Akastor ASA

OSE:AKAST

Earnings Call Transcript 2021-Q4

[Oyvind Paaske, Chief Financial Officer]

Good afternoon, and welcome to the presentation of Akastor's Fourth Quarter Results for 2021. My name is Oyvind Paaske, CFO of Akastor. And I'm here today together with Karl Kjelstad, Akastor Group CEO. Also, we are delighted to have with us Mr. Pete Miller, CEO and Chairman of HMH; and David Bratton, VP of Finance in HMH, joining us from Houston. Pete will later present the key highlights for the quarter for HMH. As usual, we will take you through the presentation that has been uploaded on our web page this morning. Karl will start by giving you a short introduction and present the key highlights of the quarter before Pete will take you through HMH in more detail. I will then present the financials before Karl will take you through our ownership agenda. After this, we will open for questions through the webcast solution. Questions can be posted at any time during the presentation and preferably as early as possible in order to make sure we receive your postings in time. I will now leave the word for Karl for the key highlights. Please go ahead.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Oyvind. And thank you for listening to this presentation of Akastor Fourth Quarter 2021 Earnings. This is the first quarter where the combination of MHWirth and Baker Hughes Subsea Drilling Systems into HMH is a part of our portfolio. As you recall, we now own 50% of HMH. I'm glad to see that HMH is performing well and report strong figures in its first quarter as a combined -- as a combined company. Following this change, most of our capital employed is now handling the JVs and financial holdings that are not consolidated into Akastor Group financials. And we are, therefore, modifying the format of our quarterly presentations. The key value driver or indicator for Akastor will be the development of the net capital employed of our holdings and not deconsolidated revenue or EBITDA for the group. As you see from the overview on this slide, the equity value of Akastor by the end of the fourth quarter 2021 has increased from about NOK 12 per Akastor share for third quarter to around NOK 15 for the end of 2021. The main reasons for the increase in equity value from the third to the fourth quarter are assessment of the values in HMH and a significant debt reduction after the transaction, partly offset by downward revision of the net value of our investment in AKOFS Offshore. The value of our shareholding in HMH is equal to 50% of the book equity value of HMH, which was reassessed on closing to an external market valuation. The net capital employed of HMH is NOK 9.7 per Akastor share, up by NOK 2 compared with the value of the previous 100% ownership of MHWirth. Further, as a part of the HMH transaction, Akastor received $78 million in net cash proceeds, reducing our net interest-bearing debt from NOK [ 315 ] million into the third quarter to NOK 984 million in the fourth quarter. This corresponds to a reduction in the debt from NOK 6.6 per share to NOK 3.6 per Akastor share. In the fourth quarter, net capital employed of AKOFS Offshore was reduced from NOK 3.6 to NOK 2.8 per Akastor share. This was partly a result of impairments taken in the company and the write-down of a goodwill on Akastor level. Summing up these changes explain most of the changes in Akastor's equity value for NOK 12 to NOK 15 per share through the fourth quarter. As you can see on this slide, HMH is by far our most valuable investment with a value of NOK 9.7 per Akastor share. Therefore, it was good to see that HMH delivered strong earnings and cash flow in this first quarter as a fully operating unit and also demonstrated strong revenue synergies by securing a subsea package for the GMGS awards in China. This adds to the award of the topside package to the same client that was awarded in the third quarter last year. Post the quarter, HMH in January, successfully secured a bond loan of USD 150 million with the proceeds to be used to refinance the Bridge Bank facility from the establishment of HMH in October 2021. AKOFS Offshore is delivering good revenue utilization for all vessels in the quarter. We are also pleased with that AKOFS Offshore was awarded a new 3-year contract with Petrobras with expected commencement in the fourth quarter this year. We continue to be impressed by NES Fircroft performance, and the company is continuing to demonstrate its attractive business model with strong and robust growth and also in the fourth quarter, especially within the Renewables segment. I will revert to the status of related to the so-called DRU claims later in the presentation, but the status is that we have started a formal arbitration process to settle this issue. Akastor equity story is quite simple. Today, our share trades with a discount about 60% compared to book values at the time we see signs of more positive market development for all of our portfolio companies. And at the same time, our track record from previous divestments show that we have realized our holdings at attractive terms. With that, I'm very happy to introduce HMH Chairman and CEO, Pete Miller, that will take you through the HMH fourth quarter earnings and key priorities going forward. So Pete, the floor is yours.

