Prosafe's (PRSEY) CEO Karl Ronny Klungtvedt on Q2 2014 Results - Earnings Call Transcript

Aug.21.14 | About: Prosafe SE (PRSEY)

Prosafe SE (Cyprus) ADR (OTCPK:PRSEY)

Q2 2014 Earnings Conference Call

August 21, 2014 4:00 AM ET

Executives

Karl Ronny Klungtvedt – Chief Executive Officer

Sven Børre Larsen – Chief Financial Officer

Analysts

Haakon Amundsen – ABG Sundal Collier

Johan Ström – Carnegie

Kjetil Haukås – SpareBank 1 Markets

Sondre Stormyr – Danske Markets

Karl Ronny Klungtvedt

Okay. Good morning and welcome to the presentation of the second quarter results for Prosafe SE. Please take a look at the disclaimer. We have an agenda today, where we start with the recent developments, then our CFO, Sven Børre Larsen will take you through the financial results. We will go through the various new building and technical projects and thereafter we will look at the outlook for the business.

Recent developments, in the second quarter we had a fleet utilization of 84%. We also signed the largest contract – largest single vessel contract for this business with a three-year firm TSV contract for the Safe Scandinavia. That contract has another four years of options. Also all of the new builds are progressing well, both with regards to time and quality. And in terms of the outlook we continue to see quite a robust long-term outlook, but we see clearer signs of short-term weakening within the offshore segment.

Then to the financial results.

Sven Børre Larsen

Yes, good morning. I'll start with the income statement. Utilization rate for the quarter was at 84%. That was a result of Safe Scandinavia being off higher for a couple weeks in beginning of April and completion phase of the SPS life extension project. Also Safe Caledonia was off by for a couple of months before it started the contract with Nexen in the beginning of June.

Bristolia commenced its job for ConocoPhillips at Judy in the beginning of May and finally Safe Astoria was off higher from Mid-May, when it completed a contract for Swiber in Indonesia, until August when it has completed a contract or commenced a contract for Shell at Malampaya in the Philippines. As a result the EBITDA came in at $71 million, which is lower than the $83 million seen in the corresponding quarter of last year, but higher than the $38 million seen in the previous quarter.

Depreciation increased to $16 million in the quarter and that is mostly a reflection of the completion of the Safe Scandinavia upgrade and SPS. This gave an operating profit of $55 million. Interest expenses remains fairly flat at $8.8 million. Other financial items $1.2 million, giving a pre-tax profit of $45 million.

Taxes came in at $2.9 million in the quarter. There you should note that the tax cost could be $2 million to $3 million higher for the next two, three quarters as the result of the new tax scheme in the UK. However, it should have a fairly limited impact in the longer term. All-in-all, this gave a net profit of $42.1 million compared to $54.9 million in the second quarter of last year and $18.3 million in the first quarter. EPS was $0.18.

Turn to the overview of operating revenues, other income was, yes, maybe slightly higher than we've seen in the past few quarters but nothing out of ordinary. And the other income was fairly evenly spread across the managed fleet.

Then to the balance sheet, as you can see the vessels line increased in the quarter. We invested almost $50 million in the quarter, and half of that – approximately half of that was related to the Safe Scandinavia, SPS, and upgrade, and also, of course, we invested a little bit in the new builds.

Also you should note the increase in working capital in the quarter. This is quite normal. This time we earn is the reflection of the seasonality in the North Sea market. Normally you would see an increase in working capital in second quarter. It should remain fairly flat in the third quarter and then drop back again in the fourth quarter.

Interest-bearing debt amounted to $877 million, of this $519 million was made up by the main revolving credit facility and at the end of the quarter we had more than $200 million of undrawn availability on that facility.

If you then turn to the key figures, you will note that net debt is up in the quarter and that is simply a reflection of the investments made in the quarter, as well as the increase in working capital that I mentioned.

Then to the dividend, in line with the dividend policy of paying out up to 75% of previous years' net profit, the board has resolved to declare a dividend of $0.16 per share for the second quarter. The shares will trade X on 27th of August, but as a result of increased uncertainty related to the short to medium term demand development in the market we want to notify the market that we may consider temporarily reducing dividend for a period of time.

