Akastor ASA

OSE:AKAST

Earnings Call Transcript 2018-Q3

[Leif Hejø Borge, Chief Financial Officer]

Good morning to all of you, and welcome to the presentation of Akastor's third quarter results. Here at Fornebu in Oslo, our CEO, Karl Kjelstad, is present together with myself, and my name is Leif Borge and I'm the CFO of Akastor.We will, in our presentation, refer to the Q3 presentation that was released this morning. You'll find it on our website.Then I leave the word to Karl Kjelstad.

[Karl Erik Kjelstad, Chief Executive Officer]

Good morning, and thank you for attending this call. The main highlights for the third quarter was, of course, the closing of the 50% sale of AKOFS Offshore to Mitsui and MOL. The terms and conditions have been communicated earlier, and we received an amount of USD 142 million, plus around USD 3 million in interest at the end of September. This transaction is also a start of a close industrial joint venture between Akastor, Mitsui and MOL, where the goal is to further develop AKOFS Offshore.The financials in the quarter reflects a gradual recovery in our industry. Revenues increased slightly from previous quarters to NOK 955 million this quarter and also the EBITDA [ was ] increase somewhat to NOK 87 million for the quarter.Our net debt position improved a lot as a consequence of the AKOFS Offshore transaction. And as of third quarter, our net interest-bearing debt was NOK 76 million.In 3 years, we have in fact repaid more than NOK 5 billion in debt and established now a strong balance sheet, where we have substantial financial capacity.Let's move on to Slide #4. When Akastor was established in 2014, we had a portfolio of 8 portfolio companies, some of them rather big and some of them rather small. Gradually, Akastor's portfolio has changed. And today, the portfolio consists of 5 industrial investments where we, as owner, involve us actively and also for more financial investments where we are less active in the daily operation and long-term strategic development. We still see a substantial value-creation potential, both in our industrial holdings and also in our financial holdings.Let's move to Slide #5, the highlights for the quarter. With regards to average risk, the highlights was that we see that the main market for MHWirth towards the offshore drilling market is gradually improving based on a relative stable oil price on a higher level than we have seen in the last couple of years. However, the utilization in the market is still on a low level with many idle rigs. Therefore, the tender activity is still rather low, but in any case, we see a much higher tender activity level than 1 to 2 years ago. The same is the situation for the service activity, that active rigs with [ amateur ] equipment has increased somewhat since 2017, but service revenues are only moderately up the last quarters. We expect to see a stronger market in 2019, but it's hard to predict the exact timing of this market recovery.Some words about AKOFS Offshore. Skandi Santos and Wayfarer are still operating very well with Petrobas in Brazil. Wayfarer has in fact now been operating in 3 quarters on a new contract, and we are very pleased with the strong performance so far. Further, the CapEx for [ Aker ] Seafarer is going according to plan, preparing the vessel for the light well-intervention contract with Equinor in the North Sea that will start in the first part of 2020.The financial results for AKOFS in third quarter was according to plan and more or less in line with the previous quarters.When it comes to NES Global Talent, where we now own 70%, we have seen a really strong recovery in 2018. In addition, the company is continuing to do strategic acquisitions, and we have just completed an acquisition in the U.S. that is strengthening the position in the U.S. onshore market. Also, 3 smaller portfolio companies, Step Oiltools, First Geo and Cool Sorption has seen a better market in 2018. [ Revenues ] for the third quarter was up 63% compared with the previous year, indicating a higher activity level for all these companies. And from being loss-making, these companies are now contributing positively to the earnings of Akastor.Let's move on to Slide 6 and some words about the fundamentals for our market. As you all know, most leading indicators have been developing positive the last year. The oil price seems to stabilize about $70 per barrel. That is substantially higher than most expected 1 to 3 -- 2 years ago. However, the oil production estimate has started to decline, a result of the rather low investments the last years. At the same time, cash flow generation is all-time high due to increased oil price, cost savings and lower OpEx and low investments. We have eventually started to see that the majors are taking up their investment budget, and this will impact the rig activity and rig rates, which again will be positive for [ MHWirth ]. Further, it will impact the subsea spending, including installation of subsea equipment and interventional subsea valves, which again will be positive developments for AKOFS Offshore.Based on this, we see a much more promising market outlook than we have seen the previous years. But at the same time, we have to remind ourselves that there's still a lot of excess capacity in many of the segments where we operate and especially in the drilling rigs and for offshore vessels. So the timing of the market recovery remains to be hard to predict exactly.With these words, I would like to leave the word to you, Leif, and take us through the financials, please.

