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Executives

Jens Wilhelmsen – Interim CEO and Chairman

Geir Karlsen – CFO

Analysts

Lukas Daul – SEB Enskilda

Songa Offshore (OTC:SGAZF) Q1 2013 Earnings Call May 16, 2013 9:00 AM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Songa Offshore First Quarter 2013 Results. Throughout the call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Just to remind you, that this conference is being recorded.

Today, I am pleased to present, the Interim CEO and Chairman of the Board, Mr. Jens Wilhelmsen. Please begin your meeting sir.

Jens Wilhelmsen

Thank you. Good afternoon to you all. This is the third time I am addressing you at the quarterly presentation, and I am pleased also to confirm that, that most likely will be the last time I do it. You may have noted from the press releases this week that Mr. Bjørnar Iversen takes over as Chief Executive Officer on June 1.

Mr. Iversen has extensive experience from the international oil-rig industry, both operationally, strategically and financially. On top of that, he also knows Statoil very well and has good experience with the Cat D project, as he was also bidding for that project with his previous employers.

I have also decided to step aside as the Chairman for Songa. This I can comfortably do because we have now put together a strong Board of Directors that has the competence required to execute the necessary steps to resolve the tasks ahead for Songa, and execute to the company’s confirmed strategy.

The recruitment of Mike Mannering, as new Chairman was a scoop. Mike has more than 30 years experience from the energy and the oil service industries, and has for many years been part of the top management in Schlumberger.

Songa also hired Mr. Jan Rune Steinsland as Executive Vice President to work alongside, Geir, in order to secure a strong focus, both, on the company’s funding as well as the financial and corporate control.

Let me spend a couple of minutes to go over what we have done and achieved in the last few months. The three rigs in the North Sea, all have high rates of efficiency, both operationally and financially. Our two international rigs are employed with the rest of the year at charter rates. We find in line with the market and very satisfactory.

Income-wise, we meet or possibly exceed the analysts’ expectations. We started the year with liquidity problems. This is now rectified and the liquidity is satisfactory, and we make money from the operations. The Cat D project is developing according to plan. We have a strong located with the location organization in Korea, and working close cooperation with Statoil to solve the items that comes up, and bringing the project forward.

In January, we did ask some of the analysts, and found that the company’s strategy was perceived unclear, and that the company may have given rather so high expectations than we managed to deliver on. And we also understood it was a good reason to vastly improve on the information we sent out, and tried to rebuild the confidence in the markets.

We have therefore changed the organization and improved many critical processes. The uncertainty among the employees at the end of the last year, about what was going to happen with the company has been removed, and we now see that there is a high drive forward in the organization.

The Board of Directors, industry, and financial confidence has been strengthened. We have made our strategy very clear. Our goal is to become a leading mid-water operator in the North Sea.

And finally, we are putting a lot of emphasis on giving the market correct information at the right time or at least as soon as it is available. In my mind, we have taken a great deal forward in the last six months, not only have difficulties behind us, but we have also constantly addressed the reasons for the problems.

No doubt that Songa still have challenges to face, but we are definitely sailing in calmer water. Actually the last couple of months, lack of big headlines about Songa, I take as a good old man [ph] that we have turned the tide, and are in the process of rebuilding the market confidence, whether there are noes [ph] that takes time.

Songa is now in a state where we have a good environment and can concentrate our capacity and resources to optimize the operation of our rigs, execute a new building program according to plan, and develop the long-term financing plan.

I will say we are a different company compared to eight months ago, and just as important, we have now strong teams in all corporate levels to bring the company to new heights.

Let me stop there and give the floor to, Geir Karlsen, our CFO, for a more detailed presentation of the figures.

Geir Karlsen

Thank you, Jens. If we just go to the Q1 review, first, just a few bullets there. Songa Eclipse delivered and generated (inaudible). Songa Trym finalized the SPS and upgrades program, started to operate in mid-February. The guided total CapEx for that dry-docking is what it turned out to be, $260 million, so there is no change in that.

Songa Venus as we know is coming up contract in July. We have secured a 7 option 2 well contract in total for Mubadala in Vietnam and Malaysia, which should then keep the rig busy towards the end of the year and maybe into the first quarter of 2014.

