Akastor ASA

OSE:AKAST

Earnings Call Transcript 2021-Q3

[Oyvind Paaske, Chief Financial Officer]

Good morning, and welcome to the presentation of Akastor's third quarter results for 2021. My name is Oyvind Paaske, CFO of Akastor. And I'm here with Karl Erik Kjelstad, our 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 main highlights before I'll go through the financial results.[Operator Instructions] I will now leave the word to Karl for the business update. Please Karl?

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Oyvind, and good morning to everyone on the call, and thank you for listening into this earnings presentation. First, please note that Akastor consolidated revenue and EBITDA continues to not include MHWirth financials. MHWirth is included in our P&L under discontinued operations.Let me start with sharing some key developments of Akastor in the third quarter. Let's move on to Slide 4. Subsequent to the quarter end, on October 1, we finalized the strategic important transaction, combining MHWirth with Baker Hughes' Subsea Drilling division.We are now 50% shareholder in this new combined company. As a part of the closing, Akastor received a net USD 78 million at closing, and we've simultaneously completed the refinancing of our revolving credit facility. Oyvind will revert to the details about the new Akastor financing later in this presentation.The value of the claim towards Jurong Shipyard was carved out from the MHWirth transaction with the Baker Hughes and will remain with Akastor. The claim is connected to the 4, so-called DRU contracts, also called Sete rigs with Jurong Shipyard. 2 of these rigs were formally terminated in this quarter -- in the third quarter and 2 remain suspended. For the 2 terminated rigs, next step will be to agree on the termination fee to be paid by Jurong Shipyard.In the quarter, we are also very pleased to see that the previously announced MHWirth contract award for delivering topside drilling equipment to GMGS in China, was formalized and thereby taken into MHWirth's order book. The contract confirms MHWirth's strong market position. Next slide, Slide 5. The new brand of the combined company is HMH. That is meant to represent association to strong legacy brands in the company, such as MH, Hydril and Wirth. The company will be headed by Pete Miller and a proven executive team is in place with Tom McGee as CFO; Eirik Bergsvik to head up to topside equipment business, while the [ POP ] business will be headed by Chuck Chavier.The Board will be chaired by Pete Miller and have 2 representatives from Baker Hughes and Akastor, respectively. The integration process has now moved on from integration planning to go live to integration implementation.A key integration planning work stream was to review and verify the synergy target of about $10 million, as communicated when we announced the transaction. Based on the progress and actual plans established in the integration process, the synergy target has now been increased to $50 million with an ambition for further increase with a stretch target to be verified. In the short term, there will be some nonrecurring costs to realize the synergies, for example, costs related to establishing a combined IT platform.Let's move to Slide 6. We have here updated the overview of our portfolio to reflect the establishment of HMH and our corresponding 50% shareholding. And further, we have included our economic interest in the claim towards Jurong Shipyard as a part of the financial investments since this represents a significant value for Akastor.Slide 7. Let me share some reflection about the drilling market. With the Brent oil price above $80 over time, the offshore drilling market continues to attract attention. After years of overhauling new project to sustain low and volatile oil prices, oil companies now have a stack of profitable project ready for final investment decision.This gives higher activity, and we see an increased number of inquiries for upgrades and so on for rigs for MHWirth equipment. For example, we recently saw that the newbuild Cobalt Explorer drilling ship with MHWirth topside that have been stacked for years at the shipyard, now have found a new home in Turkey and is, as we speak, made ready to enter into operations. And will then give service revenue for MHWirth going forward.Further, we see increased interest for the 2 rigs with MHWirth topside under construction at Keppel FELS in Singapore, making us hopeful that they soon will find a new owner and eventually come into operation in the North Sea, delivering a new standard of drilling efficiency with a record low carbon footprint.So we are quite optimistic for increased demand going forward, especially from 2023 and onwards. Let us move on to some more insights