Akastor ASA

OSE:AKAST

Earnings Call Transcript 2022-Q3

[Øyvind Paaske, executive]

Good afternoon, and welcome to the presentation of Akastor's third quarter results for 2022. My name is Oyvind Paaske, CFO in Akastor. And together with me is our CEO, Mr. Karl Erik Kjelstad. Also, we are happy to have with us from HMH in Houston represented today by Tom McGee, CFO; and David Bratton, SVP of Finance, who will later take us through HMH's third quarter financials.

As a reminder, we will, as usual, open for Q&A through the webcast solution towards the end of the presentation. 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 them in time. I will later take you through our financials. But first, I will leave the word to Karl Erik for the key highlights. Please, Karl Erik.

[Karl Kjelstad, executive]

Thank you, Oyvind, and thank you to all for listening into this presentation of our third quarter earnings.

Let us start on Slide #2. The key value indicator for Akastor is the value of each of the investments we have. And the majority of these investments today are held through joint ventures with different partners. The value of our investment for the third quarter is illustrated here through our net capital employed. As you see from this overview, the equity value of Akastor by the end of third quarter was approximately NOK 16 per share, and that is in line with the second quarter.

On October 1, we celebrated the 1-year anniversary of the establishment of HMH, where Akastor has a 50% shareholding. Following this establishment, Akastor is an investment company with limited upstream cash flow from our portfolio companies and independent realization of assets to provide positive free cash flow.

As there were no realizations in the third quarter, our net interest in debt increased during the quarter with NOK 123 million to NOK 1.450 billion. Most of this increase in net interest debt was related to noncash FX effects.

HMH continues to be so far most valuable investment. And the book value for shareholding in HMH is equal to about 50% of our net capital employed. And HMH had a value of about NOK 3 billion by the end of the quarter, and that corresponds to NOK 11.1 per Akastor share. HMH delivered a strong year-on-year EBITDA growth, and we remain positive regarding the outlook for the HMH business going forward. We expect that activity will increase with a strong momentum into 2023 driven primarily by an increased rig activity.

In the quarter, HMH acquired all shares in Electrical Subsea & Drilling, also called ESD. And HMH have, for several years, been a shareholder in ESD with a shareholding of 20% before this transaction. ESD developed technology for electronic blowout preventers and rotating control devices for riserless drilling and also for managed pressure operations. ESD technologies are beneficial in terms of weight and space reduction that contributes to a lower overall carbon footprint for drilling, which is a very important goal for HMH.

AKOFS Offshore delivered a good operational performance and revenue utilization for all the vessels was high in the quarter. AKOFS Wayfarer secured a new 4-year contract with Petrobras in the quarter and expected to commence on this new contract after the current 5-year contract and first part of 2023.

We continue also to be very pleased with NES Fircroft performance, and the company is continuing to demonstrate its attractive business model with a strong and robust growth continuing in the third quarter. In the quarter, NES Fircroft cost also raised USD 300 million Nordic bond that provides a financial framework for continuous growth going forward.

In the quarter, DDW Offshore secured a 1-year contract for the Skandi Atlantic vessel with Petrofrac in Australia. And by this, only one of the 5 DDW Offshore vessels is without contract.

Our customer equity story remains. Today, our shares trade with a significant discount compared to book values at a time where we see positive market development for all of our portfolio companies and all of our portfolio companies deliver solid performance and growth. At the same time, our M&A track record for previous transactions shows that we have realized all the holdings at attractive terms with divestments done above book values. So that is our simple equity story.

So with that introduction, I'm pleased to introduce HMH's CFO and EVP, Thomas McGee, that he'll take us through HMH's third quarter earnings and key priorities going forward. So Tom, please, the word is yours.

[Øyvind Paaske, executive]

Are you there?

[Tom McGee, executive]

Now we're here. Good morning. You thought we'd figured that out by now.

As Karl Erik said, we had a good quarter. So we continue to see very positive tailwinds in our industry. When you look at the drilling contractors and look at the day rates that they're receiving today on what is a lower cost base than they had 5 or 6 years ago, we see a lot of really positive signs from our customers.

You're seeing rig reactivations continue. Those conversations are continuing where as opposed to 1.5 years ago, when we told you that no cold stacked rig whatever come back, we think there's the possibility that those rigs will come back into service. So we continue to see a lot of strength from our customer base on rig reactivations. And we continue to expect that, that will continue the rest of this year.