[Leif Hejø Borge, Chief Financial Officer]

Thank you, Karl. Please go to Slide 8 in the presentation. A consequence of the transaction with Mitsui then buying 50% of the share in AKOFS Offshore is, as we have mentioned before, that AKOFS has been deconsolidated from the group accounts of Akastor. So in these numbers that you see on Slide 8, the historical numbers and the Q3 numbers of AKOFS is included in net profit from discontinued operations. Going forward, we will include 50% of the net profit of AKOFS under financial items.As we have already seen, revenues in the third quarter ended on NOK 955 million. This is up some 28%, taking into account that the numbers in third quarter 2017 included a one-off revenue for [ MHWirth ] of NOK 500 million relating to the settlement agreement on 3 out of the 7 year-on projects. The EBITDA of NOK 87 million in the quarter is also somewhat up compared with previous quarters.With financial items of minus NOK 11 million and net tax of NOK 10 million, we ended up with a profit from continuing operation of NOK 19 million in third quarter. The divestment of 50% of the shares in AKOFS Offshore trigger an accounting gain of NOK 468 million, explaining the strong result on our net profit from discontinued operations. Most of the gain is actually foreign exchange effect on the shares in AKOFS. The point is that the shares in AKOFS had been in U.S. dollars. U.S. dollars has strengthened relative to Norwegian krones over the last years. This has created a gain on the shares that has been built directly against the equity capital, but which has now been booked into the P&L accounts as this has now been a realized gain.Year-to-date, revenues of NOK 2.7 billion is up 23%, adjusting for the same one-off amount last year, while the year-to-date EBITDA ended on NOK 228 million.Then move let's move on to the next slide, Slide 9. As already mentioned by Karl, [ the portfolio ] of Akastor has gradually changed. This [ folio ] shows -- should give good explanation of how the different investments are treated accounting-wise. As you can see, there are 4 portfolio companies that will be consolidated on a gross basis going forward: MHWirth, Step Oiltools, First Geo and Cool Sorption. We also see the revenue and EBITDA contribution from these companies in the third quarter and year-to-date. Then there are 5 investments that will be reported under financial items going forward.With regards to the preferred equity in Odfjell Drilling, we will book the 10% interest on the USD 75 million nominal amount of the preferred equity. In addition, we will, as of next quarter, start to book the value and the change in value on the warrant structure. This is a complex option structure, so we have not yet established a good methology (sic) [ methodology ] for valuation, but this will be in place in the fourth quarter.The result from the second investment, Awilco Drilling, is simply the change in market value on the 2.7 million shares that we have in the company. In the third quarter, the shares increased with NOK 5 million, as you can see from the numbers. And so far, the share price has increased with NOK 46 million on the investment of USD 10 million that we made in the beginning of this year.Thirdly, we own 17% of the equity and shareholder loans in NES Global Talent. Actually, most of the value is in the form of shareholder loan in line with the other shareholders. We are not consolidating part of the net result of the company as we own less than 20%, but we are taking in the interest on the loan at the same time as we make evaluation to be sure that we can defend taking a positive result on the ownership position. As you can see, the positive result in the third quarter was NOK 18 million.With regards to the shares in DOF Deepwater that we own 50%, we are consolidating 50% of the net result of the company. DOF Deepwater is financed partly in U.S. dollars and partly Norwegian krones, but the group accounts of the company state in Norwegian krones. Thus, the result will [ soften ] the impact by filtrations in the U.S. dollar relative to Norwegian krones, so restatement of the debt in the company. However, the negative result now in the third quarter is merely explained by some further impairments of the 5 vessels.Finally, as of next quarter, we will also then start to book 50% of the net result in AKOFS Offshore under financial items. And in the third quarter, this was a negative result, but then in the third quarter, this was included in discontinued operation. The reason why it's negative is, of course, that Seafarer still have high depreciation while vessel is still not in operation and will not be in operation until the beginning of 2020. As you can see from the numbers, these financial investments contributed with a net result of NOK 22 million in the quarter and NOK 88 million on a year-to-date basis.On the financial items, we also had a net interest on our loans of NOK 29 million in the quarter. This will of course be reduced in the fourth quarter due to the fact that our net debt was reduced at the end of third quarter. In addition, we have net foreign exchange effects of NOK 6 million and other financial costs of NOK 10 million, explaining the total net financial item of minus NOK 11 million in the third quarter.Okay. Let's move on to Slide 10. The net interest-bearing debt improved from NOK 1.3 billion as of June to NOK 76 million as of the third quarter. Most of the positive cash flow is explained by the AKOFS divestment. One number to note is that the net debt of NOK 76 million includes loans from Akastor to AKOFS Offshore of NOK 104 million. This amount actually includes 2 part. Firstly, in order to have a sufficient cash balance, we left some cash behind when selling the shares, which is financed by a loan of around NOK 60 million from Akastor to AKOFS. The loan will, of course, be gradually repaid by the company depending on the cash flow in AKOFS Offshore. Until a -- secondly, until a separate financing for the CapEx program of Seafarer is in place, Akastor will finance the required CapEx. This funding will, of course, be gradually increased along with the CapEx program, but be repaid to Akastor whenever the financing is in place. I expect a separate financing for the Seafarer vessel to be in place in the first quarter next year. Also, the loans are, of course, charged with a normal interest cost, so the interest on these receivables will be part of net interest in our financial items.In July next year, our existing credit facility matures. We have started the refinancing of this facility and expect to sign a new facility of NOK 2.5 billion during the fourth quarter. I will come back to covenants and pricing later, but it will not be materially different from the existing facilities.Then moving on to Slide 11. This shows the net capital employed split on the different investments. These are of course book values and does not necessarily represent the market value of the companies, but gives an indication of values and value potential in the portfolio. As you can see, MHWirth, AKOFS Offshore, that is the remaining 50%; NES Global Talent, that is