Akastor ASA (AKKVF) CEO Karl Erik Kjelstad on Q1 2021 Results - Earnings Call Transcript

Akastor ASA (OTCPK:AKKVF) Q1 2021 Earnings Conference Call April 29, 2021 3:00 AM ET

Company Participants

Øyvind Paaske - CFO

Karl Erik Kjelstad - CEO

Conference Call Participants

Øyvind Paaske

Good morning, and welcome to the presentation of Akastor's first quarter results for 2021. My name is Øyvind Paaske. I'm the CFO of Akastor, and I'm here together with Karl Erik Kjelstad, the group CEO.

We will take you through the presentation that has been uploaded on our Web page this morning. Karl will start by taking you through the business highlights before I will go through the financial results. After the financial section, we will open for questions through the webcast solutions. Questions can be posted at any time during the presentation.

I will not leave the word for Karl for the business update. So please, Karl.

Karl Erik Kjelstad

Thank you, Øyvind, and good morning to everyone on the call, and thank you for listening in to this presentation of Akastor's first quarter earnings, 2021. First, please note that following the announced transaction, March 2nd of this year, to merge MHWirth with Baker Hughes' Subsea Drilling division, Akastor consolidated revenue and EBITDA for the first quarter excludes MHWirth financials. MHWirth is from the first quarter of this year included in our P&L under Discontinued Operations. As mentioned, Øyvind will take you through the financial results in the latter part of this presentation. But let me first start with some key milestones in the quarter, and let's move on to slide number five.

The main event in the first quarter was the announcement of the agreement to form a JV between Baker Hughes' Subsea Drilling division and MHWirth. This transaction is a major step for both Akastor and MHWirth. And the new company will be a leading global drilling equipment provider with integrated delivery capabilities, financial strength, and with the potential to address the full range of customers' needs. As you are aware, MHWirth today delivers mainly all the drilling equipment on the top of the rig, the so-called topside equipment, while Baker Hughes' Subsea Drilling division delivers subsea BOP. And both MHWirth and Baker Hughes delivers the [riser system] [Ph] that connects the BOP to the topside.

Especially the inclusion of the subsea BOP in the JV product portfolio is a key strength of the transaction. The entering barrier for the subsea BOP is massive due to the high safety and regulatory requirements needed. We strongly believe that the combined entity will have a solid foundation for future growth, including increased capabilities to participate in the needed oil and gas transition towards more energy-efficient solutions as well as deploying and developing technology solutions that enhance drilling efficiencies. Cost synergies is conservatively estimated around $10 million per year, however based on the ongoing integration planning we believe that we, through the integration process, can increase this synergy target.

Slide six, a short recap of the transaction with Baker Hughes. The JV will be a 50/50 owned entity by Baker Hughes and Akastor. We in Akastor, we contribute 100% of our shares in MHWirth against 50% shares in the JV. And in addition, we will receive $120 million, of which $100 million will be payable in cash at closing of the transaction. This transaction will require a refinancing of Akastor's existing corporate facility. The refinancing is committed, and it's of NOK1,250 million revolving credit facility that we will use to refinance our existing debt, and also will provide us headroom for Akastor going forward.

The closing of the transaction is dependent on the completion of the competition filings in the countries where the JV will have major operations. The progress of these processes is difficult to predict, and we expect a completion within the third quarter this year. Following the closing of the transaction, the goal is to ensure that the JV becomes, what I will call, IPO-able as soon as possible.

Slide seven. Let us look in to the performance of our portfolio companies, and let's start with MHWirth. MHWirth project business had low activity in the quarter following the uncertainties with the two harsh environment rigs that is under construction at Keppel FELS, in Singapore. Progress might continue to be hampered by the ongoing dispute between Keppel FELS and their client, Awilco Drilling. In December 2020, MHWirth was awarded a drilling equipment package to Guangzhou Marine Geological Survey, to be followed by final contract negotiations. These contract negotiations have proven to be lengthy and is still not finalized, and the project is therefore not included in the order intake for the first quarter. The newbuilding market continues to be weak, but there are some few niche projects that are currently being pursued.

The MHWirth Products business revenues were also in low in the first quarter and continues to be affected by the challenging market. And the backlog is currently on a low level compared with last year. However, medium-term outlook is more positive, with increased activity both in oil and non-oil-related markets. For example, MHWirth, this week, secured a contract with its Non-Oil Product segment for about $30 million for the delivery of slurry pumps.