But as I said, for this quarter we still remain in the high-end or the maximum dividend given, the dividend policy that we have. That Karl will touch more upon the market outlook in his presentation.

Karl Ronny Klungtvedt

Thank you, Sven. Firstly, take a look at the various projects and the progress of those. First to the Safe Boreas, that’s the first of our new builds. We have come quite well into the mechanical completion phase of that project and also quite well into the commissioning. So we're really looking forward to taking delivery of this unit and starting mobilization to Norway during the fourth quarter. As you know, we have a contract there, starting in this spring with Lundin for the hook-up of the Edvard Grieg field, no changes to CapEx forecasts, so this goes ahead as previously communicated.

Safe Zephyrus, this project is the sister vessel of the Safe Boreas, so it follows the same with the lag of a few months. As you can see in this picture here, some of the accommodations blocks have been lifted on, so this one is also progressing well with very good quality of the workmanship. She should be ready for operations in 2015.

Then going onto China, these projects have come up to a good start. We've already done the Keel laying for the Safe Notos in August, actually, that was a little bit ahead of schedule, and we see that, well, we foresee no major technical issues there, so this is all looking good, and unit should be ready for operations in 2016. So, in total, that should give us a fantastic North Sea fleet in terms of size and overall capabilities.

Then moving to the outlook section, we start with looking a little bit at the supply side. We see – historically, we saw a potential under-supply in certain of the market segments, then we've seen a very strong general development on the demand side and now a new wave of vessels coming into this market segment. We still see though that some of the units coming in were not originally purpose-built for accommodation purposes. And as a principle, we believe there will be slight division of where the various units will be operating and which contracts they will be targeting.

So the purpose-built unit will be focusing more on the higher end of the industry, whereas some of the non-purpose-built will be generally targeting the lower end of the industry. Also, of course, bear in mind that the Safe Scandinavia will be out of this market for a period of maybe three to seven years.

Then we have a new slide here, which is rather complicated and I could talk about this one for probably an hour. But it’s important to get to this message across. It is one of the essential reasons why we are building the type of units we are rather than looking at other types of designs. I think, if you look at the vertical axis first, we have what we call maneuverability there. It’s a simple ratio of power relative to the weight of a unit. So you can think about this from a sports car analogy, the higher the units are ranking the more power they have relative to the weight. However, you see a different background colors, and that reflects different hull designs.

To the left you have the darker blue, which reflect monohulls of vessels with closed ship sites. Then in the lighter blue, you have semisubmersibles that have typically rather rectangular design quite often used in more benign water for tender support operations.

And in the top right-hand corner, you have the white background, where you have the more conventional semis. And effectively, if you look at these three different designs, you will see that the conventional semis are almost omni-directional, meaning that, they have pre-transparent hulls, so that wind, waves, and currents can easily go through the unit without having a huge impact in terms of a force.

Then if you move to the light blue with a slightly longer typical benign water, the signs, you will see that it’s not exactly the same, because they are the (inaudible) more where current from the bow [ph] and stone is okay, but when the current hitting you from the side is actually challenging the vessel a bit more. Then, of course, you go to the blue area, where you have the monohulls, and you see there is a major challenge with the same current and wind there.

On the overall horizontal axis, we have what we call a motion factor. This is looking at the waterplane area of the unit relative to the weight of the unit. So this will tell you how much the unit will move in the water, as it is becoming exposed to weights. And there you see that to the left the monohulls will have a huge waterplane area, and hence, we'll move with the seas a lot more, whereas if you go to the right, these units will move a very little in the water.

So, that doesn’t mean one unit is good and one unit is bad. It just means they are good for different purposes. So, effectively, the units to the left are good for carrying weight, but they will move in the sea, whereas the units to the right are not as good for carrying weight, but they are fantastic in terms of motion stability.