Songa Mercur is finalizing the job in Cuba this month, and will then be mobilized or demobilized to Vietnam for a short program there. We’re also hopeful that we can secure more work for Mercur after the contract with eni, and we have reason to believe that that will happen.

Go to the P&L for the first quarter, as you can see we have $124 million in revenues, $65 million in OpEx, and G&A of $16 million. G&A for this quarter is slightly higher than we have been guiding on. Then we have some one-offs on the G&A side this quarter. We have used quite some resources to take over the two rigs, Trym and Delta from old P&L, and we have had some training costs relating to those personnel coming over to Songa.

We have been closing down the office in Angola due to the sale of Eclipse. And we have also done the scale down partly, the office we have in Cyprus with the people there working on Eclipse.

So there are some one-offs, hopefully we will be able to reduce that G&A quarter by quarter going forward, at least take it slightly down from the level of $16 million. It takes us to EBITDA of $50.4 million and then a bottom line at a profit of $9.4 million.

Go over to the next slide and just dig a bit rig by rig on the earnings side. It had been a very good quarter. On Venus, it has been I think it has 99% utilization. Day rate is $238,000 a day and then we’ve have had some reimbursables that take the day rate up to $250,000.

Mercur, reporting $323,000 a day. The day rate is $280,000 but then we are then putting to income part of mobilization income that we received last year, so as such you have the $15,000 a day as a non-cash item there. The same applies to Delta and Dee and Trym actually, where you are having cost of the Statoil contribution to the upgrade projects taken over the P&L over the contract term.

That also brings me into the question on the breach of covenant that we have this quarter. I mean, Statoil, has been contributing in the area of $120 million into these rigs. And as we see it, that contribution is none – there is no conditions attached to it, meaning that that is money received, its money used on the upgrades and there is no link as such to the chartered contracts. So we’re having a dialog with our auditors and we’re still in dialog with the auditors, where we mean that we should be able to take that over the P&L right away.

We have continue (inaudible) that we hope they will be able to do it out, so we have been playing this slightly conservative this quarter, and we have then just kept it in the balance sheet, and then we will take it over the contract term. That has given the result that there are – we have a minor breach in one of the covenants on the two bond agreement.

During the last week, we have had a constructive – a very constructive dialog with the majority of the bond holders. And we obtained a waiver, two to three quarter waiver now from this covenant, just in the last couple of days. Details on that waiver is sent out as a separate release today.

Songa Trym started as I said in February and has had due to the taking of 90% [ph] from the startup. So very good quarter earnings wise for the company. If you go over to the OpEx, you can see in the right – sorry left down corner there, you have the daily OpEx figures. Venus is, as it has been for a while, around $100,000, which is the expected one and should still stay there going forward. It should be approximately the same OpEx in Vietnam as it has been having in Malaysia.

Songa Mercur is $169,000, as it consists of $52,000 a day in mob expenses that we paid last year, but we are taking it over the P&L now so that cash and cash OpEx is such is in the year that we have been guiding on meaning the $169,000 minus the $52,000, it should be $150,000, $170,000 a day.

Delta and Dee is more or less what we have expected. We have had some startup additional costs on Delta. And that takes that cost a little bit high for the quarter. Dee is okay. And Trym is low obviously because most of the OpEx during the odd stay is capitalized.

Change next page. Value of the rig now is $1.9 billion as you can see. Out of that, the cap day rates consists of $524 million which again consists of approximately $450 million installments to the odds, $50 million in capitalizing interest, and the $26 million, $27 million in capitalized kind of supervision fees and costs that we have on the project that are capitalized during the construction period.

The derivative financial instrument of $3 million. You have another figure on the other side of the balance sheet, that’s related to the two bonds under swap – Dollar-Norwegian kroner swaps that we have on those. For all practical purposes we have took these Norwegian kroner bonds into US dollar booked on the loan itself and on the coupon, so this is the IFRS way of doing that accounting. It’s non-cash items anyway.

Trade and other receivables, $70 million, that is approximately $25 million higher than it should be. At quarter end, we had approximately $25 million over due. First of all from Malaysian clients that was all paid early April. And the cash as you can see its $148 million, and in other assets over $20 million, you can also say that $10 million, $15 million of that is what I call very close to free cash.