We did have a couple of -- while we had a strong book-to-bill, we did have an ERP implementation that went live on the business we extracted for Baker Hughes. That did cause some of our orders and deliveries to be pushed into the fourth quarter, and we expect to make that up. And David will cover that in a minute.

I would also just set the backdrop on some of the offshore energy policy and shifts that we're starting to see that we think are positive, obviously, as industry security continues to become a larger and larger issue globally. We expect to see more of what you see in places like the U.K. where energy policy starts to shift to be more favorable to our industry.

So as Karl Erik said, it's our 1-year anniversary -- or just was our 1-year anniversary. So I want to touch on a couple of highlights. And you've heard most of these before, but I just want to kind of summarize the year for you that we've had. I think, first, and I think really significantly was the first joint commercial win.

Our legacy MHWirth, now ESS business, worked very hard to secure this project. It took extensive contract negotiations to get this project with the Chinese. When we closed HMH, we were able to pull the pressure control part of that project through in weeks. It really speak to the power of the combination of the businesses. So we continue to be very proud of that.

We placed a bond in Norway earlier this year. As you guys -- as you all know, we've got that done very quickly. I think, really to be proud of there is we -- at post close, getting all the audits in place and getting the financing package in place in time to really hit the window before the market got really choppy. I think we're very proud of our efforts there, and we expect to list that bond really within the next couple of weeks.

We merged our operations in places where we had overlap, U.S., U.K., Singapore and Brazil. Sitting here in the U.S., we can really see that success on a daily basis of how we've been able to put these businesses together. As we talked about, when you extract a business from someone like Baker Hughes, you have to stand up a corporate infrastructure on its own, and it can be challenging.

We put -- our ERP system in place went live, shipped the product at 9:00 a.m., the day after we went live. So we're very proud of that effort, at least the immediate cost savings. We're now going to transfer in unified ERP system, bringing ESS onto that system and really modernize and refresh that whole system for the ESS side of the business.

That puts us on track for synergies and the synergy targets that we've talked to you about in the past. And so we feel good, and we've got good line of sight on those synergy targets. And then finally, as Karl Erik mentioned, we did our first acquisition, a small acquisition, but I think it can be very significant for us going forward on the floater and on the jackup side in terms of electric BOPs.

Then we'd flip to the next page. And I think most of you have seen this before if you've seen in our bond presentation, but I just wanted to highlight something. Take a step back. Look, a vast majority of our business is offshore, it's oil and gas, we get it. We do have some other things going on. We've got some things we talk about that are more in the future like subsea mining and offshore wind. But we have something going on today that I just want to highlight and spend a few minutes on, that's the slurry pumps.

We have a market leadership position in this. We're one of a handful of companies that can produce a quality product in this space. And ultimately, these pumps are used to, for lack of a better description, mine for things that go into electric vehicles. It's the easiest way to comprehend it.

And if you go to the next slide, just stepping back, why do we like this business? We've got to get installed base. We've had some really significant project wins this year, but the tailwinds in this business are significant. When you look at base metal demand here, which I think everybody is aware of the trends there. But I think when you step back and look at the base metal demand and look at the number of mines required in order to meet that demand, we feel very good about our product.

We also have an example here of where the organizations can effectively work together. Historically, Germany has not had a lot of presence in North America. Our people here are working hard at pulling them through into this -- into the North American market and the South American market. And I think it's also kind of an example of where the organizations have thrived together.

So I just wanted to touch on that real quickly as the non-oil and gas segment and then pass it on to David, who will hit the highlights on our financial results.

[David Bratton, executive]

Thanks, Tom. I'll deal with the total company results and then move into the segment details.

Revenue for the quarter was $160 million, up 18% year-over-year, driven by delivery of projects and product backlog, down sequentially with specific termination effect in 2Q '22 not repeating in the same extent in 3Q '22. Adjusted EBITDA in the quarter was $28 million, up 58% year-over-year, driven by increased volume and final termination-related fees. It's important to note that excluding these fees, HMH's adjusted EBITDA would still have shown improved EBITDA results on a year-over-year basis. Adjusted EBITDA rate was 17.8% in the quarter, again, positively impacted by the final termination fees previously mentioned.

Orders for the quarter were $172 million, up 1% sequentially with product orders offsetting services orders being pushed to fourth quarter due to ERP implementation and down year-over-year, driven by non-repeat of certain large product orders booked in the third quarter of 2021. Finally, on cash flow. Free cash flow in the quarter was $7 million, with $54 million cash and cash equivalents on hand at the end of the quarter.

