Saipem SpA (SAPMF) CEO Francesco Caio on Q2 2021 Results – Earnings Call Transcript

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Saipem SpA (SAPMF) CEO Francesco Caio on Q2 2021 Results – Earnings Call Transcript
Saipem SpA (SAPMF) CEO Francesco Caio on Q2 2021 Results – Earnings Call Transcript

Africa-PressMozambique. Saipem SpA (OTCPK:SAPMF) Q2 2021 Earnings Conference Call July 30, 2021 3:00 AM ET

Company Participants

Francesco Caio – CEO, GM

Antonio Paccioretti – CFO

Max Cominelli – Head of IR

Maurizio Coratella – COO, On-shore E&C

Conference Call Participants

Alessandro Pozzi – Mediobanca

Sasikanth Chilukuru – Morgan Stanley

Nick Konstantakis – Exane

Kevin Roger – Kepler

Mark Wilson – Jefferies

Vlad Sergievskii – Bank of America

Michael Alsford – Citigroup

Francesco Caio

Good morning, and thank you all for joining us. I’m here today with our CFO, Antonio Paccioretti and my colleagues divisional CEOs together with the IR team. Before we get into the details of the numbers and the presentation, let me say that clearly, although challenging events have impacted our numbers as you’re seeing, I strongly believe that none of those undermines Saipem structural strength. In Q2, simultaneously COVID affected the execution of our projects, slowing the progress some of those was increasing costs. Our largest LNG project in Mozambique was suspended. And a technical issue in one specific offshore wind project had material consequences on our EBITDA.

Now, none of that, however, changes the fundamental strength of our company but the resilience, the width and breadth of our competencies and the wealth of well-established relationship with key clients. And it is actually on this trend that I intend to build a more competitive Saipem. And to that end, we’ve launched a strategic review where we’re about to put together a new plan that we intent to present in autumn in a Capital Market Day. But we’ve also launched a program to reduce operating leverage through streamlining of operations and processes. And for the time being, we’ve identified 84 initiatives that will yield when fully implemented above €100 million in savings and we will get back as things progress.

But as I look forward, I see three concrete sources of growth that Saipem is well-positioned to capture. First and foremost, the new investment cycle and traditional systems and value chains the ones that you can call our core business and we’ve seen already evidence of that very concrete evidence of that in our drilling fleet engagements particularly in regions where we have well-established presence namely the Middle East.

Secondly, we look at energy transition as a source of growth. Energy transition, drive investment in new plants, and new infrastructure that Saipem is already building in renewables, in biofuels, in CO2 capture. And actually, we’re working on our technology portfolio to widen it through acquisitions such as the one we’ve announced in May for Naval Energies in floating wind and through joint ventures also with more tech driven companies in green hydrogen production or with larger company like Versalis for bioethanol.

And finally but by all means least is our home market Italy where as you know we see National Recovery and Resilience Plan coming to unleash a substantial wave of new investment in growing sustainable energy infrastructure but also in high speed rails where as you know Saipem has a very strong track record, is effectively competing as we speak.

So, with that frame of mind, with that contextual comments, I will handed it over to Antonio, that who will take us through the details of our results. Thank you.

Antonio Paccioretti

Thank you, Francesco. And good morning, everyone from me as well. Business involvement in the first half was still conditioned by pandemic which reflected on our business causing certain project execution delays and cost overruns. Our reference market and consequently our project acquisitions in the last 12 month in particular in E&C Offshore were not sufficient to cover higher awareness and internal fixed costs. The third sector of the pandemic in our numbers was debt. We are seeing very indirect cost not allocated the project. In a challenging business environment, in the first half we also had two specific issues. One was related to the execution challenges in a specific of four offshore wind projects and the other being as you can imagine, the Mozambique project suspension.

Revenues decreased by 13% also due to unfavorable comparison with the first quarter last year was not fully impacted yet by CapEx cuts from our clients. As a result, on the revenue just explained, adjusted EBITDA was negative. However, we also saw some positive developments. Firstly, our commercial activity brought good rewards. Order intake was €4.4 billion, which led to a book-to-bill ratio or 1.4 times in the first half.

Of the E&C order intake was not oil — 85% of the E&C order intake was not oil. Total backlog as a result was €26.6 billion in the appendix, you will find the user slides with a list of rewards of our backlog composition also shown by year of execution. Secondly, despite weak operational performance, cash flow was under control resulting in a net debt of €1.4 billion lower than the end of March. The third positive is that our offshore drilling fleet is almost fully under contract showing positive signs of recovery. This is historically a leading indicator of new investment cycle in the oil and gas that can lead to improvement also for the E&C. Drilling onshore is set to improve utilization by year-end. The main client in the Middle East has notified us that half of the suspended rigs are about to start operation again.

