Akastor ASA

OSE:AKAST

Earnings Call Transcript 2022-Q2

[Øyvind Paaske, executive]

Good afternoon and welcome to the presentation of Akastor's, second quarter results for 2022. My name is Oyvind Paaske, CFO and with me I have our CEO, Mr. Karl Erik Kjelstad. Also, we are happy to have with us from Houston HMH team represented today by Mr. Pete Miller, CEO and Chairman; Mr. Tom McGee, CFO; and David Bratton, VP Finance. The HMH team will later take you through HMH's second quarter results. Towards the end of the presentation, we will open for questions through the webcast solutions. Please note that questions can be posted at any time during the presentation and preferably as early as possible in order to make sure we receive the questions in time.

I will now leave the word to Karl for the key business highlights. Please, Karl.

[Karl Kjelstad, executive]

Thank you, Oyvind. And firstly, thank you to all for listening to this presentation of our second quarter earnings.

Let's move to Slide 2. Key value indicator for Akastor is the value of each of our investments. And the majority of our investments today are held through partner investments together with different partners. The value for our investments for the second quarter is illustrated here to our net capital employed.

As you can see from the overview, one of -- on this slide, net capital employed active value of Akastor at the end of the quarter was approximately NOK 16 per share, and that is an increase of NOK 1 per share since the previous quarter. And that is mainly driven by FX effects, most -- since most of our holdings are denominated in U.S. dollars.

Following the establishment of HMH in 2021, Akastor became an investment company with limited upstream cash flow. And we depend on realization of assets to provide positive free cash flow. As there were no realization in the second quarter, our net interest-bearing debt increased during the quarter to NOK 1.329 million, and roughly half of this increase in the net interest-bearing debt was related to noncash FX effects.

HMH continues to be our far most valuable investment. The book value of our shareholding in HMH is equal to 50% of the book equity value at -- of HMH had at the close of the transaction last year, and that's NOK 3 billion for the end of the quarter, and that's similar to NOK 10.7 per Akastor of share.

HMH showed good growth in the activity in the quarter and growth quarter-to-quarter, and we remain positive regarding the outlook for HMH business going forward. We expect that activity will increase, especially through the second half of '22 with a strong momentum into '23, driven primarily by an expected increase in the service activity.

AKOFS Offshore delivered good operational performance and revenue utilization for all 3 vessels in the quarter. Also in the quarter, AKOFS Seafarer concluded the yard stay to prepare the Seafarer vessel for coil tubing operations and later in the quarter, performed the first-ever coil tubing operation for vessel. The operation was safe and successfully performed early June at the field at the -- in the North Sea, confirming the strong value proposition that Seafarer vessel is offering to its clients. We see this as a great achievement for AKOFS and also a manifestation of the capabilities of the AKOFS team.

AKOFS Wayfarer was in the quarter selected by Petrobras for a new 4-year contract with Petrobras expected to commence after the current 5-year contract ends. Formal documentation and approvals remain, and we will work once this is in place.

We continue also to be very pleased with the NES Fircroft performance, and the company is continuing to demonstrate its attractive business model with a strong and robust growth continuing also in the second quarter.

In the quarter, we also bought out bank -- the banks from the so-called profit split of the DDW Offshore vessel Skandi Parago. And after this, DDW Offshore holds the full economic exposure toward that vessel. We believe that this will be a positive for the DDW asset values in this segment since this segment has continued to enhance values.

Our equity story remains. Today, our share trades with a discount of close to 16% compared to our book values. And at the same time, we see signs of more positive market development for all portfolio companies.

With that, I am pleased to introduce HMH Chairman and CEO, Pete Miller, that also in this quarter will take you through HMH second quarter earnings and key priorities going forward. So Pete, the word is yours.

[Merrill Miller, executive]

Thanks, Karl Erik. I appreciate it. And thanks, everybody, for listening in to this call this morning. I want to make a few general comments about the HMH business, and then I'll turn it over to Tom McGee, our CFO, to take you through some of the numbers. But in general, we're very pleased with the direction the business is heading. We're seeing a lot of green shoots. We're seeing a lot of rig reactivations. We're excited about that. We think the integration of the 2 companies is going well.

One of our big challenges is our ERP system, and we think that's going to go online here very soon, and we're excited about the potential that that's going to give us for the company. And it really is helping to bring a lot of the organization together right now.

One of the things that we did do this quarter is we divested ourselves of our Frontica Engineering Group, and that was sold to Aker Solutions. This is a great group of people, a great group of engineers, but it really wasn't core to what we were doing. And we think they found a great home in Aker Solutions. We'll continue to use them as projects arise. But again, they just -- being a pure engineering group, it really didn't fit with what we were trying to accomplish. So we're excited for them. And again, it's a great group of people.

