Akastor ASA

OSE:AKAST

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Øyvind Paaske, executive]

Good afternoon, and welcome to the presentation of Akastor's third quarter results. My name is Oyvind Paaske, CFO, and I'm here together with our CEO, Mr. Karl Erik Kjelstad. Also, we are happy to have with us HMH from Houston represented by Tom McGee, CFO; and David Bratton, SVP Finance.

Now let me start by taking you through the key highlights before the HMH team will take you through their quarter. I will then go through the financials. Towards the end, we will, as usual, open for questions through the webcast solutions. Please note that questions can be posted at any time during the presentation.

I will then leave the word to Karl Erik. So please, Karl Erik.

[Karl Kjelstad, executive]

Thank you, Oyvind, and good afternoon and good morning to U.S. participants, and thank you to all for joining us in this -- for this call.

We are quite pleased with our third quarter results and remains positive on the outlook for the remainder of the year as well as for 2024.

As you see on Slide 2, we have an overview of our portfolio. The book equity value for Akastor per the end of the third quarter was NOK 15.1 per Akastor share.

HMH continues to be our most valuable investment. The book value of our shareholding in HMH is equal to slightly above 65% of our total net capital employed with a book value of about NOK 3 billion per the end of the quarter or NOK 11.4 per Akastor share.

HMH delivered a strong third quarter with an EBITDA result of $35 million, actually the highest EBITDA since the inception of the combined company back in October 2021. EBITDA increased both year-over-year and also quarter-over-quarter, driven by the continued increase in Aftermarket Services. Also, the company saw a continued strong order intake with a book-to-bill just above 1.

We expect that service activity will continue to be strong for HMH also going forward. We're also pleased to see that the cash conversion, as expected, is improving with the key projects progressing according to plan. And we expect a solid cash conversion in the coming quarters, and Tom will refer to this in his part of the presentation.

We continue to be very pleased with NES Fircroft. The performance was good in the quarter with the company delivering a strong EBITDA growth year-over-year of about 23%. This is demonstrating NES Fircroft's attractive business model, and the outlook for the business remains promising also going forward.

AKOFS Offshore. AKOFS Seafarer vessel was delivering somewhat mixed results this quarter, but with an excellent coiled tubing operation during the summer months, followed by some operational downtime post the coiled tubing campaign. That was related to demobilization of this campaign.

Aker Wayfarer has now commenced on a new 4-year contract with Petrobras and has since commencement delivered good technical up time.

In the third quarter, DDW Offshore completed the sale of Skandi Saigon and Skandi Pacific to the Brazilian company, OceanPact. And further in the quarter, DDW Offshore was refinanced with a new USD 31 million facility that is maturing in September 2026 and this gives the company a good runway to optimize the value in a future sale of the remaining 3 vessels.

And then, finally, the DRU arbitration case is completed and we are waiting for the results from the arbitration tribunal. Based on advice from the Singapore arbitration institute, we expect to receive the conclusion from the arbitration tribunal before the year-end.

With that, I am pleased to, as usual, introduce HMH CFO, Thomas McGee, that will take you through the HMH third quarter earnings and key priorities going forward. So, Tom, the floor is yours.

[Tom McGee, executive]

Thank you, Karl Erik. Appreciate the kind words. We're obviously very excited, our team here has continued to do a fantastic job this year in delivering on all fronts. And we obviously, as Karl Erik mentioned, had a record quarter and involved a little bit of everything. Market trends going the right direction, some cost control, some integration milestones and some cash items we'll talk about in a minute So we're thrilled.

So if you look at the order intake, continues to be strong. Its rigs are reactivated -- our customer rigs are reactivated. Their day rates continued to increase and they continued to have restocking as they depleted their inventories during the downturn. We continue to benefit from that.

So we're very excited by what we see in our customer base, and they're talking a lot about even justifying very high-cost rig reactivations. And we've even had some of the jackup players talk about potential for newbuild jackups. And we're seeing that in the Middle East and India, it's been publicly announced. So there's a lot of really good things happening in our customer base that we're excited about.

Increased EBITDA year-over-year and quarter-over-quarter. I think the only thing to mention there is we do have an eye on cost here and there is a -- as we continue to integrate the businesses. We are managing our costs well. So hopefully, we continue to benefit from strong incrementals.