The MHWirth Digital business continues to see a positive momentum for its software solutions with a good pipeline of opportunities. One CADS, and CADS that is short for [Configurated] [Ph] Automatic Drilling System, was delivered in the first quarter. MHWirth has a good pipeline of growth opportunities within software solution and control system upgrades. The MHWirth service business, DLS, had 45 active rigs in the quarter. That's the same level as we had in the fourth quarter last year. MHWirth expect the number of active rigs to increase through the second quarter, and this is based on the contract schedule for the rigs with MHWirth equipment. MHWirth saw a lower spend per active rigs in the first quarter driven by lower spare part sales, partly an effect of some hoarding, in 2020, due to the logistic chain uncertainties following the global COVID-19 pandemic.

MHWirth expects that the spend per active rig will increase over the coming quarters. And the potential is there for a full-year 2020 revenues to reach levels around the same as we saw last year, however with uncertainties related to possible continued effects of the COVID-19, including travel restrictions, and so on. Despite a somewhat slow quarter, the DLS business continues to create a solid basis for MHWirth, with good medium to long-term growth opportunities. So, all in all, results for MHWirth in the first quarter was affected by low activity in the Product business, modest product sales, and lower DLS revenue per active rig.

Let's move to slide eight. AKOFS Offshore, all the three vessels delivered safe and good operations in the first quarter. Revenues were impacted by the scheduled five-year periodic survey for Aker Wayfarer that was completed in the quarter according to plan, with 35 days off-hire, 100% revenue utilization for Aker Wayfarer in the remaining part of the first quarter. Skandi Santos delivered excellent operations, with 100% revenue utilization in the quarter. And AKOFS Seafarer also had good operations, but the revenue utilization was impacted by the waiting on weather clause in the contract that gave somewhat reduced total revenue utilization. Traditionally, the first quarter is the period with some challenging weather in the Norwegian seas.

Further, we are pleased with AGR's strong performance in the first quarter, and this is driven by the high activity, especially for the consultancy business in Norway. Cool Sorption had low activity in the quarter, and I need to win new contracts. Our largest financial holdings, Odfjell Drilling, traded well during the quarter, and continue to build a strong order backlog. And our preferred equity instrument delivers a steady yield to Akastor. NES Fircroft saw continued growth in the number of contractors, and we expect this to continue throughout the year. DDW Offshore had all vessels in off-hire the first quarter, and this resulted in a negative EBITDA.

However, based on agreed charter agreement and sales agreement with Brazilian company, OceanPact, two of the vessels in DDW Offshore, DDW Offshore really improved its contribution going forward. Key focus for us now is to secure utilization of remaining three vessels in the fleet, and we have some concrete opportunities that is currently being pursued.

Turn to slide nine. Let me conclude by summarizing some of the key value drivers for the key investments. MHWirth, our key priority is to ensure a successful closing of the transaction with Baker Hughes, and thereafter push the JV to be IPO-able as soon as possible. AKOFS Offshore, maintain all vessels on contract with a focus on security high uptime and high revenue utilization through safe and excellent operations, combined with exploring strategic opportunities for the company. Odfjell Drilling, maximize the return on investment and realize this investment at right time. And then NES Fircroft, grow with customers, continue to expand into new market segments such as renewable sector, as well as continue to assess consolidation alternative, as well as realization alternatives in order to enhance value.

For the remaining of 2021, we are somewhat cautiously optimistic that the global economy, and thereby also our business sector, the oil services sector will recover from the impact of the global pandemic, assuming a continued successful rollout of effective vaccines over the world, we believe that we will see an increased demand for our portfolio companies coming forward, and over the next 12 to 18 months.

So, then, Øyvind, could you take us through the more details regarding our financial performance in the first quarter, please.

Øyvind Paaske

Yes, thank you, Karl. I will then present the figures for the first quarter, starting then at slide 11. Please again note, that as from Q1, following the announced agreement to combine MHWirth and the Baker Hughes SDS, MHWirth is classified as held for sale, and reported as a discontinued operation. Financial figures for previous periods have been restated on this basis. Following closing, the new entity will be reported as a financial investment in our P&L and balance sheet. As a result, our consolidated P&L is of less relevance going forward as it represents then only a minor part of our net capital employed.

With that in mind, in the first quarter, we saw a decline in consolidated revenues of 25% compared to comparable figures for the first quarter in 2020. This was primarily driven by lower revenues in AGR. The EBITDA in the quarter was negative NOK19 million, down from positive NOK2 million in the same quarter 2020, primarily a result of lower activity in AGR as well as DDW Offshore, which was consolidated into Akastor in Q4 last year, and was contributing negatively this quarter. Net financial items contributed negatively, with NOK28 million in the quarter, I will get back to this on the next page. Again, our consolidated revenue and EBITDA does not include MHWirth this quarter, as MH is reported on a net profit basis under discontinued operation, which contributed negatively with NOK40 million in Q1.

