Songa Offshore Se (OTC:SGAZF) Q2 2014 Results Earnings Conference Call August 25, 2014 9:00 PM ET
Bjørnar Iversen - CEO
Jan Steinsland - CFO
Ladies and gentlemen, welcome to the Songa Offshore Second Quarter 2014 Presentation. Throughout the call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session.
Today I am pleased to present Bjørnar Iversen, CEO. Please begin your meeting.
Thank you very much for the introduction and welcome to you all to the Songa Offshore second quarter presentation. As last time, I will take the general part and the CFO, Mr. Jan Rune Steinsland will take the finance and accounting part.
As we said -- as the introducer said, we will run the presentation without comments and will open up at the end for Q&A session.
I think in general, it’s important to see the larger picture when it comes to Songa Offshore. We are currently building a company after we have taken delivery of Cat Ds in 2015. We will have a company that will turn around $1.1 billion and we are building a company with a strategic focus on the North Atlantic with the starting point in Norway.
That means that we will more than double in size over the next year in the time where we see contraction in the drilling market and in this period, we will build up the largest, semi submersible drilling company in Norway.
Okay, with that, let’s go to the first slide, Financial Performance. Songa Offshore is delivering a very solid quarter even with the lack of revenues from Songa Venus of approximately $30 million where we were 55 days of contract in this quarter. We had excellent drift, sorry, operation on all in the other rigs and we came in with an operating revenue of $151 million.
We also had very high, relatively very high EBITDA this quarter with $61 million, as I said, even with the lack of revenues from Venus in part of the quarter. This is due to very high up-time on the rest of the fleet and relatively low operating cost.
We've also in this quarter taken an impairment of $60 million, which is related to the second quarter EBITDA of the Mercur and Venus and we also took a $50 million impairment related to the rig evaluation for end of June 2014. Jan Rune will come back to that impairment during the financials.
That brings us to a net loss in the period of $9 million and we adjusted for the impairment, the extraordinary impairment we would have $6 million in comparison to last quarter.
All-in-all, Songa Offshore is very happy with the cash flow that we had this quarter and we can sum up this quarter with a solid quarter for Songa Offshore.
Let’s then move to the highlights. Strong EBITDA of $61 million reflecting the 97% earnings efficiency and of this, we had approximately $57 million in EBITDA contribution from the three Norwegian rigs.
We also completed the sale of Songa Mercur and the Songa Venus. We had the closing on the 23rd of July, 2014, which was strategically very important for Songa turning the company to become a focus company on the North Atlantic.
Songa Dee SPS we arrived Invergordon, Scotland, yesterday around noon and the preparation are according to schedule and budget and finally we have started and kicked off that project and we are now in the execution phase.
When it comes to the Cat D, we have no change to the Cat D cost or delivery schedule this quarter and we expect as we said last quarter, one Cat D delivered per quarter in 2015. That means one in the first quarter, second quarter, third quarter and fourth quarter with delivery from the yard.
We've also received firm commitment for 1.1 billion financing for Cat D 3 and 4, which equals $550 million per rig in comparison to the $507 million that we had for the first two. Jan Rune will also come back to more details to this financing during the financing slides.
Okay. Let's then move to fleet and operations and have a look at that. To sum up the quarter, I’d say solid operations. We had in average, an operating efficiency in this quarter of 99% and we are very happy with what our crews and employees delivers both in the sea and onshore.
We are delivering up time and efficiency for our customers and I feel that our people have very high motivation and I'm really respecting the hard work that are now being put in hand.
We also had high operating efficiency of 98% for the Southeast Asia fleet, where we had 98% and we had 96% for the Songa Venus when that unit went on hire.
Let's then move to the rig operating expenses. We had good control on the cost side on all our rigs during this quarter and we see $182,000 per day in average for the Norwegian fleet and we see $82,000 in average for the Southeast Asia fleet.
We can say that as part of the Norwegian fleet, this part in there, which is related to the mobilization of the Cat’s training of personnel and so forth and that is in the range of $10,000 per rig. This is basically extra personnel on the training for the Cat's.