the -- over 17% shareholding; and the preference warrant in Odfjell Drilling represents 95% of the total enterprise value of Akastor. Based on the share price yesterday, Akastor is priced at around 90% of book value.Then let's move to Slide 12, MHWirth. Revenues of MHWirth in the third quarter was NOK 751 million, which is somewhat up from previous quarters and up 23% compared with third quarter last year. This is again when we adjust last year numbers with one-off revenue of NOK 500 million. Service revenues represent 50% of total revenues or NOK 425 million in the quarter. The EBITDA was NOK 71 million in the quarter, more or less in line with the previous 2 quarters.MHWirth did not sign any new contracts for completed drilling packages in the quarter, but order intake for single equipment has improved somewhat during 2018. Order intake in the third quarter was NOK 640 million for MHWirth.The number of active rigs with MHWirth equipment was stable in a quarter with 53. This is, of course, an important number for the service revenues of MHWirth. By the way, we have now included information on installed base on single equipment as well. As you can see from the graph in this slide, MHWirth has an installed base of 84 rigs with complete drilling packages from MHWirth, 53 of these are active and 31 are idle as of end of September. In addition, there are some 339 rigs with some kind of equipment from MHWirth. This may be a mud pump, a roughneck, a top driver or other equipment. On top of this, of course, comms equipment delivered to the land market or non-oilfield market that also requires services.Moving on to AKOFS Offshore, Page 13. Remember that these numbers are not included in the consolidated group accounts of Akastor. Total revenues were NOK 290 million in the third quarter, same level as in the previous quarter. Compared with last year revenues, these are up 50%, explained by Wayfarer coming into operation at the beginning of this year. The EBITDA of NOK 118 million is also in line with the previous quarter. Both Skandi Santos and Wayfarer are doing well in Brazil with good performance, while Seafarer will not generate any revenues until the vessel commences on its 5-year contract with Equinor in the first half of 2020.With regards to NES Global Talent on Slide 14, I guess these are the first numbers we have presented for the company. As mentioned several time, we own 17% of the financial ownership in the company and thus do not consolidate any of the numbers we have in front of you. As we can see, the company has around USD 1 billion of revenue annually, with a strong growth the last 12 months. This is a business that typically generate 5% to 6% EBITDA margin, while the company had net debt of a little less than USD 200 million as of August. So then you have some indication whether the book value of NOK 476 million on our 17% shareholding is realistic or not. Operationally, the company is doing well as a result of the recovery in the main market of oil and gas.Moving on to Slide 15. The investment of USD 75 million in Odfjell Drilling is a preferred equity instrument. You may remember that the investment was made in the second quarter this year as part of the financing required to buy the Midmax rig from Samsung. The preferred equity yield at 10% interest, of which 5% is paid in cash and 5% is a peak rate. The commitment fee of USD 5.75 million was booked in the P&L in the second quarter this year, but will be paid in the second quarter next year.The warrant structure, which gives the right to buy up to 5,925,000 shares in Odfjell Drilling to a price of $0.01 per share, contains 2 triggering events. One, if the share price of Odfjell has increased with 20% at the end of May per year, the next 6 years, you may buy a little less than 1 million shares or 1/6 per year. The result's a catch-up effect, so as an example, the share price has not increased 20% the first year, but has increased 20% per year or then 44% over the next 2 years, you maybe -- you may buy a little less than 2 million shares or 2/6 of the total warrant structure.Secondly, the warrants that has not been used during the first year according to the conditions that I just mentioned gives a right to buy shares also after 6 years, depending on the share price of Odfjell. There is a linear allocation starting with 0 shares if the share price is NOK 36 or lower through allocation, if it's NOK 107, which represents 20% increase over 6 years, and linear inventory. So for example, if the share price of Odfjell has increased with 8% per year over the next 6 years to NOK 57, then we will get around 30% of the shares or 1.7 million shares. We will buy this, of course, for a very low amount, $0.01 per share, while the value of those shares in 6 year will be around 100 million.As already mentioned, there is no value on the warrant structure in our balance sheet yet because we are still trying to develop a good methology (sic) [ methodology ] to evaluate this quarter by quarter, and this will be implemented in the fourth quarter.Then finally, Slide 16. This slide covers the 3 small portfolio companies, Step Oiltools, First Geo and Cool Sorption. Step Oiltools operates in the drilling market and has seen some improvements in order intake and revenue during this year. Revenue in the third quarter were up 23% to NOK 70 million, with an EBITDA of NOK 5 million. First Geo had a very strong quarter, mainly due to one contract that -- and fortunately will be completed in the fourth quarter. And revenues of NOK 53 million with an EBITDA of NOK 15 million is probably all-time high for the company. But then have in mind that the revenues and the result will drop in the fourth quarter and going forward when this project has been completed.Cool Sorption has also experienced higher tender activity and order intake this year. Revenues of NOK 23 million is -- in the third quarter is more or less the double of last year, but EBITDA in the quarter was only around 0.Well, then I leave the word back to Karl for some final remarks before we open up to Q&A session.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Leif. Some few and final remarks from me before we move on. As already mentioned, the divestments and investments that we have made the last 2 years have changed the portfolio of Akastor significantly. However, we still have a portfolio that is well positioned for the expected recovery of the oil service market that have strong market position in its respective markets, and therefore, we see a significant value potential in our portfolio.The job number 1 for the Akastor team is therefore still to develop our existing portfolio. We have over the last year shown a strong M&A track record, especially in selling companies at attractive values, but also in making investment with the value-enhancement potential like the Odfjell and Awilco investment. We now have a strong balance sheet that gives us some investment capacity, but we will continue to be very careful when we are considering what to invest in.With that, we are ready for the Q&A session. So operator, can you please help us facilitating the Q&A session, please?