[Pete Miller]

Thank you, Karl Erik. And I'll tell you, I'm very excited to be heading up this new company that was created really on the 1st of October. And as you can see from this particular slide right here, the 2 parents are Akastor and Baker Hughes. And Baker Hughes, for those of you that might not be that familiar with them, is one of the leading oilfield service companies in the world. They're part of the big 3 that includes Schlumberger, Halliburton and Baker Hughes. David Bratton is with me. He's our Senior VP of Finance, and he'll go over the numbers a little bit later. But I think the thing that's really critical for you to understand here is, number one, the industrial logic of putting these 2 companies together makes all the sense in the world. The MHWirth had basically everything on the surface and Baker Hughes SDS had everything subsea. And so now we actually have an entity that can go from the wellhead to the crown and take care of everything that's on the rigs. And I'll show you a little bit more in a second about our installed base, but we really have a wonderful market position now. I think the combined companies are going to be much stronger than 1 plus 1 equals 2. It's really going to be 1 plus 1 equals 4. You can see our strong global presence, which is really imperative for us to be able to take care of our customers wherever they might be working in a world. You can see that we have over 2,100 employees worldwide, and we really hit every basin that you're going to see any sort of activity, be it land and/or offshore. So having that presence really gives our customers a great sense of security knowing that, number one, we're strong financially. But number two, we're going to be there to take care of them when they need that. Let me move to the next slide, please. As you can see here, we have a joint presence across all the drilling segments, floaters, jack-ups, platform rigs, onshore rigs, we touch everything. And we've got the ability to be able to service those rigs. And as David will point out just a little bit, those life cycle service revenues are really the bedrock of what we're trying to do. Now also, not only do we have this, but we have some other products out there such as slurry pumps for mining. We're doing things on pile driving for construction. We're doing things with offshore mining, and we're doing things on mooring systems for offshore wind floating system. So we've got some other things that are really going to be impactful in the energy transition, but I just -- but I don't want to say that's what's going to lead us. What's leading us is our ability to take care of everything in the drilling segment and our ability to have people out there to service these rigs, to provide new equipment when necessary, but to ensure that these rigs run efficiently and very well. Next slide, please. You can see here's the installed base right now. It's effectively a very young, really 75% of our installed base is 15 years or younger. You can see where we are on the fixed platform floaters, jack-ups. And this, again, provides the bedrock of our revenue base because we're servicing this. I'd like to tell people that when we build rigs, it becomes the gift that keeps on giving because they're out its life span, we're out there taking care of it as the OEM, whether it's taking care of the blowout preventing system, the risers or everything on the surface. We have the people that are there to do that. We have many different contractual types that we're working with right now. We're very creative in being able to do things with different contractors on a basis where we'll be out there all the time, our fixed costs, our variable costs, on transactional costs, a lot of different methodologies. But because of bringing these 2 companies together, we can learn from each other and be able to provide to the customers what's best for them. Next slide, please. And this is a really good example of that. I want to emphasize this. Karl Erik mentioned in the opening that we had won as a company the GMGS project, both the topside and the pressure control system. Well, what had happened is prior to the merger, MHWirth had won the topside, but it went into an extensive period of negotiating the contract simply because it was kind of the first time, I think that a lot of the folks in the Chinese market had done this. And so it was pretty intricate. But after about 4, 5 months, we were able to get that done. Well, after we merged, they rebid the pressure control system and through great work, our pressure-control team won, but the neat part of it was that we were able to consummate the contractor in less than a week because of the work that had already been done. That's an example of the soft synergies. When we bring these together, being able to take the capabilities of both organizations and combine them is really attractive. It's great for the customer, but more importantly, it's great for us. We have a much bigger quiver of arrows offer to our customer. At this point, I'd like to turn it over to David to take you over some of the highlights of the quarter.