about the performance of our portfolio companies. Slide 8. Recent operation with MHWirth topside equipment was stable in the quarter with 48 rigs on average in operation, same level as we saw in the second quarter.As communicated earlier, we expect the number of rigs in operation with MHWirth topside to increase in the last part of this year. MHWirth saw an increased activity level across its service business in the third quarter, and we expect this development to continue over the coming quarters, and maintain full year target of service revenue to be in line with what we delivered last year.However, still with some uncertainties related to possible continued effects of COVID-19, especially with regarding travel restrictions. Total number of offshore rigs with full topside package and/or [ BOP ] delivery by the combined company, HMH, was by the end of the quarter, 139 units. Of these 93 was in operation.The combined company will have a service business that is even more robust and captive than what MHWirth had stand-alone, which gives the new company a very solid foundation for the future. The project market continues to be muted. MHWirth product business had an order intake with a book-to-bill of 1.1 in the quarter, and we expect order intake to increase going forward, but it will be lumpy based on timing of specific contracts.Key drivers here is increased activity, especially in the non-oil-related product business. MHWirth Digital business had a continued high activity in the quarter with delivery of 7 new systems and continues to see a positive momentum for its software solutions and control system upgrades with a good pipeline of opportunities.Let us move on to the other companies in the portfolio on Slide 9. AKOFS Offshore, Aker Wayfarer and Skandi Santos delivered a very solid quarter in Brazil with an uptime of 100%, difficult to do better than that.When it comes to AKOFS Seafarer, they delivered a revenue utilization of 91% in the quarter. They had solid operations and a high technical uptime, but the revenue utilization was somewhat impacted by more days on transit rate than normal. AKOFS offshore is in a tendering process with Petrobras for a possible new 3-year contract with Skandi Santos, and we expect this to be formalized during this quarter. That means the fourth quarter this year.Further, we are pleased with the continued strong performance of AGR with delivering an EBITDA of NOK 10 million in the third quarter, driven by high activity, especially in the Norwegian shelf consultancy business.Cool Sorption had stable activity in the quarter and delivered a book-to-bill of 1.1. And of our largest financial holding, Odfjell Drilling, had a negative share price development in the quarter that impact the value of the warrant structure.Our preferred equity instrument in Odfjell continues to deliver a steady yield for Akastor. NES Fircroft, saw a continued strong growth in the number of contractors in the quarter and an increasing revenue run rate. We expect this to continue through the year, and we are very pleased with the development of NES Fircroft, and we expect 2022 to be an even stronger year than 2021.Further, we are pleased to see that the company continues with a strong growth in the renewable sector. DDW Offshore, 3 out of 5 vessels is normal contract for the end of the third quarter and one vessel on yard preparing for new contract that will commence now in the fourth quarter.Let's move to Slide 10, and let me repeat our road map for realizing our investments and the associated capital allocation priorities. The most near-term realization will most likely be our financial investments as our most liquid holdings. The timing here would depend on the market dynamics, and we believe that 2022 can be a very interesting year for these investments.In addition, as a part of our financial holdings, we are working to capitalize our economic interest on a contract to Jurong Shipyard related to the 4 DRU rigs. For industrial holdings, we will work to find structural solutions that can imply a straight out sale of creative structures. Timing here will, of course, depends on the market situation, but also on specific company factors such as the contract situation in AKOFS, for example.For HMH, as mentioned before, our key priority is to do a separate listing of the company. With regard to capital allocation, we need first to address our debt; however, with a clear goal of returning value to our shareholders. So our strategy remains targeting to realize the value of potential of portfolio, optimize the timing in order to maximize value and return the capital to our shareholders.So then Oyvind, would you please take us through some more details when it comes to our financial performance in the third quarter?

