Akastor ASA

OSE:AKAST

Earnings Call Transcript 2018-Q4

[Leif Hejø Borge, Chief Financial Officer]

Okay. Welcome to the fourth quarter earnings call of Akastor. My name is Leif Borge, I'm the CFO of the company. Together with me, I have our CEO, Karl Erik Kjelstad, who will start the presentation. So Karl, please go ahead.

[Karl Erik Kjelstad, Chief Executive Officer]

Good morning to everyone on the call, and thank you for listening in to this Akastor earnings call. I will take you through the first part of the presentation, and let's start on Slide #3. A key milestone for Akastor in the fourth quarter was clearly the agreement to sign a merger with -- between First Geo and AGR. We are aiming to build a leading well management and reservoir service company and are enthusiastic about this opportunity.Further, just before Christmas last year, we had our refinancing in place, a facility of NOK 2.5 billion with a consortium of 5 banks. This secures us a robust and flexible financial platform going forward. If you look at our result for the fourth quarter, we see that revenues are continuing to increase from the previous quarters, now at NOK 1,090,000,000, but with a somewhat lower EBITDA result compared with the last quarters.Unfortunately, as we have announced earlier this month, after the quarter, we received a disappointing arbitration ruling in the MPO legacy case. That could potentially have a negative financial impact for us up to USD 29 million.Let's move on to Slide #4. This morning, we are happy to announce that Pete Miller has been appointed Executive Chairman of MHWirth and that Eirik Bergsvik has been appointed CEO of MHWirth. Both changes are effective as of today. We are excited to bring both Pete and Eirik onboard to lead a transformation of MHWirth.Our ambition is to expand MHWirth through a combination of organic growth and M&A with the goal to position MHWirth for an eventual market recovery. We, in Akastor, we will focus on our resources on supporting this growth plan, and we target to build an MHWirth that could be a standalone IPO company within the next 5 years.Pete and Eirik together bring a tremendous industry insight and a proven track record of developing drilling-related businesses. We are proud of what MHWirth has accomplished through the downturn, and we now look forward to building the company over the next phase with increased focus on business expansion and development of new technology solutions.Let's move to Slide 5. Let me use this opportunity to reflect somewhat over Akastor's achievement in 2018. A key focus for us in '18 was to continue to drive growth in our portfolio of companies combined with pursuing value-enhancing transactions. We are pleased with that MHWirth was awarded drilling package to Keppel FELS for a new harsh environment semi drilling rig for Awilco Drilling, one of the very few contracts that has been out in the market the last couple of years.Further, we are pleased with -- that MHWirth service activity, combined with the growth in a single equipment. We are also very happy with the leading position that MHWirth has taken when it comes to offer our clients digital solutions for drilling operations.When it comes to AKOFS. Clearly, the Mitsui-MHWirth transaction was a significant milestone. This, combined with the successful commencement of Aker Wayfarer's 5-year contract with Petrobras, and last but not least, the 5-year contract for Seafarer's Equinor was a significant achievement for AKOFS Offshore in 2018. We're also happy to see that Step Oiltools, First Geo and Cool Sorption, our smaller portfolio companies, all have significant positive development in '18, both in terms of revenue and growth of profits. We're also very pleased to see that the strong growth in NES Global Talent is continuing, reinforcing NES Global Talent leading position as a staffing company for the oil and gas industry. And right now, they have over 10,000 consultants hired out to the industry.I mentioned the AGR transaction already, but I would also like to mention that we are pleased with our investments in Odfjell and Awilco. We believe that both those companies are very well positioned for an eventual market recovery for the drilling business moving forward.Then I would like to use the opportunity also to say some words about MHWirth and the work we have done within digital solutions. I'll have to move now to Slide #6. After the development period, we, in 2018, started active sales and marketing of our digital software solutions. We have called it DEAL, and