SBM Offshore NV (OTCPK:SBFFF) Q4 2017 Earnings Conference Call February 8, 2018 4:00 AM ET
Bruno Chabas - Chairman & CEO
Douglas Wood - Chief Financial Officer
Erik Lagendijk - Chief Governance & Compliance Officer
Philippe Barril - COO
Peter Testa - One Investments
Luuk Van Beek - Banque Degroof Petercam S.A.
Quirijn Mulder - ING Groep N.V.
Guillaume Delaby - Societe Generale
Wim Gille - ABN AMRO Bank N.V.
Martijn den Drijver - NIBC Bank N.V.
Andre Mulder - Kepler Cheuvreux
Ladies and gentlemen, thank you for holding. Welcome to the SBM Offshore Full Year 2017 Earnings Update Analyst Webcast. [Operator Instructions]. I would now like to hand the conference over to Mr. Bruno Chabas, go ahead, please, sir.
Thank you very much, operator, and welcome all to join our 2017 full year results webcast. I'm joined today by the full management board with Philippe Barril, Douglas Wood and Erik Lagendijk. Douglas will run through the financial numbers and we're going to be all there to answer your question at the end of the call. As always, I'm pointing to the disclaimer and I assume you're going to spend a certain bit of time reading it but I advise you to do so.
So in summary, where do we stand for 2017. We have had a strong operating and financial performance in a recovering market, all of these has been underpinned by the strong lease and operate activity that we have had which is really highlighted by the $1 million production of oil per day which is quite remarkable. Also another point which is remarkable given the fact that we were quite a downturn market is the fact that our backlog is stable year-on-year.
So giving more flesh into the summary, we are looking at a strong financial performance for the year with number in line with the guidance that we gave. We got some awards. Actually we were awarded the Liza FPSO and the Johan Castberg turret mooring system. Two out of the four larger FPSO awarded during the year, the two other one are in Brazil and, as you know, our position in Brazil means that we cannot get project awarded from Petrobras at this stage. All of these leads - led us to a stable backlog year-on-year. We also invested into the transformation of our business, making commitment to the [indiscernible] on Fast4ward. And this project is progressing on track.
We made some progress on compliance, finalizing the agreement with the U.S. Department of Justice and still some progress in Brazil to be made. And last but not least we really upgraded our reporting, providing more flesh into [indiscernible] reporting with the full balance sheet and cash flow being reported at this stage and giving lot of, more visibility on our financial at this stage.
So going more in detail on the 2017 review. What is remarkable on the awards of Liza and Johan Castberg is really the fact that those projects are an evidence of SBM being - taking [indiscernible]. It's proof that experience matter. It really validates the fact that we have kept our key results during the downturn in order to be able to be competitive and to be able to deliver project going forward. It also underpins that investments we have made in technology over the years and also during the downturn which are providing new solution to the client and it really demonstrate our ability to deliver projects over full life cycle.
All of these gives in terms of number the following. The revenues stand at USD 1.7 billion, a decrease of $337 million year-on-year which is in line with the expectation. The underlying EBITDA increased by 4% to USD 806 million. Our backlog at the end of the year stand at $16.8 billion, and this is despite the sale of the Turritella asset. And on net debt year end stand at USD 2.7 billion, a decrease from $3.1 billion underpinned by the strong cash flow linked to the lease and operate activity but also the cash flow settlement on the Yme insurance claim.
From an operating standpoint and you can see this through our HSSE performance. We have had the best year ever on the total recordable injury frequency rate. From an environmental standpoint we have decreased our flaring by 50% and we have reduced our green gas emission by 30% year-on-year. We also have invested a certain bit of time and money into process safety management, improving what we're doing, putting much more focus, putting in place a number of campaigns and we're going to put further plans to develop the process safety in 2018 and 2019.
Compliance, this has been going on for a long time as this chart is showing. But we are making progress year-on-year. It's slow, it's painful, it's frustrating at times but that's what it is. We have completed the discussion that we have had with the Department of Justice. This led to an additional penalty of $238 million which was paid before the end of the year.
And in Brazil the company remains committed to close out the legacy issue by the mean of the Leniency Agreement. And we are in continuous discussion with the various authorities over there.
So from a macro standpoint where do we stay. The first element is really linked to the oil price. It's not news to any of you but obviously the increase in oil price means that our client's cash worth improve, that their balance sheet is stronger and that there is basically more opportunity for them to invest if the right opportunity arise as well. There is also another point which is important is when you look at the forward curve on the oil price it also means that there is a perception in the market which I believe is there to stay, that the oil price is lower for longer. And basically no investment decision are going to be made with the expectation that the oil price is going to increase in the future. They are going to be made in - with the mind that the oil price is going to be between $50 to $70 or let's call it around $50 per barrel. If it goes above that there is a bonanza coming up. But the investment decision would be made on that.
Now it means that we need to find projects with an attractive breakeven point and you will see that there is plenty of those in the offshore world. It means that we need to be able to provide efficient solutions but also that we need to deliver reliable solution there, and that's where the experience of SBM matters and makes a difference.
Now a lot of talk has been happening in the industry about the significant cost reduction we have seen year-on-year since 2015. And when we look at the cost reduction or the deinflation we have seen in the industry, it probably can be quantified around 30% of all. Now that's all good and dandy. However if the demand was to increase significantly or not so significantly because there is not that much per capacity in the industry, we could see a lot of reinflation coming back. Now, the stabilization of the reduction in cost and the better efficiency we're going to see going forward means that we need to increase the productivity [indiscernible]. And that's really what we have been investing over the past few years in particular since 2014 developing the Fast4Ward project to develop standardization, to develop ways to add [indiscernible] company and way to bring the economy of scale into new projects coming up.
