Akastor ASA

OSE:AKAST

Earnings Call Transcript 2022-Q1

[Øyvind Paaske, executive]

Good afternoon, and welcome to the presentation of Akastor's First Quarter Results of 2022. My name is Oyvind Paaske, CFO, and I have with me Ms. Karl Kjelstad, Akastor CEO. Also, we are happy to have with us from HMH, Mr. Pete Miller, CEO and Chairman; and Mr. Tom McGee, CFO; as well as Steven Brooks, Director of Finance. As usual, we will take you through the presentation that has been uploaded to our web page this morning. Karl will start by presenting the key highlights of Akastor before Pete and Tom and Steven will take you through HMH first quarter results. I will then present the financials before Karl will wrap it up. After this, we will open for questions through the webcast solutions. Questions can be posted at any time during the presentation and preferably as early as possible in order to make sure we receive your posting it in time.

I will then leave the word to Karl for the key highlights of the quarter. Please, Karl.

[Karl Kjelstad, executive]

Thank you, Oyvind, and thank you for listening to this presentation of Akastor's First Quarter '22 Earnings. Let's get started on Slide 2. As you might recall from our fourth quarter earnings, Akastor's capital employed is now mostly [ 100 ] JVs and financial holdings that are not considered into our cost of group financials. The key value in care for our Akastor business that the value of each holding it is erred on this slide through our net capital employed.

As you see from this overview, the net capital employed at a equity value for Akastor is -- was for round of the first quarter '22 in line with the fourth quarter '21. The value of our shareholding in HMH is equal to 50% of the book value of HMH. HMH continues to be by far of our most valuable investment, with a book value of NOK 9.5 per Akastor share. HMH had somewhat soft first quarter, mainly due to seasonality and that first quarter is normally a slower month for the service business.

We expect that activity will increase going forward, especially through the second half of '22, with a strong momentum into '23. In January, HMH successfully secured a bond loan of USD 150 million, with the proceeds to be used to refinance -- used already to refinance the Bridge Bank facility that was established at the establishment of HMH in October '21.

AKOFS Offshore delivered a good revenue utilization for all vessels in the quarter, despite some downtime related to COVID-19 outbreaks. Further, the tender process for renewal of the Wayfarer contract that ends in December '22 is progressing. Seafarer started in late March, a 48-days planned yard stay to expand its service offering with Equinor and is expected to be back in operation in May. This is affecting revenue utilization during the planned yard stay since the charter rate is reduced to 50% during the outstay.

We continue to be very pleased with the NES Fircroft performance and the company is continuing to demonstrate its attractive business model with a strong, robust growth also in the first quarter. Strong growth in renewables segment continued also in the first quarter. During the first quarter, Odfjell Drilling contemplated split of the company, spinning of the [ bank ] service business into offshore technology that is now listed on Oslo Stock Exchange.

Akastor's exposure after the split through both preferred shares and warrant instrument is towards the drilling company, Odfjell Drilling solely. The so-called arbitration is progressing according to plan and arbitration proceeding is scheduled to know formally -- scheduled formally and set in February next year and the outcome is expected during the first half of 2023. Our cost of equity story remains today or share of trades with a discount of about 60% compared to the book values and at a time where we've seen more positive market development for all of our portfolio companies.

At the same time, our track record from previous investment shows that we have realized our holdings at attractive terms. So with that, I'm happy to introduce HMH Chairman and CEO, Pete Miller, to take you through the HMH first quarter earnings and key priorities going forward. So Pete, please, the word is yours.

[Merrill Miller, executive]

Okay. Thanks, Karl. Thanks, everybody for calling in on this call today. I want to make a couple of macro comments and then I'll turn it over to Tom to dive into the numbers a little bit. But first of as Karl said, the first quarter result was a little soft due predominantly to seasonality. But the thing that I really want to emphasize today are the green shoots that we're seeing in this business. Offshore is showing very good signs of life. One of the benchmarks that I use when I talk to people about this is, Transocean recently put a rig to work for 395,000 a day, which they announced in the Gulf of Mexico. And while that's a little bit lower or substantially lower than what it would have been in the -- in fact hit the boom in 2014, the fact of the matter is that 395 they've lowered their cost so much if they're almost getting the same free cash flow.

So I think that's a good indicator and many of our customers are talking about bringing some rigs out of warm stack, obviously, but even some out of cold stack to put it work. So as you look at the activity rate for a lot of the floaters and starting to surpass the 80% level, which is really where the pricing mechanism switches over to the contractors. So we're very excited about what's going on there. Same thing to a certain extent, while our business has been great in land, we're seeing a lot of land green shoots as well, both in the Middle East, North Africa and in the U.S. basins and Colombia, places like that.