Total backlog per end of quarter was NOK2.5 billion, which includes MHWirth, that is around NOK500 million lower than last year driven by delivery of the ongoing projects since last year, without any new [indiscernible] projects having been booked in the period. Please again note, as Karl mentioned, that announced Chinese project where MHWirth was selected as a preferred supplier has not been included in order intake in Q1, as MH is then still engaged in negotiations, and the final contract is not yet in place. Net working capital, here presented including MHWirth, was NOK617 million per end of the quarter, increased by NOK90 million compared to last quarter, driven by a low starting balance, however still significantly lower than per Q1 last year.

It is worth noting here that the post closing of the MHWirth transaction, working capital over Akastor will continue to include the positions related to the four suspended [DRU] [Ph] projects towards Sembcorp, up until now reported as MHWirth working capital, as these will be carved out of the transaction and will then remain Akastor's exposure. Total working capital position of Akastor excluding MHWirth was NOK360 million per Q1, then including net value of the DRU positioned booked at NOK456 million.

Then, over to slide 12, for a breakdown of the financials, the revenues for AGR was down 18% compared to Q1 2020, however 28% higher than previous quarter, driven by continued growth within the consultancy in Norway. In Q1, AGR constituted 88% of total consolidated revenues for Akastor. EBITDA from AGR was NOK10 million in Q1. DDW Offshore is included here under Other, and contributed negatively with NOK13 million in Q1 as all vessels remained [stuck] [Ph] through the quarter. This will improve going forward as a result of the OceanPact agreement, resulting in lower stacking cost. The agreement is expected to be treated as a financial lease with account effect at commencement of the contracts.

MHWirth and AKOFS Offshore is not consolidated in our financials, with MH then reported in the discontinued items this quarter, while AKOFS is reported as before under net financials. However, MHWirth reported revenues of NOK591 million in the quarter, that is 49% lower than Q1 2020, driven again by lower activity within projects, and also then a slower quarter for services affected by the spare part sales. AKOFS delivered lower revenues and EBITDA than last year, mainly a result of revised terms for the Santos vessel, and also then the planned SPS for Wayfarer which resulted in 35 days of off-hire on this vessel. AKOFS Seafarer contributed positively with a technical uptime above 90%.

Under net financial items, the preferred equity instrument in Odfjell contributed positively with NOK33 million, of which around NOK9 million has cash effect, and NOK10 million relates to calculated increase in the valuation of the warrant structure. NES contributed positively with NOK23 million in the quarter, driven by booking of interest on our preferred equity holding in the company. Net interest cost was NOK23 million in Q1, in line with previous quarter. AKOFS Offshore contributed negatively, with NOK58 million under net financials, representing then our 50% share of net profits in the company.

I will then turn to slide 13, where you will see that our bank debt increased by NOK252 million during the quarter, partly a result of low working capital balance per start of the period, affecting then operating cash flow in Q1. We expect total net working capital, including MH, to further increase somewhat over the next couple of quarters based on activity. CapEx in the quarter was extraordinarily high driven by a specific item booked in MHWirth in Q4, last year, with a total cash effect of NOK33 million in Q1. Other funding included funding of AKOFS Offshore, with a total NOK38 million, partly through an equity injection and partly through an established net working capital facility related to the Seafarer vessel.

Of our total reported net bank debt, DDW Offshore constituted NOK418 million per end of Q1, in line with Q4 last year. Per end of quarter, our liquidity reserve through our undrawn credit facility was NOK1.5 billion. Going forward, we expect negative cash flow in Q2 as a result of increased net working capital and various cash commitments. Cash proceeds from the MHWirth transaction will then reduce net debt at closing, currently estimated in Q3. Net proceeds from MHWirth closing is estimated to around $70 million to $75 million net of adjustments and costs related, for example, working capital balance at closing, which is agreed in the agreements with Baker Hughes.

Please note that the financing structure of AGR and DDW will remain as is, and will lie outside of the new corporate facility.

Then, over to slide 14, total net capital employed per end of Q1 was more or less in line with last quarter. MHWirth is, per Q1, classified as held for sale on the balance sheet. Following closing is -- which is then expected to take place in Q3, the new JV will be reported as a financial investment with P&L effect at closing. Per end of the quarter, the market valuation represents a discount to book values of around 50%.

Then, if you turn to the next page, I will provide some further details on MHWirth. MH delivered a low quarter in terms of both revenues and EBIDA, driven by reduced activity within Projects & Products due to a low backlog for last quarter as a consequence of the tough market conditions and economic lockdown seen last year. Revenues from these segments was NOK144 million in Q1, representing 24% of total revenues for MHWirth, or a decrease of 73% compared to Q1 last year. Revenues was affected by low progress on the Keppel projects, where one unit is suspended and one unit is in the very late phase where progress is slow. Sale of single equipment was also low in the quarter, again driven by low backlog going into Q1.