Moving on to financials in Slide 10. The decrease in revenues mainly came from the two E&C divisions which were the main contributors to over €600 million decrease year-on-year of adjusted EBITDA. In fact, E&C Offshore EBITDA decreased by €444 million with the single largest component being the offshore wind project in the North Sea. The soil conditional side are challenging and recently caused some technical issues. And we’re assessing the project, we move the expected extra cost for the remainder of the slide to the best of our current knowledge and assessment. Negotiations are ongoing with the client to move forward as we cannot share too many details.

We have concluded just few days ago the appraisal also on the basis of the expertise findings and taking into account the most recent and ongoing discussion with the client suppliers and our subcontractors. Let me remind you that from Q4 last year, revenues related to this project are no longer producing margin and so it will be for the residual life of the project.

The E&C Offshore EBITDA decrease was also caused by the presence in the first half 2020 or the projects in completion and reducing positive contribution upon finalization which were not substituted by senior volumes in the last 12 months. The third element is bottlenecks in fabrication at our yard in Far East closed by COVID-19 which caused logistic issues and people mobility constraints to us to our subcontractors and suppliers impacting some projects. The remainder of the project or the portfolio is progressing well.

On E&C Onshore, the year-on-year adjusted EBITDA decreased by €134 million. In Q2, Mozambique project contribution was lower since the bulk of revenues of the project in the quarter mainly came from reimbursement of suspension and security costs. The simple element also for E&C Onshore is the absence this year of high margin projects in completion during first half 2020 and not substituted by new ones. Third element is extra cost matured in project in the Middle East due to delays for restrictions related to COVID-19. Lastly, we have one-off items related to a legal case with the suppliers on an ongoing project and to some provision of receivables for a total amount of €55 million. The trend of adjusted EBITDA led to adjusted net loss of over €600 million in this semester.

Looking below EBITDA is Slide 11. D&A decreased by €64 million due to the termination of contract on a leased E&C vessel last year and 2020 impairment of offshore drilling gas. Lower financial expenses are due to the cost incurred in the first half 2020 for the bond buyback and to lower expenses this year for foreign exchange derivatives and leasing. For the full-year, we expect a lower figure than 2020. Result from investment were negative by €25 million due to the progress of one project. We expect this line to improve in the second half following the execution of the projects.

Taxes for the period were €60 million equally spread between corporate income taxes and with all these taxes applied to gross of revenues in the specific countries. The year-on-year decrease is due to the lower taxable income. We expect second half taxes to be brought in line with the first half. On minorities, we had no contribution from projects in entities with minority partners.

Let’s take a look at the special items in Slide 12. Special items in the first half were €123 million all at EBITDA level of which €36 million were embedded cash costs related to COVID-19 limited to the ones not reimbursed by clients. It is important to underline that the bulk of the effect of the overall group’s financials from pandemic such extra costs, delays in manufacturers and project progress are reflected on the project’s results and on our adjusted EBITDA.

Others for €87 million is the combination of provision for redundancy for per million and for litigation on a project already completed for €75 million. For the full-year, we expect COVID-19 costs close to €100 million as opposed to the €110 million in the full-year 2020. Bear in mind that this amount can vary according to the problems of pandemic in our countries of operations.

Let’s now look from Slide 13 the key operational drivers starting with the E&C Offshore. As I mentioned before, first half last year was only partially affected by the pandemic and this comment is actually valid for all the group. First half 2021, saw reduced activity in Middle East and North Africa compared to first half 2020 partially offset by higher volumes in America and Europe. I have already explained the drivers of the negative adjusted EBITDA but when we emphasize that the rest of the portfolio is progressing well. However, our operating leverage this leverage with our operating leverage this level of revenues falls short of covering fixed costs. As our CEO said, we are working to improve this.

Moving to E&C Onshore, revenues increased in the first half by around 4% year-on-year driven by Sub-Saharan Africa while Middle East recorded a decrease. Mozambique project in the first half recognized the Q2 suspension cost on irreversible basis. For both, utilization, direction condition replace to improve the operating performance in the second half even though in the highly uncertain pandemic context which is at the different stages in the different countries. In particular E&C should benefit from the contribution or recent awards in Qatar and Saudi Arabia.