So we think that overall on the macro basis, the wins that are back. This has obviously manifested itself when you look at the oil and gas prices. Oil today, it stayed over $100 a barrel and those of you that live in Europe understand what's happening in the gas business and what's happening with LNG. One of the things that I emphasize to everybody who are out here, I'm not sure we're in the oil and gas business as much as we're in the gas and oil business right now. I think people are again starting to realize that natural gas is going to be the bridge fuel to the energy transition and it's not going anywhere fast.

I'd also like to say that one of the things that we discovered especially since that the Ukraine situation started is the new mantra in our business is energy security. It's no longer, hey, what are we going to do over here? How are we going to replace this? Everybody is starting to understand we need to have energy and if we're going to have vibrant function economies, we need to keep energy. And I think that's playing well into what we're doing. And we feel good about the combination so far and I'll come back to that in a little bit, at this time, I'll turn it over to Tom to look at the numbers.

[Tom McGee, executive]

Okay. Thank you, Pete. We said revenue is up year-over-year, down sequentially due to seasonality. Margin is a little bit lower, primarily due to mix. When you look at the order intake and equipment backlog continue to be strong and we'll touch on that when we talk about services in particular because I think it will tie us together nicely. And free cash flow, primarily due to the supplier payments for projects, we got a lot of payments in Q4 related to couple of projects, some of that slow down and there continues to be noise with the Valaris [ 20K ] Project in the [ China society ] drillship and so you're going to continue to see some volatility -- short-term volatility in working capital.

But getting to the next page, I think it's really where we can tie this together. And that's -- if you look at the order rate on aftermarket services in 3Q '21, you've got about a 6 to 9 month conversion cycle from order to revenue and profit. And so I would point to that, you saw some seasonality, like we said, but also some supply chain and stuff pushed out starting in Q3, that's coming back now and you look at the order rate we had this quarter at 133 on the aftermarket side. That will start to show up in second half of this year. So we see very good progress. It is something that was not unexpected to see Q1 look like this, candidly, the order rate in Q1 and aftermarket exceeded our expectations, so we continue to see very good things happening in the back half of this year.

And specifically, I don't know if you want to add any on the specific reactivations you want to highlight or?

[Merrill Miller, executive]

Yes, I think I'll add a couple of things to what Tom said. When you think about offshore business, well, let me contrast it with land because in the United States, if you decide you're going to build drill well, a land well, you're moving your rig within 10 to 15 days. And so somebody out in Permian Basin since we're going to stick a well, good, let's get a rig, let's go out there, boom, you're ready to go. Offshore is totally different and as Tom just pointed out, you're talking about 6 to 9 months. I talk about that 395 a day for Transocean. That rig will not go out until late Q3 and Q4.

We're getting orders for things to go on rigs like that right now, but at the same time, it doesn't happen. And if you look at the middle graph right here, the order intake and you'll see like in the third quarter, it's a soft quarter for us and that manifest itself in the revenues in the first quarter this year. The fourth quarter and the first quarter of '22 is much stronger and so when you see that first quarter of '22, that will start to manifest itself in our numbers in the third quarter of '22, fourth quarter of '22. So that's kind of a dynamics of this business. The good news is it's getting better. The intermediate news is we wish it would get better, faster, but we feel very good about where we are. Tom, why don't you go through that?

[Tom McGee, executive]

All right. Thank you to -- get to the next slide very quickly, Karl, really already you mentioned this. We took that USD 150 million bridge refinanced at a 3-year note over there and that was done in the first quarter. As we talked about there is a little bit of volatility on the cash side, given the projects that our management still very strong liquidity and we continue to have our revolving credit facilities undrawn.

I will point out that that senior-term loan is being amortized now at a little over 7 million a quarter, so you'll see that come down over the course of this year, but that's it.

[Merrill Miller, executive]

And if you look at the last nature on the summary and outlook, again as I've said, we're seeing green shoots. We feel good about where we are. We think there are going to be more and more rigs picked up. I think the third bullet point right there, our Digi tech orders are really starting to come into focus. A lot of people are understanding many of the things we're doing with ESG, which Digi tech really kind of plays into that. And I want to emphasize, we feel very good about the integration of the 2 companies at this point in time.

We're on schedule. We feel very good with what we're doing and we do believe that by the time we roll into 2023, if the opportunity presents itself, we will be IPO-ready. So that's a very brief and quick synopsis of what we're doing in HMH as you can tell. We feel good about it. We're excited. We think the timing of putting these 2 companies together has been very good and we look forward to the future and some of the things that are going to happen the rest of this year.