We think the rig reactivations are going to continue, and they're a great source of revenue for us, as you'll see as we go through some of the numbers. And again, the information and the vibes we're getting from our customers and our customers' customers show that there's going to be a continued resurgence in this industry over the next couple of years at a minimum. And I think, quite frankly, it will go a lot further than that. And you can see that when we talked about our order intake, and we'll get to that in just a minute. But at this time, I'd like to turn it over to Tom, and he'll take you through some of the financial highlights over the last quarter.

[Tom McGee, executive]

Thank you, Pete. I think looking -- first, let's hit the termination of the Valaris 20k BOP project. I'm going to read you very quickly what our customers said in regards to that project as a result of the contract termination. Valaris will see an early termination fee that is more than sufficient to cover expenses commitments incurred by Valaris on the project. We make the same statement in regards to HMH.

secondly, both their CEO, while we are disappointed this contract has been terminated, the floater market and day rates have improved meaningfully since this contract was entered into in July 2021. We expect there will be other attractive projects for a high-specification drillship like Valaris [ SDS 11 ] with similar earlier commencement dates. So we are tied together with our customer on that statement. And the reason I mentioned that is it did have an impact on the quarter, a positive impact, a onetime impact.

Without going into the details, I -- we cannot reveal to do to the customer sensitivity, I will say that if you were to look at 2Q '21 to 2Q '22, that increase of 19 to 31, absent this termination had the project continued as planned, we would have seen year-over-year growth in EBITDA. So it's consistent with that.

We'll talk a little bit more on the order rate. I'm going to table that until we get into the specifics, specifically about aftermarket because really that's the story there, and it's a very positive story. On the free cash flow, I think it's important that you guys know that we've been backing out onetime -- some onetime expense, which is really IT, you talk about the ERP project. We continue to spend a lot on that to get that stood up and to get that unified across the organization. So our EBITDA is adjusted for that.

Cash flow is not. That's one reason you see volatility in cash flow. The other reason is because of the project, the -- some of the project payments. It's not really the aftermarket. It's really the projects. And you do see some working capital volatility over the last couple of quarters. That said, we had a good selling cash flow quarter, even including a lot of the one-off expense we had on IT.

So I think go to the next page, please. Can we flip to the next page, please? Thank you. I think the story and, Pete, maybe add some color here after I'd say it, but I think if we look at this middle chart, you really see the story. We're having exceptionally strong order rates for the aftermarket business. And as we said on the last call, you look at a 6- to 9-month conversion cycle on those. So if you're looking forward, we obviously feel very good about what's coming.

We do see that these order rates are starting to break some seasonal patterns. So I think there are true underlying growth in green shoots in the industry. And it's really the place you're starting to see it in our results is not yet -- quite yet in the P&L. It's in order rates, and we expect those to convert over the next 12 months into higher base revenue. I don't know if you have any color to add.

[Merrill Miller, executive]

Yes. I might add a little bit on that. As we go back over the last couple of years, the real strength has been a harsh environment market and was Norway predominantly in the North Sea. But what we're seeing now is strength throughout the world. I mean we're seeing it all big, in particular Brazil has turned very hot where -- even the U.K. sector of the North Sea is much more active. You're seeing it everywhere, the Gulf of Mexico, West Africa. And so this is really a broad -- very broad-based improvement in the business. And that's really beneficial to us as we're worldwide, and we've got operations everywhere and can take care of these rigs wherever they go. So I think that's one of the positive things that we're seeing right now. It's not a one-trick pony. It's really a business that's doing great all over the world.

[Tom McGee, executive]

And I think that on the product side, we actually had to adjust for the Valaris 20k BOP project. But I will say, without getting into specifics, we feel good about the second half of the year on a project order basis. We can't say more on that now, but we definitely would say that we have a good outlook.

Next page, very briefly, just talk about net interest-bearing debt. I think the point -- a couple of points here. One is we continue to pay down the term loan. The bank revolving credit facility remains undrawn, and we have ample liquidity. So we're very happy with the way the year has played out on the capital structure side of things.

Next page, for Pete.

[Merrill Miller, executive]

Yes. And finally, just kind of summarying the outlook, it's really what I've talked about before. Again, we're feeling very bullish about the market at this point in time. I was at an IADC meeting in France a couple of weeks ago and made a presentation there, and all of the contractors that got up in talked were very bullish. So this isn't me saying it. I'm getting it directly from like the CEO of Transocean, the CEO of Valaris, other people. So seeing a lot of positive things in that regard.