And basically what we're expecting is while the market demand will probably increase in the coming few years is that through the experience that we have brought in Fast4Ward we're going to be able to remain at a low cost, creating value both for ourselves and for our client.
Now all of these will not make any sense if there was no project developed. Now what we have seen is over the past few years a number of clients throughout the world have been able to decrease the breakeven point by more than 60% at time. And a number of high-quality reservoirs being sanctioned for the development of field. So this gives us visibility and opportunities to demonstrate that offshore is a viable investment opportunity for the oil companies going forward.
Now, the case in point on this is the work that we have jointly done with Statoil on the marine systems. We got involved with them during the FEED analysis and watching really with the client developing a fit-for-purpose solution using your stand-down, using your added value. And at the end of the day we are basically being able to bring the solution to the satisfaction of everybody which is [indiscernible] in terms of cost than what it was few years ago. And this has been done really in full cooperation with the client, looking at standup, challenging everything and working really with the company experience of SBM Offshore and the experience that we can bring to this project.
Now more specifically if we look at the market going forward in 2017 we have seen nine FPSO being awarded, out of which four were of a large nine and SBM Offshore is involved in two of those. Basically the two of those where we could be involved [indiscernible] Brazil.
We're seeing a gradual recovery. Well basically the expectation is that for the coming two year we have an expectation of project award of anywhere between seven to nine FPSO. But we're seeing also positive outlook in terms of the number of subsidiary which are being ordered. So the question really is are we at the turning point in the industry. It's certainly too early to answer this question, but I would say that if the coming project are being redelivered, developed in line with the expectation I believe we're going to see a recovery in the industry in the years to come in period of 2020 and beyond.
Now all to these really depends on the ability to deliver complex projects on time, on budget like we have done for G3 generation whereby we have delivered four G3 FSPO, so the large FPSO on time. Now if we compare to the rest of the industry only 30% of those projects are being delivered on time. So the reliability of delivering on time has a huge effect even more important than the impact of the deflation in the market on the economic solution.
And all our focus has been over the past few years really to find ways to improve the reliability of what we're doing, to reduce the time to market of the project that we're doing and to learn on everything that all the project that we're doing in order to improve project after project.
How does it translate on when we compare SBM offshore to rest of the field, basically it reflect that based on our time to delivery and the turnkey experience that we have, based on our unique offshore operating experience that we have and the complexity of the unit that we're bringing basically SBM Offshore is standing uniquely on top of the chart there as you can see.
Now what is the strategy in order to capitalize on the market upturn? Our strategy which has bene developed really two years ago has not really changed. The first aspect is way to optimize what we're doing. Let's not forget that today we're producing more than 10% of the oil in the quarter. We have a backlog of around 70 billion that we deliver to the full satisfaction to our client. So with reliable production, with high excessive performance and all of these were in budget generating the cash flow that we expect.
We also see that there is an opportunity for the deepwater field to be developed and for this we need to transform the industry. For this we have invested in Fast4Ward and we'll keep investing in Fast4Ward. For this we're investing also in digitalization and I'm going to go more in detail later on in the presentation.
Now our world is evolving, energy demand is growing and the sheet in demand is changing with more demand for the gas, more demand for the renewable. There we have opportunity for future growth in the company. We are positioned on the LNG market both from moving system but also for full system development and we are also positioned on the floating renewable market.
Now in order to deliver in what we expect is a growing market we need to have an organization which is more agile, more efficient and more expensive. By this we need to have more client focus. So what are we doing? Basically we are looking at the resource pool that we have throughout the world and through all the center that we have in Houston, in Monaco, in Schiedam, in [indiscernible] Brazil, basically throughout the world. We're looking at full of resource and to see how we can allocate those resources better in order to deliver the portfolio of project we're going to have and of operation that we're going to have.
We're also looking through this organization to a continuous improvement and to build on our experience. And through this we expect to transform the way we're going to deliver the project. We're also going to look at better managing our risk. The last thing that we want to do during this upturn is to take too many projects so we are going to extremely selective on the number of projects, we're going to be selective in targeting projects which makes - which creates value for our clients and create value for us and we are not going to go over-extend ourselves. So the purpose of this organization is really to become more agile, to use the resource better, to learn based on the experience and to manage our risk better.
Now the lease and operate activity, again we are delivering 10% of we're producing 10% of the [indiscernible] which is quite remarkable. We have had an extremely strong strike record over the year and this year we basically several times produced more than $1 million per day. It's really a sign that we are a leading operator in this activity. A signs for the reliability that we're bringing, to the quality of operation and obviously the volume of activity that we have there.
On digitalization, it's a program that we have developed over the past two, three years and really we have been concentrating at this stage on what could be the benefit of digitalization for our fleet. And we have invested a fair bit of time and money on this looking at what we can learn through the operation, what we can do in order to improve our operation and to improve the reliability and the safety of what we're doing.
We have some program ongoing which are live today which are starting to bear results. We are going to keep investing on these, we're going to expand this program throughout the fleet and really we're going to use this as a way to transform the way we operate [indiscernible]. We are applying the same principle in the way we're going to develop projects and the way we're going to invest on the turnkey activity.
Fast4Ward, it's gaining traction, it's gaining traction throughout the world. We have a number of clients being interested in this. We have made a commitment to the first half. We're investing in the catalog, standard catalog that we're going to using, which again is going to help us to really be faster to the market, to increase the reliability and to adapt to the requirement of the market.
So in our view this is absolutely critical to manage the risk, to be able to deliver projects on time, to deliver project - to deliver projects faster to the market and is really a solution that we believe is going to help the industry revival. On the gas technology, again the company has been involved there for long period of time. Our strategy has been to be involved both on the marine technology but also to be involved in the medium-size LNG market. We're looking at different alternatives, different projects. We're involved in the FEED there and we're looking at making progress for the coming 18 months I believe. And we want to leverage our experience obviously by doing so.