So with that, I think I'll pass it back to you to go over the Akastor numbers.

[Øyvind Paaske, executive]

Thank you very much, Pete and I will then take you through the Akastor financial update, starting then with Slide 9, with the key financial highlights of the first quarter. Again, please bear in mind that our JV Holdings, HMH and AKOFS Offshore are not consolidated in our group financials and thus that our consolidated figures again represents only minor part of our total net capital employed.

AGR delivered a strong quarter, yet again driven by the Norwegian consultancy market, with total revenues ending at NOK 208 million and an EBITDA of NOK 35 million in the period. Both revenues and EBITDA in Q1 was positively affected by accounting effects related to the creation of Fon Energy Services joint venture, which was completed in Q1. Adjusted for this, EBITDA in Q1 was NOK 14 million, in line with the recurring EBITDA in previous quarter.

DDW Offshore included on this slide under other contributed negatively with NOK 6 million in EBITDA in Q1, affected by delayed start-up of a new contract for one of its vessels, which resulted in a period of standby models in Australia at a high OpEx rate. Corporate costs in the quarter included around NOK 10 million in costs related to the DRU claims. With that, our consolidated revenues and EBITDA in the period came in at NOK 264 million and NOK 7 million respectively.

And then our JV [ EM ] Holdings. As Pete and Tom has already been through, HMH delivered a somewhat lower quarter with regards to earnings compared to Q4 last year, with then an EBITDA of NOK 13 million in the period, adjusted for specific integration costs of around NOK 6 million illustrated here on this slide in NOK figures. The run rate and margin is expected to increase in the second half of the year based then on -- again on assumed aftermarket activity pick up.

AKOFS Offshore delivered a solid operational performance also in Q1. However, with around 8 days of downtime on the Wayfarer vessel related to COVID-19 outbreak on board. Also, Seafarer as Karl mentioned arrived at the yard on the 14th of March for to-date mobilization for cold tubing operation, which then reduced revenue utilization in Q1 somewhat. Total revenues thus ended at USD 35 million in the quarter in line with previous quarter and around 13% higher than last year, explained mainly by improved utilization on Wayfarer, which was at the yard for its 5-year SPS in Q1 '21.

EBITDA in Q1 '22 ended at USD 7 million for AKOFS Offshore shown again here on this slide in NOK. Then over to the next slide for a further look at our consolidated P&L, focusing here on our net financial items. And the net financial items in Q1, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 46 million, which included a positive noncash effect of NOK 21 million related to the valuation of the warrant structure.

NES contributed positively with [ NOK 26 million ] in the quarter, in line with previous quarters. AKOFS Offshore contributed negatively with NOK 49 million under net financials, equal then to 50% of the net income in the period. HMH contributed negatively with NOK 99 million under net financials, representing 50% on net profit in the quarter, but also included approximately USD 4 million in a noncash accounting effect related to 2021 tax cost, identified as part of the annual audit completed in Q1 this year.

If we then turn to the next slide for an overview of net debt movement in the period. You here see that our net bank debt increased by NOK 84 million during the quarter, driven by cash flow in the period. Of our total reported net bank debt of NOK 1.4 billion, DDW Offshore constituted NOK 446 million per end of Q1, while AGR net debt was NOK 130 million. Net interest-bearing debt per end of the quarter was NOK 1.06 billion, including then the net interest-bearing positions towards AKOFS and HMH.

Then over to the next slide for a overview of our external financing facilities. There has been no changes to this structure during Q1. The drawing under our corporate banking facilities was NOK 805 million per end of March. There was no draw on the subordinated liquidity facility from Aker Holding AS. Per end of the quarter, our liquidity reserve through the undrawn credit facilities was NOK 0.5 billion.

With that, I will pass the word over to Karl for the next session. Please, Karl? Karl?

[Karl Kjelstad, executive]

Thanks, Oyvind. Let me run off this presentation with some reflection about our ownership agenda for the portfolio companies. First, on Slide 14, you see our portfolio overview and this is unchanged compared to the last quarter. So let's move to Slide 21, HMH, where Pete has been through the operational performance and some views on the market outlook, but let me from the older perspective add some comments. And that is that, we are very happy with the outlook for the HMH business and we believe that the company is very well positioned to take part in the upturn, driven by the increased focus on the energy security situation worldwide.

We expect high activity especially from '23 and onwards and this is all the way is driven by several factors. One is the management increased rating activity and right now warm 7 and 6 drillships are practically sold out and it's not that [ many stack ] rigs available for deepwater market either. Activation of these cold stacked rigs will normally take 12-plus months and we also see that the jack-up market is very strong, driven by the Middle East market that again give knock-on effects on other regions as well.