I think the one point I want to point out here, though, as you know, the end game for us is an IPO, and we are working very diligently to be prepared for that. And I think as we get into 2023, we will have all the systems and situation in place to be able to do an IPO given what the equity market might look like at that point in time.

So we're excited about where we're going. The 2 companies have come together very, very well. A lot of good things happening out there. And we look forward to having improving results as we move through the next year.

So at this time, I'll turn it back to Karl Erik and Oyvind, and then we'll be here for questions that you might have later. Thank you.

[Øyvind Paaske, executive]

Thank you, Pete. I will then take you through the financials for Akastor and starting then Slide 9 with the financial highlights. Again, please note that our JV holdings, HMH and AKOFS are not consolidated into our group financials, and thus, our consolidated revenue and EBITDA only represents a very minor part of our total net capital employed.

In Q2, AGR delivered a strong quarter, yet again driven by the Norwegian consultancy markets. Total revenues ended at NOK 193 million with an EBITDA of NOK 15 million. Adjusted for the specific effects related to the creation of the Fun Energy Services booked in Q1, both revenues and EBITDA in AGR in Q2 was above previous quarter and last year. DDW Offshore included under Other delivered revenues of NOK 20 million in the quarter, down from NOK 65 million last year, explained by the financial lease effects related to the agreements with Oceanpact booked last year.

DDW contributed negatively with NOK 4 million in EBITDA in Q2, improved compared to Q1 but lower than last year, again due to the Oceanpact effects. Corporate costs in the quarter included around NOK 10 million in costs related to the Drew arbitration process. With that, our consolidated revenues and EBITDA for the period came in at NOK 260 million and negatively NOK 17 million, respectively.

Then our JV holdings, as Pete and Tom has already been through, HMH has delivered good numbers compared to both previous quarters in last year with an EBITDA then of $31 million in the period, adjusted for specific integration cost of around NOK 9 million and then including the positive accounting effects related to the Valaris termination fee. Activity in HMH is then expected to increase going forward.

For AKOFS Offshore, they delivered a solid operational performance on all vessels in Q2 and increased revenues and earnings compared to Q1. Total revenues for Q2 ended at USD 40 million in the quarter, up compared to previous quarter and in line with last year. EBITDA ended at $15 million.

Seafarer was at the yard from start of the quarter until mid-May related to the mobilization for the coal tubing, reducing then revenue utilization in the period. However, as Karl mentioned, we are happy to see that Seafarer after that yard stay has been delivering being operations to the great satisfaction of the customer and at very high utilization rates. The coil tubing equipment will be demobilized in July, and the vessel will then return to normal well intervention assignments.

Looking forward for AKOFS Offshore. Skandi Santos went to dock in July in order to prepare for the new contract with Petrobras, expected them to commence in December this year, which will affect utilization of this vessel in Q3. The other vessels remain in normal operations for the rest of the year with only then the short yard stay in Q3 for Seafarer to demobilize coil tubing.

Then if we turn to the next page for a further look at our consolidated P&L, focusing here on our net financial items that came in positive, NOK 117 million in the period. Under net financials in Q2, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 90 million, including a negative noncash effect of NOK 7 million related to the valuation of the warrant structure. NES Fircroft contributed positively with NOK 27 million in the quarter, in line with previous quarters.

HMH and AKOFS Offshore contributed negatively with NOK 18 million and NOK 50 million, respectively, equal then to 50% of the net income in the period. Net foreign exchange effects were positive with NOK 189 million in Q2, driven by the U.S. dollar-NOK exchange rate that has increased significantly during the quarter, leading to positive accounting effects related to our dollar holdings.

Let's then turn to the next slide for an overview of net debt in the period. You here see that our net bank debt increased by NOK 351 million during the quarter, driven by cash flow in period but also then a noncash foreign exchange effect of NOK 188 million. In addition to normal corporate cash flow, cash flow in the second quarter included funding of AKOFS in connection with the Seafarer yard stay as well as the buyout of the mentioned DDW profit split related to one of the vessels. Also, certain transaction costs related to the HMH transaction that closed last year had a cash effect in Q2.

Of our total reported net bank debt of NOK 1.7 billion, DDW Offshore constituted NOK 483 million per end of period, while AGR net debt was NOK 133 million. Net interest-bearing debt per end of the quarter was NOK 1.3 billion, net of the interest-bearing positions towards AKOFS and HMH. Our receivable against out costs increased through Q2 as a result of the funding in period.