[David Bratton]

Great. Thanks, Pete. I'll begin with the total company results and then move into the segment details. Orders for the quarter were $207 million, driven by the $78 million crush control order with GMGS, and a 10% increase sequentially in aftermarket services. Orders were down 30% sequentially driven by nonrepeat of the Valaris 20,000 pressure control order and the GMGS topside order that occurred in the third quarter. Revenue for the quarter was $168 million, up 17% sequentially and 6% year-over-year driven by delivery of project and product backlog. Adjusted EBITDA in the quarter was $31 million, up 72% sequentially and up 35% year-over-year. Adjusted EBITDA rate was 18.5% in the quarter, positively impacted by DLS bonus performance payouts. Finally, on cash flow. Free cash flow in the quarter was $26 million, positively impacted by collection of project milestone payments. On the next slide, I'll walk you through the segment results in more detail. In aftermarket services, revenue in the quarter was $108 million, roughly flat sequentially as short-term contracts per rig continue to affect order intake. However, signs of improvement with reactivation activity are expected to pick up in 2022 with HMH well positioned to benefit. Additionally, HMH's share of active floater installed base remained steady in the quarter. And Projects & Product revenue in the quarter was $60 million, up 71% sequentially, driven by increased output in our slurry pump product line. Looking into 2022, given the recent project wins with GMGS and Valaris, we have strong project and product revenue visibility going into the new year. Moving to the next slide, we'll see net interest-bearing debt. Overall we ended the year at net debt of $124 million. It's important to highlight that HMH successfully refinanced our bridge loan with a new $150 million bond in January 2022. Leverage in 4Q was below targeted capital structure, ending at 1.6x, driven by strong performance on cash and EBITDA in the quarter. Overall, we're very pleased with the team's execution in the fourth quarter. And with that, I'll turn the call back over to Pete.

[Pete Miller]

Thanks, David. I'd just like to make a few final comments here. I think one of the things that's very important for us right now is the market fundamentals are improving. I've -- we started to see improvement in 2019, but then we got racked by COVID in 2020 and 2021. But I think we're coming out of it right now. Through all of our channels and our conversations with our primary customers, the bidding activity is really increasing with the drilling contractors, and they're getting ready to approach over 80% utilization. And that's a magic number in the industry. Once you get over 80%, all of a sudden, some of the pricing power switches from the operator to the drill and that becomes very important for us. We think there's going to be some opportunity for reactivation of some stacked rigs, and we're excited about the prospects and the timing of this. I'm delighted that we've got, hopefully, COVID behind us, and we're going to be coming out of this. And especially as we get into late '22 and early '23, I think you're going to see the fruits of the improvement in this market. And then finally, just a summary and outlook on the last part here, we've -- again, it's a great story as far as the complete product line that we're now able to offer our customers. We've got a good starting backlog that's very positive for us. The aftermarket is going to be the gift that keeps on giving and it's really going to provide the opportunity that we need to be able to make this strong and successful. We also, as we take a look at, as I just mentioned, we think that reactivations and the market tailwinds are going to be positive for us. So we're excited. Our integration process is going along quite well. I think we've got a highly motivated team around here and in Norway that is excited to be doing this. So that's really kind of what we're seeing today at HMH. And at this point, Oyvind, I'll turn it back over to you.

[Oyvind Paaske, Chief Financial Officer]