On the floating wind we have had - we are on track with the FEED that we're going with EDF. We expect the full investment decision by 2019. There is opportunity for the world as you can see on this map. The idea today is really to put the first test program offshore, to validate the technology that has been developed through the year. And our expectation is markets are fairly high, it's something which is going to take a bit of time, that's obvious, but we want to be positioned and we want to be a leader, leading competitor there.
Now turning over to the financials. Douglas?
Yes. So thank you, Bruno. Good morning, everybody. So as Bruno mentioned, we delivered a solid set of results in line with the latest expectations. On the finance front we've expanded directional reporting to include the balance sheet and cash flow now incorporating these into our audited financial statement which we published along with the annual report earlier this morning. And we're also seeking to enhance our ability to diversify our financing sources on which I'll update a bit more in a minute.
So while business and financial performance was delivered ahead of initial expectations 2017 was also characterized by a number of significant exceptional events notably the Turritella purchase option exercise, the Yme settlement and then the resolution with the DOJ. In line with our dividend policy adjusting for the exception items to take into account the underlying performance also considering our view on the underlying cash flow position, we're increasing the dividend by 9%.
But briefly on the overall story line on this slide. While we had material new orders in Liza and Castberg from a financial perspective as anticipated the absence of material turnkey order intake at the start of the year led to a decrease in revenue, down 17% year-on-year, slightly below $1.7 billion, but in line with guidance. The revenue increase in lease and operate from the full year contribution of the three major units we delivered in 2016 could not offset the turnkey decline from a revenue perspective.
But these new vessels underpins the EBITDA results which was up around $30 million just over $800 million on an underlying basis, ahead of initial expectations at the start of the year which was due to better-than-anticipated performance in turnkey. To get to underlying EBITDA and EBIT we adjust for the Turritella partner settlement, the Yme Insurance proceeds and the DOJ settlement I just mentioned plus the net increase in the onerous contract provision for the SBM Installer amounting to a negative $210 million aggregate impact which is in line with the guidance we provided in November.
Moving to the detail of the segments starting with lease and operate. The metrics here reflect the full year contribution from the 2016 additions to the fleet with revenue and EBITDA both up around 15% in line with what we expected at the beginning of the year. Then the EBITDA margin came in just above 63%, that's in line with the average cash conversion guidance we gave. And just to note, we intend to provide some additional disclosure on this going forward which I'll cover when we get to the backlog.
Turning now to turnkey. As expected revenue was down by over $500 million year-on-year mainly due to the low order book at the start of the year. There was no impact on revenue or EBITDA from Liza as in the absence of partnering project expenditure in 2017 was booked as CapEx under directional and then Castberg was obviously only awarded at the end of the year.
But assuming partnering in Liza in 2018, and by the way that's the base case, these projects will start to contribute to revenue and margin from 2018 onwards remembering that margin will be booked after 25% completion of project construction. Underlying EBITDA here excludes income from the Yme Insurance settlements of $125 million and the net increase of the SBM Installer onerous provision of $17 million.
The resulting loss of $86 million is a function of the strategic choice we've made to protect experience and retain turnkey capacity by maintaining investment in R&D and marketing efforts to prepare for the future. However, the result is better than expected at the start of the year. As we flagged at the midyear, this is due to good performance in closing out the major projects delivered in 2016 which allowed us to release contingencies plus then we saw a slightly higher level of engineering activity and control of overheads also contributed to a better performance than initially expected.
Now looking at the group P&L. Again the storyline is somewhat complicated by the various exceptional items I've already mentioned plus a few more. All of these have been covered in earlier announcements last year but I highlight the impacts here and then we provided a table outlining all of these and the lines items that impact in the appendix of the presentation which will be made available online after the call. I'll cover overheads on the next slide but then walking through the other elements we haven't already discussed.
Looking at other expense, this mainly represents the exceptional items for 2016 and 2017. For 2017 it include the DOJ penalty of $238 million Turritella partner compensation of $80 million and Yme settlement income of $125 million. And then recalling that in 2016 the other expense were mainly related to a small increase in the provision related to the leniency agreement in Brazil and some restructuring costs. Then depreciation increased with the three vessels delivered during 2016 now contributing for a full year.
If we then look at net financing costs here the movement primarily reflects the unwinding of the project loan and hedge related to the sale of FPSO Turritella, that's around $21 million which we restated from the underlying results. And then there's a smaller increase in interest from the project loans on the new vessels.
Then moving to share profit in associates which as a reminder consists of our share in the net results of our JV owning construction yards and construction vessels. In 2017 the line includes the further impairment of the Paenal yard in Angola for around $30 million which on top of the impairment we made last year of around $60 million means we've now fully impaired the yard. So if you adjust for these effects underlying performance in associates was negative and that reflects lower activity in construction yards based on a lack of order intake.
Then on tax. Previously to calculate the directional tax charge we applied the year's IFRS effective tax rate percentage to directional pretax earnings. But with the expansion of directional reporting we're now able to do this on a bottom-up basis. So this means we now reflect our share in the income tax and withholding tax reported on joint ventures related to lease and operate contracts. And note, we've restated the 2016 tax result here for the same basis for comparative purposes. So then if we put all the various elements together we saw a decrease in underlying net profit of $40 million to $80 million.
Moving to the next slide and overheads. Here we see a slight improvement but now stabilizing performance, down another 4% on a net basis. And this result was mainly driven by savings in G&A which were down 7%, including optimizations from adjusting some of the organizational structures. And this was slightly offset by an increase in R&D expenditure, reflecting the fact that we're continuing to invest in R&D projects such as renewables and digital FPSO as Bruno just mentioned.