Moving to the next page, I'll walk you to the segment results in more detail. In aftermarket services, revenue continued to increase sequentially despite ERP go-live limitations, and we again see an improved output in the fourth quarter. Aftermarket order intake was up 6% year-over-year, driven by market tailwinds but down 24% quarter-on-quarter. The sequential drop was driven by HMH's first wave of ERP implementation in which we experienced a 2-week system blackout and had to undertake manual processes. We have line of sight for a rebound and aftermarket order intake in the fourth quarter.

In Projects, Product and Other, revenue in the quarter was $54 million, up year-over-year as we continue to execute on the GMGS project and down sequentially driven by lower Valaris 20K-related fees and GMGS volumes.

Moving to the next page, our net interest-bearing debt. We ended the quarter with net debt of $142 million. Leverage in the third quarter was below targeted capital structure at 1.4x, driven by strong performance on cash and EBITDA in the quarter. Overall, we're very pleased with the team's execution in the third quarter.

And with that, I'll turn the call back over to Tom.

[Tom McGee, executive]

Yes. Just to wrap up here, strong quarter, I feel great about the market. I think that where we are in the cycle -- a couple of points in the cycle. One is we're in a cycle where as a management team, you have to shift. You're shifting over the course of the past year from survival to growth, right? I mean things are good now. We have to embrace it. We have to be happy about it and we have to lean forward and get excited. So we're excited. We're shifting into growth mode. I think that's positive.

We're also at the point in the cycle where our customers are talking about capital discipline and balance sheets and the rigs they have stacked that they're going to bring back and they're never going to build a new build again. That's kind of where we are in the cycle. I do think -- will that change? Yes, I think it will change eventually. But I think right now, we're in this cycle of our customers, reactivating rigs, our installed base growing, selling discrete products to them as they bring them back in service and continue to service, our installed base as the market continues to strengthen. So again, we feel good about the future. We're happy with where we are.

And with that, we'll pass it back to Akastor.

[Øyvind Paaske, executive]

Thank you very much, Tom.

I will now take you through the Akastor financials, starting then at Slide 11 with the financial highlights. As before, please bear in mind that many of our holdings, including the HMH and AKOFS, are not consolidated into our group financials and thus, our reported group revenue and EBITDA only represents a very minor part of our total net capital employed.

With that in mind, AGR delivered yet another strong quarter with positive year-on-year growth from both revenues and EBITDA. Total revenues ended at NOK 184 million with an EBITDA of NOK 14 million. Activity level was slightly lower than previous quarter, explained mainly by seasonality and the holiday season.

DDW Offshore, included here under Other, delivered revenues of NOK 35 million in the quarter, increased both year-on-year and quarter-on-quarter, driven by increased utilization of the fleet. DDW delivered a positive EBITDA of NOK 5 million this quarter compared to a negative contribution in Q2. Corporate costs in the quarter included around NOK 8 million in costs related to the DRU contracts. With that, and including positive contribution also from consortion, our consolidated revenue and EBITDA for the period came in at NOK 251 million and negative NOK 3 million, respectively.

Then our JV holding. As Tom and David has already been through, HMH delivered yet another good quarter with a EBITDA of $28 million in the period, adjusted for specific integration costs of around $4 million. And the results and intake then in the period affected by the ERP implementation already mentioned with the catch-up effect expected in Q4.

For AKOFS, they delivered a solid operational performance on all vessels also in Q3 with total revenues for Q3 for AKOFS ending at $37 million in the quarter, roughly in line with previous quarter and an EBITDA at $12 million.

During Q3, Seafarer was out of operations for a shorter period in connection with demobilization of coiled tubing equipment after having delivered a successful coil tubing campaign for Equinor during the summer. The vessel has now returned to its normal well intervention assignments.

Skandi Santos went to yard in July in order to prepare for the new contract with Petrobras expected to commence in December this year. The 2 other vessels remain in normal operations through the rest of this year.

Then over to the next slide for a further look at our consolidated P&L, focusing here on net financial items that came in at a net positive of NOK 104 million in the period. Under net financials in Q3, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 27 million, which included a negative noncash effect of NOK 2 million related to the valuation of the warrant structure.

NES contributed positively with NOK 28 million in the quarter, in line with previous quarters. HMH and AKOFS contributed negatively with NOK 2 million and NOK 65 million, respectively, equal to then 50% of the net income in the period plus a positive true-up effect for HMH related to previous periods following completion of the 2021 audit in Q3.