Looking at the Southeast Asia the 82,000, during this quarter, we have had more or less the same cost of the Venus during its demobilization and of course moving rigs and fuel and so forth that has pushed the OpEx on the Venus up to 78,000 and on average of 82,000 and moving forward, we will probably reduce that cost somewhat -- that OpEx somewhat.
We're also working on the Norwegian Continental Shelf. We're to replace some chains on couple other rigs, which is hired in today, or rented in today and we also had some drill pipe that will be replaced that is currently on hire instead of own. So we expect to have slightly reduction in the OpEx when it comes to the Norwegian rigs.
We're also consolidating all our base activities at Mongstad outside Bergen, where we will have our logistics center supporting our whole seven rig fleet in Norway.
Let's then move to the next slide, Contract Status, for 1st July 2014, we see there the contract coverage that we have relatively. Few changes here and we have chosen after the sale of the Mercur and Venus to take those two rigs out of the contract status.
As a comment, we can say that we have a good contract coverage, especially I would say of course for the Cat Ds that has an eight year contract and after that, 12 years with options and we have for the incumbent fleet, we have the first one coming off contract, second quarter 2016 and we have the Dee and the Delta coming off fourth quarter 2016 and there is also some options there.
Moving on to the contract backlog; as I said, we are currently building a drilling company that grows from approximately $500 million in turnover to well north of a billion dollar company. We see on 2016 that we have in fixed contracts and options approximately $1.1 billion in turnover.
So after mobilization the Cat’s, we will have a company turning around $1.1 billion a year in turnover and based on the current contract portfolio, that also imply that we will have an EBITDA in the range of probably 50% on that, which leaves us to an EBITDA in the range of 500, 550.
As we see there, we have a fixed backlog over $6.5 billion and we have further $8.5 billion in options and that brings us to the company in the world with the longest contract portfolio and also the highest contract portfolio per rig in average and we’re pretty satisfied with that in the current market where we see a contraction more or less in all segments. Mostly in the Norwegian market, I would say that Southeast Asia market, but probably also the deepwater and ultra deepwater market.
Then some few market updates or comments. Since we are sold out in Norway, as I said, up until let’s say in average maybe 2016, the current or today's market is not particular interesting for Songa. But of course looking at the last part of 2016 is very important for us and we think that the options rates on the incumbent fleet in average around $360,000 will be exercised.
Due to that, if you look at the Statoil fleet and the options today, these are the three lowest options -- optional prices in the Statoil portfolio and we think they will also be very competitive looking at the 2016 Norwegian Continental Shelf market.
On the other side, during this contraction, we see a trend of having very well-qualified applicants to the open positions for the Cat’s and where we see drilling people from other drilling contractors wanting to start working for Songa and this could have a positive impact on the mobilization cost and also the quality of the teams and their crews both on the incumbent fleet and on the Cat D fleet.
I would also like to comment on that we still have a strong focus on Songa Mercur and Songa Venus, especially Venus which is currently on a bareboat contract for Songa and we are also working with various contract opportunities through our new JV with Opus Songa Offshore, Songa Opus Offshore drilling. So in general -- but in general, I think we can say that the market in Southeast Asia is weak.
Then a few words about our fleet. If you look at the beautiful picture on that slide that is Songa Dee coming in yesterday morning in Invergordon on the toe and it arrived around 12'O clock in Invergordon Queen's Dock 24th of August, 2014.
On the next page, I would like to say a couple of words about the Songa Dee Special Periodic Survey. We have no changes to cost or schedule. As I said it arrived yesterday for 60 days yard stay. The budget is $90 million.
So our slogan for this yard stay is zero incidence, 60 days yard stay then $90 million budget, 60-90 and we have very good control over the work scope which includes approximately 200 work packages and on the long lead items there we have the BOP and we have the existing anchor winches.
We had the pre-arrival team. They have been onboard a rig for one to two weeks already and so far we have, we are on track maybe even a little bit ahead of schedule so far and during our wind tunnel testing of the rig and the modification of the winches, we found out that we don’t have to install four, but we now have to install two winches. This also gives us a little bit more execution power when it comes to the winch installation.