[Oyvind Paaske, Chief Financial Officer]

Sure, Karl. Thank you. I will then present the figures for the third quarter, starting then at Slide 12. MH is, as Karl mentioned, per Q3 still classified as held for sale and reported within discontinued operations. As the transaction was closed on October 1, accounting effects following the transaction will be included in our Q4 financials.With that in mind, in the third quarter, we saw an increase in consolidated revenues of 20% compared to last year, driven by higher activity level in AGR. The EBITDA in the quarter was negative NOK 10 million compared to negative NOK 5 million in the same quarter 2020, driven by negative results in DDW in the period.Net financial items contributed negatively with NOK 59 million in the quarter, of which NOK 29 million was noncash effects. Profit from discontinued operations in the quarter was negative NOK 149 million, representing net profit from MH in the period, including certain write-downs of balance sheet items in connection with legal entity valuations conducted in connection with closing of the MH transaction.These noncash bookings will not have any consequences on equity value for the new combined company. And thus, for Akastor, accounting effects will be reversed in Q4 through an increased accounting gain following closing.Order intake, including MHWirth in the quarter was NOK 1.6 billion and includes then the drilling equipment package to CMGS secured by MHWirth. Total backlog per end of the quarter was NOK 2.5 million (sic) [ billion ], affected by the notice of termination related to the 2 DRU units with a total effect of around NOK 800 million.Total working capital position of Akastor, excluding MHWirth was NOK 351 million for Q3, including then the net book value of the DRU positions of NOK 456 million. The DRU positions are, as Karl mentioned, carved out of MHWirth in connection with the merger with Baker Hughes SDS and will remain Akastor's full economic exposure with values to continue to be reflected in Akastor's books, also post-closing of the transaction.Then over to the next slide for a further breakdown of the financials. Revenues from AGR was up 42% compared to Q3 2020 and in line with last quarter, driven by continued high activity level within the consultancy business, especially in Norway.In Q3, AGR constituted 65% of total consolidated revenues. EBITDA from AGR was NOK 10 million in Q3. DDW Offshore here included in the other, contributed negatively with NOK 8 million in EBITDA in Q3, driven by stacking costs and preparation for a new contract for Emerald, which is expected to commence in Q4.MHWirth reported revenues of NOK 757 million in the quarter, in line with Q3 last year and slightly up compared to Q2 this year, driven by increased activity within single equipment. AKOFS delivered revenues of NOK 333 million in the quarter, 59% higher than last year, explained by the commencement of AKOFS Seafarer late last year. EBITDA ended at NOK 98 million.Under net financial items, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 1 million, which included then a negative noncash effect of NOK 24 million related to the valuation of the warrant structure.NES, continues to contribute positively with NOK 24 million in the quarter, in line with previous quarters. Net interest cost was NOK 30 million in Q3. AKOFS Offshore contributed negatively with NOK 46 million under net financials, representing again our 50% share of the net profit in the period.If we then turn to Slide 14, you will see that our net bank debt increased by NOK 145 million during the quarter. Other cash flow, as presented on this slide, includes noncash FX effect of NOK 67 million driven by the U.S. dollar NOK rate.Of our total reported gross bank debt, DDW Offshore constituted NOK 465 million per end of Q3, while AGR debt was NOK 182 million. Both these arrangements will remain as per Q3 also after closing of the MHWirth transaction.Per Q3, the net bank debt, excluding AGR and DDW, was NOK 1.4 billion, representing then the net draw on our corporate facilities per end of Q3. Based on proceeds from the MH transaction received October 1, this will be reduced over the course of this quarter, and we estimate a net draw per end of year of around NOK 800 million, in line with previous guiding.Per end of the quarter, our liquidity reserve through undrawn credit facility was NOK 1.3 billion. This, however, will be lower per end of Q4 as a result of the refinancing completed earlier this month, which I will get back to on a later slide.Then over to Slide 15. Total net capital employed per end of Q3 was more or less in line with last quarter. Again, MH is classified as held for sale in our balance sheet per end of this quarter. Following closing of the merger with SDS, which will be accounted for in October, the value of our holding in HMH will be booked as a financial investment with net capital employed, reflecting