Now on to cash flow on a directional basis. The cash position increased by $55 million compared with the year's starting position to finish at $878 million at the end of the year. On operating cash flow I note in this bar we're excluding the DOJ penalty and Yme, reflected strong lease and operate cash generation partly offset by turnkey which was approximately a $200 million cash out. Around half of this being working capital related to completing projects mainly driven by the pay down of payables and then the other half related to overheads and structural costs.
Then we repaid debt and interest, the dividend for last year with the CapEx being spent on Liza and the VLCC to support bidding activity. Cash-in for Yme more than offset the payment we had to make to the DOJ. However note we still need to make payment part of this to the amount to Repsol based around our earlier reported sharing mechanism.
I think then other things to bear in mind if we look forward to next year would be Turritella impacts, the fact we maintain the provision for Brazil settlement, Liza expenditure. And then finally we're investing cash in our Fast4Ward program which we book in the balance sheet under inventory.
Then the direction of balance sheet. I think we've covered the main elements of the movements you see here. Maybe to note a few points on the loans front, in-line with the previous slide. But I think this is a good point in time to note that we closed the financing for Liza at the end of 2017. However the facility was undrawn at that year end. I think it's also good to note here the fact that we had no debt at corporate level. Then you also see the provisions, the movement there is mainly caused by the payment that is yet to be made for Yme and Turritella partner compensation accrued for in 2017.
If we finally combine the cash and the debt movements, the net debt position decreased by more than $400 million to around $2.7 billion at the end of the year.
Turning to the dividend. Last year we clarified our approach to capital allocation, emphasizing our purchase on shareholder returns where we also updated the dividend policy. In line with this policy and taking into account our view on the outlook for cash and the specifics of the impacts from the exceptional items, we are proposing to increase the dividend by 9% and pay a dividend of $0.25 per share in cash in 2018.
We've also been reviewing our funding options. So let me briefly update you on that. Benchmarking the costs of financing we achieved on our asset financing model has shown that these are very competitive based on the credit quality of our lease portfolio. However we would like to create further optionality to allow us more flexibility to raise equity or perhaps debt finance based on a portfolio of assets like for example an MLP. Although just to note specifically on MLP, at the moment we still don't see the conditions being quite right for this, but we're monitoring the situation carefully.
But in order to be able to do this, turning to the next slide, you need the right kind of corporate structure which we don't have at the moment. It can take time to put such a structure in place given all the necessary documentation. So during 2018 we intend to establish what we're calling a funding platform under which we can put existing and new assets to ensure the company can access a broader range of alternative funding options and optimize financial efficiency and flexibility. And we're also intending to see to improve the flexibility we have on short-term financing including restructuring of our [indiscernible] on more flexible terms.
Now turning to the outlook for 2018, starting with the backbone of the company, the backlog, which, as Bruno mentioned, remains stable at $16.8 billion. Now as per the midyear announcement we've provided the directional backlog charts on a pro forma basis giving a normalized outlook on the existing leases. So this pro forma view excludes lease and operate income from the FPSO Turritella sale as of 2018 and includes charter and O&M contracts for Liza starting in 2020.
The backlog has been maintained close to the $17 billion mark with $1.5 billion revenues in lease and operate this year and the Turritella sale impact being offset by Liza and the Castberg awards. We reconfirm the 63% average cash conversion rate, so revenue remains valid for the remainder of the backlog to 2036.
We decided to provide further disclosure regarding the phasing of this average. For 2018 we expect cash conversion to be in line with the average. But from 2019 to 2022 we expected to dip just below 60% before increasing from 2023 to a multi-year average of just about 65%.
This is driven by the fact that the revenue during this period will include increased non-cash deferred income which has an impact on the ratio of cash to revenue. If you apply IFRS rules for operating leases under directional, this means the contracts with a step down lease profile are straight-lined over the duration of the contract.
During the 2019 to 2022 period we have a small number of contracts where the lease rate will step down resulting in the release of deferred income. To help on this we provided further disclosure on the amounts of deferred income and you can find this in the notes on directional accounting in the annual report published this morning. But again I want to reiterate that the overall average remains 63% and this brings us finally to the guidance for this year.
So on revenue this is expected to come in at around $1.9 billion, an increase year-on-year. Lease and operate guidance drops from $1.5 billion to $1.3 billion mostly due to Turritella leaving the fleet, but this is offset by turnkey, which is expected to increase from $200 million to around $600 million mostly driven by the assumption for the sell-down to partners in Liza and Castberg major turret award.
On EBITDA, we are providing guidance of around $700 million, and this is on a normalized basis to allow comparison with 2017. So as such it excludes the effect of the Turritella gain on sale which is $230 million as well as an impact from the fact that we are adopting IFRS 16 in 2018. This will mean a number of operating leases moved to financing leases, transferring lease cost from operating cost to finance cost, resulting in an EBITDA increase of around $35 million. So then if you do the math and include these on a headline basis, we expect around $1 billion of EBITDA. So with that let me now hand back to Bruno who will summarize the presentation.
Yes. Thanks, Douglas. And before I open up the call for question, few points in conclusion. Our performance from the financial and operating standpoint well in line with the outlook that we provided, the award also has been excellent and really has positioned ourselves for the future. What we demonstrate is that we are well-positioned and we are also an early-cycle player. Our strategy is based on experience and it's helping us today to address the industry challenge of the future. And that's what we're doing for a number of investments including Fast4Ward, digitalization and so on. And the three pillars that we have in our strategy of optimize, transform and innovate is really going to set the footing for us going forward to grow our business on basically managing our risk and to grow the value of the company going forward. So based on this we open the floor for questions. Thank you for your attention.