No material steel replacement and we’ve had of course before we arrived extensive inspection of the rig and we have a very strong team ready to execute and they are already pushing forward as quickly as possible and so far so good.
I am very happy about the team, I am very happy about the way our offshore crews work together with project team and I am looking forward to follow this up over the next days and weeks.
Let's then move over to the Cat D project. As I said, no change to cost or schedule compared to the first quarter reporting. Songa Enabler, the Cat D number four, has left dry dock and all four rigs now afloat key side along.
We have started for some time ago, the commissioning activities both of the Songa Equinox and the Songa Endurance, they have commenced and Songa Equinox to be delivered in Q1 and with one Cat D rig being delivered thereafter per quarter.
As the last quarter, average ready-to-drill cost will be $660 million plus 2% to 3% as reported in Q1 and we will be repaid from our cost in the Statoil, a mobilization fee of $40 million per rig to be received on delivery on the yard delivery.
To sum up the full costs again, May and August, Q1, Q2, Q3 and Q4 2015, and of course with the sale of the Mercur and the Venus we -- of course the organization will even have a stronger focus on the delivery of the Cats and the SPS team that we have on the Dee will after that project be focusing of course on receiving the Cats to Norway.
Then we have some beautiful pictures from the yard here and the one above we can see on the left that is Cat D number, the Endurance number two, we see more or less in the middle of the picture, we have Cat D number one, the Equinox, and we have -- we see on the right part of the picture there, the last two rigs, the one to the right is number three and the one little bit more to the left in vector in red, that’s number four the Enabler.
So, the project is moving forward and we have 150, 160 people at the yard and Statoil is also on the yard around -- having around 200, 20 people onboard and brining a lot of valuable comments into the project.
To understand Cat D project in a larger picture, the build inspect towards DSME is based on Statoil’s specification and Statoil will approve the yard technically before we leave the yard.
That takes out a lot of risk in the project and the only test that we’re going to do in Norway is basically the full deployment test where we going to show all the stuff that we had proven in Korea will also work when we come to Norway and that is a big difference compared to all of the mobilization of rigs that we’ve seen in Norway.
And let’s then move over to the sale and over Mercur and Venus and come with some comments related to that. The sale of Mercur and Venus as I said was completed on the 23rd of July 2014. At that time we established also a joint venture with the buyer Opus Offshore to operate the rigs.
The Joint Venture will be fully integrated to a drilling management company for the international regions and Opus has an option period to acquire Songa Offshore’s 50% of this Joint Venture starting two and half years post inception.
We’re happy we have a strong team in there built around over VP International Operations, Ian Martin and we have also strengthened that team with Mike Unsworth and we have -- we are in the process of setting up and getting a full fledge management company there.
We have also very strong Board in place with Mike Mannering and myself from Songa and Vern Westerhout and Peter Burnett from Opus.
Songa Venus is taken back to Songa on bareboat charter from 1st of June till the earlier of 31 March 2015, of the commencement of SPS at a day rate of $120,000 a day and I think in the big picture, we are satisfied with this transaction.
And based on that, I think I will give the word to CFO in Songa Offshore, Mr. Jan Rune Steinsland. Please Jan Rune.
Thank you, Bjørnar. We then turn to Page 17 and the financing. We did announce the financing for Cat D, 3 and 4, end of June and that was an important milestone for the company, the finance team had worked on that since Christmas and I think we’ve reached most of our objectives of that financing.
Above all we got good volume with post-delivery financing of $550 million per rig compares to $507 million per rig for the two first ones where the basis now has been the updated rates that were renegotiated with Statoil.
We also got in place a $90 million per rig pre-delivery revolver. So, we have a good flexibility there with these funds that we can elect to draw on or not.
The commercial tranche of the facilities is underwritten by banks. So the financing is so to say done and we’re on competitive terms. We’ll come back to terms when all the documentation is in place and we’re planning to complete that within a good month or so end of September or beginning of October.