Net foreign exchange effects were positive with NOK 137 million in Q3, driven by the U.S. NOK -- U.S. dollar-NOK exchange rate that further increased during Q3 and had positive accounting effects on our dollar holdings.

Let us then turn to Slide 13 for an overview of the net debt movements in the period. You see here that our net bank debt increased by NOK 158 million during the quarter, driven then primarily by noncash foreign exchange effect of NOK 111 million included in the graph under Other. Of our total reported net bank debt of NOK 1.9 billion, DDW Offshore constituted NOK 521 million per end of period, while net debt in AGR was NOK 133 million. Net interest-bearing debt per end of the quarter was NOK 1.45 billion, netted then against our interest-bearing positions towards AKOFS and HMH primarily.

As also mentioned last quarter, funding of approximately USD 5 million to AKOFS is required in connection with the Santos yard stay and will have cash effect in the fourth quarter. Also, in addition to normal corporate cash flow, the guaranteed preferred return to Mitsui and MOL in connection with AKOFS Offshore divestment in 2018 will have cash effect in Q4.

Then over to the next slide for an overview of our external debt financing facilities. With the effect mentioned on the previous slide, the drawing on our corporate banking facilities increased to NOK 1.2 billion per end of September, an increase of around NOK 110 million, of which around NOK 80 million was noncash and related to FX through an increased draw on the U.S. dollar facility when translated to NOK. There was no draw under the subordinated liquidity facility from Aker Holding AS per end of the third quarter.

Per end of quarter, our undrawn corporate credit facilities stood at NOK 0.25 billion, somewhat down compared to Q2 as a result then of cash flow in the period. Our corporate bank facilities mature in the first quarter of next year. We are currently in dialogue with our banks on this and are targeting an extension in order to bridge time to realization.

As also mentioned in the second quarter presentation, Akastor today is an investment company with limited upstream cash flow from its portfolio companies. It does depend on realization of assets to reduce debt and also then to improve liquidity. Going forward, we are targeting to increase the liquidity buffer through realization of assets. Depending on timing of such realizations, additional financing could be required. And as part of this, we have initiated the dialogue with our financial sponsors regarding potential increase of current facilities should this be required.

With that, I will pass the word back to Karl Erik for some additional comments on the portfolio. Please, Karl Erik.

[Karl Kjelstad, executive]

Thanks, Oyvind. Let me roll off this presentation with some ownership agenda reflections.

First, on Slide 16, you see our portfolio overview. That is unchanged compared to the last quarter. So let's move quickly on to Slide 17, covering HMH, where Tom has already gone through the operation performance. At Akastor, we're happy with the outlook for the HMH business, and we believe the company is very well positioned to take part in upturn driven by a focus on LNG security worldwide going forward.

As HMH shareholder, our key focus is to support the HMH management in the integration work, including realization of both cost and revenue synergies. And in addition, we are supporting the management's effort to grow the company, both organically and through M&A.

Akastor, together with our co-owner, Baker Hughes and the HMH management team, are targeting to make this investment liquid through an IPO as soon as the company is ready. And equity market is offering interesting valuation of our HMH investment.

Let us move on to Slide 18, covering AKOFS Offshore. As mentioned in previous quarter, the key objective for AKOFS Offshore in 2022 was to ensure award of new contracts of Aker Wayfarer after a contract with Petrobras ends early 2023. With the formalization of the Wayfarer for the new long-term contract, we have ticked this objective off. And by this, all AKOFS vessels will be on long-term contracts that is an important prerequisite for exploring different structural solution for the company, including combination between AKOFS Offshore and other industry players.

AKOFS's core market, the subsea well intervention business, are in the early phase of our current upcycle for the offshore oil and gas project. And we see that the supply side for subsea well intervention looks to be tightening rapidly, which can create interesting opportunities for AKOFS going forward.

Slide 19, covering NES Fircroft. NES Fircroft is the clear global leader with its niche and the market has, however, still potential for further consideration and growth. And when it comes to growth, we have a strong demonstration of that in the third quarter with an LTM for the company going with approximately 30% compared with 1 year ago.

NES Fircroft is what I would call exit-ready and different alternatives being explored, including a potential listing in Oslo. The USD 300 million bond that was raised in September for NES Fircroft fits very well into the plan to list NES Fircroft as soon as the IPO markets offer interesting valuations.