[Operator Instructions]. Our first question is from Peter Testa, One Investments.
I was wondering if you could just help us a little bit with the guidance in bridging the $806 million to the $750 million, just with some items in there. For example the Turritella absence, Liza and turnkey or Castberg having some impact I guess on overhead recovery, they're not booked profit and any other factors. And then on turnkey itself, you have a $200 million backlog and $600 million guidance for the year, can you just help us understand those two items please, how you reached that and whether there will be any working capital swing in turnkey this year?
Thank you very much for the question. Douglas, you want to take those?
Yes, so I think - good morning, Peter. I think you just about summarized the key elements in terms of the bridge between this year and the guidance, so, yes, you need to think about Turritella impact on lease and operate. I think as I said on turnkey we see 2017 is the bottom and recovery coming driven by the new order intake bearing in mind the [indiscernible] of 25%. But there will also be some impact in increased efficiency from the restructuring that Bruno mentioned. So I think those are really the key elements to think about there. You asked about working capital, don't see any kind of major impacts on, significant impacts on working capital this year. And then on Liza, turnkey revenue is not in the backlog for Liza at the moment because it's a 100% project. So we've got, yes, 100% of the bareboat and the O&M at the moment. [indiscernible] the questions there?
Well, I was wondering if you might be able to quantify some of the bridge from $806 million to $750 million between Turritella out and turnkey a bit better with some overhead recoveries, projects start to use engineering resource?
Yes, I think - yes, we are sort of sticking to the overall project, at the overall guidance on the EBITDA, so, yes, around $750 million and then, yes, not going to go into the various details of the pluses and minuses, but, yes, I think as I mentioned and you articulated the elements are the ones that you mentioned.
And one other question please just on the description of the turnkey streamlining. I was wondering if you might be able to elaborate a bit more on what you're doing and what impact that has on the cost base or otherwise?
Yes, it's a good question. It has few impacts, it has obviously an impact in terms of the cost base and what we are doing there, it's transferring a number of resources basically which used to be on otherwise on nonallocated project. So it's going to have an impact going forward in the reduction of the overheads and allocating the results there. But also it has another impact on using the resources on the worldwide basis. In the past what we used to do is to allocate projects on the regional center and basically people developing their project. And if they had to hire locally, they had to hire locally even if they could pull on the resources from the group.
Today that's not way we were going to be looking at it, we're going to be looking at the overall portfolio of activity on a worldwide basis for the group putting on the resources worldwide, allocating the best resources depending on the project in order to deliver the portfolio with the best result for. So that's the key principle, the - key principle also is looking at these basically what we're trying to optimize is the company at large rather than the different center. And we're looking at basically beefing our risk management profile because one of the big risk that there is during the upturn is to take too many projects and therefore having a clear visibility on the capacity that we have, the competence that we have is really to be able to be able to increase our backlog but in the reliable manner both for clients which is critical for the future of that deepwater industry but also for us.
Our next question is from Mr. Luuk Van Beek, Degroof Petercam.
Luuk Van Beek
First of all a question about your outlook, you obviously comment on them, say, the medium term, the market is clearly improving, you mentioned a number of awards you expect for this and next year. But can you indicate to what extent you really the FEED studies that are going on [indiscernible] contracts and to what extent you expect the first part of the [indiscernible] to be a form of new FEED studies?
So maybe Philippe you want to address the question on the overall market demand.
Yes, good morning, Luuk. If you look back at the market in 2017 and the number we've been providing this morning for 2018 and 2019 you see that the overall market seems to be the same at the bull case to be at nine FPSO. I think one of the difference we can see is that we see this bull case being more probable and I think that's an important [indiscernible] because we are at the start of the year. The other thing that is important is the accessible market for us. And on this accessible market we don't see out of those nine a real difference. We are still at four FPSO, part of that market being Brazil and other part being outside. Coming back to the FEED questions. I think as you've seen in closing 2017 we've achieved a better result in the recovery and the cost of the investment we had for the period 2016 and 2017 and this is a reflection of the level of engagement we have on the conceptual and pre-FEED which is going to be hopefully leadings to FEEDs during the year 2018.
Luuk Van Beek
I have a question about your guidance and the inclusion of a sell-down on Liza which [indiscernible] a bit difficult, do you have a feeling for what you expect for the underlying profit development. So is there any indication you can give on the impact there and what you should expect for turnkey. Underlying you mentioned that you expect improving performance, does that also apply to profitability or will that lack because of the gate period? And maybe also you can give some indication about the time of Liza so that we know how much revenue we should include in this year.
Okay. So on Liza, as we said the base case is that we will do a sell-down this year that's very close to 50%. We're in advanced negotiations in respect of that. So then that's built in, then assumption that that happens is built into the $750 million guidance so that you would expect us to be booking margin on Liza in 2018. And as I think I mentioned on the previous question is that that means that we are seeing coupled with a number of other things a recovery in the profitability of Turnkey. But again, yes, we're not giving specific elements of the breakdown on the EBITDA as between lease and operate and turnkey, so overall $750 million.
Our next question is from Quirijn Mulder, ING.
Couple of questions on the compliance issue, is it correct to conclude since the 22nd of December there has been no progress you mentioned, even that the date of the lawsuit is not known yet, that's my first question. And the second question is are you able with Fast4Ward to produce 220,000 barrels per day and also willing to have - to be in a purchase arrangement instead of a lease for Fast4Ward?
Okay. So thank you for your question. Erik do you want to discuss about compliance?