Based on current backlog, we expect contribution from the Project & Product segment to remain at a relatively low level over the next couple of quarters. However, MHWirth has a good pipeline with promising leads, especially within single equipment where the non-oil market is gradually improving, clearly illustrated by concrete orders, as Karl mentioned, of around $30 million, signed early Q2 within this segment which should improve run rate from Q3, and forward. There are also good leads on larger projects, however with the expected longer timeline for award, and thus more limited effect on 2021. As mentioned before, the Chinese project is not yet formally placed and not included in order intake this quarter.

Revenues from DLS and Digital Technology was also somewhat low in the quarter, and came in at NOK447 million or 76% of total revenues in MH, decreased by 28% compared to first quarter last year. Lower activity level compared to last year was driven by low spare parts sale, which we believe is a temporary effect, and potentially then a result of very high spend within this area last year, partly driven by a for of hoarding among clients fearing supply chain issues following the COVID outbreak and economic lockdown. Average number of active rigs in the quarter remained stable compared to Q4. And based on the contract schedule of the fleet and option structure, the number of active units should increase over the next quarters.

Total fleet size per Q1 was 80 units, that is a reduction of one unit this quarter which was previously classified as cold. 14 floaters per Q1 is classified as cold stacked. EBITDA from MHWirth in Q1 was then NOK12 million, representing a margin of 2% affected by the low revenue level, especially within DLS. We believe margins should increase as service activity picks up over the coming quarters, as well as the normalization of the single equipment market.

Then over to slide 16, and some details of AKOFS. Revenues in the quarter was affected by the mentioned off-hire days for Wayfarer in connection with the five-year SPS. The yard stay went according to budget, both in terms of time and cost. Both Wayfarer and Santos delivered very solid operational results, with 100% technical uptime in the period in operation. Seafarer delivered a quite solid quarter as well, with technical uptime above 90%. Revenue utilization was affected by certain periods, as Karl mentioned, of harsh weather conditions, resulting in some downtime related to waiting on weather.

Total revenues in the quarter thus ended at NOK269 million, with an EBITDA of NOK42 million. EBITDA margin in the quarter was then affected by the Wayfarer yard stay in particularly. Q1 revenues represent a revenue reduction of around 12% year-over-year, primarily driven by the adjusted terms on the Santos contract, compared to Q1 last year, and then lower Wayfarer utilization this quarter.

I will then turn to slide 17. NES Fircroft continues to grow month-by-month across most business segments and geographies. Pro forma LTM revenues for NES Fircroft, per February, was down around 30% compared to one year ago, as a result of the market turmoil. However, as mentioned, we see a positive momentum and a continued increase in the number of contractors through the company. Going forward, we still believe the stabilization of oil prices and increase in oil service activity as well as the general recovery of the global economic markets will translate into solid growth potential for NES.

Expanding its already significant business outside of oil and gas is a key focus area going forward, with both organic and inorganic growth avenues being assessed. Integration following the merger with Fircroft is going according to plan, with synergy targets increased since closing.

Then over to page 18, other holdings include then AGR and Cool Sorption. AGR delivered revenues of NOK177 million, and an EBITDA of NOK10 million in Q1. We're happy to see that AGR continues to show growth, driven also this quarter by increasing activity within the Norwegian Consultancy Business, where the number of billable consultants increased by 44% over the quarter. The high activity is expected to continue with this segment into Q2, and forward. Activity in Cool Sorption was low in Q1 driven by few VRU projects currently under delivery, with a total revenue of the company of NOK11 million, and an EBITDA of negative NOK2 million booked in the quarter.

Service income constituted around 50% of total revenues for Cool Sorption in the quarter. Cool Sorption still has a limited order backlog per end of the quarter, and development going forward will depend on ability to secure new project orders.

With that, we are through our Q1 presentation. And we will move over to the Q&A session.

Question-and-Answer Session

A - Øyvind Paaske

Okay. And yes, then we have one question from [indiscernible asking about the price achieved for the two DDW Offshore vessels which was sold in the quarter.

I can comment on that. That the sale price for the two vessels which is included then in the bareboat contract is a forward sale arrangement, with the sale of the vessels in 2023, for a total consideration of $9 million per vessel.

Øyvind Paaske

I think that was all the questions we had, and we through. And I would then like to thank you all for your attention. And wish you a good day, and welcome you back for our presentation of the second quarter results, on July 15. Thank you very much.