that stands for drilling equipment automation layer, it's easier to just say DEAL. And the purpose of DEAL is to increase the efficiency and lower the operational costs for rigs using the DEAL software. As a part of DEAL, MHWirth has developed specific software solution that enables multi-machine control and drilling automation. It's an open architecture and it can easily be integrated with third-party software products and services.We are very happy with how well DEAL has been received in the market with important customer wins such as Equinor, BP, Seadrill, Transocean, Husky Energy and Awilco. Going forward, we see an exciting opportunities for MHWirth within the digital technologies, both in terms of offering cost-effective drilling automation as well as expanding its offerings also into other areas like condition-based maintenance.Then let's move to Slide 8, just a quick look at our portfolio. The only change here is that we have changed the First Geo logo with the AGR logo. This AGR will be the official name of the merged company when the deal is closed.So let's move quickly over to Slide #9. The market -- and say some words about highlights for the portfolio companies. The market fundamentals for MHWirth are still challenging, but they are improving with increased investment budgets for oil companies. However, the utilization in the market is still on a low level with overcapacity with many idle rigs. Therefore, the tender activity is still relatively low, but it's more active than in previous years driven by some reborn of activity, and last but not least, need for new technology with the operators.The same goes actually for the service activity. The active rigs with MHWirth equipment have increased somewhat since 2017. We expect to see a challenging market for MHWirth also in 2009 (sic) [ 2019 ], followed by a start of a recovery in 2020. But as mentioned many times before, it is difficult to give exact timing of the market recovery.Moving on to AKOFS Offshore. The Skandi Santos and Wayfarer that are both operating in Brazil are delivering steady operations this quarter. Wayfarer has now been in operation for 1 year with Petrobras and we are pleased with the first year's performance.The CapEx program for Seafarer vessel is going according to plan, and we have just signed a contract with Myklebust yard in Norway for the upgrade of the vessel and Myklebust yard we know very well, since we also use the yard for the Wayfarer upgrade. The vessel will start intervention service in the North Sea in the first part of 2020.When it comes to the companies in other holdings, we have positive development in the fourth quarter expect -- except for First Geo that's, in a way, was back to normal after the large one-off project that had boosted First Geo's result earlier this year has been completed.Let's move on to Slide 10, and let me say some few words about the AGR and First Geo transaction. We expect to close this transaction within the second quarter this year. The transaction will imply that Akastor will have 100% ownership of the merged company, but with an economic interest of 55% while DNB, Nordea and Silverfleet, together, will have the economic interest for the remaining 45%. In addition to the equity element, the transaction also has a debt element where Akastor holds NOK 90 million of debt to AGR and the banks hold NOK 180 million of debt at a nonrecourse basis to Akastor.So if we move on to Slide 11. We look forward to close the transaction and start our journey together with the AGR and First Geo team to build a leading well management and service company. We believe that the new company will have the necessary scale to be an interesting partner for the oil companies going forward, and thereby also provide more robust financial results in a market that still is difficult, but we believe will recover.Let me close this part of the presentation by some few words about the market illustrated on Slide 12. The drivers for general market recovery that we are positioning among other companies to be a part of is illustrated on this foil. It's a positive development, but at the same time, we have to remind ourselves that there are still a lot of excess capacity in many segments, especially when it comes to drilling rigs and offshore vessels. So as mentioned several times, the timing of the market recovery is difficult to predict, but we definitely believe that recovery will come.So with those words, I leave the word to Leif and he will take you through the financials. So Leif, please?

