SUBSEA 7 S.A. ANNUAL REPORT 2014 WHO WE ARE Subsea 7 is a world-leading seabed-to-surface engineering, construction and services contractor to the offshore energy industry. We provide cost-effective technical solutions to enable the delivery of complex projects in all water depths and challenging environments. Our vision is to be acknowledged by our clients, our people and our shareholders as the leading strategic partner in our market. OUR VALUES Safety Performance We are committed to an incident-free workplace, We are predictable and reliable in our performance. every day, everywhere. We continue to minimise We always strive for excellence in everything we the impact of our activities on the environment. do in order to achieve superior business results. Integrity Collaboration We apply the highest ethical standards to We are locally sensitive and globally aware. everything we do. We believe that by treating Our people work together, leveraging our global our clients, people and suppliers fairly and know-how and capabilities to build sustainable with respect, we will earn their trust and build local businesses. sustainable success together. Innovation We constantly strive to improve the efficiency of our business by investing in the development of our people and through innovation in technology, operations and processes. Overview Performance Governance Financials 2 Chairman’s Statement 22 Africa, Gulf of Mexico 26 Board of Directors 42 Financial Review 4 What We Do & Mediterranean (AFGOM) 28 Executive 48 Consolidated Financial 8 Where We Operate 23 Asia Pacific & Middle East Management Team Statements Contents 10 Chief Executive (APME) 30 Corporate Governance 49 Report of the Réviseur Officer’s Review 24 Brazil 37 Risk Management d’Entreprises Agréé 12 Our Strategy 25 North Sea & Canada (NSC) 50 Consolidated Financial 14 People Statements 15 Technology 56 Notes to the Consolidated 17 Assets Financial Statements 19 Local Presence 105 Additional Information 20 Corporate Responsibility 108 Glossary 2014 Summary Operational Financial • Strong execution of various large and technology-rich • Record revenue and Adjusted EBITDA driven by projects worldwide strong execution • High project activity with global vessel utilisation of 82% • Solid backlog of $8.2 billion, of which $4.2 billion is • Strategic investments in fleet renewal on schedule for execution in 2015 with the first of six new-build vessels, Seven Waves, • Robust liquidity position with low net debt and a new operational in 2014 five-year revolving credit facility in place • Safe operations with 84% of vessels recording zero • Cash dividend and share repurchase programmes Lost Time Incidents enhanced returns to shareholders • Onshore asset investment saw reopening of spoolbase • Impairment of the goodwill arising from the January in Leith, Scotland, UK, and development of a logistics 2011 Combination resulted in a non-cash charge and fabrication yard in Takoradi, Ghana. of $1,183 million. 2014 Financial highlights Revenue Adjusted EBITDA3 $6,870m $1,439m (2013: $6,297m) (2013: $981m) By Territory1 By market segment2 Net (loss)/income AFGOM $2,464m SURF $5,303m APME $911m Conventional/Hook-up $705m $(381)m BRAZIL $954m Life of Field $642m (Including the goodwill impairment charge of $1.2 billion) NSC $2,533m i-Tech $220m (2013: Net income $344m)4 CORPORATE (CORP) $8m Backlog Cash and cash equivalents $8,239m $573m (2013: $11,770m) (2013: $692m)4 By Territory By year of execution Earnings per share (diluted) AFGOM $2,131m 2015 $4,150m 5 APME $211m 2016 $1,690m $(1.02) BRAZIL $3,427m 2017+ $2,399m (2013: $1.00 earnings per share)4 NSC $2,470m 1. For definitions of Territories, refer to page 66. 2. For explanations of market segments, refer to page 4. 3. For explanations and reconciliations of Adjusted EBITDA, refer to page 105. 4. Re-presented due to reclassification of assets held for sale, refer to page 79. 5. Includes the goodwill impairment charge of $1,183 million. Adjusted diluted earnings per share excluding the goodwill impairment charge was $2.32. For definition of terms refer to Glossary on pages 108 to 110. seabed-to-surface 1 CHAIRMAN’S STATEMENT Kristian Siem Chairman “ We remain committed to investing in strategic capabilities and skills to ensure we can outperform the industry when the market recovers.” To the shareholders of Subsea 7 S.A. Subsea 7 S.A. achieved record revenue and Adjusted EBITDA in 2014, driven by excellent project execution overall and rigour in risk management. Group revenue rose by 9% to $6.9 billion, while Adjusted EBITDA improved over the prior year to $1.4 billion, equivalent to 21% of revenue. Net income amounted to $802 million or $2.32 per share excluding the impact of the goodwill impairment charge of $1.2 billion recorded in the fourth quarter. This impairment charge was a non-cash item and gave rise to a net loss of $381 million. It was largely driven by a reassessment of the near-term prospects for the Group following