Cash flow is improving. There are a couple of things here that we're on the other side of. One is the ERP implementation, I'll talk about in a minute.

The other are some -- is one large project. That large project is the GMGS project we've talked about extensively. I think we're going to disclose today so you understand the magnitude of the cash flow impact that we're approximately negative $25 million cash on that project. We will be breakeven by end of Q1. So that has sort of been the plan all along. We wanted to open up a little bit on why you're seeing some of those cash swings and actually quantify it for you.

And so as we continue to progress into Q4 and Q1, what I will remind you that Q1 has seasonal weakness and we do want to set the expectation that you'll see a little bit of that in Q1, so not to continue to extrapolate 1 or 2 quarters. That said, we should really start to see what we expect on a cash conversion basis once we're on the other side of that project and we get a lot of the payments by year-end and in Q1.

And as mentioned a second ago, we completed Wave 2 of our ERP implementation, and we thank everyone for their hard work on that. It was a complete team effort. And so now we have one unified ERP. And I think it allows us to really unify our policies across that get a lot better reporting. And I think, most importantly, it makes us IPO-ready and really public reporting-ready. We can publicly report anywhere in the world as of Q1. So that was our goal. We've hit that milestone. I think we're very confident in our ability.

We still have a little bit -- there's always more work to do and so we're continuing to do -- fill in some of the details and round out the process. But we're really excited we've gotten on the other side of that.

And as we've stated, we're continuing to contemplate what our financial structure and capital structure should look like going forward. As part of that, we completed an amendment process with the banks where we deferred term loan installments and have the option to extend the maturity and also the option to extend the RCF maturity.

So that gives us a lot of flexibility forward. And again, as we go into Q1 and we get these payments on GMGS, I think we'll be well equipped to continue to evaluate all these options.

So with that, again, great quarter. Appreciate everyone on the team playing a role here in driving HMH to a record quarter. And I'll pass it on to David.

[David Bratton, executive]

Great. Thanks, Tom. I'll begin with the total company results and then move into the segment details. Revenue for the quarter was $203 million, up 29% year-over-year and 8% quarter-over-quarter, driven by increased Aftermarket Service activity and GMGS project progress.

Adjusted EBITDA in the quarter was $35 million, up 25% year-over-year and up 5% quarter-over-quarter, driven by increased aftermarket activity and higher service margin. Adjusted EBITDA rate was 17.3% in the quarter.

Orders for the quarter were $207 million, up 20% year-over-year, but down 7% quarter-over-quarter driven by Aftermarket Service intake increasing 39% year-over-year but down 8% quarter-on-quarter.

Finally, on cash flow. Free cash flow in the quarter was a positive $8 million, driven by improvement in project cash profile and improvement in collections as a whole. As Tom mentioned, we are currently in a negative $25 million cash position on GMGS project, but expect to be cash-neutral by the end of 1Q '24. We ended the quarter with $44 million cash and cash equivalents on hand.

Moving to the next page, we'll walk through segment results in more detail. In Aftermarket Services, revenue was $147 million in the quarter, up 38% year-over-year and up 7% quarter-over-quarter, driven by increased spare part output and overhaul and repair activity. Aftermarket order intake was $145 million in the quarter, up 39% year-over-year, driven by spares and SPS orders but down 8% quarter-over-quarter, driven by nonrepeat of large prior quarter recertification spare order intake.

In Projects, Product & Other, revenue in the quarter was $56 million, up 10% quarter-over-quarter driven by continued progress on our GMGS project.

On the next page, we'll walk through our net interest-bearing debt. We ended the quarter with a net debt of $174 million. Leverage in 3Q was 1.6x, which allows us to stay within all covenant requirements for minimum liquidity, gearing ratio and interest coverage ratio.

Current RCF draw was related to increased market activity as well as our GMGS project progression. As previously mentioned, we continue to see improvements in our project cash position, which in turn will reduce our RCF drop, both in the fourth quarter of this year and first quarter of 2024.

Lastly, as previously mentioned, in the third quarter, the company amended its terms under the facility agreement. The amendment gives the company an option to extend the maturity date of our revolving credit facility and the term loan from February 2024 to December of 2024. Further, no payments are required on the term loan until maturity.