Thank you. Thank you very much, Pete. I will then take us through the Akastor financials, starting at Slide 14 with some key financial highlights for the quarter. Again, please bear in mind that our JV holdings, HMH and AKOFS are not consolidated into the Akastor Group financials and thus, that our consolidated figures only represent a minor part of our total net capital employed. With that in mind, our consolidated revenues and EBITDA in the period came in at NOK 247 million and negative NOK 15 million, respectively. AGR delivered a strong quarter with 38% growth year-over-year. EBITDA in AGR of NOK 4 million was affected by specific costs booked in relation to the sale of the U.K. well management business completed in December. Adjusted for this, EBITDA in Q4 was NOK 15 million. DDW Offshore here included in Other, contributed negatively with NOK 4 million in EBITDA in Q4, improved by NOK 8 million compared to last year, driven by increased activity. Then our JV holdings. As David has already been through, HMH delivered a very strong quarter with an EBITDA of $31 million, adjusted for specific integration costs of around NOK 6 million. The quarter was, as David also mentioned, positively impacted by bundles achievements related to specific service agreements. AKOFS Offshore delivered good operational performance with utilization above 90% for all vessels. Revenues came in at USD 37 million in the quarter, around 16% higher than last year, explained mainly by improved utilization on Seafarer. EBITDA ended at USD 7 million, with both revenues and EBITDA in the quarter affected negatively by around NOK 4 million related to a noncash accounting adjustment regarding NOx refund received earlier in 2021 and booked as revenue then. This was in Q4 reversed and booked as a reduction of CapEx. Operational results in AKOFS in Q4 is thus better than reported figures with an adjusted EBITDA of NOK 11 million. Then over to the next slide for a further look at our consolidated P&L. Our net profit in the quarter came in at NOK 1.2 billion in Q4. This included financial effects following the creation of HMH with a reported profit from discontinued operations of NOK 1.3 billion related to this. As a result of the transaction, MHWirth was deconsolidated in the quarter and the gain calculation carried out based on the received cash proceeds and the 50% ownership in HMH as well as the shareholder loan. HMH is per end of Q4, consolidated as a joint venture using the equity method, taking then 50% of equity value of HMH into our books. The total equity value of HMH of $600 million at closing was determined at fair market value based on an external valuation of the new company. Under net financial items in Q4, the preferred equity instrument in Odfjell Drilling contributed positive of NOK 18 million, including a negative noncash effect of NOK 6 million related to valuation of the warrant structure. NES contributed positively with NOK 21 million in the quarter, in line with previous quarters. AKOFS Offshore contributed negatively with NOK 229 million under net financials, driven by impairment effects of NOK 156 million related to vessel valuations in the company and the goodwill adjustment in Akastor related to positions accrued in connections with the sale of 50% of the company in 2018. HMH contributed positively with NOK 6 million under net financials, representing then 50% of net profit of the company in the period. Other financial income relates primarily to a recycling of a foreign exchange translation reserve from equity to the P&L as a result of the liquidation of a legacy company. This is noncash and did not have equity effect. Turning then to the next slide for an overview of our net debt movements in Q4. You here see that our net bank debt was reduced by NOK 649 million during the quarter, driven by the cash release following closing of the HMH transaction. Of our total reported net bank debt of NOK 1.3 billion per year end 2021. DDW Offshore constituted NOK 425 million per end of Q4, while AGR's net debt was NOK 138 million. Per Q4, the net bank debt, excluding AGR and DDW, thus was NOK 735 million, representing then the net draw on our corporate facilities. Net interest-bearing debt per end of quarter was NOK 984 million, including interest-bearing assets of NOK 215 million, increased compared to Q3 due to the new HMH shareholder loan that was part of the transaction structure. Then over to the next slide, which provides an overview of our external financing facilities. As mentioned last time, Akastor refinanced its corporate facilities in connection with the closing of the HMH transaction. The new bank financing consists of 2 facilities with a total size equivalent to around NOK 1 billion towards a consortium of 3 banks. As mentioned, the draw on these facilities was NOK 735 million per year end. The maturity of these facilities is February next year. During Q1 this year, we have discussed and agreed with banks certain amendments to the structure. The U.S. dollar for $7.5 million down payment due in March '22 has been waived and potential reduction of the facilities are now exclusively linked to realization of values down to a minimum facility size of NOK 400 million. In