[Operator]

[Operator Instructions] We are going to open the question from ABG, Haakon Amundsen.

[Haakon Amundsen, Lead Analyst]

Haakon Amundsen from ABG. Just 2 questions from me, please. You touched briefly upon it in the last comments, but you are refinancing into a quite large bank facility and you have a strong balance sheet. Can you give some more color on the size and what kind of investments you would be considering? That's my first question. And second, now that I guess the mix may change a little bit in MH given your execution on new packages and maybe some higher aftermarket revenues, how should we think about the margins going forward here? Can you give us some color on that, please?

[Karl Erik Kjelstad, Chief Executive Officer]

So let me start on the last one, Haakon. When it comes to investments, our key focus is add-on investment that can strengthen the existing company we have in the portfolio. So that is what is the main focus when we're looking for investments. Then also, we have an opportunistic view if there are some investments we think have attractive characteristic, we're also open for that. But the key focus is to invest in investment that can strengthen the portfolio that we have.

[Leif Hejø Borge, Chief Financial Officer]

With regards to your question on MHWirth, most likely, we will see a stronger growth in revenues from the products and projects going forward than in the services, especially if MHWirth win new contracts. As you probably all know, the margins on services have always been higher than the margins on products. That should, of course, give a dilution effect on the margin. On the other hand, even though we have cut the indirect costs in MHWirth a lot over the last 3, 4 years, the indirect cost as a percentage of revenue is still much higher than 3, 4 years back. Point being that it should be possible now to grow the top line without adding too much on the indirect cost, and that should have a positive effect on the margins. So our ambition is to keep the -- around 10% margin in MHWirth, and hopefully, over time, also grow the margin somewhat from that level.

[Operator]

There is no further question.

[Karl Erik Kjelstad, Chief Executive Officer]

Okay. Then we thank you all for listening into the third quarter earnings call, and I hope you will all attend the fourth quarter call on the 30th of February. Have a nice day, all of you. Thank you.