Yes, happy to, thank you, Quirijn, and indeed in Brazil the situation since we have the press release issued December 22nd has evolved in one way that the discussions around leniency have continued, so they have not been halted, but it's fair to say that we have not heard back from the court whether or not they're going to take this case and in that sense there is still a level of uncertainty around that development.
No idea about timing whatsoever, no idea when it might happen then.
Well, indeed fair to say that speculation about timing in Brazil has turned out to be no more than speculation. So indeed I rather refrain from commenting. Yes, if and when there is a decisive development then we will obviously inform the market.
Yes, coming back to your question on Fast4Ward, so it's more than a program [indiscernible], it's really an overall solution. So coming back to the values projection profile, the one you mentioned can be accommodated by Fast4Ward and even there are even cases that are higher than this one. Now on your next question which is about whether would Liza sell. I think I want to stress starting by that that Liza is not just a financial solution. It is as well an operational solution where we take a long-term commitment to produce efficiently for our customer. So that's something that we've seen the customer in the period to be more agreeable not only on our prospect but as well they are very interested to have us operating for [indiscernible]. Having said that, we have a number of opportunity where we are considering to sell the FPSO or even to operate it - to operate as we've been doing that very successfully [indiscernible] for short periods where in order to stabilize the production and then hand it over to the customer.
Our next question is from Bruno Carraro, Accenture [ph].
I was wondering whether the cost cutting that Bruno hinted at the beginning of the call are included in the guidance which is rather disappointing on 2018 EBITDA?
Your line was not clear. Did you get the question?
Yes, So Douglas here, good morning, Bruno. Yes, so the impacts of all of the reorganization that we're making are built into the guidance for the 2018 of around $750 million.
Okay. And can you give us some color on the magnitude of those initiatives...
Again I think you are looking at the wrong end of the stick there. What we're looking at is an opportunity for the market to recover and therefore what we're looking at is finding, adding more productivity in the organization that we have, managing our risk better and being able to deliver our project in a reliable manner both to our clients and to ourself. This is obviously a cost exercise but more importantly is a quality exercise, it's a reliability exercise and is a risk management exercise. The biggest risk you're finding in near-term in the industry is that people are filling up their order book, they are taking too many projects, they are making a mess of it both for the clients and for themselves and the purpose of the reorganization that we're doing is basically to remain reliable in the delivery of what we have done to our clients, to our shareholder and to everybody else for this matter.
The following question is from Mr. Guillaume Delaby, Societe Generale.
Two questions for me, one for Douglas and the second one for Philippe, so no one from Bruno Chabas. First question regarding the legacy issues, I missed what Douglas said regarding how much still has to be paid in 2018, so this will be my first question. And maybe after the answer I will ask my second one.
Okay. Good morning, Guillaume. So, yes, just to help with the so-called legacy issues. I think we paid the DOJ in 2017, so that's gone. As I mentioned, we've provided for pavement we need to make from the overall $280 million Yme cash. I think we've given you all the elements there. So, yes, we have $125 million as an exceptional item. When you look at the annual report you'll see that we included an amount of $17 million for Yme in gross margin offsetting some of the cost that we spent this year, so that gives you $146 million overall. And then you can figure out the difference relative to the overall amount. Then we'll need to make the payment to our partners for Turritella if you want to call that a legacy issue from 2017, and that was $80 million.
So the question for Philippe is regarding what's going on in Brazil with flexible pipes. There has been a lot of, I would say, bad news really or bad noise regarding flexible pipes. In 2017 one of them has been specifically to see [indiscernible] but also there are news that basically flexible pipes has to be changed roughly every two years. What is your takeaway of the situation and do you see it as a possible risk for you going forward?
Thanks, Guillaume. Before I answer and in order to clarify what is the matter we have to indicate that the sequencing of the connection of the riser is particular to Brazil and thanks to the high productivity of the well we are connecting the FPSO Liza by Liza. And so that means as well that we have the permanent equipment, Liza pulling system installed and the crews that are used to do that operation which is a normal operation. The other thing I want to indicate because you mentioned fixable Liza, we have as well on our FPSO rigid Liza, so we used to pool rigid and fixable Liza. And to come with the good news, there is nothing such as a two-years campaign in replacement of the Liza as far as we know.
The next question is from [indiscernible] KBC Securities.
I just have one question on SBM's current financial balance sheet capacity and engineering capacity of taking our new FPSO projects. So how many new FPSOs goods and works SBM take on simultaneously?
Yes, so thank you for the question. It's actually you're right to point out both the constraints on engineering, product management and financial and that's what we're looking at when we look at taking a new project. One additional constraint that you need to take into consideration is the type of project that we're doing. It's quite different to build an FPSO to SBM standout compared to the standout of the client. Some of the clients will require much more manpower, much more engineering time and basically reduce the capacity of the company in order to deliver those. So assuming that we can deliver the FPSO based on SBM standout, based on Fast4Ward we basically have a capacity which fluctuates between 2 to 3 new FPSO per year. Douglas, do you want to add something?
Just to add something on what Bruno mentioned, I mean you mentioned the financial aspect as well and we have a very clear process in place where at each stage we decide to bid or accept an award. We're looking forward at various scenarios modeling our liquidity and cash flow to make sure that we have the means to manage those.
And would you have an idea on, for example, a Modec in terms of their balance sheet, how many FPSOs they could take on. Is there an estimate or a guess from your side?
Absolutely no idea, and if you ask we would be willing to get your feedback on that matter.
Next question is from Mr. Wim Gille, ABN AMRO.
