Songa Offshore Se (OTC:SGAZF) Q1 2016 Earnings Conference Call May 27, 2016 6:30 AM ET
Bjørnar Iversen - Chief Executive Officer
Jan Rune Steinsland - Chief Financial Officer
Lukas Daul - ABG Sundal Collier
Thank you very much. First of all, welcome to the Songa Offshore’s First Quarter 2016 Presentation. Again, it’s very good to see that so many have taken the time for call into the conference today. And as last time, myself, Bjørnar Iversen, the CEO will present through the general part and CFO, January Rune Steinsland will walk you through in the financial and accounting section. After that, I will sum up the first quarter.
In general, I would like to say that the Songa Offshore organization is in another phase. We have now transformed and are in the process of transforming into focused drilling organization. The core focus of the company now is to deliver safe, efficient quality operation and prime value to our customers.
Let’s move to the presentation. Quickly mentioning in the disclaimer, financial performance and highlights, we delivered an EBITDA of US$71 million in the first quarter. Songa Encourage commenced a eight-year drilling contracts on 11, April and Songa Enabler was delivered from the yard on March, 31.
We had 81% total fleet earnings efficiency in the quarter reflecting the start up challenges we had for the Songa Equinox and the Songa Endurance in the month of January. We commenced contract there - we came back after our BOP issues the 5, February. And I will comment more on this on the next slide. We also had the comprehensive refinancing including a new US$125 million convertible bond issued in April. [Indiscernible] will come back more on the financial related to that refinancing.
Let’s then go to fleet and operations. First, looking at our legacy fleet, again solid operation on our legacy fleet with 100% operational [indiscernible] 98.5% earnings efficiency an excellent quarter for the legacy fleet. Let’s then take a look at the Cat D fleet. We see that in January, we had our BOP issues, we came back this February and then moving into March approaching high close to 100% operating efficiency on both rigs climbing and we see a good trend on both rigs.
We had the two rigs, the two Cat D rigs Songa Equinox and Songa Endurance in operation this quarter. And to sum up the challenges we had in January and early February. We have seen continues improvement in the operation and we will continue to run in the rigs and make them top performers over the next month and we also see good lessons learned to share with rig number three and rig number four to avoid the issues we had in January on the other two.
Let’s then move to rig operating expenses. The OpEx level has continue to come down, driven by cost focus and currency. The OpEx level on the Cat D seem to stabilize some place between US$140,000 and US$150,000 a day after the start of month based on today’s currency level. But still there are some I would say uncertainty related to those figures due to the few months we have been in operation. We see 113 average legacy fleets and we see for the quarter 157 average for the Cat D fleet and of course in that 150 reflecting additional start up costs - initial start of costs for both Songa Equinox and the Songa Endurance.
Then a quick look at the EBITDA average. What has changed from fourth to first quarter. We see in last quarter we had $103 million that concluded $41 million cancellation fee from Songa Trym. And then we see the $20 million from Trym’s EBITDA operation in the fourth quarter. So 61 minus on Trym’s contribution, Trym must be effect during the first quarter.
Let me see the contribution from the Cat D fleet $24 million in the quarter and this is some improvement on the EBITDA from Dee and Delta $1 million due to both operational efficiency and cost awareness. And we also see an improvement on the G&A of US$2 million that brings us to the US$71 million in EBITDA that we reported here.
I would also comment on a couple of initiatives that we have related to EBITDA improvement in the company. Of course, we focused on operational excellence and up-time, we have rightsizing project going on that will lower the G&A and we expect that is fully implemented that it will have an anticipated effect of US$30 million year. We have also kicked off our supply chain projects, which will lower the relative OpEx further going forward.
Then, contract status Songa Dee and Songa Delta have firm contracts through September and November 2016. And we see the Cat D contract on this slide and as we informed about in the press release March, 15 Statoil exercised the contractual rights to reduced contract duration on Equinox and Endurance by respectfully 347 and 184 days due to that late delivery from yard. Statoil also has the same right on Songa Encourage and Songa Enabler and expect if exercised, it will be 132 days on Encourage and approximately four-months on Songa Enabler.