In Slide 14, we share a few thoughts on offshore wind and on Mozambique. We are challenged by soil condition in a specific project which also resulted in some technical issue. Discussions are ongoing with the client to move forward. Other offshore wind projects in the portfolio are not entirely in technical methodologies like the North Sea project and do not pose similar challenges. We are investing in the floating wind market with proprietary technology recently strengthened with the acquisition of the technology from Naval Energy. In a nutshell, offshore wind remains an attractive opportunity for us.

On the Mozambique area one project, we are discussing the best way for work to preserve the value of the project, assessment of security risk at site, aiming at resuming the activity smoothly after operation suspension. Timing of restart is still uncertain and would be driven by clients programs. Residual backlog of this project at the end of June is around €3.6 billion. And this figure excludes potential contribution coming from future suspensions cost reimbursement which could increase the overall revenue profile of the project for its entire life. In the second half, revenues contribution on Mozambique should come from the suspension cost on reimbursable basis.

Let’s now move to the Drilling Offshore in Slide 15 with the fleet engagement. All vessels are under contract and the commercial activity showing signs of recovery. Our vessels utilization is ahead of the market for both shallow and deep water. As you know, the drilling fleet has been farther renewed and strengthened with the asset light approach, which is now covering a third of the vessels. We have recently added to the fleet the Santorini drilling drillship under these for two years with purchased option at Saipem’s discretion, and already contracted Eni for the Gulf of Mexico from November starting the new operation in early 2022. Santorini is a state-of-art seventh-generation drillship further enhancing the quality of our offshore. With our asset light approach, we will play the expected cyclical recovery.

Looking at Saipem 12000,12000 options for the farther activity in Mozambique beyond October has not been exercised and we are actively marketing the roster. We are confident that opportunities in the eastern — in the East African region could materialize soon. All-in-all, you can see from the light blue bars in the chart that we have successfully added new work for our deep water vessels Scarabeo 9, 8 and 5. The shallow water Jack-Up fleet is almost fully committed as well for the next two years with only one exception the elder unit Perro Negro 4.

Moving now to the drilling results in Slide 16 starting with the offshore. Revenue decreased in the first half by 10% year-on-year better than previously expected with Q2 significantly improving mainly due to Saipem 12000. In the first half, volumes decrease year-on-year for Saipem10000 in Perro Negro 8 partially offset by Scarabeo 8. Some vessels recovered rate while others had raised at lower levels as a long tail of the crisis. The EBITDA decrease is due to the operating leverage. EBITDA of the division in the second half of 2021 would be affected by maintenance activity. But the recent signals we have seen in the market which has increased our contractual engagements give us a very good visibility for 2022.

Moving on to drilling offshore, revenues decreased due to the lower activity in the Middle East has partly compensated by the year-on-year increase on volumes in LatAm. Adjusted EBITDA margins stayed in line with the first quarter at around 19%. Commercial outlook shows some positive signals of starting recovery, especially Middle East where we expanded to reach contracts for additional 05 and 10 years. From the second half, half of the suspended rigs are expected to gradually restart operation, in fact, we received notice of restart from for six of them in the Middle East.

30 rigs will be active during the third quarter and this should support a gradual improvement of results with a Q4 stronger than Q3. At year-end, utilization rates of the overall fleet are expected to be at around 50% of the 56 rigs excluding Venezuela. More details on the current recession are in appendix.

To wrap up on drilling, signals of recovery out there with fleet engagement on the rise. The positive commercial developments in drilling offshore are expected to bring results improvements from 2022, headcount for drilling onshore is recovered as we speak in the second half of this year. For the second half, we expect an EBITDA adjusted for both the division combined similar to the first half.

Let’s look at the evolution of our cash flow and net debt in Slide 17. The cash flow evolution is highlighted in the light blue shaded area. Despite the weak operation performance in some cash specialized in related COVID-19 costs, net cash flow from operation was neutral, thanks to the positive delta working capital supporting by the received for that month’s payment on the project that are now up and running and indeed the strict control of our cash flow — cash flows. Few words on CapEx, which were at €140 million in the first half. These are mostly related to vessel, ordinal maintenance ahead of upcoming engagements. At the end of June, we close with €1.1 billion net debt pre-IFRS 16 or €1.4 billion post-IFRS 16. This is lower than the end of March which was €1.45 billion.

Slide 18 shows the liquidity and the structure. I guess we’re quite familiar with this one. On the right hand of the slide, you can see the debt maturity profile well spread in banner with the first significant maturity in 2022. As you know, in March of this year, we issued a new €500 million bond due to 2028 which provided in pre-funding of the repayment dues in 2022. Gross group gross debt is therefore now around €3.4 billion with tenor above three years and an average cash cost of around 3%. Liquidity is always very strong and €3.3 billion in total including France a variable in the consolidated perimeter, cash in the joint ventures and the fully undrawn RCF of €1 billion.

