive Director]

John, do you want to take it?

[John Evans, Chief Operating Officer]

Yes. If I take the PLSVs first, Mark. As Jean mentioned in his prepared remarks, our thinking at the moment is the fact that when the PLSV renewals will take place, we'd be looking to put one of our PLSVs probably into the main EPIC work of the main SURF business. And that could well be also still in Brazil or internationally. So for us, there are needs for flex-lay vessels to go in on the very large projects, which we ought to bid in Brazil. But also, as you see, for example, on the Lapa project, which we just announced this quarter, we'll be taking the Seven Seas, one of our international vessels, back to lay flexible product in Brazil next year. So again, the main message we want to give, we have an international fleet of heavy construction vessels. 4 of them are currently assigned as PLSVs, but they are all internationally capable and we'll be moving them in and out to Brazil as we see the opportunities. In terms of your question on the short cycle. I think one of the things that we have seen this year is a number of change of ownerships in the U.K. sector, and that change of ownership has meant slight disruption in some of the near-term plans for some of our clients in the U.K. sector, which has historically been a sector which has been quite strong for us in quarter 3 most years. So we can see that as being a transient phase. And as the new ownership position settles down, we would expect that to normalize.

[Operator]

Then our final question comes from the line of James Thompson at JPMorgan.

[James Thompson, Analyst]

Just want to join others on the call by -- Jean -- by wishing you all the best for the future. I just had a couple of quick questions, if I may. Firstly, on Brazil. I mean, there was a lot of anticipation going into the transfer of rights around some of the major operators getting involved there. And I think it was a pretty disappointing result overnight, obviously, were going pretty much to Petrobras, and we'll see what's going to happen with the other pre-salt awards today. But do you -- do you see any kind of risk to your kind of medium-term outlook in Brazil from a slightly underwhelming auction cycle at this point in 2019? And just a second point, you have been very successful in the last couple of months in terms of the renewables piece, which is good to see some of those coming through. Do you see opportunity for a positive EBIT in 2020 from that business?

[Jean P. Cahuzac, CEO & Executive Director]

John, do you want to take the question?

[John Evans, Chief Operating Officer]

Yes, I'll take the question. Yes, you're right, the transfer of rights were announced yesterday. And as you said, 2 of the blocks were unawarded and 2 went to Petrobras. I guess for us, the main message we want to give to the market is Brazil continues to be a very exciting business for us, and we can see opportunities for international oil companies, such as Equinor or Total as well as with Petrobras. If it swings more to Petrobras, there's more opportunities for PLSV deployment. And if it swings to international [ OCs ], there's more opportunity for EPCI work. So for us, the main message is around the overall health of Brazil. The other thing that I think to remember is Brazil has also had other rounds of block awards this year as well, which have been very, very successful with people like Exxon putting down very large block bonuses. So we continue to see Brazil to be, A, an important market; and B, one that will be very key to Subsea 7's future success. But the healthy thing is it will be a mixture of international oil companies and Petrobras. I guess, on the renewables, we are coming from a position where there is strong competition in there, and it will take time for that business to normalize. So that, I think, is the key message to look out there.

[Jean P. Cahuzac, CEO & Executive Director]

So thank you for participating in our results call today. I have to say it's been a privilege to lead Subsea 7 for the last 11 years. And when I retire at the end of the year, I do so with full confidence that John will drive the business onwards and supported by a very strong executive management team. So thank you again for the call, and all the best to the new team.

[John Evans, Chief Operating Officer]

Thank you, Jean. Thank you.

[Operator]

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.