So, therefore, if you look at the blue units that we have plotted, that is the Prosafe DP fleet, and you see a smallest unit the Floatel Reliance – sorry, the Floatel Reliance and Safe Concordia about same design there. However, the gap is pretty large if you move from that design to the Regalia, or new builds in Notos and Eurus, and even more to the new builds units coming out of Jurong Shipyard.

So for us it was important to build the units that would actually handle the actual operation of an accommodation unit in a very good way. And here you see the meaning of the importance of doing specific purpose-built new builds for this segment.

Another way of looking at the different markets and how volatile they may be in terms of shifts and demand. If you look at the North Sea to the left, you will see that even though there is a growth in number of vessels, there is not really a growth in terms of number of owners, so that market is still pretty well consolidated. If, however, you go to Brazil, you see that despite a growth in number of vessels, there is no consolidation, and the number of owners is almost growing in proportion.

So there you see a slightly different market with different dynamics. North Sea, clients put a lot of value on track record organizational debt to improve our confidence. Certain other regions, you don’t see currently the same focus on these important elements.

Then moving over to the demand section, still, I think it’s fair to say that North Sea demand is looking rather robust, but if we were looking at trend, the trend is down from last quarter, our index shows 95 relative to 100 last time. What has been important for us now when we have issued the statement in relation to dividend is to look at what is happening in other industry segments.

In the past, we have sometimes seen that there could be volatility in some segments, and it doesn’t hit us and sometimes it does hit us. What we have done now is just reflecting on the fact that, oil companies are focusing on cost-cutting for the next two-year period, and we've just sort of taken that into account in terms of our communication.

So we need to just follow closely what is happening there to see if that has a similar type of impact on our market, or if it doesn’t really have that impact, that remains to be seen. Anyway, long-term, we don’t really see much changes, the same demand drivers are there in terms of aging infrastructure, some new development projects down the pipeline, and also good activity in recent licensing rounds.

Day rate development, not much new to report out. The trend remains reasonably steady with the Safe Scandinavia being a bit of a statistical outlier there, and that is due to the TSV work rather than it operating in a normal accommodation mode.

Then moving to Mexico, a lot is happening now in Mexico with the new energy reform. So that will be a significantly more important and interesting market overall for the coming years. However, from an accommodation perspective, it is not expected to happen in terms of these new developments in the next three years as it will take some time for this energy reform to have an impact for people to look at seismic to more exploration drilling, and then we will see demand pickup in deep water areas.

However, if we look at the more sort of existing infrastructure in shallow water regions, there is also a positive development there. If you track the number of jack-ups, the drilling in Mexico, that is climbing quite considerably, so there is also clearly an initiative to do more also in the more mature shallow water areas.

Day rates, not a lot new, as we haven’t really entered into any new contracts there recently. Then moving to Brazil for a long time, this has been the prime growth region of the accommodation market in terms of number of new units. We continue to see high activity in the Campos basin, and it’s still that is primarily driven by maintenance requirements.

However, we gradually see now that Santos is picking up with more opportunities there. And also what's interesting to see is that, all of our players in (inaudible) are now looking at using accommodation units in these waters, so that could be another enhancement of the long-term demand side.

However, the challenge is, as I mentioned a very fragmented supply side, and also as we have communicated before credit challenging operational and cost environment. The positive is that, we have seen an increase in day rates over the last three years. It’s gradual, but the contract we won last year for the second quarter was considerably better than the first ones we got some years earlier, so returns have been picking up, but still at a slightly slower pace than we would like to see in this segment.

Rest of the World, some interesting opportunities there as well. Australia continue with some demand in relation to hook-up and commissioning of relatively major projects. And what is interesting there is now gradually also the market for maintenance and modification should be starting to pickup. We haven’t yet seen the same volumes there yet, as the infrastructure has been somewhat younger than in our core markets like the North Sea and Mexico.

Southeast Asia, we will continue to see a bit fragmented market there with some demand for semis. We have, of course, the Astoria operating there now in the Philippines. US Gulf of Mexico, a bit of same picture that mostly for us, it will be deep water U.S., which is interesting. We've done a couple of jobs there in the past and more areas in the pipeline.