addition, Akastor as part of the refinance in Q4 secured a commitment for NOK 250 million subordinated liquidity facility from Aker Holding AS, this facility was not drawn per year in 2021. The AGR and DDW financing structure remained as before. Per end of quarter, our liquidity reserve through the undrawn credit facilities was NOK 0.6 billion. With that, I will pass the word over to Karl for the next section. Please, Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thanks, Oyvind. Let me round off this presentation with some ownership agenda reflections. First, on Slide 19, you see our portfolio overview. This time with over 50% holding in HMH as a part of the portfolio. Let us move to Slide 20. As mentioned earlier, let me update you on the status of the so-called DRU contracts. First, some background. This claim is coming from the contract MHWirth entered into for delivering 7 drilling packages back in 2012. In 2016, all these contracts were suspended and further in 2018, a settlement was reached for the termination of 3 of these contracts. That was the key contracts that was least progressed. In 2020, the Shipyard announced a settlement with its client Sete in Brazil for all contracts. And then in September last year, the Shipyard formally terminated 2 of the 4 remaining contracts with MHWirth. As a part of the MH transaction, the claims towards the Shipyard have been carved out. And although these contracts formally and legally are still held by MHWirth, the financial interest ultimately rests with Akastor. To date, the Shipyard and MHWirth have not been able to agree on a commercial settlement for the 2 contracts that have been terminated and for the 2 contracts that remained suspended. As regulated in the contract, MHWirth has referred the dispute to be resolved through arbitration. The formal arbitration process has now been started, but no timetable has yet been set. Since these contracts under mentioned dispute is subject to confidential undertakings, we will not disclose details of these claims or the legal basis for them. Then let us move to Slide 21, covering HMH where the operational performance has already been covered by Pete and David's presentation. As HMH owners, our key focus is to support the HMH management in the ongoing integration work, including realizing synergies. As HMH core market is improving, it's key to ensure that HMH has the capacity and capability to take part in the market upturn, both organically and through M&A. This is in the safe hands with Pete and his team. Akastor together with our co-owners, Baker Hughes and the HMH management are targeting to make this investment liquid through an IPO as soon as the company is ready and the equity market is offering interesting valuation for our HMH investment. Let's move on to Slide 22. For AKOFS Offshore, we have already mentioned that the contract with Skandi Santos that was entered into last year. Another important process in '22 would be to ensure award of the new contract for Aker Wayfarer after the current contract with Petrobras ends all through this year. A tender process for similar scope as Wayfarer has in the current contract, has earlier this month been issued by Petrobras. And if Petrobras keep the indicated pipeline, we expect that the result of this tender process will be ready before the summer. Despite an excellent operational track record and a high-quality vessels and technology, AKOFS remains somewhat vulnerable with a fleet of only 3 vessels. We are, therefore, open to assess different structural solution for this company, including potential structural combinations between AKOFS Offshore and other players in the industry. Slide 23, NES Fircroft. We are, as mentioned, very pleased with our ownership in NES Fircroft that we entered into early 2017 to the combination of NES Fircroft and Frontica Advantage. Since then, the company has grown from close to 6,000 contractors in 2017 to about 22,000 contractors worldwide today, and NES Fircroft is now the clear global leader in this industry. However, the market still has the potential for further consolidation and growth, and we find NES Fircroft's strong growth within renewable business, particularly interesting. Let's move to Slide 24. AGR continues to deliver strong underlying operational results, although the fourth quarter was impacted by a one-off restructuring costs connected to sale of U.K. well management business. Our ownership agenda is to continue to profitably grow AGR business, both organically and through M&A. Finally, on Slide 25, you see an illustration of the Akastor road map related to realization of our investments. As mentioned before, realizations of our financial investment will most probably come first and realization of our industrial investments will probably take some time and could require more structural solutions. For HMH, the clear target is to do a separate listing of the company as soon as the company is ready. And as mentioned, the equity market is attractive. With that, we are through the presentation, and we will move over to a Q&A session. I think we will pause for a minute or 2 in order to let all the listeners provide their questions. So let's now pause, and thank you for your attention.