In the second half of the year, in addition to normal corporate cash flow, we expect that additional funding of approximately $5 million to AKOFS will be required in connection with the Santos yard stay.

Then over to the next slide for an overview of our financing facilities. With the effects mentioned on the previous slide, the draw on our corporate banking facility increased to NOK 1.1 billion per end of June, an increase of around NOK 300 million, of which NOK 140 million was noncash and related to FX. There was no draw under the subordinated liquidity facility from Aker Holding AS.

Per end of the quarter, our undrawn corporate credit facility was NOK 0.3 billion, down compared to Q1 as a result of cash flow in the period. As Akastor today is an investment company with limited upstream cash flow from its portfolio of companies, we then depend on realization of assets to reduce debt and improve liquidity. Going forward, we aim to increase the liquidity reserve through the realization of assets. In the short to medium term, however, an increase of financing facilities could be required, and Akastor has initiated the dialogue with its financial sponsors on this basis.

With that, I will pass the word over to Karl again for the next section. Please, Karl.

[Karl Kjelstad, executive]

Thank you, Oyvind. Let me try to run off this presentation with some reflection about our ownership agenda. On Slide 14, you see an overview of the portfolio, and there is no change in that portfolio since the last quarter. So let's move to Slide 15, where Pete has already gone through the operational highlights for the quarter. And I would just like to mention that we are very happy with the outlook for the HMH business, and we believe that the company is well positioned to take part in the upturn that we see driven by the increased focus on energy security worldwide.

As owners of HMH, our key focus is to support Pete and his team in the ongoing integration work, including utilization both of cost and revenue synergies. And we are very happy with the progress and performance that Pete and the team is showing.

The HMH core market is, as mentioned, improving and it will be key to ensure that HNH has the capacity and the capability to take part in the market upturn both through organic growth but also through M&A. And also, as mentioned previously, together with our co-owner, Baker Hughes, and Pete and the management, we are targeting to make this investment liquid through an IPO. And we'll do that as soon as the company is ready and, of course, also subjected that the market is offering interesting renovation for that -- for HMH.

Then let's move to Slide 16, who is covering AKOFS Offshore. A key objective for us in 2022 was to ensure award for a new contract Wayfarer after current contract with Petrobras ends in December 2022. With the selection of Wayfarer for a new long-term contract in the second quarter, we are close to having ticked this objective of. And by this, all AKOFS vessels will be on long-term contracts that is an important prerequisite for exploring different structural solutions for the company going forward.

Then let's move to Slide 17, covering NES Fircroft growth. NES Fircroft had in 2017 about 6,000 contracts -- contractors worldwide. This has grown significantly. And today, we have 23,000 contractors worldwide. And the company is now the clear global leader within its niche. However, the market still has further consolidation and growth. We find NES Fircroft's growth within renewable business very interesting, but we also see that it's continuing with a strong growth in oil- and gas-related businesses.

Current trading is strong. And the last 12 months earning continue to increase month by month. In fact, earnings is up by more than 100% compared to last year, which we obviously are very happy with.

Let's now move to Slide 18. AGR continued high activity level with consultancy driven by Norway with a number of contractors close to all-time high. But also worth mentioning is that we also see a high well management activity in Australia in the quarter. Our ownership agenda for AGR continue to be -- to profitably grow the business, both organically and also through M&A.

And then finally, Slide 19. Here you see the illustration of Akastor road map related to realization of our investment as we have presented earlier. We continue to believe that realization of our financial investment will most probably come first. And we work on several initiatives in this regard, for example, realization of the Oceanpact instrument. Realization of our industrial investment could require more structured solution, and we believe that such solutions will become more and more available as the market continues to develop positively. For HMH, the clear target is to do a separate listing of the company as soon as the company is ready and the equity market is attractive.

With that, we are through the presentation, and we will move over to a Q&A session. So I believe we will pause for a minute or 2 in order for you to provide questions. So then we pause.

[Øyvind Paaske, executive]

Okay. We have received a question from Martin Kelso in Nordea. It goes to the HMH management. It relates to the Valaris effects. In total, what were the termination fee of the Valaris 20k project? What were the expected quarterly EBITDA contribution from this contract? Maybe Tom or Pete, could you please comment on that?

[Tom McGee, executive]

Yes. I would circle back to the press release that I read and referenced our customers' press release. We can't say more due to customer -- the customer situation. And that's all we're allowed to say.

[Øyvind Paaske, executive]

Okay. With that, as we haven't received any additional questions, I believe we are through. And I would like to thank you all for your attention, and we wish you a good day. And we'll come back to our presentation of the third quarter results on October 27. Thank you very much.