West Africa has been a quiet region for us for quite a considerable period of time. That is due to the fact that mostly you can operate there with simpler vessels and using an accommodation semi. And when we've been in the past, that has been in relation to larger projects typically run by oil majors. And now we've seen a little bit more of those actually coming back, so there might be a slight pickup in West Africa for the demand of our type of units.

Rest of the World day rates, again, this is bit comparing apples and pears as the operating costs are varying. But you see here the improvement in income for the Safe Concordia as she shifted over to the new contract earlier this year. High contract visibility and considering the normal outlook for this business, which is very much maintenance and modification driven, this is actually a very high contract visibility for us, still as you can see, we will have some gaps to fill in 2015 and 2016.

Converting this into order backlog numbers, you see there being a shift from the first and second quarter as the Letter of Intent from the TSV contract was firmed up, so the blue line is up, but we've also then consumed a little bit of firm contracts in that period, so the total value, including options now stands at US$2.2 billion.

So in summary, the order backlog is the best we've ever seen. New building projects are progressing really well. The key is the uncertainty related to what we as – see a short-term demand issue, as the long-term demand perspective looks reasonably intact. So we feel that all-in-all we are well positioned. We should be the best player in this segment and the challenges the market will see over the next few years may create some interesting opportunities for us.

So with that, we're happy to take questions, if there are any, yes.

Question-and-Answer Session

Haakon Amundsen – ABG Sundal Collier

Thank you. Haakon Amundsen from ABG. Just a quick question on the tax issue first, you said it was temporary, is that due to the mix as we go beyond these quarters, or what's the reason? Why the tax should come down, given the new tax regime?

Sven Børre Larsen

No, I mean, if you go into details on the tax cost, it’s – there are sort of certain incentives implied by the tax law that you cannot adopt to, but that takes a bit of time and will be a value to our existing contracts.

Haakon Amundsen – ABG Sundal Collier

Okay. Okay, thank you. And then with respect to the outlook on the dividend, is there any specific issues relating to visibility on the units that is the new builds that is coming on stream, that is weaker than you had like last quarter. For example, Zephyrus, that is leading to this i.e., certain issue relating to uncertainty about your operating cash flow, or is it because you see these opportunities in the long-term you want to build buffers for opportunities? What's kind of the driving force, is it the operational near-time side, or the long-term view here?

Karl Ronny Klungtvedt

And for all of the new builds they are progressing well technically and we are seeing contract opportunities for all of them. So that picture hasn’t changed recently. What we are looking at is just seeing the general offshore industries slowing down a bit. And in the past, we've seen sometimes that it impacts us and sometimes it doesn’t, so for us it’s just saying, okay, there might be something happening that could impact us, so let us also have a look at that.

Haakon Amundsen – ABG Sundal Collier

Okay. Thank you.

Johan Ström – Carnegie

Johan Ström, Carnegie. Just a follow-up on that, when you're giving yourself this short-term period of the reassessment of the outlook, how long do you see that period go? Is this a couple of years, or quarters to assess the dividend outlook?

Karl Ronny Klungtvedt

That one is difficult to say, all we've sort of promised that is the board will look at that situation and see if there was a need for a temporary reduction in dividend, so that one is difficult to call upon just now. But I think if we take it parallel to the – well the post-2008 situation that was a pretty aggressive, defensive move by the oil companies. And there we saw that for a period of year-and-a-half, we basically won very little contracts. But this is not yet what we're seeing now. We're just seeing a slow down, so we're just turning out the sign of caution that we may need to be a bit more defensive for a period of time.

Johan Ström – Carnegie

Thank you. And, on – I think you mentioned a couple of opportunities in Brazil in the report. Could you elaborate a little bit on that and the development in the ongoing tenders there, for example?

Karl Ronny Klungtvedt

No, I don't want to comment specifically on any tenders, but I think it's fair to say that it's open that there are some opportunities in Brazil, mostly long term, but also history shows us that it tends to take quite a while before these tenders are resolved.