[Oyvind Paaske, Chief Financial Officer]

Hello again. We will then facilitate the Q&A session with the received questions on the webcast solution. The first question is from Mr. [indiscernible] , asking if we are able to give some guiding on the EBITDA margins for HMH for 2022 and related to the DLS bonus and how much this affected the profits in Q4?I will pass that question over to Pete and David for their comments. So please, Pete, if you could comment on the EBITDA margins and the DLS bonus for -- included in Q4.

[Pete Miller]

I'll talk a little bit about margins. We're completing right now our budgeting process for the year. And I would think that the margins on EBITDA should be pretty similar to what we saw in the past year. I think I don't like to get into making projections like that when there's a lot of moving parts right now. This is where we're only in what the ninth day of February of the new year. We're anticipating something is happening, but I'm concerned about COVID. I said it in my comments earlier, I said we felt it was behind us. But at this point in time, who knows. I mean if you get another variation of the COVID, then we can have something else there. But I would -- I feel good that we should be able to maintain the margins. And on the service revenue and the bonus payments, we don't opine on those. Those are effectively corporate negotiations that each one kind of stands on its own, and we don't really disclose those.

[Oyvind Paaske, Chief Financial Officer]

Thank you, Pete. Thank you very much. Then the next question is all -- is from Mr. [ Sean Corcel ]. He's also asking around the bonus payments, but he is asking for an elaboration on the DLS bonus performance payers, how those structure works? And is this something we could expect to see quarterly going forward? So maybe you can comment a little bit on the structure of those type of arrangements, Pete.

[Pete Miller]

Well, I'll let David handle that.

[David Bratton]

Sure. Yes. Those arrangements with our customers are related to downtime in which HMH has incentivized to have the best uptime available for the -- for our products. Those are always paid out in the fourth quarter of each year. So there's always going to be seasonality in our figures going into the fourth quarter.

[Oyvind Paaske, Chief Financial Officer]

Thank you, David. Then a couple of questions from Mr. Haakon Amundsen, also for the HMH. How many rig activations do you expect in 2022? Yes, maybe we can do a question by question. So if you'd like to comment on that, Pete, that would be appreciated.

[Pete Miller]

Okay. Well, I was on mute. At this point in time, I would think 5 or 6 reactivations this year. Again, that's somewhat of a moving target. We would hope that maybe we'd see the upside on that. But then again, you could see a couple of things be pushed out, again, simply because of maybe some COVID-related issues. And interestingly, some of the larger players aren't back in the office yet. And that impacts planning. And as you all know, I think when you're talking to these major offshore projects, there's significant planning associated with it, and sometimes that can slip a month or 2. But I would -- we're confident that we'll see 4 or 5 come out this year.

[Oyvind Paaske, Chief Financial Officer]

Thank you, Pete. Then also a question from Mr. Amundsen. Is there any lease commitments in HMH? And can you provide some EBITDA and CapEx targets for 2022? So Pete or David, if you could comment on those, that would also be great.

[David Bratton]

Sure. In terms of leases, we do have offices that are leased across the world. I will say we're light on leases in terms of -- we don't have a large rental fleet or anything like that, that we're doing. In terms of CapEx budgets for the year, we're not going to give an exact range for 2022, but we will say it should be in line with what we've done in 2021.

[Oyvind Paaske, Chief Financial Officer]

Thank you. Then we have a question from [ Mr. Erik Orbeck ], which is for Karl, I guess, to comment on. One of the slides shows a road map for realizing investments. Do I understand the slide correctly that the focus is to realize the financial investment short term and listing of HMH long term? If not, can you comment on the time line for realizing investments and capital allocations. So I'll let you comment on that Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Yes. These illustrations indicated the sequence that we expect. And as you see from the slide, we think the financial investment will come first. And then when it comes to HMH, what timing would be of a listing is depending on, one, that the company will be IPO-ready. That is not a long-term issue. The company is well functioning and is close to being IPO-ready. But of course, we also would like to see an attractive equity market that meets our expectations of valuation.

[Oyvind Paaske, Chief Financial Officer]

Thank you, Karl. Then we have another question regarding the DLS bonuses in HMH from [indiscernible]. More factual question, does the HMH DLS revenue for Q4 include the bonuses? I'll let you confirm that, David.

[David Bratton]

That's correct. Bonuses will show up both in our DLS orders and DLS revenue.

[Oyvind Paaske, Chief Financial Officer]

Thank you. There's also a question from [ Mr. Stian Larsen ] around the progress on the potential settlement with you Jurong, but I believe that has already been covered through the presentation that covered...

[Pete Miller]

Yes, I think so. I think I can see the posting was before we came to that slide. So I think I already covered that. They are truly covered already in the presentation.

[Oyvind Paaske, Chief Financial Officer]

So with that, I believe we are through the questions we have received. And we would like to thank you all for your attention and wish you a good day, and welcome you back for our presentation of the first quarter results on April 28. Thank you very much.