Eneti Inc.

Hello, and welcome to the Annette Inc. First Quarter 2023 Conference Call. I would now like to turn this call over to James Doyle, Head of Corporate Development and Investor Relations. Please, go ahead, sir.

Thank you for joining us today. Welcome to the Annette Inc. First Quarter 2023 Earnings Conference Call. On the call with me are Emanuele Oro, Chief Executive Officer, Robert Bugbee, President, Cameron Mackey, Chief Operating Officer, Hugh Baker, Chief Financial Officer, Sebastian Brook, Chief Operating Officer of CJEX. Earlier today, we issued our first quarter earnings press release, which is available on our website at nettyinc.com. The information discussed on this call is based on information as of today, April 27, 2023, and may contain forward-looking statements that involve risk and uncertainty. Actual results and events may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release issued today as well as Annette Inc.' 's SEC filings, which are available at annetteinc.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the Internet and is also being recorded for playback purposes. The archive of the webcast will be made available on the investor relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at NNE.com and on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. Now, I'd like to turn the call over and introduce our Chief Executive Officer, Emmanuel Alora.

Thank you, James, and welcome, and thank you for joining us today to all. In the first quarter, the company generated $13.8 million of revenue and a loss of $17.6 million. Our business is seasonal, and we optimized the seasonality in the first quarter to perform necessary maintenance of the fleet ahead of what's going to be a busy reminder of the year. Looking forward, revenue is expected to increase throughout the year as our vessels begin employment on several contracts. Our two largest assets, Scylla and Zaraton, are contracted for the remainder of the year, and there is availability for additional employment on the NG2500s, which we're currently working on. We are now starting to actively market for sale the NG2500s, whilst we are benefiting from higher day rates on these assets. Until now, We had openly said that we thought these were non-core assets to our fleets. More or less a year into this statement, the market has favorably developed, both on the rate and utilization side. And as I just mentioned, we have decided to actively market the vessels for sale going forward. The outlook for WCID is continuously strengthened, and we are optimistic about the opportunities for the existing fleets, as well as the immediate ones. Significant demand for offshore wind and constraints in the WTI supply create tremendous potential for increasing day rates, increasing cash flows, and increasing returns. We have announced last week our MOU with Transocean to engage in offshore wind foundation installation services. This potential venture combines an active experience through CJEX of installing over 500 foundation components in Europe and in Asia. Together, we transitioned 300-plus rig years of experience in offshore drilling and conversions. There is no equity requirement from ENETI, and we are excited about working with a best-in-class operator and owner in the offshore industry. Much of the progress we are making has yet to be realized, but it will benefit the company in the coming years. and we are excited to capitalize on these opportunities and the good news ahead, as well as our role in the transition to a cleaner and more sustainable future. Thank you all for your support, and I will now turn the call to Sebastian. Sebastian, please. Thank you, Emanuele. Slide seven, please. Just to introduce myself, I'm Sebastian Burt, the COO and one of the founders of CJAX. which has been installing wind turbines for top-tier clients since 2009. And we're the operating platform of Enetti. And we're responsible for operating and contracting the fleet of five Sea Jack vessels that are currently on the water and the two next-generation new-build installation vessels, which are scheduled for delivery in the second half of 2024 and the first half of 2025, respectively. We've been building backlog over the past two years, and you can see from the chart on the bottom left, We've not only been successful in building backlogs, but also in increasing revenue through extensions of contracts beyond their original contractual duration. It was a very busy 2022 for Seagate, so we've used any idle time in Q1 to perform necessary maintenance on the fleet and to mobilize and reposition equipment for our contractual commitments in 2023. During the first quarter, Cilla transited from Asia to Europe, and after undergoing maintenance and preparation for her contract with Van Orde, is now on hire. As of today, she's installed three wind turbines at Herlandi Coast West Wind Farm. During the first quarter, Zaratan completed maintenance at ST Marine in Singapore and finalized mobilization for the themed turbine installation campaign at the Yunlin Wind Farm located offshore Taiwan. All three MG2500s will begin work in this quarter. The buyer finished current wind contracts and performing hookup and commissioning services of an offshore wind substation for a leading developer in Northwest Europe, Cracking is currently on contract performing repairs and maintenance at an offshore wind farm offshore France, and Hydra is facilitating decommissioning of oil and gas infrastructure in the southern North Sea. There are also numerous conversations with clients that could lead to additional employment in 2023. If you recall a few years ago, there were six vessels similar to the or the NG2500 class operating in the North Sea, but today there are only four, which has affected the reduction in supply by a third. We were optimistic that rates and utilization for these vessels would increase, and I'm pleased to report that they have. With regards to the NG2500 demand, we're seeing increased demand in all areas, all core markets, as the smaller turbines approach 10 years in the water and require increasing levels of maintenance. The number of substations requiring hookup, commissioning, and maintenance in the North Sea continues to increase in line with installed capacity, and the energy crisis has prompted utilities and operators to maintain the critical gas infrastructure in the region. Slide eight, please. Offshore wind is a growth industry, and while analysts may have differing views on exactly what the growth rate is, they are all agreed that growth is robust and any revisions to forecasts tend to be up rather than flat or down. This will lead to increasing demand for our insulation vessels and create a favorable rate environment for our services. While the turbine installation work is a critical part of the offshore wind supply chain, it represents a relatively small portion of the overall cost for developers, around 2% of the total spend. So we do not believe that increases in vessel rates will jeopardize the overall viability of wind farms. Slide nine, please. As you can see from the graph, the WTIB market is forecasted to be undersupplied through the end of the decade. These fundamentals will provide opportunities not only to Annette and Siren, but also for Zilla and Zaratan. Annette's new building, Siren and Annette, are scheduled to deliver in the second half of 2024 and first half of 2025 respectively. We had previously announced the initial employment contract for Annette, which is expected to be between 226 and 276 days. and generate approximately 60 to 73 million of net revenue after forecasted project costs. This would equate to a day rate of €260,000 per day after project costs, which reflects the value, capability, and flexibility that our next-generation new vital assets provide our customers. We've not yet announced a contract for Siren, but continue to work towards securing her maiden contract. For these new buildings, we continue to focus on finding the right contracts and high-capital vessels that will enable us to generate the most attractive returns for our shareholders. Contracting activity is high, and we continue to see high levels of interest across our fleet. We work across all geographies, with inquiries running from 2024 to the end of the decade, as clients look to secure capacity early in a market that is predicted to have a shortage of vessels as we move into the second half of this decade. We're in advanced discussions with clients about future work and are looking forward to announcing these to the market once finalized. With that, I'm going to hand over to James Doyle.