the recent significant drop in the price of oil. Our strong underlying performance is largely attributable to the expertise and commitment of our project and vessel management and engineering teams, both onshore and offshore, as the focus on safe and efficient execution of our order backlog continued to be a priority during the year. A further driver underpinning our good results was proactive management of our costs and the implementation of a series of business improvement initiatives to deliver efficiencies at every level of the organisation. Our strategic investment in the renewal of our fleet with globally mobile, versatile vessels proceeded well in 2014 and is expected to be fully completed in 2016, on schedule and within cost targets. Four of the six new-build vessels are flexible Pipelay Support Vessels (PLSVs) and will operate under long-term, firm contracts in Brazil. 2 Subsea 7 S.A. Annual Report and Consolidated Financial Statements 2014 Overview Ready to face the expected It is our sustained investment in expertise and technical cyclical downturn know-how through our people and our core strengths We identified a softening of the market in late 2013 with of engineering, project management, supply chain and a reduction in the number of projects being sanctioned vessel management that enable us to define, develop around the world as our clients sought to reduce their and apply these critical new capabilities and which costs by cutting capital expenditure plans for field make us a top tier player today. These core strengths, development. This trend continued throughout 2014 combined with high-specification assets, are what will and was exacerbated by a collapse in the price of oil drive our outperformance and enable us to secure attributable mainly to a sluggish growth in global demand opportunities when the market improves. for hydrocarbons and rising shale production in the USA. Living our values This fall in the oil price has introduced a new period of uncertainty for the subsea sector. Above all, our clients value Subsea 7’s commitment to ensuring our people and our contractors conduct In this context, our Management Team has made good business with integrity and that we apply the highest progress during 2014 in taking the necessary actions to standards to everything we do. address the market downturn. This focus will continue in 2015 as efficiency improvement and cost reduction will be I am proud of Subsea 7’s track record in acting responsibly key priorities to remain competitive in everything we do. in all of our operational environments, onshore and offshore, around the globe. We aim to set the benchmark for safety Subsea 7 recognises the pressure on project expenditure in our industry and be recognised as a responsible and that the industry faces around the world as the costs of reliable partner for our clients. Minimising our impact on deepwater exploration challenge the economics of oil the environment and investing in the communities where production. We intend to be at the forefront of helping we operate to support local development are central to to reduce our clients’ costs by contributing to industry our approach. standardisation, developing fit-for-purpose solutions and driving efficiency. We are working closely with clients Returns to shareholders and suppliers to offer better solutions. Early engagement We took various steps in 2014 to return cash to with our clients is the key to lowering the overall cost of shareholders and reduce the risk of future earnings field developments as this will optimise front-end design dilution. During the year the Group paid a dividend and project engineering, streamline procurement and equivalent to $195 million. This was distributed while enable the application of appropriate new cost-reducing funding our vessel construction programme using technologies. This broader, collaborative approach available liquidity and cash generated from operations. to addressing all cost, technical and risk elements of a complex oilfield project can be achieved and still The Group re-purchased 10.5 million shares at a cost ensure all parties’ long-term interests are protected. of $157 million and $82 million of the $700 million 2017 convertible bonds. The $275 million 2014 convertible bonds While it is difficult to predict the evolution of the oil price matured in October and $261 million were redeemed or how long this downturn will last, I am confident that for cash. the medium- and long-term fundamentals of global oil and gas demand remain strong. These will continue In view of the challenges facing the oil and gas industry to drive capital investment to develop new oil and in the near to medium-term, and in order to preserve gas reserves and ensure that deepwater oil and gas the Group’s financial flexibility so that it can benefit from production remains a significant market with long-term opportunities that may arise during the downturn, the Board growth potential.