Also another way to look at all the backlog, is to look at these bar chart, we see the firm order backlog of $5.1 billion that takes us through full contract on all four rigs to 2022 and we see that is also bringing us into 2023 and into 2024. We also have the options on top there again of $7.9 in options, but that shows the operation that we have in the book that brings us more/less creates the floor of approximately $660 million to $680 million per year over the next seven to eight-years.
Then the world map again, we remember the world map, we have now moved all the rigs out of South Korea and we have closed down our office in Korea. And the Songa Enabler is currently on her way between Walvis Bay in Namibia and up to Las Palmas, we expect the rig to arrive in Norway early July and to commence the contract in August. The other three rigs and operating in Norway, Songa Equinox and Songa Endurance of the Troll field and the Songa Encourage outside [indiscernible] field.
Cat D project, last rig approaching NCS, Songa Equinox and Songa Endurance as mentioned commenced drilling operations in December. Songa Encourage commenced drilling operation in April or we went on contract March, 31. Songa Enabler delivered from the yard March, 31 and expected to arrive in Norway early July and to commence her drilling contract in August this year.
As mentioned Cat D project organization in South Korea is demobilized and estimated ready-to-drill cost per rig of $693 million excluding the tug assist cost of $9 million less estimated net liquidated damages against yard of $15 million. Mobilization fee of $40 million per rig received for the first three rigs in 2015 and we received in May 2016 the loss mobilization fee for Songa Enabler from Statoil.
Then, DSME Arbitration, there is nothing new on the arbitration. To repeat in March 2016, refer our press release on the March, 21. We submitted our response to the DSME claim and we also submitted at that time a $66 million counterclaim against DSME. Songa Offshore is of the view that DSME is fully responsible for the delays and any attempt to recover cost overruns is of no merit in this case. Songa Offshore has continued to prepare a case and we remain confident on our position and we will defend it rigorously.
Next, I'll move to the market updates. Okay, here we see the Norwegian NCS floater market. As mentioned earlier the Dee and Delta have firm contracts until September and November of this year. Songa Trym is stacked and marketed both in Norway and UK. Number of stacked NCS compliance rigs has increased during the quarter and it will increase during the year and we see a relatively weak flow to demand on the NCS both for 2016 and into 2017.
With that, I would like to give the word to the CFO in Songa Offshore, Mr. Jan Rune Steinsland. Please Jan Rune.
Jan Rune Steinsland
Thank you, Bjornar. I would first summarize the refinancing and the restructuring exercise that we have been through recently, and that we’re a still working on the subsequent offering. Firstly, in terms of capital rates, we issued in March a breakdown on $91 million and in April, we evolved this into a new $125 million convertible bond that closed on April 20.
We are in the process of launching the subsequent equity offering with gross proceeds up to 25 million. This is partly a repair issue, but it’s also open to all investors to subscribe. And as you might have seen from our press release today, the prospectus was approved by the Norwegian and [FSA] (Ph) yesterday and the subscription period will start on Monday and the prospectus will also then be sent us a press release on Monday.
On the restructuring of bond and the shareholder loan the existing convertible bond of 150 million was converted to equity inflow. Maturities for the senior unsecured bonds and the shareholder loan from Perestroika have been agreed to repay one-third on the original maturity and the remaining two-thirds will be extended 30-months until 2020 and 2021.
We have further coupon reductions of these three unsecured debt facilities and we will pay through third quarter of this year 0% coupon. Then up to original maturity in 2018 we will pay 2.5%. And then in the extension period, we will pay a coupon that is 1.5% reduced compared to the original coupon. We also had a covenant relief through the second quarter of 2018 and we only have the minimum cash covenant of 50 million in relation to the unsecured bonds in this period.