Thank you, Sebastian. Slide 11, please. Third quarter revenue was $13.8 million, a decrease from the fourth quarter as the fleet optimized off-hire time to perform necessary maintenance after a busy 2022 campaign. Quarter over quarter, Daily vessel operating expenses declined for Scylla and Veritan, and we're slightly higher for the NG2500. The safety of our seafarers, reliable operations, and delivering high-quality service to our clients remain our top priorities, but we are always working to manage costs as efficiently as possible. And we expect a further decline in operating costs in the second quarter and would recommend using $45,000 per day for the Scylla and Veritan and $25,000 per day for the NG2500. Last quarter, we anticipated $16.1 million in project costs for the full year 2023, and as of today, expect $13.6 million for the year. The difference is primarily due to fuel savings from lower bunker prices, specifically on Scylla's repositioning voyage from Asia to Europe. Specifically to Q1, we benefited from the timing of certain project costs, which were expected to occur in the first quarter and have moved to subsequent quarters. Slide 12, please. To date, we have paid almost $100 million of installment payments on our new builds, and as previously announced, we have received an underwritten proposal for $436 million to finance our new builds, which we are focusing on finalizing. As new building finance, the company has 120.3 million in remaining CapEx for its new building program. To the right, you can see our CapEx schedule for our two new building vessels. Slide 13, please. As Sebastian mentioned, the initial contract on our first new build, Messi, is at €250,000 per day, or $280,000 per day. And as you can see from the sensitivity chart, assuming 85% utilization, this would translate to 70.4 million in EBITDA or a 21% cash on cash return. This day rate confirms our thesis, increased demand for offshore wind and constraints in the supply chain, which have the potential for a higher rate environment. And with that, I'd like to turn it over to Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Thank you. Our first question comes from Ben Nolan from Stifel. Ben, please go ahead.

Thank you. So I was going to – I have a couple. Hopefully that's okay. The first relates – I was hoping that maybe you could give a little bit more color as it relates to the trans-ocean JV. I know that you'd mentioned there was no equity requirement. Is this – As you envision it, is this just sort of a services-provided sort of thing, or in the end of the day, I mean, will you have some capital invested in this? Just curious if you can kind of flesh out how you envision it playing out to the extent that it moves into a formal agreement.