Let's move to Slide 20. AGR continued high activity level within consultancy business especially driven by the Norwegian market, with an all-time high revenue and EBITDA results for the consultant business in the third quarter. The high well management activity in Australia also continued in this quarter. Our ownership agenda for AGR is to continue to profitably grow AGR business, both organically and also potentially through M&A.

Then finally, on Slide 21. We continue to believe that the realization of our financial investments such as Odfjell profit share instrument and our shareholding in the NES Fircroft will probably be the realizations that come first and we are working on several initiatives in this regard.

As already mentioned by Oyvind, realizations are important to strengthen our balance sheet and increase liquidity buffer going forward and is therefore, a key priority for us. The DRU arbitration case is on track and we expect a clarification here during early or medium 2023 as the arbitration process is finally concluded. For HMH, the clear target is to do a separate listing of this company as soon as the company is ready and equity market is attractive.

Now with that, we are through the presentation, and we will move over to a Q&A session. And I guess, Oyvind, we should pause for a minute or 2 to provide opportunities for people to raise questions. Thank you.

[Øyvind Paaske, executive]

Thank you. We'll be back in just a short minute or so. Okay. We'll start with a question from Mr. [ Martin Kolsrud ] to HMH team, asking if you could please provide some additional color to the impact of the first wave of the ERP implementation and how that pushed orders into Q3 and how this negatively impacted the results. So Tom, maybe you could shed some more light on that.

[Tom McGee, executive]

Sure. I'll try and describe what actually occurred first. And David can give you some color. We're effectively blacked out for a period of time, right? So when you think about your system, when you're switching systems, it's turned off. You're trying to do things manually. So we had weeks in the quarter, multiple weeks in the quarter we effectively couldn't book orders into the system and ship product.

And so it's fairly typical in that situation. I'm very pleased that it was only a matter of weeks. ERP implementation has gone wrong, you have problems like that for a month. So it went very smoothly. It was all expected, but the reality is stuff gets moved out in the quarter. David, I don't know if you want to add anything to that or not?

[David Bratton, executive]

Yes. No, I think it was a material impact from an order intake standpoint. And for the fourth quarter, like we said, we're anticipating a strong rebound in that regard.

[Øyvind Paaske, executive]

Thank you, Tom and David. Then we have one question, I guess, that goes to you, Karl Erik. Which positive triggers do you see potentially come in, in Q4? I guess that's something you can comment on.

[Karl Kjelstad, executive]

Yes, yes. Of course, it's a sensitive subject, but they're twofolded. One is, of course, the general market that we -- our portfolio companies operating in that they are continuing to grow and deliver solid results as they have done in the previous quarters. That's a trigger. And then as we being an investment company, that our focus on doing transaction, also potential transactions will also -- could be a positive trigger. So I think I'll leave it with that answer, Oyvind.

[Øyvind Paaske, executive]

Thank you, Karl Erik. Then we have one additional question for Tom and David. Can you comment on the underlying EBITDA in HMH adjusted for the termination fees? That's from Jorgen Opheim of Pareto. So maybe, Tom, if you can just...

[Tom McGee, executive]

Yes, at a high level, step back and it's kind of similar to what we said last quarter. We -- absent the fee, we -- and if the project had been running along, we would have seen quarter-over-quarter growth and year-over-year growth. Dave, I don't know if you want to elaborate on that more. I think that's the easiest -- that's kind of similar to what we said last quarter.

[David Bratton, executive]

Sorry. Yes. normalizing for still growth year-over-year in that regard.

[Øyvind Paaske, executive]

Thank you, David. Let's see. I guess there's another question from PTB caller, which I have to translate from the region on live here. So pardon me for -- if this comes out funny. But are you looking on strategic additions to the portfolio of subsea or supply companies? And are you assessing to buy shares or increase ownership in other similar companies? I guess that's a question on whether we consider new investments at this time, basically.

[Karl Kjelstad, executive]

Akastor strategy is to develop the companies that we have and do potentially add-ons to the existing portfolio. Currently, to do new platform investments is not a part of our strategy. But as we realize investments, our balance sheet will be strengthened and there's opportunity to also assess new investments. When it comes to the portfolio company, especially for HMH, together with Tom and the team, we are looking into different options in order to grow the company also through M&A. So I think that's it.

[Øyvind Paaske, executive]

Thank you. Okay. There's no more questions as of now. So with that, I think we are through. And I would like to thank you all for your attention and welcome you all back for our presentation then of the fourth quarter results on February 15 next year. Thank you very much.