Overall, as Tom mentioned, we're very proud of HMH's team's performance in the past quarter and we continue to be optimistic about the macro trends in the market. And with that, I'll turn the call back over to Tom.

[Tom McGee, executive]

Yes. Just real quickly, just to touch on a couple of things in terms of areas of focus for us. I think we've talked about the land business in the Middle East. We've got a team working really hard over there right now looking at both land opportunities and in newbuild jackups as we discussed. So we've got some really exciting things happening there.

Our mining pump business continues to make good progress. And I think we've talked about the offshore segment, that goes without saying, but I didn't want to just highlight a couple of areas of focus that we have outside of that.

So we're excited about the market. Again, it continues to -- our customers continue to thrive. And when they thrive, we thrive. Their backlog is our backlog. So we're really excited about the market, and we look forward to giving you an update again in another quarter. Thank you.

[Øyvind Paaske, executive]

Thank you very much, Tom. And then I'll take you into the financial update for Akastor, starting at Slide 9.

First, the net capital employed. As you see, HMH remains our largest investment. And through Q4, we saw our carrying value of HMH decrease slightly driven by FX, partly mitigated then by positive net earnings in the company in the period.

Our book value related to AKOFS Offshore was reduced in Q3, driven by negative net profit, partly mitigated by equity funding in the period. The negative net profit was affected then by Aker Wayfarer being out of operation until commencement of its new contract late July. Negative bottom line is, however, expected also going forward as a consequence of the current contracts and the capital structure of the company.

The net capital employed of NES remained around the same level as last quarter. While the net capital of DDW was affected by the realization of the 2 vessels sold to OceanPact as well as the settlement then of the profit split agreements for the remaining vessels enabled by the refinancing. Total net effect on net capital employed in the period for DDW was relatively limited, but it's then worth noting again that DDW net capital employed per end of Q3 includes the full asset value of the 3 vessels.

Net capital employed of the DRU positions was reduced in period, driven by around USD 6 million of cash received on account from the client related to an undisputed portion of the claim. There has been no final conclusion received on the claim and the cash received is small compared to the total claim and does not in any way change the case as such.

Other net capital employed includes the value of our smaller financial investments as well as pension accruals and various provisions related to previous transactions. The values here increased by NOK 74 million in Q3, driven by AKOFS equity funding accrued for in Q2 and paid out in Q3.

If we then turn to the next slide for an overview of our net debt movements. Net bank debt increased by NOK 107 million in the quarter. Other cash flow included then the equity funding of AKOFS Offshore with a total of NOK 71 million. This was required as a result of the Wayfarer downtime in Q1 and Q2.

Besides this, the net debt movement in the period was, as already mentioned, affected by the DDW transactions, including then the sale of the 2 OceanPact vessels.

With this, reported total net bank debt came in at NOK 1.176 billion per end of Q3, including the net debt position of DDW Offshore of NOK 178 million, down from last quarter driven by net proceeds received from the sale of vessels as well as a mandatory prepayment of the DDW debt prior to refinancing following realization of Odfjell seller credit in Q2, partly then mitigated by the settlement of the remaining profit split agreements.

Going forward, we expect DDW net debt to increase as a result of a planned SPS for Peregrino that will take place in Q1 next year.

Net interest-bearing debt per end of the quarter was NOK 631 million, including then our interest-bearing positions towards AKOFS and HMH.

Then the overview of our external financing facilities. The net draw on our corporate banking facilities was NOK 0.9 billion per end of September, up from Q2 driven by corporate costs and the mentioned AKOFS funding. There was no draw on the subordinated liquidity facility from Aker Holding AS per end of the quarter.

The new DDW Offshore USD 31 million facility towards EnTrust Global is guaranteed by Akastor and matures in September '26. The facility has a fixed interest rate of 10.85% and an amortization schedule starting from 2024, reducing the gross debt to NOK 10 million at maturity, however, with flexibility to defer the first year of installments to the balloon.

Per end of Q3, our undrawn corporate credit facilities was NOK 375 million in addition to NOK 144 million in cash held through DDW.