I'm Wim Gille. I've got two questions. First of all on the new financing platform that you mention. Can you give us a feeling about just kind of the timeframe when you would like to have this completed and is this purely kind of a legal separation or is it's really something that kind of is capable of generating a funding vehicle for SBM as of the get-go, and can also third-party investors predominantly people investing in public shares access this funding vehicle for you. In relation to that you mentioned that the conditions are not optimal for an MLP at the moment. Are those conditions SBM-specific, i.e. to do with the litigation issues that you still in Brazil or do you view the overall conditions on the MLP markets supportable at this point in time? And then the last question would be on IFRS 16, just to be completely clear. Is it true or do you intend to say that your guidance would be $750 million excluding the IFRS 16 impact and $785 million including the IFRS impact and given the fact that in directional you already treat everything as operational lease anyway. Why would it kind of have an impact on directional at all?
Okay. Yes, thanks for the questions, Wim. So we'll take them one by one. On the funding platform, so this is really about preparing for the future and it's something that we are going to be working toward to put in place during 2018. It is not to be very clear any kind of business separation, that's not what we're thinking to achieve as you mentioned, it's about a funding vehicle that will allow us to access a variety of different types of funding over and above the structures we already use. That could include accessing an MLP which is obviously available to people publicly, could be private investors, potentially even it could involve, it could involve issuing debt, so just really about giving us flexibility, more tools in our kit on the financing front.
On the MLP a couple of things, I'd say they're all market related, the first market related is the MLP market itself. We don't see yields where we would like them to be and I think there's also a consideration around liquidity in the overall MLP market that we want to look at. The other part that's market-related would be I think if we launched hypothetically an MLP I'd like to see more of a runway on future projects. Obviously we got a good backlog to underpin any type of transaction, but we'd be looking to see more forward-looking momentum. You asked about IFRS 16. So, yes, I can confirm the around $750 million excludes the impact there, so, yes, you're at $35 million I mentioned, that gets you to around $785 million if you want to include the IFRS 16. I think when it comes to looking forward next year we'll just assume that this impact is part of our underlying, so but just to make the kind of the bridge we're excluding it from the - from the guidance for this year.
And then, yes, the operating lease approach we take only regarding the lease fleet so it's only when we are - but so - but in this case we are a lessee, so we have a number of things like buildings, installation, vessels, which we are the lessee and operating lease spaces. So they are going to be converted [indiscernible] financing leases [indiscernible] removed from the operating expense, the financing expenses. That results in EBITDA going up.
And then one more thing on the Liza outlook. I mean, on the one hand you mention that Liza is not included in the backlog but obviously we have two things, we have $200 million in backlog in turnkey and $600 million in guidance. On the other hand you do say that the best case is that you will sell part of the Liza FPSO this year.
And that you as a consequence will book margin in 2018. So how should I read all this? Liza is not included in our turnkey backlog but it is included in the outlook?
Correct. That's right, yes. And if and when the transaction happens then we'll adjust the various pieces in the backlog accordingly.
The following question is from Mr. Martijn den Drijver from NIBC.
Martijn den Drijver
I have a question with regards to the Petrobras tender bidding rules. I understand from Petrobras they are - that they were contemplating or they are contemplating making a change in those particular tender and bidding rules that would allow SBM to not only bid for contracts but actually win them. Could you provide your own comments on what I just said? That's one. The second one is there's been some input cost deflation, so I was wondering if you could help us out with some CapEx guidance for 2018-2019 for turnkey? And the third one, if you could help me out with the - to quantify if you can the closeout contract provision tailwind that you got that you received in 2018, excuse me, 2017 EBITDA?
Okay. So I would ask Douglas to address the two last question. Let me take your first question with regard to the Petrobras tender. What I can say at this stage is that we're doing a good job for Petrobras. It's highlighted in the performance of our fleet, it's highlighted in the performance of our Generation 3 FPSO producing over there and the overall production profile that we've seen in our fleet but also in the result of Petrobras. That's the first point.
The second point is that the Fast4Ward investment that we have done and the concept held - but the overall concept there would be of a huge benefit to develop the oil province in Brazil, in particular for Petrobras. Also we have done a lot of local content in Brazil and we have done this on the realizable manner. If we look at the performance that we have had on commissioning of FPSO, CDM and CDS in Brazil, the record time which has been in order to develop those FPSO and the competitive cuts that we have done I think it's pretty relevant to the Brazilian economy and in particular in the period where there is going to be election and where people are wondering if there is job in the future. So what I'm saying, in not so many words, we're providing good service to Petrobras. We have a product which is really will add huge amount of value to Petrobras and furthermore that the local [indiscernible] that we have done over there can be done a competitive manner and a reliable manner.
Now our policy in Brazil has been extremely clear, is until either we close the Leniency Agreement or Petrobras is changing their tending rules we're not going to tender project for Petrobras. Now if you're telling me that Petrobras is changing their tendering rules, okay, I'm not aware of it, but if you're telling me that they're going to do that and that we're going to be allowed to win projects, we're going to consider this at this stage and if it's really the case we're going to stick with the policy that we have put in place.
Okay, then Martijn, good morning. On your other questions, CapEx we're not giving precise guidance on - the major CapEx item this year though will be Liza. I think we've given a lot of - there is quite a lot of information about the size of the vessel, you know the debt number $720 million we disclosed at the end of last year. And then as I mentioned, assume partnering around 50-50 basis. And I think that gives you the elements to take a decent view on that. Then you were asking about if I understood correctly where we ended up on the payables in working capital for last year?
Martijn den Drijver
No, that's actually not the case.
I'm sorry, okay. Can you just clarify your question then, sorry"?
Martijn den Drijver
Sure, Douglas. You mentioned, which is normal for SBM that there were some - there was some benefit from the closeout of the contract provisions.
I'm sorry, yes, okay.
Martijn den Drijver
Yes, and that also has obviously helped you in terms of your EBITDA, I was just wondering if you could quantify, provide a bit more granularity on that.