On Slide 18, we have an overview of the debt maturity profile following the financing of Cat D Number 3 and 4 and we see here with light blue that financing coming with installments of 84, 96, 96, 96 in the first four years and then with the main maturity in 2020. So, you will see it’s a five-year loan.
If we look at the near-term maturities that we have, we see that in third and fourth quarter of 2014, we have $53 million to repay to banks under the fleet loan that consists of the $24 million that we did as a mandatory prepayment in relation to the sale of Mercur and Venus and two normal installments of $40 million.
Then next year we have the first installments under the Cat D, 1 and 2 financing in the end of the year, we have the Statoil pre-delivery financing for Cat D number 3 and 4 that matures at delivery of Cat D number 1 and 2 and again we have $57 million of the fleet loan facility, those are four normal installments of $40 million and this facility is now financing the Songa Dee, Songa Delta and Songa Trym only following the sale of the two other rigs and after the mandatory prepayment, the balance is now down to $292 million.
I think we then turn to the interim financial statements and with P&L on Page 20. Operating revenue came in at $127 million down $9 million from previous quarter, but as Bjørnar mentioned, we had $13 million lower revenue from the Venus in second quarter and that was partly made up by $3 million to $4 million higher contribution from the Norwegian rigs.
So all in all, good operating revenue in spite of the shortfall from Venus that went off contract early May.
Then we have reimbursable revenue that is up some $4 million to $15 million, but as we see the reimbursable cost is of course increasing accordingly. And then we have other revenues at $9 million also up $2 million, from absence of some of the agency fees when the activity on the Southeast Asia rigs are being reduced from our side.
All in all total revenue $151 million down $4 million from pervious quarter, in spite of the -- again shortfall from Venus of '13.
On the rig OpEx side we are pleased to report $65 million only, which just stands out as a very good number compared to any quarter in the past year here. We are down $2 million from first quarter and that’s primarily lower cost related to the Mercur where we had a settlement related to a previous contract in the first quarter.
The reimbursable cost I did comment on G&A we also came in at a low end which or close to $12 million while we had $40 million previous quarter. We probably were a little bit quick to take some of the cost on the G&A side in first quarter. So I think $13 million each quarter and as a going rate now gives a good picture. That brings us down to EBITDA $61 million down $4 million from previous quarter.
We then turn to Page 21. I’d like to spend a little bit time on the impairment side just state that ordinary depreciation was basically at the same level as previous quarter with $29 million.
On the impairment side, we did as in first quarter; we did an impairment equivalent to the EBITDA from the Mercur and the Venus that was $16 million in second quarter, but we also did another additional impairment of $15 million bringing this number up to $31 million.
And we need to lean back a little bit to understand how that additional $15 million are developed and at the end of the last year, we have reported Venus and Mercur at the value of $180 million. We have then written them down through the EBITDA contributions of $40 million in first half year so they're down to $140 million.
And then in July in the closing, we received $112 million in cash leaving a value of $28 million in the balance sheet.
If we look closer at these $28 million, we need to look what’s in there and we have several elements. We have the earn-out of almost $35 million that will be settled in 2017, that needs to be evaluated and is counted, no, that's the sellers credit, sorry, we have a long-term earn-out on the Mercur and we have a short-term earn-out on the Mercur related to the contracts coverage.
And then after these positive elements, we also have the obligation of the Venus bareboat arrangement up to the 31st of March or the SPS of the Venus.
So we took an overall evaluation of the $28 million, the net amount of $28 million sitting there as a receivable in the balance sheet and we took a cautious approach and reduced this by $15 million to about $13 million, leaving much, much lower probability that any of these elements will hit the P&L in the future.
So do no expect to see the Venus bareboat in the EBITDA in third and fourth quarter. The only thing you will see from Venus and Mercur is in second quarter, the EBITDA contribution up to 23rd of July.
Okay, that was a long story. I hope I was able to bring that across in an understandable manner.
We then go to the balance sheet. We don’t have a lot of exciting movements. Rigs are down a little bit $60 million from the normal depreciation and additional CapEx. The newbuilds are ticking up as we’re doing the investments in the Cat D’s.