Turning to Slide 20. Even if today, we do not expect issues like the ones that affected the specific projects in the first half as we commented earlier. National is still complex due to the pandemic, which is particularly severe in some of the countries where we operate. Anyway, we want to provide an indication on how we see the immediate future the second half of this year, while we progress in our strategic plan exercise, which will tend to present in autumn. In the second semester, we expect the revenues between €4.5 billion and €5 billion. Expected fleet plus renewables and project progress should lead to CapEx between €200 million and €300 million.

Business recovery should allow us to get back to a positive adjusted EBITDA in the second half. We expect an increase on net debt in Q3 versus Q2 driven by the progress of the projects, then followed by a decreasing in Quarter 4 in the last quarter supported by a positive working capital dynamic with a strict control of cash flows and strong focus on collection on receivables. As a result, we expect net debt post-IFRS 16 at the end of this year of around €1.6 billion. This outlook does not factor farther and possible material macro and business deterioration including the evolution of the pandemic.

With this, I will hand the floor back to Francesco.

Francesco Caio

Thank you, Antonio. With that we have completed our review of Q2 numbers. And obviously, myself, my colleagues and Antonio, we’re ready to answer your questions. We’re moving forward, moving forward to pursue the concrete growth opportunity for which we believe Saipem is very well-positioned. We’ll get back to the market in autumn to present our new strategic plan and provide you with an update on the other programs we’ve launched.

I now thank everybody for your patient attention. And can we now start the Q&A session? Thank you very much.

Question-and-Answer Session

Operator

Ladies and gentlemen, we now begin the question and answer session. [Operator Instructions] Our first question came from the line of Alessandro Pozzi from Mediobanca. Please go ahead. Your line is open.

Alessandro Pozzi

Hi there and good morning. I have a few questions. But first of all, I would like to congratulate Francesco and Antonio for the new positions, may be just wish it was under better circumstances but key-ups. So, the — I think the size of the losses is staggering this quarter. And I think is even more staggering, given that we were expecting a gradual recovery in the offshore E&C as per last update. So, I was wondering what has really changed since then. I mean, we knew COVID would have been a lingering issue but are you up fronting some of the costs that you’re expecting in the coming quarters?

And maybe can you give us a split of how much cost you have embedded in the adjusted EBITDA for COVID versus the project in the offshore in the North Sea, the renewal project in the North Sea. And again on that project again, that is been an issue for a few quarters. Are you seeing extra cost on top of what you were expecting in Q1? That’s my kind of first question at the moment.

Antonio Paccioretti

The answer is yes. First of all, we do have some special technical problems of Q1s for the project in North Sea and we had to recognize in the — at the end of June. The future costs that today we are in the position to evaluate in the range of €200 million, firstly. Secondly, we do have some project jeopardized by the problems of COVID that we have in particular in the yard we had in the Far East affecting few projects. Problem is that we couldn’t evaluate before see the fabrication we’re talking about also started in the — at the end of the first quarter.

Thirdly, as far as the other cost for the COVID, we recognize around €37 million in the first half, the expectation we have is to have such a cost close to €100 million at the end of this year. As far as the other the last important element, the last important element of this -– of the accounts at the end of June, which is Mozambique. Mozambique over the period represented for us in terms of revenues, the reimbursement of costs, therefore the contribution to the EBITDA was very negligible.

Alessandro Pozzi

Okay, thank you. And of course with such a depressed EBITDA, I think the mind goes to the covenants. So, do you expect covenants to be renegotiated, are you in talks with banks to do that for 2021? And also remaining on the net debt, I think the net debt was a positive kind of surprise, even more positive given the size of the EBITDA loss. So, that’s not having a cash impact at the moment but I was wondering at some point you will have a cash impact on the net debt. And can you quantify when this is going to be — are we talking about next few quarters or is going to be more in 2022 or 2023?

Antonio Paccioretti

The best expectation is that the cash effect will occur during the execution of the project. So, we are talking about in the following years. Execution of the project who’s timing is under negotiation under discussion with the client. As far as the covenant, yes. As you know, we do have some financial covenants. In particular, we do have a covenant in terms of net debt to EBITDA in with a pressure of 3.5 times.

Well, let me say that the covenant is calculated at post-IFRS 16 reported figures with some minor adjustments on EBITDA. And most important, the ratio is tested annually at the year-end. Having said that as described earlier, we do have a significant financial flexibility at around €3.3 billion in total, if you — if we also include, if we also consider the fully undrawn FCA for €1 million. So, I would say frankly speaking that leverage on this financial buffer we are in the position to start the — it could start the discussion with our lenders soon.