Johan Ström – Carnegie

Thank you. And then, just some housekeeping, the CapEx guidance for 2014 was last updated in Q4. I think is that still…?

Karl Ronny Klungtvedt

Still around, yes.

Johan Ström – Carnegie

Okay. Thank you.

Sven Børre Larsen

$420 million to $480 million.

Johan Ström – Carnegie

Well, $50 million, $60 million in non-CapEx growth.

Karl Ronny Klungtvedt

Sorry.

Johan Ström – Carnegie

With $50 million to $60 million being...

Sven Børre Larsen

That's the range, $420 million to $480 million. It depends a little bit on, it's always a bit difficult to say which side of New Year certain investments will be booked, particularly of course this time related to the upcoming Concordia project.

Johan Ström – Carnegie

Thank you.

Sven Børre Larsen

And the TSV project for that matter.

Kjetil Haukås – SpareBank 1 Markets

Kjetil Haukås, SpareBank 1 Markets. Can you say anything about which payout ratio you consider if you're lowering the dividend?

Karl Ronny Klungtvedt

No, all we have said is that the board will consider a temporary reduction. So this is mostly a sign of sort of precaution that it's something that we will need to look at, but I cannot comment anything more than that.

Kjetil Haukås – SpareBank 1 Markets

Okay. Thank you. And then on Notos and Eurus, the two China new builds, can you say anything about which region they are most likely to operate in? I mean, is it more likely that they are now going to Brazil for example, then…

Karl Ronny Klungtvedt

No, well, we could, but we won't. But there are a number of opportunities, specific opportunities in several regions for those vessels. The key for us when ordering these units was to make sure we had versatile units that could operate very well year around UK, could do Brazil, Australia, basically any region except for the Norwegian continental shelf.

Kjetil Haukås – SpareBank 1 Markets

Okay. Thank you.

Sondre Stormyr – Danske Markets

Sondre Stormyr from Danske Markets, on the Zephyrus in 2015, you say you're seeing contract opportunities. Could you comment a bit on what's holding back the – those type of contracts given that you have no other units to compete with in 2015, is the decisions by all companies to or timing on projects or pricing discussions or…?

Karl Ronny Klungtvedt

Well, in general, whenever things are holding back in terms of a contract discussion that very seldom has to do with the supplier of the unit. It's normally clients that need to coordinate their internal projects, seeing exactly when they would like to start up a project, how it should be solved, et cetera. So, I will say, almost invariably, it's a question about the client deciding when, how to execute the job.

Sven Børre Larsen

And also, I mean, if you look at the last few years, you'll have a higher than normal portion of (inaudible) on the prospectus, where you typically see longer lead times, so it's not – if you go back historically it's not normal that you see lead times of, yes, even less than one year, but one to two years. But we have bit spoiled in that area for the last couple of years.

Sondre Stormyr – Danske Markets

And in terms of the longer term supply picture in the North Sea, one of your competitors with a pretty old unit ended up in a conference call where the oil company had to answer for the unit not being available due to repairs and maintenance and stuff in the second quarter call. How do you see attrition and sort of the North Sea supply developing from 2017 onwards when some of these very old units are facing new SPSs and potentially will not be there anymore?

Karl Ronny Klungtvedt

I think that's one of the reasons why we have focused on adding some new units to that market, because it's clear that some of our competitors without mentioning any of them don't have the same long term focus on this market segment. So for while, some of these units have earned excellent returns in this segment despite not really being up to the standard that most of the clients would require. So I think that you're pointing to something which is a potentially interesting development, because I think clearly with the new units coming in it's going to be more challenging to pick a sort of 70s build unit, if it's not really well maintained.

Sondre Stormyr – Danske Markets

And I have a final one. Statoil is requesting information for jack-up or semi for the Bressay field, so it's not sort of completely off the charts. What's the latest you heard about that field where you have the option for the Zephyrus, I believe?

Karl Ronny Klungtvedt

Again, we don't want to comment on any specific field.

Okay. If there are no further questions, then thank you for attending today, thanks.

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