Hey, Ben. Emanuele here. I'll start, and then my colleagues can add. It's not that we wanted to be cagey, it's just that we have started this cooperation, which we've been discussing for a number of months with TransOcean. At this stage, it's difficult for us to detail more than what we said, because we are working on putting together a joint venture, and this is why we have started from the MOU. as I said, not wanting to take things away, but I wouldn't know what to say more than what we've said already. So it is, yes, it is services potentially, and then see what the opportunity will bring. For the time being, that's what we have. I'm not sure if Sebastian or anybody else has anything to add to this. No, I think that man really summed it up. It's It's a very good combination of, like Manuel said before, kind of first-in-class floating foundation vessel operator or floating vessel operator and us with our previous transport and installation activities. And there are no obligations to provide equity in any deal, but there will be lots of open doors in the future as and when we get a contract.

Okay. I appreciate it. be watching for that. My second question relates to if you could maybe speak to the contracting market. I mean, obviously, we've seen even recently with some of your competitors, contracts where the day rates are consistently moving higher. And one of the things that I think often happens in markets where day rates are moving higher is that you begin to see contract durations lengthen. I'm curious if you're seeing that at all. Is there any potential for the new build that it's, you know, you might possibly be able to get something that is longer than the traditional, you know, whatever, nine to 12-month duration?

Great question. I think that there's no doubt that the trend is towards longer contracts. It's just difficult to guess when those will hit. And it's driven by just the tightness of supply. The more we speak to our clients, the more that they are concerned about availability of vessels. And there have been discussions about longer-term commitments, which won't be securing tonnage on a project-by-project basis, but more more to be able to execute a pipeline of projects. So without being more specific than that, you're absolutely right. The fair observation, the market tightens. We're going from short-term contracts to longer-term contracts. And I think from a contracting perspective, we're all aware of the benefits that brings. But the overriding message for me is that it's a tightening market, and that is going to help improve over time utilization rates and the general contracting environment.

Okay. Okay. All right. Well, I appreciate it. I'll turn it over. Thank you.

Thank you. Our next question comes from Vikram Bagri from Citi. Vikram, please go ahead. Vikram, are you muted?

I apologize for that. Good morning, everyone. I understand the secrecy around the potential JV with transition, but I was wondering if you can frame the timeline for this JV. How much time will you guys spend on looking for market potential and getting indications of interest from your customers? When the JV could come into force? And I believe it will take about 36 months after that to repurpose the vessel. If you can just, like, you know, expand on the signposts we should look at to frame the timeline for this year?

Yeah, sure. Sebastian here. So just from my perspective, the joy of the agreement is that there aren't actually any milestones. So it's, you know, we're currently speaking to all of the major clients and based on their response or an acceptance from any of these developers, then we'll move on from there. So it's very difficult to say that the floating foundation market is as tight or tighter than the turbine installation market. So our clients are very motivated to engage in those discussions and progress them as soon as possible. But again, it's very difficult to answer. I'm not, again, using Emanuele's words, not trying to be cagey, but it really is. a kind of sequential process there. So we start with the MOU, then we work out what the specific requirements are from the clients. Once they're in a position to give us what we want, then we'll split the scope, and then we'll see what opportunities arise from there. So again, it's just a sequential process, so difficult to give a firm timeline.

Understood. And then on the existing assets, can you talk about the M&A landscape and potential for M&A, you know, related to your 2,500 vessels, Does it make sense to, you know, if the market is robust to, you know, sell those vessels and focus on the key assets? How do you see the M&A landscape today?

Robert, do you want to take it or should I? Thanks for the question. So you're referring specifically to the 2,500s on the M&A front or in general? Sorry. 2,500s in specific. Okay. On the 2,500s, there are a number of operators, mainly Middle Eastern players, that given the tightening of the oil and gas markets and the amount of money invested in the area are actually looking at these vessels. You know, we haven't been focusing, to tell you the truth, on potential M&A transactions on the 2500. So it's a little bit difficult for me to tell you whether we would consider looking at business combination or using these assets for a potential entry into M&A. and other, or specifically the oil and gas. I do not think so, though. I think that the beauty of, and the reason why we would consider these assets to be non-core is actually because we want to keep the clean, renewable side for NFE and CJEX, and this is the reason why we will be looking at divesting from these vessels. So on the $2,500, I I'm sorry to not be giving you an exciting answer, but I do not see much M&A activity possible there. I think a straight sale is what we would pursue.

Great. And then finally on housekeeping, I saw the SCNA dollars went down sequentially. Can you talk about what the drivers were and if this is going to be the run rate or there were some one-time items in first quarter or fourth quarter that led to the decline in GNA dollars?

We would expect that GNA remains similar to prior quarters, somewhere in between this quarter and previous quarters.

Thank you. That's all I have. Thank you.

Our next question comes from Liam Burke from B Reilly. Liam, please go ahead.