Alessandro Pozzi

Okay, and the undrawn –.

Antonio Paccioretti

Please?

Alessandro Pozzi

Yes. And the undrawn, can you draw the facility even if you have a bridge in the covenant, so all the funds are committed and available in the new event on the bridge?

Antonio Paccioretti

Today we are not in bridge. The covenant will be calculated at the end of the year.

Alessandro Pozzi

Okay. That’s all from me. Thank you.

Operator

Thank you for your question. We have the next question from the line of Sasikanth Chilukuru from Morgan Stanley. Please go ahead.

Sasikanth Chilukuru

Hi, thanks for taking my question. I had two please related to the Mozambique LNG project. The first one was, yesterday total energy is kind of highlighted a delay of at least one year for the resumption of activities in that specific project. Just wondering, you mentioned having discussions with the operator. But is that a view that you share with that it goes beyond the end of this year for the activity to start, if you can give us any guidance on the expected timeline for resumption there. The second one was also regarding to that project, if you could provide some more color on the steps that you have taken to actually neutralize the impact the cash flow impact for Mozambique LNG force majeure. If you can, please let us know if these actions that you have taken for 2021 are they likely to have any negative impact on the cash flow for 2022 once the project starts? Thank you.

Max Cominelli

Sasi, Hi. It’s Max here. Line was pretty bad and so let me ask you whether we got the right questions from you. So, the first one was an update on the Mozambique project. And the second one, whether this Mozambique project we expect any material impact in terms of cash beyond 2021? Is that correct?

Sasikanth Chilukuru

That’s correct, yes. The first one was mostly total energy common thing it is a one -year delay in resumption. So, just wanted to comment about based on that.

Maurizio Coratella

Yes, delay that a client has shared, publicly. And the second one is if you expect any cash component or the cash impact beyond ’21. Okay, this is Maurizio the Head of the E&C offshore. What I can tell you is that for total is always anticipated to us that this suspension would have lasted a minimum of 12 months, and the suspension has started in the mid of April 2021. Therefore, all our numbers are reflecting a resumption of activities in the first quarter of 2022. As far as the conversation with total is concern, of course, we are working together, we have a joint team reviewing constantly, what are the cost of this suspension, the arrangement we are discussing and we’re almost finalized is for reimbursement of the costs that will incur during that period.

The situation on the ground, I will not comment as the total has responsibility for the security on site. In terms of numbers, of course, we are working on estimates, we are estimating what could be the cost of the suspension which is fraction of the duration and the agreement we will have which with each and every supplier subcontractors in preserving the project value and suspending the activity without losing value for the entire project. Once the project will resume, it will start with this normal progress and will contribute to the EBITDA and the margin as expected, we don’t have other information to share. Thank you.

Operator

Thank you for your question. The next question is from the line of Nick Konstantakis from Exane. Please go ahead. Your line is open.

Nick Konstantakis

Good morning, guys. Thank you for taking my questions. Francesco, Antonio welcome on board, who which were talking under a more positive climate. I would like to start on the balance sheet actually and just follow-up on the previous question. Can you that really speaks to intervention actions with the lenders, is that just during negotiation or are you considering other measures? And given the pretty significant maturity in 2022 on the bond side, are you thinking about rolling it over this year or is that a next year event? Then I just wanted to confirm you’re talking about Mozambique just now, so for the three quarters that you’re assuming the backlog for next year.

Is the revenue the same as you have guided before for the three quarters of ’21 i.e. the €1.4 billion or is that a different figure? Lastly, on litigation. Can you just give us a bit more on what that relates to, is there a potential loss there, is there a provision that we should be thinking? And lastly, and I’m sorry for taking too many questions. We’re in the summit of difficult period, everybody’s facing issues with COVID that is how have been in it for 18 months. So, how can we — how much of a confidence do you have on the rest of the portfolio on the action that you’re taking? I guess we’ll go with this is why is that not going to happen again in two or three quarters time, what are the safeguards? Just any color on that on safeguards will be very helpful.

Max Cominelli

Hi, Nick its Max here. Sorry, but the line was not very good. Let me wrap up on the four questions you asked. So, the first one was on lender, negotiations with lenders. How would you kind of approach them? The second one was, what do you expect from the Mozambique in the next few quarters since you had €1.4 billion to be executed pre-force majeure, right?

Nick Konstantakis

Exactly. No, it’s for the 2022. Can we take the €1.4 billion — is that would be assumed in the backlog?