then 50% of the book value -- book equity value of the new company.Based on valuation conducted in connection with closing, we expect a gain related to this transaction and thus expect total net capital employed to increase when we come to Q4. Akastor's DRU position as -- has here per Q3 been presented as a separate item with a total value then of the NOK 456 million. This is included in our net working capital, and the 2 terminated contracts constitute NOK 302 million of this total.Then if we turn to the next page for some further details on MHWirth. MH delivered an increase in revenues of 11% compared to Q2, driven by increased activity within single equipment as a result of order intake in the first half of the year.Revenues from DLS and Digital Technology was NOK 535 million, in line with last quarter and around 70% of total revenues in MHWirth. Within the project segment, activity remained low in Q3. The activity within this segment will, however, increase going forward, driven by progress from the new CMGS project booked as order intake in Q3.As Karl has already mentioned, average number of active rigs in the quarter remained stable compared to Q2. Based on current contract schedule and option structure on the fleet, we expect a number of active units increase in Q4.Total fleet size for Q2 was 74 units, a reduction of 2 since end of Q2 due to 2 Seadrill units confirmed scrapped in the quarter. Both these units has had previously been cold stacked, thus reducing the number of cold-stacked floaters to 8 units per end of Q3.EBITDA from MH in Q3 was NOK 49 million, representing a margin of 6.5%, still affected by a relatively low revenue level. Also, MH recorded certain specific nonrecurring costs of around NOK 20 million in the quarter. We expect margins to increase as activity picks up going forward. Per end of Q3, the total backlog of MHWirth was NOK 2.1 billion, including now then the CMGS project. However, with the DRU Unit 2 and 3 removed in the period.Then over to AKOFS Offshore on the next slide. Wayfarer and Santos delivered very solid operational uptime in the period, with both vessels recording 100% revenue utilization in Q3. Seafarer then also delivered a solid quarter with revenue utilization of 91%. Based on this, total revenues ended at NOK 333 million with an EBITDA of NOK 98 million. EBITDA margin in the quarter was roughly in line with last quarter. Q3 revenues represents a revenue increase of around 60% year-over-year, explained then by the commencement of Seafarer in Q4 last year.I will then turn to Slide 18. NES Fircroft continues to deliver growth month-by-month and the key KPI of NES, number of contractors have increased by around 10% since our last reporting. The pro forma LTM revenues for NES Fircroft for August was down around 20% compared to 1 year ago, however, with an increasing revenue and earnings run rate, driven by the mentioned growth in number of contractors. EBITDA booked in August was almost 40% higher than EBITDA booked in May, demonstrating the solid trajectory of the business.Going forward, we expect to continue -- growth to continue driven by the increased global oil service activity as well as growth within the renewable space. Then our other holdings include AGR and Cool Sorption, with AGR delivering revenues of NOK 177 million and an EBITDA of NOK 10 million in Q3, largely in line with previous quarters.Consultancy continues to form the largest part of AGR, still constituting around 80% of revenues year-to-date. Activity in Cool Sorption continued at same level as per Q2 with total revenues of NOK 22 million and a neutral EBITDA in this quarter.Then lastly, a few words on the refinancing completed in October. In connection with the combination of MHWirth and SDS, which closed October 1, Akastor refinanced its corporate facilities. The new bank financing consists now of 2 facilities with a total size equivalent to around NOK 1 billion towards a consortium of 3 banks.As mentioned, we estimate to draw on these facilities of around NOK 800 million per year-end. In addition, Akastor as part of the refinancing, also secured commitment for a NOK 250 million subordinated liquidity facility from Aker Holding AS.The covenants for the new bank facility includes equity ratio and gearing ratio as well as a minimum liquidity. EBITDA earnings are not part of the covenants in our new financing given the new structure of Akastor. The nonrecourse debt related to AGR as well as the debt in DDW has not been affected by the refinancing and remains as before.With that, we are through the presentation for Q3, and we will move over to the Q&A session. [Operator Instructions]Okay. As we have not received any questions, I think we are through the presentation. And I would like to thank you all for your attention. I wish you a good day and welcome you back for our presentation of the fourth quarter results on February 9. Thank you very much.