[Leif Hejø Borge, Chief Financial Officer]

Thank you, Karl. Let's move to Slide 14 in the presentation. As a reminder, these figures are without AKOFS Offshore that was deconsolidated as of the third quarter. The revenue for the rest of the portfolio increased some 22% year-on-year to NOK 1.1 billion in the fourth quarter while the EBITDA ended on NOK 63 million. The EBITDA in the fourth quarter 2017 included release of onerous lease provisions of NOK 50 million and Avium AKOFS result of NOK 10 million. Thus, the EBITDA is more or less on the same level in the fourth quarter '18 as the previous quarter in the year before.The financial items were negative in the quarter with minus NOK 243 million, mainly due to valuation and the impairment issues in the financial portfolio. I will come back to this on the next slide.Also, the tax was negative in the quarter mainly due to impairment of tax losses carried forward and the negative effect on the tax loss carried forward of a reduced tax rate in Norway.As already mentioned by Karl, we had to announce a negative arbitration award for a company that was sold back in 2016, but where we, through the sales agreement, remains with certain liabilities. The loss may be up to USD 29 million, which has been fully provided for under discontinued operations. We already had a provision of USD 6 million, thus the negative P&L effect in the fourth quarter was just below NOK 200 million.The Board of Directors has proposed no dividend for 2018, and the motivation for that is simply that we will reserve the financial capacity of Akastor to support the future growth of MHWirth rather than increasing the leveraging of Akastor at this point in time.Moving on to Slide 15. I will come back to the portfolio of companies, so let's focus on the financial investments on the right side of the foil. As already mentioned, net financial items were negative with NOK 243 million in the quarter. Most of this was related to revaluation of assets or impairment issues. Firstly, the investment in Odfjell Drilling preferred equity and warrant structure had a negative effect of NOK 58 million. The cash and PIK interest had a positive effect of NOK 16 million, thus the negative effect of minus NOK 74 million comes from a revaluation of the warrant structure. The somewhat strange effect here is that we have to book a loss on something that we have not yet booked a profit on even though it's impossible to lose money on the warrant structure. This comes from the fact that, according to IFRS, you have to book the initial profit of the warrant, which was calculated to USD 14 million or NOK 117 million, to book this gain over 6 years while changes in value from one quarter to the next quarter has to be booked immediately. Thus, in the fourth quarter, we booked a part of the initial gain, NOK 11 million. But due to the fact that the share price of Odfjell dropped quite a bit during the quarter, the estimated value of the warrant structure dropped NOK 85 million, which was booked as a loss.Going forward, we will, independent of what happens with the value of the warrant structure, book a profit of NOK 5 million per quarter. In addition, we have to book a profit or loss depending on how the fair market value of the instrument has developed through the quarter.Secondly, the value of our shareholding in Awilco had a negative effect of NOK 49 million in the quarter, of course, in line with the drop in share price in the company.Thirdly, AKOFS Offshore contributed negatively with NOK 48 million in the quarter. In fact, the profit before tax was on a break-even level in the quarter. Thus, the loss was due to impairment of tax losses carryforward, mainly due to the fact that the company has decided to move one of the vessels into the Norwegian tonnage tax regime. So this is a one-off effect. It will, for sure, not have any cash effect because moving this vessel into tonnage tax regime still means that you are not paying tax, but accounting-wise, we had to impair a tax loss carried forward. The minus NOK 48 million is then simply 50% of the net result of AKOFS after tax in the quarter.Moving on to DOF Deepwater. We see a negative result of NOK 35 million in the quarter. This was mainly due to further impairment of the vessels as well as negative currency effect on the financing as roughly half of the debt is in U.S. dollars and the U.S. dollar strengthened during the quarter. So on the financial investment that had a positive effect in the fourth quarter was NES Global Talent with the positive effect of NOK 22 million.Then let's move to Slide 16, the debt position. Our net bank debt increased from NOK 180 million to NOK 403 million. However, NOK 150 million of this increase was due to funding of the AKOFS Seafarer vessel upgrade. This will be repaid when a separate financing is in place, most likely in the second quarter of this year.Adjusted for the funding of AKOFS Offshore, and net interest-bearing debt increased with NOK 70 million to NOK 146 million. Around NOK 40 million of the increase was currency effect as most of the gross debt is in U.S. dollar while the receivables and cash is mainly in Norwegian krone. And as mentioned before, U.S. dollar strengthened