Max Cominelli

Okay. Backlog to be executed in 2022 on E&C Onshore is that, yes?

Nick Konstantakis

Actual –. Exactly — yes.

Max Cominelli

Okay. And the third one was about the provision I couldn’t get it, can you tell me or please repeat?

Nick Konstantakis

Can give us a bit more visibility on the litigation costs? What as we referred to is there a provision related to that potential loss here and then done it in there? And the last one is safeguard against this happening again COVID is uncertain but how are you trying to protect the business in the coming quarters?

Max Cominelli

Okay, thank you. So, let’s start with the first one perhaps on the negotiation with lenders, how do you — how we are going to approach it.

Maurizio Coratella

More than negotiation, I would talk about conversation I mean we do have a sort of footprint then. The reason of the financial we have accounted, as I tried to explain before most of the negative effects coming from the — for the EBITDA is due to some provisions or non-cash items. So, I believe again that leveraging firstly on the liquidities we do have. Secondly, on the fact that the net financial position has been managed flat. So, we do have some very good results from that. And also on the perspective of the company because this is the most important one. We will have all the elements for finding with the lenders an appropriate solution.

Nick Konstantakis

Does your liquidity preclude that an equity raise or is that the one of the solutions being considered?

Francesco Caio

No, the answer is no, absolutely we do not need any equity need on that. I have to apologize but the line is very bad, so we are trying to understand properly the question. So, which is the next one?

Nick Konstantakis

So, the next one was on the Mozambique contribution to the backlog what do you expect from that?

Francesco Caio

Antonio?

Antonio Paccioretti

As we already said, the contribution is €3.6 billion, so no news about that.

Francesco Caio

This is Francesco. I think it’s maybe helpful to repeat that the way we’re dealing with Mozambique is a suspension. Therefore, while we’re having impact on the marginality of the workforce this year, we expect the project to unfold and progress as per plans, soon the work resumed as we’re hearing in negotiation with our client. And as Maurizio mentioned before.

Nick Konstantakis

I’m sorry guys, the question was 2022, what is the assumed contribution from Mozambique for the three quarters. You’re saying it restarts 1Q 2022, I take it you’re assuming the credit?

Antonio Paccioretti

I mean, the contribution depends on the progress, it depends on when the project will start in and the progress of the project. As already discussed, we had to share with the client such a program. So, we are not in a position today to share any estimation on that. For the first part, I mean for the recognition of revenues coming from Mozambique this semester, I just want to reiterate that in the second quartet we recognize around €400 million of revenues fully related to the suspension and security costs with a return. So, did recognize on a reimbursement basis. So, the margin related to this €400 million was close to — was very limited. But it is — this is not the core of the project. The project is has been suspended and will be postponed and all the targets we have on the project remain the same.

As far as the litigation and the provision we accounted for the litigation, one of them is related just to through a project we had — which was completed I would say in 2015 or ’16 something like that, a very good one and very long litigation. On the provision on the political provision, we do have a very strict procedure for assessing the effect that we have to recognize on our balance sheet and which is based on the evolution of the litigation and it is based on the opinion we receive from lawyers as technical, lawyers for the American technical for the amount to be recognized.

According to the most recent developments of the litigation, we on the basis of the opinions we have received, we had to recognize an additional €75 million of provision and this is the one we have treated as special item. We do have also a provision in the adjusted account related to two projects coming from the same assessment supported by the external opinions from legal and engineer. That’s all I can say about that. It is clear that we do not expect anything more because otherwise we would have recognized such a new item in our cost.

If I understand well about the last question is related to the quality of the portfolio, the quality of the rest of the portfolio, if it remains the same. We expected yes, the answer is yes. Again, we had experienced one problem in a specific project in the North Sea. We do have some effect negative effect due to the COVID-19 for the publication in particular for the rest the quality of the portfolio remains absolutely in line with the our expectation.

Operator

Thank you for your question. Next question comes from the line of Kevin Roger from Kepler. Please go ahead.

Kevin Roger

Yes, good morning. Thanks for taking the question. It will be mostly related to the E&C Offshore. In your prepared remarks you say that basically your topline did not cover your fixed cost base. I was wondering if you can give us a bit of information of your fixed cost base, especially. So, if you can give us the let’s say revenue level that you need to be at the breakeven because this quarter you had the impact of this famous offshore wind project LNG. And on LNG, I was wondering if you can — the project has waited on the marginality over the past three quarters. So, I was wondering if you can give us a bit of details on how much in total you booked in terms of overall costs in this project because it was relatively major one for you €700 million. So, if you can give us now the magnitude of the loss that you booked in Q4 and Q1 and in Q2 now. Please?