Thank you. Sebastian, you mentioned in your prepared comments that there's a lot more interest in the smaller vessels, the NG-25 hundreds. Is that more interest on the oil and gas side, or are you seeing a heavier interest in the offshore turbine maintenance?

To be honest, it's kind of across the board. Like I said in that piece, if you look at what they're doing at the moment, you've got one which is hookup and commissioning of an offshore substation. You've got one which is doing some maintenance work on transition pieces in France. And then you've got one vessel that's focused on the decommissioning of an oil and gas market in the Southern North Sea. I think that actually the trend will be towards just increased maintenance as the installed capacity gets older. And there's also a big backlog of substations going in between now and the end of the decade, which are planned and will go ahead. So So there's a split there, difficult to guess. And I expect that mix to carry on for the foreseeable future.

Great, thank you. And on the new builds, you announced one contract for the first new build. Can you get any sense as to the degree of interest for additional contracts on the first or any interest on the second?

Yeah, I mean, I've got to say that it is, from a contractor's point of view, it's a great market to be in. You know, we had a number of years, three to five, six years ago, which were, as I said before, but, you know, it's a very European-centric market. It was very competitive. And now just all of the fundamentals have changed. So there is very high interest in both vessels. We're talking to people about contracts throughout the end of the decade. You know, we're talking about multi-year, potentially multi-year maintenance contracts going forward. Everything is geared towards growth and, you know, kind of exciting years ahead. So we have a lot of interest both on Nessie and Siren. And as we said before, we're really focused on finding the right contracts for those vessels, the contracts that we think give our clients, you know, the capabilities they require. So, for instance, like the Changhua contract in Taiwan, and the reason they're doing that is because it's easy for them to justify a rate if it's being used to its greatest capacity. It's easy for them to justify a rate that gives us an attractive return to our shareholders. So we haven't changed our philosophy. We're not waiting to be the last taxi cab on the rank. We're just really focused on finding the right contracts for those vessels. The activity is very high, very, very high. Great. Thank you, Sebastian.

Our next question comes from Rold Harvinson from Clarkson Securities. Rold, please go ahead. Hi.

Thanks for taking my questions. So, first, I want to touch a bit upon the drill ship conversions. So, looking back at history conversions of older vessels, could entail some risk of cost and time over rent. And I know it's still very early, but can you elaborate a bit on how you're working with TransOcean and Potential Yards in these early stages to mitigate this risk?

Sure. So it's early days in the MOU, so we're trying to, before we get into that, we need to work out what the specific opportunity is, what the timing is, the has Electrons Ocean speak themselves, but they've done a lot of investigation into shipyards and pricing, what have you. And the joy of having them as a partner, to be really honest, is that they have built so many highly complex and eighth generation or seventh generation drill ships. And I don't see the shipyard portion as creating as much of an issue for them or even any issue, given their experience, compared to people who are doing a one-off or aren't familiar with that market or what have you. So I totally take the point that historically, if you're taking a very old hull and converting it, primarily people do that into drill ships rather than from drilling into construction. So I'd far rather be doing it from drilling to construction than going from construction to drilling, if you see what I mean. So it's the right way around with the right partner, and I think that that that risk is mitigated by those measures.

And on, again, I guess it's early, but on operational efficiency of a converted drill ship compared to a specialized new build, how are you thinking around that?

All I'm thinking is it's going to be one of the most capable vessels in the market. So I think it will speak for itself.

Okay, thank you, and that's it for me.

We have a question from Adam Forsyth from Long Spur Capital. Adam, please go ahead.

Good morning. Just a slightly general one for me. Just obviously the Inflation Reduction Act is bringing a lot of interest in demand in the U.S., and I just wonder where your thinking is around that, particularly given your previous relationship with Dominion and And I think I'm right in saying your decision not to go ahead with the Jones Act vessel about a year ago. Has your thinking changed in any way in just how you see that going forward? Thanks.

I think that we keep a close eye on the American market. I think that we've already got a toehold in there. As you referenced, it's not been a toehold. We've been looking at it for seven years, seven or eight years. We've got a relationship through Dominion. We are very close to the dynamics in the U.S. market, and that allows us to keep assessing it for opportunities, you know, and as and when the right opportunity comes up, you know, we'll look at developing it. But we're in it. We're close enough to it to understand it. And like I said, I think that's important so that you can assess the opportunities as and when they come along. Yeah. Thanks very much.

Thank you.

And this concludes our question and answer session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

Thank you. We don't have any closing remarks. I appreciate everybody's time and look forward to speaking with you all in the next few days or weeks. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.