Yes. I mean not the details. I mean obviously I said we ended up at 90, around 90 on turnkey and implicit guidance was 150 for the year, but the difference is explained by a number of factors. So the closeout of the project is one, there was a bit more FEED activity than expected. Then, as I mentioned, I think we actually did a pretty good job on what I would call controlling the overheads. So it's a combination of all of those factors.
Our next question is from Mr. Andre Mulder, Kepler.
Number of questions. Firstly, you talked about this IFRS impact being around to $35 million, how does that relate to, for example, the $16 million in operating lease expenses that you recorded in 2016? What's the difference there? Secondly, it seems that most companies are now going for a slightly negative impact on the bottom line, would you agree with that?
So on your first question, I think we see a neutral impact on the - sorry, the second question, a neutral impact on the bottom line. I'm afraid I don't have the kind of reconciliation with the IFRS off the top of my head right now to say the impact is going to be $35 million increase in EBITDA, but then you see the other opposite effect going underneath the EBITDA. And, yes, maybe on the details of reconciliation you can follow up with the IR team later on.
Then on Encosa, any statement on that one? I think that was still open with contract ending at the end of October '18?
Yes. So on Encosa I think it's, the way we see it is the option is not going to be pronounced by the customer so there we have various options which means it could have potential sell of the unit or the mobilization, that's where we are.
Then the last question on Fast4Ward, I think I missed the statement there, would a floater with a Fast4Ward hill also be able to be short to clients or would you prefer that as the proprietary technology?
So the answer and ambiguously we are ready to sell the full FPSO as well as leasing which is our traditional model or anything in between which means because we trust this is a good solution to [indiscernible] short period for the customer.
We have a question from Mr. Quirijn Mulder of ING.
Two additional questions from me. One is on for Bruno. So you are quite positive on, let me say, the experience of SBM and the history, et cetera. So have you a good explanation why you missed out on Coral South given the fact that there is also an important turret there, so maybe you can give an explanation there. And my second question is on about the Paenal - about Paenal. It's now zero on the book, so what is the - what are still the operational costs there and what is - what are the considerations to close this yard given the fact that your activity in Angola is relatively low with regard to building new FPSOs?
So good question. And Philippe would take the Paenal question and maybe we would expand on the turret one. The [indiscernible] on the turret one is out of nine last turrets in the world SBM [indiscernible] eight and we have lost the call one. What I can say also is that all the turrets that we have built throughout the world and over the years, none of them have had any operating issues and the clients are looking at this when they look at the operation. When you have an operating issue on the turret, it creates a lot of disruption in the way you operate, it creates a lot of additional costs, it creates a lot of modification and I believe there is a case like this happening presently in Western Africa. And basically when you look at the evaluation of the contractor you need to take all those points into consideration. Now I cannot tell you how people do their evaluation on the bids but everybody [indiscernible].
Now thank you for your question. To come back just for one second on Coral. It's not so much that we are not awarded the turret, but that the consortium we were part of didn't get awarded the full FLNG. So - and like on the projects such as Johan Castberg where the strategy of Prelude was to somehow segregate and look very closely to the turret contract. From the end customer's point of view it was treated somehow differently by the operator. Now on Paenal, I think one thing that we've been seeing in the period in Angola is revival of interest of the international company into the country with the appetite and but [indiscernible] this is primarily on paybacks and I think it's going to be bad news for us because we have existing FPSOs. So maybe there will be further opportunity for payback for those units. I want to stress that somehow in Angola we are [indiscernible] we are doing fine jobs to optimize the production on that particular field. It's a bit early days to say that there will be further greenfields. That might require further exploration. But we still believe that this is the market we have to look at.
We have another question from Mr. Wim Gille from ABN AMRO.
On IFRS 16 again, you mentioned the impact on the EBITDA, what is going to be the impact on the net debt number going into 2018? And then I have another question on the issues in Brazil. You mentioned obviously very clearly that you're looking to have a deal with everybody involved. In addition to that, you also mentioned that you are not going to change your position about tendering unless you either have a view in place or that Petrobras changes their tender rules. But just to be completely clear, according to the current tender rules of Petrobras do you need a deal with the MPF in the Fifth Chamber or can you do a deal with everybody else excluding the MPF and the Fifth Chamber and still be able to get awards from Petrobras again?
Okay. So the first question on IFRS 16, the impact on debt, the answer is...
The answer is $150 million increase.
So $150 million.
The situation in Brazil, Erik, why don't you take this and give more flesh to it.
Yes, happy to. Thank you. It's fair to say that the complexity has increased in the late December developments and it's a little bit complicated because we had six parties or institutions involved and now potentially we have seven because if we now look at an MPF agreement there is Fifth Chamber approval but also we would seek a clarification from the court that there would be no prosecution. The key of what we do in our strategy there is that we are willing to get into leniency as we have always said but not want to be phased with new initiatives on the same matter thereafter. You may have witnessed some other international companies that have done global settlements, then later on then prosecuted or been asked for more money by other authorities and that is what we try to avoid. Is this the answer to your question?
Sort of. And just to be clear, the $150 million in IFRS that's based on directional numbers, right?
Yes, it's actually the same, but yes.
We have another question from Mr. Andre Mulder, Kepler. Go ahead, your line is open.
Thank you. Question has been answered.
Wonderful. We love this question.
We have no further questions, sir, please continue.
Okay, so thank you very much for your attention and the question and your interest. We wish you a good rest of the day and you can now resume your normal activity. Thank you very much.
Ladies and gentlemen, this concludes the SBM Offshore Full Year 2017 Earnings Update Analyst Webcast. Thank you for attending. You can disconnect your line now.