Antonio Paccioretti

The second question is easier. The additional costs that we had to recognize as I said before are in the range of €200 million.

Kevin Roger

Okay, thanks.

Antonio Paccioretti

As far as the operative leverage, let me say this is one of the element that we have to assess and will be also part of our exercise on for the next strategy update. Let us a few weeks for assessing better this problem and we will talk about that next autumn. But you’re right, this is one of the issue.

Kevin Roger

But can you just provide the Q2 focusing about the let’s say we’re expecting breakeven moving forward for Q3, Q4, et cetera, can you give us the Q2 level that you will likely to get breakeven excluding LNG?

Antonio Paccioretti

Sorry, we are trying to elaborate an answer. It does, please — a second. Sorry, anyway, I would — anyway I would prefer to elaborate better on that next autumn but let me give you a straight answer, which is the following. The results of the offshore division is negative for an amount which is some higher than €200 million €270 million. And it is affected by the non-recurring item of €200 for the North Sea project. So, I would say that without this project, the EBITDA would be around zero. So, the amount of cost that we would recover with additional revenues for covering the operating leverage is around €200 million.

Francesco Caio

Okay. Anyway just — so just –. And to complete the picture and your question was very clear indeed. Obviously, you’ve seen the volumes in first half of the offshore division being particularly low. We expect that situation already to begin to improve in second half thanks to the acquisitions we’ve announced in last few months.

Kevin Roger

Yes. Okay, that’s fair enough. Thanks a lot for that and good luck for the year coming months for the setup of the strategy.

Operator

Thank you for your question. The next question coming from the line of Mark Wilson from Jefferies. Please go ahead.

Mark Wilson

Yes. Hi, good morning. Just wanted to clarify one point in terms of the improvement in the second half, and in point two the new awards in Saudi and Qatar as being one of the reasons that E&C will improve in the second half. But at the same time, you speak to extension of projects in the Middle East as a consequence of COVID being one of the impacts on the margin in the first half. So, could you just speak to that and quite why the Middle East won’t continue to see COVID impacts through Q3? And that’s the first question. And the second point, you’re obviously focusing quite a lot on the drilling and the offshore drilling with the addition of the rig. I know it’s 50% of the offshore rigs are working with Eni, could you talk to the pricing environment now for those deep water rigs? We reached a trough in terms of pricing and other incrementally higher day rates coming through. Thank you.

Antonio Paccioretti

Thank you very much for your question. I think when it comes to projecting the impact of COVID-19 in those regions in various work, unfortunately with this short of magic balls and crystal balls to see it. However, on a more serious note, you have to consider that some of the work that would get started is in yards which is an area that is more affected by COVID than ships and vessels where we have more flexibility.

And therefore, this is one of the reasons of our presence in talking about second half, because you’re right, you’re absolutely right. The level of uncertainty remains high but the diversified nature of the works that we’re about to start, give us some confidence about a gradual improvement in second half. We’ll see when that comes to pass. When it comes to the drilling offshore rates and we’re seeing the bottom. There are indications there’s really that we may well like it seems the bottom of the rates, it’s maybe a bit too early to talk about rebound and the strong tension in the process. But as you know, this market is very prompt in dealing the relationship between supply and demand. There is clearly more demand and on the supply side, you begin to see some benefits.

Mark Wilson

Okay, thank you very much. And then just to confirm on that covenant point. You say that it’s tested annually and you’ve guided to a €1.6 billion. So, we can simply divide that by 3.5 that is the level you would have to deliver EBITDA in 2022. Does the €200 million is spoken to in the North Sea, does that adjust down? Thank you.

Antonio Paccioretti

So, just to repeat the two questions. The first one is how you calculate a covenant, right. And the second one was, do you foresee other extra costs other than the €200 million you’re adding Q2 for the North Sea, is that correct?

Mark Wilson

Yes, that is correct, I mean yes that’s correct.

Antonio Paccioretti

Okay. So, I have to apologize but the line is really very bad. So, we have to get sometimes the question, so, sorry for asking you to repeat or for permitting us for then as to repeat your question. So, the first answer is clear. I mean, I tried to explain before but I confirmed that the calculation is at the end of the year. Anyway, we will the calculation of the financial ratio, we will contact immediately our lenders in order to discuss the most appropriate way for facing this issue. The second question is for the provision we accounted for the North Sea offshore project and I have to repeat that this is the — the result of our best evaluation to the information we do have today. We are not in a position to expect something more on that.

Mark Wilson

Thank you very much. I will handover.