Other side of the balance sheet. Not really much to comment there. You can see the $100 million I talked about that is capitalized as deferred income that’s Statoil contribution. That is hitting as you can see that $66 million on the non-current liabilities and $33.6 million on the current liabilities. Other than that, the bank debt is now $760 million nominal, and we have bond debt of $368 million.

If we go to the cash flow statement. The purchase of property, plant and equipment of $138 million, is kind of the over leg from the dry-dockings of Delta and Trym, which has mostly been paid during the quarter. You have the $590 million in from Seadrill, and then you have the repayment of bank debts of $312 million which was mostly related to the Songa Eclipse.

CapEx for the quarter is $65 million, as you can see on next slide, more or less close to zero CapEx on the four rigs on top and then you have the overhang as I said for the remaining part of the CapEx on two for the quarter. Then you have the CapEx on the Cat D rigs, the last – the four next ones of approximately $17 million where approximately $10 million of that is capitalized interest costs.

The capitalizing in our Statoil loan as you know and we are also capitalizing the $50 million facility that we have on the two first loans, but then – and then for the rest, we are capitalizing bond interests. So out of the $368 million bond debt, we are capitalizing around $280 million of that into the Cat D, I mean the interests.

And we go over to the contract status and revenue backlog. Not much news there compared to last time. The North Sea rigs are in cash flow now as you know. All three rigs will now go into 2016. Dee and Trym will stay until the third quarter – to the end of third quarter, while Trym will actually go into February 2016 before the options are getting in.

On Venus, that has secured now work in Malaysia, Vietnam to the end of the year. Day rate is between $230,000 and $250,000, $255,000. In the period that the rig is going to operate in Vietnam, we are tax exempt meaning decline to pay the tax. So that could generate slightly better day rate for slightly better contribution for the Songa.

Mercur is going to Asia now early June, and will do the one option one well for eni in Vietnam. Day rate there as you know is $250,000 plus mobilization, or the demobilization from Cuba. So from Cuba to Malaysia or Vietnam, you will have a demobilization from their current contract and a mobilization fee on the new contract. That will take the rig back to Asia.

Then on next slide you have the utilization, very good quarter, 98%. No more comments on that. We are very glad to see that we have a high utilization on both the rigs that we’ve taken over.

And just a few comments on the market. Yes, as you see on the first slide there which is the semi market in total, it just shows up that it can ring upwards slightly on the mid-water side and we can here see most of the reason why the jackup market is that strong as we see now these days.

Now going to use much time to comment on the different slides here. But I could say – I have just a comment on the Southeast Asian market, I mean we are seeing now – we have been seeing a market in Southeast Asia for our type of rigs that’s around $230,000, $220,000, $230,000. While it has picked up a little bit now as far as we can see, so we have now talking $250,000, $260,000, I would say. So there is quite a few rigs available there now free, so hopefully we can see the rates – the day rates should tick up just a little bit at least towards the third and the fourth quarter this year.

On the financing side, with regards to Cat D rates, I think I would just like to have a comment on that. We are now running five to six different processes that all includes the potential alternatives on the financing on the Cat Ds. We are looking at all kind of alternatives and also alternatives that we not include a 100% ownership in the rigs, by Songa.

So we know that after the pretty expensive dry-dockings taking place last year, the challenge to capitalize these four rigs are – it’s a higher challenge now, it’s a bigger challenge now than it was nine to 12 months ago. There is no doubt about that. That’s why we have to be – have to look a little bit broader, and maybe also for alternatives that we didn’t look at, say nine months ago. But we are running six to seven processes in parallel. And as you can understand, not able to share any details with you on those processes, but we have an aim to try to find the solutions for all four rigs, let’s say within the 2013 and for the two first ones, earlier than that.

So hopefully, when we are reporting next quarter, we should be able to release some news at least on the two first rigs.

That concludes my part of the presentation, and I guess we open up for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) There will now be a brief pause while questions are being registered by the telephone participants. (Operator Instructions) Okay. Our first question comes from the line of Lukas Daul from SEB. Please go ahead with your question. Your line is now open.