The Norwegian harsh environment market is somewhat soft in '22, but we expect this market to develop positively from '23 and on warrants due to the overall increased activity driven by the Norwegian tax incentive program for the new field development among others. In addition, the current fleet rig -- the rig fleet with some few exceptions are based on technology from the last newbuilding boom. And since then, a lot of new technology have been developed to ensure more efficient operations and reduced carbon footprint.

The market for upgrades and implementation of new technology as Pete mentioned, digital solutions and so on is therefore expected to contribute positively going forward. So as owners of HMH, our key focus is to support HMH management in ongoing integration work, including organization of both cost and revenue synergies.

Our cost drill together with our co-owner banker use and the management team are targeting to make this investment liquid, as Pete mentioned and we would like to do an IPO as soon as the company is ready and the equity market is offering interesting valuation for our HMH investment.

Let's then move to Slide 16. For AKOFS Offshore, a key objective for '22 is to I'm sure the management award of a new contract for Wayfarer that where the current contract is ending at the end of '22. At the time of process, with a similar scope as Wayfarer current contract was initiated by Petrobras in February and the tender process is ongoing as we speak and if Petrobras keep its indicated time line, we expect that, that result of that process will be ready before the summer.

And also as mentioned, despite an excellent operational track record and high-quality vessels and technology, AKOFS remain somewhat vulnerable with a fleet of only 3 vessels. We are therefore open to assess different structural options for the company, including different peculiar solutions and other players in the industry.

Then let's move to Slide 17 and some words about NES Fircroft growth. We continue to be very pleased with our ownership in NES Fircroft that we entered into in 2017. Since then, the company has grown from call 6,000 contractors worldwide to about [ 22,000 ] contractors today. And the company is today a clear global leader in this industry.

However, the market still has potential for further consolidation and growth and we find NES Fircroft strong growth within the renewable segment particularly exciting. As illustrated in the graph on this slide, activity has increased significantly over the last 12 months, illustrated by the double-digit growth in the LTM revenues and combined with strong margin growth driven by successful integration with Fircroft.

Last month close to 50% of new contracts was within the renewable market that demonstrates NES Fircroft's strong position in the energy transition. Slide 18, AGR continues to deliver strong underlying operational results and the first quarter results a positive effect, as mentioned by Oyvind third energy service joint venture that we established together with IKM. Fon is now up and running as an operation entity and I will get back to you with some more details on the next slide.

Our ownership agenda for AGR continue to be -- to grow the company in a profitable way, both organically and through M&A as demonstrated by the Fon joint venture establishment. Then to Slide 19. And so a few words about Fon. Fon aims to be a global service provider for offshore wind industry. Fon has in the start about 100 employees, with a revenue of about NOK 100 million, that is a solid foundation for developing the company further.

We are targeting that Fon should become a global service provider within feed and operation and maintenance in offshore wind by leveraging on the strategic and commercial capability of its owners. We think that Fon is well positioned to capitalize on the strong market fundamentals within the O&M market win and to following their first journey going forward.

Then finally on Slide 20. You see the illustration of our customers' roadmap related to realizing our investment as presented earlier as well. We continue to believe that organization of our financial investment will probably come first as realization of our industrial investment probably will take some more time and could also require more structural solutions. So let me repeat for HMA, the clear target is to do a separate listing of the company as soon the company is ready and equity market is attractive. So with that, I think we are through the presentation and we will move over to the Q&A session and I think we will pause for a minute or 2 in order to -- for you to provide your questions. Thank you for your attention.

[Øyvind Paaske, executive]

Okay. We have received one question from Mr. [ Rendlin Wang ]. I will leave that for the HMH team. Could you please provide a little more color on the service mix that's caused HMH EBITDA margins to be lower this quarter? Is this mix expected to persist? So Tom or Pete, will you care to comment on that?

[Karl Kjelstad, executive]

Go ahead.

[Tom McGee, executive]

Yes, we don't expect it to persist. Again, there's some noise with regards to seasonality and kind of a one quarter mix shift. We continue to think that it reverts to where we were before and indicative -- looking at the strong quarter rate in the quarter tied with expectations that it normalizes.

[Øyvind Paaske, executive]

Thank you. With that, we have not received any other questions. So I would then just like to thank you all for listening in and we wish you all a good day and welcoming back for our presentation of the second quarter results on July 14. Thank you very much.

[Merrill Miller, executive]

Thank you all.

[Tom McGee, executive]

Thank you.