Operator

Thank you for your question. Next question came from the line of Vlad Sergievskii from Bank of America. Please go ahead.

Vlad Sergievskii

Yes good morning gentlemen, and thank you for taking my question. I will start with the project portfolio. Have you managed to complete the full project review by now and would you be able to share with us what proportion of backlog is now impaired and in the future will be running at zero margin? This is the first question. Hello, can you hear me, okay?

Antonio Paccioretti

Yes, we heard you. So, you’re asking on the backlog there, right, Vlad. How much of the backlog has been impaired mainly related to the North Sea projects and –.

Vlad Sergievskii

Exactly, this is the question. And also did you — have you completed the full project review of the full portfolio?

Antonio Paccioretti

Yes, I try to repeat, the project review is executed regularly every month. What occurred in this for this project is a triggering event which posed the necessity of a reassessment a significant reassessment and the result of the reassessment is the amount we have recognized in the current financials.

Vlad Sergievskii

Alright, that’s clear. Can I ask you a question about the upcoming strategic review? Obviously you are talking about the review of the footprint and operating leverage which I think is definitely the right thing to do. But do you have the right balance sheet in order to do it? Obviously, you are guiding for yes like a free cash flow in the second half, then provision through cash out later on, are you able at this stage to completely rule out the need for equity at some stage in the near term?

Francesco Caio

Look, I think the strategic review is part of selecting within our portfolio of regions of clients of technologies where we want to leverage our strength to go forward and capture profitable sustainable growth. We have, as I mentioned various streams of works focused on at least three fronts, our core business but maybe more than others. Your thinking applies in terms of what is the right mix of geographic presence, account relationship and technology focus. But we also have the initiatives that we are pursuing and we will continue to pursue in energy transition, and potentially, hopefully, a stronger presence in our home market Italy.

So, we think we have all the flexibility we need to go forward and look forward with some confidence about the ability to make the company even more competitive. And I will leave it at that saying that our commitment to get back to you in the autumn is an indication that we are aware that the market as we did ourselves have questions about priorities and way forward once you fully get them and continue to work in line to create values for our stakeholders and shareholders in particular.

Vlad Sergievskii

This is great, thank you very much for that. And the very last quick question from me, if I may. On offshore drilling business, do you plan to continue this pretty unusual practice of leaving someone else’s rigs and using that? I mean, this seem obviously helps EBITDA as of course you capitalize maintenance costs and lease payments are all falling below EBITDA light but probably is not very cash flow accretive. If you will be able to comment on that, that will be helpful?

Max Cominelli

Vlad, your question, sorry it’s not clear. It is about the drilling offshore, we’ve got the asset light approach with few vessels in the portfolio. Your question was where are you going to continue on this path of leasing vessels? Is that correct, right?

Vlad Sergievskii

Yes, it is correct. And also, how cash flow accretive is that asset light approach?

Max Cominelli

Well, let me elaborate you better on these SFI strategy. As we said in the previous calls, I said like strategy really a tactic to be able to capture the upside of the market in an environment where capital is critical in this situation. So, we were able to bring four rigs over the last couple of years and added to our fleets. And we are 1/3rd with this strategy which generates of course EBITDA contribute positively to the margin of each region. And as we do especially with the last edition of Santorini, we count on considerably and substantially improve our operational capabilities in a very critical region.

And that we’ll have a very positive effect in 2022. Of course, it depends on the market on the availability of these rigs to be rented or and unfortunately or fortunately the market is going to pick up and therefore it will be even more difficult to capture more opportunities. But we already choose to do so and we’re very confident and this strategy was a good choice.

Vlad Sergievskii

Thank you very much, gentlemen. And good luck.

Operator

Thank you for your question. Your next question is from Michael Alsford from Citigroup. Please go ahead.

Michael Alsford

Hi, there. Good morning. I’ve just got one question remaining. I appreciate there’s a full strategic review coming up in autumn. But could you just confirm whether you’re still exploring alternative options for the drilling businesses and that they remain non-core to Saipem over the medium-term? Thank you.

Francesco Caio

Thank you for your question. As I was mentioning before, we had to create value. And one of the tools to create value is to have a good business plan and capacity to execute it as well as some M&A levers. I think, on that last point, is better to talk about these things when you do them rather than when you think about them. Thank you very much.

Michael Alsford

Understood. Looking forward to autumn. Thank you.

Operator

I will now hand back the conference to the CEO. Please go ahead, Sir.

Francesco Caio

Thank you again for your attention. And I look forward to seeing you with my team in autumn for the new strategic plan of Saipem. Thank you again.

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