Lukas Daul – SEB Enskilda

Yes, hi guys, just a few follow-up questions. Firstly, on Mercur, when you are moving it from Cuba to Southeast Asia, what will be the combined rate that you will be booking in the period?

Jens Wilhelmsen

I think what we will do there, Lukas, we will most likely than book the whole demobilization fee during that period and the mobilization (inaudible) that we will then capture the part of the mobilization.

Lukas Daul – SEB Enskilda

Okay. And what is you remaining de-mob fee?

Geir Karlsen

It’s between $5 million and $6 million plus and the mobilization fee on the new contract.

Lukas Daul – SEB Enskilda

Okay. And you will book at that over one and half months while you are moving the rig?

Geir Karlsen

I think so, yes.

Lukas Daul – SEB Enskilda

Okay. Good. Then on Venus, I assume that in your fleet status report that it was on a zero rate for the whole month of April?

Geir Karlsen

I think it was approximately – that would be the guess, right.

Lukas Daul – SEB Enskilda

Yes, okay. And could you say what the CapEx associated with that recertification was?

Geir Karlsen

I don’t have the details that ready to share with you yet, Lukas.

Lukas Daul – SEB Enskilda

Okay. Then one question on the cash balance. You had $148 million at the end of Q1, and I believe you have some $25 million to $30 million left to pay on Trym and Delta. And then you are saying roughly $35 million to $40 million will be paid to you, those are invoice just post year [ph]. Is there any other movement in working capital or something that we should expect in the second quarter on top of this?

Geir Karlsen

First of all the accounts receivables of $70 million is too high. We know that as for that $20 million, $25 million [ph] that was overdue from one of the clients in Asia and that was paid very early in April. So that should take it down to – it should be around $50 million. And then as I also said in other assets we have $10 million to $15 million that is what I call that is very close to cash.

Lukas Daul – SEB Enskilda

Okay.

Geir Karlsen

Or the effect for the second quarter considerations.

Lukas Daul – SEB Enskilda

Okay. And beyond that, that’s it basically?

Geir Karlsen

That’s it basically, yes.

Lukas Daul – SEB Enskilda

Okay. And then finally on when you are talking about finding a solution for the Cat Ds maybe coming with something already in the next conference call. I was wondering are you looking at that, that you might find first solution for the first two rigs, and then you will work separately on the number to be unfold or could you sort of bit more color on that, how are you thinking?

Geir Karlsen

I think as I said we are working on – just some of different processes. Some of those processes include two rigs, some of the processes include only four rigs and some of the processes include one rig. So it’s – then that’s a difficult question to answer in that sense. And what I meant with the two first rig, I mean if you look at delivery date of that (inaudible) so we feel that based on what we would like to have at a goal at least to finance those two rigs within the next let’s say four or five months. That could include – that could be as a result. That could be, as I said a solution for all four rigs, but we should at least make sure that we have secured finance for the two first ones, first.

Lukas Daul – SEB Enskilda

Okay.

Geir Karlsen

It’s a little bit difficult to answer straight and give you more information on that question.

Lukas Daul – SEB Enskilda

Yes, sure, I understand and I appreciate the color. So based on your dialog with banks, what do you think is the appropriate debt level given the length of the contract and the counterpart?

Geir Karlsen

Again, the one huge advantage we have with these things are as we are saying the contract of eight years and with a very good counterpart, so I think the appetite for let’s say from the banks that we have been discussing with is I would say good. And it also looks like now that which we have been guiding on earlier as well that the ECA’s report will be most likely be in the $400 million area. And then we need – on top of that we need a commercial tranche of I would say $50 million to $75 million.

So we are quite confident that we will be well with the secure period bank debt supported by the ECAs in the area of $450 million to $475 million. And then it will be up to us whether we can be able to put something on top of that in addition to the bank and tranche.

Lukas Daul – SEB Enskilda

Okay, very good. Thank you very much.

Operator

We appear to have no further question at this moment. I hand the conference back to you sir.

Jens Wilhelmsen

Thank you very much and thank you for attending the conference. I am looking forward to talk to you at the third quarter presentation. Bye.

Operator

This now concludes our conference call. You may disconnect your line. Thank you and have a good day.

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