quite a bit during the fourth quarter.At the end of the year, we refinanced our bank debt putting in place a new NOK 2.5 billion credit facility with 5 banks. The facility has a 3-years maturity, so it matures in December 2021. Covenants are more or less in line with the previous facility meaning that we have an interest ratio covenant, so net interest including interest income from the Odfjell pref, on EBITDA -- sorry, EBITDA on net interest, which should be maximum 4 -- or minimum 4, sorry. Secondly, we have a debt-to-equity covenant that should be maximum 1 and we have a minimum liquidity covenant of NOK 500 million. We are, of course, well within these covenants as of today.Based on this, we have a liquidity buffer of NOK 2.2 billion as at the end of 2018.Slide 17 shows the book value of the largest investments in our portfolio. As you can see, MHWirth, AKOFS Offshore, Odfjell preferred equity and the 17% shareholding in NES Global Talent represents most of the value in Akastor.The book value of our assets represents around NOK 16.3 per share relative to the share price yesterday of NOK 14.4.Then let's have a look at the portfolio companies, starting with MHWirth on Slide 18. Revenues in MHWirth grew to NOK 893 million in the quarter, mainly due to growth in projects and single equipment. This had a negative effect on the EBITDA margin as equipment and project has lower margins than services. The EBITDA ended on NOK 73 million in the quarter with a margin of 8.2%.Even though the rig activity has improved somewhat, service revenues only increased with 2% year-on-year. As you can see from the graph, the number of active rigs increased from 50 at the end of 2017 to 52 at the end of '18. The total installed base was 84 at the end of the year, thus relatively fewer rigs with MHWirth equipment has been scrapped during 2018 and also in previous years.With regards to AKOFS Offshore, I'm now at Slide 19 in the presentation. Once again, we do not consolidate the revenues and EBITDA as we now only own 50% of the company. But in order for all of you to follow the operational and financial development of the company, we will continue to present figures as you see on this slide.On technicality, to be very obvious, that Avium Subsea, which is the owning company of the vessel Skandi Santos and which has been owned 50-50 by Akastor and Mitsui for some time, is consolidated in a different way in the fourth quarter than historically. This has a negative effect on revenues, but a positive effect on the EBITDA while net profit is marginally impacted. The result in the fourth quarter was negatively impacted by some provisions that were made, thus we expect a somewhat higher EBITDA in the quarters to come, and of course, even higher when Seafarer goes into operation in 2020.Let's move on to NES Global Talent on Slide 20. The company continues to show a quite strong growth. Part of it is due to 2 acquisitions that were made last year, but also part of it is due to stronger markets, and thus, organic growth. I'm not allowed to present exact figures for the company, but as you can see from the graph, the run rate revenues is now well above USD 1 billion on an annual basis.Slide 21 shows the structure of the Odfjell preferred equity. The instrument is yielding 10% annual interest, of which 5% cash and 5% PIK interest. The face value of the preferred equity had thus increased to USD 77.2 million at the end of last year as a result of the PIK interest.I have already mentioned the strange P&L effect in the fourth quarter and the strange effect that we now have a negative balance sheet item on the warrant structure even though it's impossible to lose on it, so I leave it with that.And finally, Slide 22, Other Holdings. Total revenues from these 3 smaller portfolio companies increased from just below NOK 400 million in 2017 to NOK 532 million in 2018, that's up 35%. The EBITDA increased from a break-even level in 2017 to NOK 48 million in 2018. First Geo had one very profitable project that impacted the earnings in the second and third quarter, thus the EBITDA went down to a more normal level in the fourth quarter. The EBITDA of First Geo and then also in the reported total numbers here, the NOK 9 million, was also negatively impacted from merger costs between -- the merger between First Geo and AGR around NOK 3 million. In any case, very positive that all of the companies contributed positively in 2018.Then I leave the word back to Karl Erik Kjelstad before we open up for the Q&A session.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you for that, Leif. Just on Slide 23, a quick summary. I think when it comes to last quarter, the message is simple: operation in our companies are on track. We still see a challenging market, but some signs of market recovery. And we have the refinancing in place that provides us with financial flexibility.Going forward, the clarified structure for MHWirth gives us a good platform to build on and the plan is to execute the buy-and-build-strategy for MHWirth, targeting an IPO within 5 years. We will continue to pursue a value-enhancing M&A going forward. And we will continue to have capital discipline.So with those words, we are opening up for Q&A.