Deferred tax asset was not touched this quarter and remains at $50 million, $55 million. The derivatives to one here in non-current assets and the one in non-current liabilities as well as the bond loans, these three lines need to be viewed as one component and they in both quarters add up to about $375 million, the value of the two unsecured bond loans in dollar terms; so, no movement there.
Assets held for sale are the Mercur and Venus valued at $125 million now before the transaction flows and then after the close, where we received $112 million as said, we have the remaining net $12 on that line.
And we have just minor operational movements for the next few lines and cash is the next one with a major movement where we’re up from $297 million to $379 million to the end of second quarter reflecting primarily the draw on the junior loan of under the Cat D 1, 2 financing, the pre-delivery tranche as well as good cash flow from operations in second quarter.
However this cash balance is even higher now after the close of the Mercur and Venus transaction and it was running just north of $450 million last week.
Shareholders equity is basically unchanged at $1.1 billion after the quarter. Bank loans have increased somewhat from the draw under pre-delivery junior tranche partly offset by installments. Other items are pretty stable here on the non-current liabilities and on the current liabilities we’ve recognized $24 million, which is the mandatory prepayment that was paid in relation to the sale of Mercur and Venus and that is now out of the balance sheet.
Current portion of bank loans, Statoil with $110 million and Nordea fleet loan with $56 million, corresponding to the next four installments, smaller movements on the remaining items.
Then, turn to Page 24 and the CapEx and we see, we had on the three rigs in operations; we had CapEx of $12 million in the quarter, $6 million related to the Dee SPS and $6 million related to other capital expenditure, minor projects.
While on the Cat D project, we had another quarter of stable addition to the Cat price interest of $9 million, while CapEx was going up from $15 million to $20 million, mostly representing other furbished equipment, meaning major spare parts that the company is ordering in addition to the yard price and according to budget and plan.
By that, I hand over -- hand back to Bjørnar.
Thank you, very much, Steinsland.
Okay, I’ll try to recapture what we have done over the last, I would say three quarters. The Songa house, we're building the Songa Offshore turnaround and let’s look at the components that we had put in place over the last three quarters.
We have got a new Board and management in place. We have a new vision and strategy where we are not focusing any more on deep water or the Southeast Asia or international market. We are aiming at the North Atlantic harsh environment segment and that only, we are a much more focused company so, a new vision and a new strategy in place.
And during the recapitalization, we got in $400 million in new equity or equity to instruments and we have also at the same time we amended both the bank and bond loans.
In that round, we also improved the Cat D drilling contracts towards Statoil and increased our backlog also accordingly and based on this restructure last year, we we're also awarded the offshore prize for the marine, among the Offshore conference for the best restructuring for oil and gas offshore for 2014.
Solid operations as we see also from this quarter, solid operations on all the rigs, strengthening of the organization and we're also putting a lot of systems in place to strengthen the company further.
We also repaired the -- had a repair issue in January, February this year, and we also got the financing of Cat D 1 and 2. For this quarter we have the two ones in green there, ticking off to another two, bringing it up to 10 out of 12 of the action that were -- had planned to achieve and we have the sale and closing of the Songa Mercur and the Songa Venus and we also had as Jan Rune said in place the financing for the Cat D 3 and 4 with it’s pre-delivery facility.
Then remains two more challenges, one maybe bigger than the other one. We have started and kicked off the execution of the Songa Dee SPS project yesterday in Invergordon and that shall be finalized over the next 60 days and then we have the Cat D deliveries and mobilization where we take one Cat per quarter in 2015.
That brings Songa in 2016 and realize with all the rigs in operation to around the company turning $1.1 billion with approximately up 50% EBITDA going forward and that is whatever remaining and I think that sums up in many ways Songa Offshore, what we do, what we have done and what we are focusing in going forward.
After the divestment of the Songa Mercur and the Venus, we have the whole organization now is focusing on and taking delivery of the four Cats.
And I think with that, we open up the Q&A session.
(Operator Instructions) We currently have no questions.
Okay. I think with no question there, we thank all of you guys for listening in and we’re looking forward to welcome you on our next quarterly presentation, approximately a quarter from now. Thank you very much.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.
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