On the bank side, we are extending the cross currency swaps that are related to the senior unsecured bonds. And we have amended the bank facilities providing covenant headroom and reducing the need and risk for the [indiscernible] and repayment on the facilities that could arise from the work rig valuations that we've increasingly seen in the market.
We then turn to Page 18. So how does our new debt maturity profile look like? Above all, we have moved the two-thirds of the senior unsecured bonds and the shareholder loan maturities from 18 to 20 and 21. And the 115 million convertible bond maturity in 2019 has now been removed from the schedule as it was converted to equity.
This enable us to handle 2018 and 2019 from our cash flow and from cash on hand and gives us optionality to choose a good timing for refinancing of the Cat D fleet, when the market is in good shape for us. In relation to this, I would also like that we are repaying about 50 million on each of the Cat D rigs each year.
Let's then turn to page again to Page 19 and go to the P&L and review the major changes from fourth quarter to first quarter. Operating revenue came in at 123 million down 9 million. As Bjørnar touched on, this is primarily related to the Trym cancellation fees that we received in fourth quarter of 41 million, and absence of other Trym related revenues of 17 million in fourth quarter. This is almost offset by ramping up Cat D revenues that increased by 50 million for the last quarter.
Reimbursable came in somewhat lower than previous quarter also with the corresponding lower reimbursable cost lower down in the P&L, and other revenue came in at down nine from 18, which primarily reflecting a high level in fourth quarter, as all the remaining Trym differed revenue was washed out when the recomplete of the contract. So total revenue came in at $137 down $22 million.
Rig operating expenses were 53 up 16 the Cat Ds added about $25 million and this is partly offset by assets of Trym OpEx of $7 million. G&A came in at $8 million and that's $2 million to $3 million lower than previous quarter, this is reflecting the earlier effects of the right sizing project, but also some credits due to lower bonuses that we got in first quarter.
This brings us to an EBITDA, which is down by 32 to 71, but an EBITDA that has the higher earnings quality as we see it than fourth quarter, as fourth quarter had one of Trym cancellation fee and also a higher portion Trym non-cash other revenues. So all-in-all, a relatively good quarter from EBITDA perspective and on forecast we see it.
On the next page depreciations are up by 11 to 39 that’s primarily from a full quarter depreciation on the Equinox and the Endurance and on the [indiscernible] are some offsetting affects where we have lower depreciation, because we took impairment. So we have a lower depreciation base, but then we also depreciate a very shorter life time, so that’s what against us.
EBIT came in then at 32, we had finance income of two and we have finance expenses that increased by $21 million to $22 million. The gross interest in the quarter was about $30 million just as previous quarter but seems the Equinox and the Endurance now have per quarters in operation, we kept last fall less interest on the project that we did and we will see more of our interest coming the P&L away rather than into the balance sheet going forward.
Net financial items were at 26 also reflecting some $6 million in negative other financial items primarily for ForEx related. Income tax, we had a credit of four, this is probably related to the ForEx items above, but also loss in the Norwegian operations due to the down time on the Equinox and the Endurance in January and into February. All-in-all, bottom-line with the profits of $10 million for the quarter.
If turn to next page and let’s go through the balance sheet and I will just point out the largest movements. For the rigs in operation, we reduce the balance by 35 to 1,929 that’s just the ordinary depreciations that kick in. For the new builds, we’re up $0.5 billion to 1.4 almost reflecting that we took delivery of the Enabler and there is also some Enabler, Encourage further CapEx from the mobilization.
On the derivative financial instruments, we have a line here going from $97 million to zero in this quarter. This is related to certain de-recognition of cost currency swaps that we’ve had and that have been recognized both on the assets and the liability side and grossed up. And some of the swaps have been close to zero, we have de-recognized these swaps during the quarter and that will have an effect here of no swaps shown on the asset side and a much lower number on the liability side, but in total about zero.