[Leif Hejø Borge, Chief Financial Officer]

So operator, please help us with the Q&A session.

[Operator]

[Operator Instructions] We will now take our first question.

[Terje Fatnes, Analyst]

It's Terje Fatnes from SEB. So question on MHWirth, can you elaborate a little bit on the considerations you did when you decided to go for a growth strategy and an IPO of MHWirth?

[Karl Erik Kjelstad, Chief Executive Officer]

Yes, Terje. Hello, this is Karl Kjelstad speaking. I'll try to get -- yes, thank you for the question, Terje. We have been over and over of MHWirth through the downturn since 2014, we have adapted the cost base. We have developed new technology and so on. And we think the most value-enhancing way to develop shareholder value for MHWirth is to position the company for the recovery that we see coming in our business. But that's the key thing. The alternative, of course, would be, as we have proven earlier with many of our holdings, to do a trade sale. But no, it is in a way very clarifying to now put a strategy at work. And of course, in a time -- 5-year time period, a lot of things can happen, but that is our ambition now: to pursue a growth strategy based on organic growth and M&A.

[Terje Fatnes, Analyst]

And just to follow up on the timing. A 5-year timeframe is quite a long horizon. Normally, you tend to be more specific. So what is the, call it, more working plan that you have? I guess, 5 years is not basically the base assumption you have, I guess.

[Karl Erik Kjelstad, Chief Executive Officer]

No, no. Of course, this will -- sorry for the noise, at least I have a noise here. This can, of course, happen also earlier, Terje. So the point being is that when we do an IPO of MHWirth, the company needs to be larger than it is today. And if we achieve that earlier, of course, then it can happen earlier. To say 5 years is just a symbol of the time horizon that we have now for MHWirth.

[Leif Hejø Borge, Chief Financial Officer]

And if I may add, the consideration here is, of course, also that we are now in a very early phase of a new up cycle in the drilling industry. Whether it's an up cycle that will last for a very long time or not, no one knows. So our idea is simply to spend the next few years of the up cycle to build the company and be prepared for an IPO at the right time of the cycle. Whether that's 5 years, 3 years, 7 years remains to be seen, but we have to give us -- give ourselves some time to develop the company.

[Terje Fatnes, Analyst]

And a timely question is also on MH. You mentioned that MH needs to be a larger company before it's ready for an IPO. Does that mean in terms of revenues? Or does it mean that you need additional products and services in the portfolio that you currently do not have?

[Karl Erik Kjelstad, Chief Executive Officer]

It can imply both. So of course, there are some products and services that we think could be beneficial to include in the portfolio. And also, we see a lot of interesting opportunities on new technology, I mentioned this time also within the digital space and so on. So it's both, actually.

[Operator]

[Operator Instructions] We'll take our next question.

[Haakon Amundsen, Lead Analyst]

Yes. Haakon Amundsen from ABG here. Just a follow-up on Terje's question on MH. Just wondered if you could put some color on what kind of products and markets that you think are most interesting to expand in MH. Are you looking at the onshore market or other types of floater markets, for example? That's my first question. And secondly, how good of a proxy is Q4 for MH 2019 earnings in terms of the run rate going forward?

[Karl Erik Kjelstad, Chief Executive Officer]

I think when it comes to which projects, which regions and so on, that is something we would like to revert to you a little bit down the road. I think we just brought on a new Chairman, a new CEO. They will work with this plan. We have some ideas, but it's too early stage to be concrete on that now. So when it comes to 2019 result, Leif, can you answer that?

[Leif Hejø Borge, Chief Financial Officer]

Sorry, can you repeat the question again?

[Karl Erik Kjelstad, Chief Executive Officer]

So I'm wondering if a proxy -- or this was a proxy for the '19 result, the '18 last quarter.

[Leif Hejø Borge, Chief Financial Officer]

I mean, the margin in MHWirth I think we have communicated in the past that, short term, we expect the margin level to be on where we have been in the last quarters, so between 8% and 10%. It will, of course, fluctuate a little bit mainly due to the fact that service margins is quite much higher than product and project margins. But new potential contracts in MHWirth will not impact the result in 2018 that much, especially then for complete drilling packages. So even though we hope for a stronger order intake during 2018, I think the financial results of that -- of the year will be more or less in line or somewhat higher than the numbers that we have presented for 2018.

[Operator]

[Operator Instructions] It appears that there are no further questions at this time, sir.

[Leif Hejø Borge, Chief Financial Officer]

Okay. Well, then I would like to thank you all for attending this call. Have a great day, and hope that all of you will attend our first quarter earnings call at May 2. So once again, thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.