Our net leverage compared to our net capital employed continues to be at a relatively low level. However, Akastor, as before, depend on realization of assets to improve liquidity and reduce the refinancing risk into next year. There are ongoing processes on this basis, including then the DRU arbitration. And based on this, we still expect to reduce debt and increase liquidity over the coming quarters. We have initiated our refinancing discussions on this basis and expect to have a solution in place ahead of maturity of our corporate facilities. The DRU award, which we then expect in Q4, will affect our financing need and could also potentially affect targeted sources of capital.

Then over to our P&L on the next page. As always, our holdings in HMH and AKOFS are not consolidated, and thus, our consolidated revenue and EBITDA represents a very minor part of our total investments. With that, DDW Offshore delivered revenues of NOK 53 million in the quarter, increased compared to both last year and year -- sorry, and last quarter, driven by utilization of the fleet. DDW came in with a positive EBITDA of NOK 18 million in Q3, significantly higher than 1 year ago due to the utilization.

Other EBITDA includes corporate costs in the period with around NOK 5 million in costs related to the DRU contracts at the same level as last quarter.

With that, consolidated EBITDA came in at a negative of NOK 4 million.

Then a further look at our net financials. Net financial items came in at a negative of a total of NOK 49 million in the period. Odfjell Drilling contributed positively with NOK 5 million. This is entirely related to an amortization of the deferred gain related to the warrant structure from inception and does not include effects of a positive Odfjell share price development during Q3 as our warrant valuation is updated semiannually. An updated valuation will be conducted for Q4.

Just as a reminder here, the final strike date for this warrant instrument is May 30 of next year, where share price above approximately NOK 31 per share in Odfjell Drilling gives Akastor the right to buy a predefined number of shares in Odfjell for NOK 0.01. You'll find more details on this in the appendix of our presentation.

We had a negative effect from other investments of NOK 8 million related to share price development in our holdings in ABL, Maha Energy and Awilco in the period.

Net foreign exchange effects were negative NOK 18 million in Q3, driven by the strengthening of the NOK versus the dollar during the period, which has negative accounting effects on our dollar holding. This has reversed since quarter close.

Other financial expenses of NOK 30 million in the quarter includes accounting effects related to the profit split settlement in DDW Offshore.

Share of net profit from equity-accounted investees contributed negatively with NOK 39 million, consisting then of 50% share of the net profit in HMH and AKOFS Offshore. AKOFS contributed negatively with NOK 74 million, lower than last year driven by Wayfarer being out of operations for part of the quarter. HMH delivered a positive net profit in the period with an effect for Akastor of NOK 40 million.

With that, I'll pass the word over to Karl Erik. So please, Karl Erik.

[Karl Kjelstad, executive]

Thank you for that, Oyvind. Let me try to run off this presentation with some reflection around our ownership agenda for our portfolio companies.

Here we see a snapshot of our portfolio. It's 9 companies in addition to the DRU claim. There's one change since last quarter and that is that the economic interest, as mentioned in DDW Offshore has increased from 50% to 100% after the settlement of the profit split that we did in the quarter.

Let's move to Slide 16, HMH, where the operational performance has already been covered by Tom. We, in Akastor, continue to be very pleased with the outlook for the HMH business and we believe that the company is well positioned to continue to take part in the upturn that we see in this industry. That is mainly due to the increased focus on energy security that -- and again, it's contributing to increased rig activity and also increased day rates for rigs.

As HMH owners, our key focus is to support the HMH management in its efforts to grow the company, both organically and also through M&A, and with a clear target of making our investment in HMH liquid to an IPO.

When it comes to what I can call HMH readiness for IPO, the successful completion of the Wave 2 of the ERP implementation that Tom mentioned in this quarter was an important milestone. HMH will be positioned in the equity market as a company with a track record of robust recurring revenue base that is delivering double-digit margins, strong cash conversion enabling growing dividend capacity combined with the growth potential, both organically and through M&A.

HMH is on track to be ready for a potential IPO in 2024. But it, of course, remains to be seen whether the equity market is offering attractive valuation for the oilfield service sector in general and for HMH specifically.