Trade receivables are up by 45 this need to be seen together where the earned revenue that is down 18, these are the invoiced and un-invoiced portions of work done not paid yet. And so in total, this up by 27 and that’s just reflecting more rigs in operations and more receivables on that. Cash is down $12 million to $156 million and in this context we can mention again that we received a un-invoiced portions 91 million on the bridge loan in the fourth quarter, while the remaining part of the CB of 125 was receive when the loan closed in April and we also received the Enabler mobilization fee in May.
Total assets is then reaching $3.6 billion and this is about or close to the peak that we will see, this time around for Songa Offshore as all Cat Ds have now been delivered and only some mobilization is left to boost the balance sheet a little bit further, but this is basically the level we will go up to before starting to repay on loans and depreciate assets.
On the following page, we see that shareholder equity is about flat at 572 and this is reflecting that the convertible bond of $150 million is converted to equity in April. Bank loans are up by about $450 million that’s the Enabler post delivery portion of the loan. And we see the convertible bonds are up 160 to 291 that’s the $150 million loans taking there and with the addition of the bridge loan. And then we see on the next line with the derivatives that we are down $110 million reflecting the deal recognition that I already addressed on the previous page.
As other movements are less significant, I believe we turn to the next page at our CapEx review and we see on the left hand side at both the existing fleet or the legacy fleet as well as the Cat D fleet incurred $2 million of CapEx in the quarter. and on the Cat D project side, we had CapEx of $491 million primarily related to Enabler finance final installment that was just short of $440 million.
With that, I'll turn back to Bjørnar.
Thank you Rune. Let's then sum up the quarter. Songa delivered $71 million in EBITDA this quarter, the three Cat D rigs, we have three of the Cat D rigs on day rate and the fourth rig arriving in Norway early July and will commence drilling contract in August. We have continued solid operations from the legacy fleet with 100% operational uptime. We have strong focus on the Cat D fleet performance and cost efficiency and we see good operational improvements on the three Cat D rigs in operations over the last months.
We have completed a comprehensive refinancing with new $125 million convertible bond, conversion of the existing $150 million convertible bond to equity and we've extensive unsecured bond coupon reductions and maturity extensions as well as improved bank and bond covenants, securing a longer runway for Songa Offshore.
We will have the refinancing concluded with $25 million subsequent equity offering as we start 14-days subscription period on coming Monday. Drilling market environment remains challenging and securing new contracts for the existing legacy fleets remains a top priority for the company.
With that, I think we go to the Q&A session.
Thank you very much. [Operator Instructions] First question is comes from the line of Lukas Daul of ABG Sundal Collier. Please go ahead with your question. Your line is now open.
Thank you. Hello, guys. I had a question on the Norwegian or the North Sea market in general. Obviously you said that securing follow-up work is one of your top priorities for legacy rigs and could you just shade some more light on what is out there in terms of standards, what are the durations, what are the startup dates and how do you see that matching against the availability of your rigs?
Hello, Lucas. I would say the market as we commented in the market section, it's slow, there is not much out there, there something, but I don't want to go into detail on what exact things we are working on Lucas. But I would say in general, still very slow for 2016 and 2017. I have nothing more to comment than that for today.
Okay, fair enough. And then on the Cat D project, can you say how much net cash outflow there is left in the second quarter as you have taken delivery of the final rig?
Jan Rune Steinsland
Lukas I think this is your favorite question and I think I will have to pull out my favorite answer, which we provide you with how much of cost in total and how much we spent so far and then we will leave it to you guys to subtract.
Yes, I was more checking against or around the mob fee did you receive that - when did you receive that?
Jan Rune Steinsland
The Enabler mob fee was received early may and the other three mob fees were received last year.
Okay. I was wondering about the last one. So okay, thank you.
[Operator Instructions] Gentlemen, at this stage, there seems to be no further questions in the queue. Sir, may I please pass it back to you for any closing comments.
Thank you very much. With that, we would like to thank the participants for calling in and we are looking forward to the next quarterly presentation and we wish all of you a nice weekend. Thank you very much for attending.
Jan Rune Steinsland
This now concludes today's webcast. Thank you very much for attending and you may now disconnect your lines.
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