When it comes to potential value for an IPO, both Oslo and New York are being considered. While before the summer, we thought that an Oslo listing was the most realistic venue for HMH listing, we don't see a change in the sentiment in the U.S. equity market making U.S. listing also a more viable alternative than earlier considered.

Let's move to Slide 17, NES Fircroft. NES Fircroft is the clear global leader within its niche and it's -- as mentioned, the company continued to deliver strong growth. We are pleased to see that the growth the last 12 months are strong also in the nonoil segment continuing to diversify NES exposure.

We expect to see continued organic growth going forward as well continued potential add-ons through M&A within specific niches and in specific geographies -- areas.

NES Fircroft is, as mentioned before, exit ready with an IPO in Oslo next year as the main track, subject also here to that equity market is offering attractive valuations. In this regard, we are happy to see that there is multiple expansion for NES Fircroft's listed peers over the last year, from a low point of about 5x EBITDA to now close to 7x EBITDA for NES Fircroft's listed peers.

Moving on to Slide 18, covering AKOFS Offshore. For AKOFS Offshore, the key focus going forward will continue to be to deliver high-quality operations with high revenue utilization for all 3 vessels. Through the third quarter, Seafarer and Santos was in contract for the full period while Wayfarer commenced its new contract late July, and therefore, Wayfarer delivering a revenue utilization of 64% in the quarter while Santos is delivering 87%.

During the quarter AKOFS Seafarer was demobilized for coiled tubing operation and mobilized for deepwater operation before she returned to normal international work. In this period, Seafarer completed the first deepwater operations on Aasta Hansteen field in the North Sea.

Seafarer ended the quarter with a rough utilization of 78% affected by the yard stay and saw certain smaller issues after remobilization, which has now been solved.

With this, total revenue for AKOFS ended up at USD 30 million with an EBITDA of USD 6 million, both up compared to the previous quarters as a result of Wayfarer again being on contract.

Also in the quarter, Akastor funded AKOFS with NOK 71 million, which was required due to late commencement of Santos and the planned downtime for Wayfarer in the quarter. Going forward and achieving a normal level of revenue utilization, there should be no additional funding needs for AKOFS over the foreseeable future.

Regarding our ownership strategy for AKOFS, all vessels are now on long-term contracts. And this is an important prerequisite for exploring different structural solutions, including solution between other players in the industry. Such opportunities are something Akastor, together with our co-owners, are continuing to explore.

Then DDW Offshore. As mentioned, refinancing of DDW Offshore, including the settlement of the profit split increases our exposure on terms, we believe, are favorable. But most importantly, the new structure provides more flexibility runway towards optimizing the realization of the 3 remaining vessels.

In the quarter, the sale of the 2 vessels previously bareboat-ed to OceanPact was, as mentioned, closed giving a net proceed or around $9 million to Akastor. After this, DDW then holds the full economic exposure to 3 remaining vessels. Skandi Atlantic and Skandi Emerald are currently on contracts and we expect revenue utilization to be good also post these current contracts. And Skandi Peregrino, we have just initiated a reactivation process that includes the 5-year special survey and we expect this vessel to be available for contracts around mid-first quarter 2024.

Our strategy for DDW is to capitalize on the positive momentum in the market with attractive day rates that generate attractive cash flows combined with continuously monitoring the market to optimize the sale of the remaining 3 vessels. So to summarize, we believe DDW refinancing has enabled a value enhancement potential for this investment that we find attractive.

And finally, let's move to Slide 20. Regarding the DRU case, we are waiting on the award from the arbitration tribunal. Going forward, we target further realization of our holdings with our financial investments, such as monetizing of our shareholding in NES Fircroft that we expect at the earliest might happen through an IPO of the company in 2024.

For HMH, the target is, as mentioned earlier, to do a separate listing of the company as soon as the equity market is offering attractive valuations of the oilfield sector and HMH.

With that, we are through the presentation and we will then move over to the Q&A session. I guess, Oyvind, we will pause for a minute and then come back. Thank you for your attention.

[Øyvind Paaske, executive]

There does not seem to be any relevant questions received. So with that, we would just like to thank you all for your attention, and thank you very much to the HMH team from Houston. And we welcome you all back for our presentation of the fourth quarter results on February 14 of next year. Thank you very much.