Akastor ASA

OSE:AKAST

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Øyvind Paaske, executive]

Good afternoon, and welcome to the presentation of Akastor's fourth quarter results for 2023. My name is Oyvind Paaske, CFO, and I'm here together with our CEO, Mr. Karl Kjelstad. Also, as usual, we're happy to have with us HMH from Houston represented by Tom McGee, CFO; and David Bratton, SVP Finance. As usual, Karl will start by taking us through some key highlights before the HMH team will take you through their quarter.

I will then go through the financials before Karl will wrap it up. At the end, we'll take questions from the webcast solution where you can submit questions at any point during the presentation. With that, I'll leave the word to Karl. Please Karl.

[Karl Kjelstad, executive]

Thank you, Oyvind, and good afternoon, and good morning to our U.S. participants. And thank you to everyone for joining us today. We are quite pleased with our fourth quarter results, and we remain positive for the outlook for '24 for all of our portfolio companies.

Let us start on Slide 2. with a short overview of the key milestone for Akastor in '23 before we go further into the quarter. 2023 was a year that has been marked positive development for all portfolio companies, strong profitable growth for HMH creating together with refinancing a solid foundation for a potential liquidity event. With regards to processing, from our side, the DRU case was completed in '23, and we are now only, I will say impatiently, waiting for the conclusion from the arbitrational tribunal. This is expected to be received soon.

Transaction wise, the sale of AGR to ABL was completed in '23, where we were able to carve out AGR's shareholdings in Maha and in Føn Energy Services that is now directly owned by Akastor. Further, other transaction is successfully executed in '23 was the sale of Cool Sorption, 2 our of 5 DDW vessels were sold and the seller credit to Odfjell Drilling was also settled.

Let's move on to Slide 3. And as you see on this slide, the book equity value for Akastor for the end of the fourth quarter was NOK 14.8 per share. HMH continues to be our most valuable investment. Book value of our shareholding in HMH is equal to slightly above 65% of our total net capital employed. With a book value of around NOK 3 billion for the end of the quarter, the fourth quarter, or NOK 11.3 per Akastor share. HMH delivered another record high quarter with an EBITDA result of $44 million, the highest quarter EBITDA since the inception of the combined company.

EBITDA increased both year-over-year and quarter-over-quarter, driven by continuing increase in aftermarket services and we expect that the service activity will continue to be strong also going forward. We are also pleased to see that cash conversion as expected, a strong key project milestones reached according to plan. We continue to be very pleased with the NES Fircroft performance with company delivering a strong EBITDA growth of 16% compared to 2022. That again demonstrating the aspired growth this attractive business model and the outlook for the business remains promising also going forward.

AKOFS Offshore delivered good operational performance in the quarter with all 3 vessels in operation. In the quarter, DDW Offshore had Skandi Atlantic and Skandi Emerald vessels in operation with full utilization. The third vessel, Skandi Peregrino is currently undergoing 5 years classing and will be ready for the market later in this quarter. And finally, as earlier mentioned, the DRU arbitration process was completed from our side last year, but we are still waiting for result from the tribunal.

We are in dialogue with the Arbitration Institute with respect to when the arbitration award can be expected. And in December, we received an update saying that the tribunal were not able to meet the previously advised target of completing the award before the turn of the year. The most recent update is that the final drafting of the award is under review by the Institute, which should mean that we can expect to receive an award in near future.

Whether this means 1 week or 1 month is, of course, difficult to say. But we are confident that the process is in its very final stage. So with that, I'm pleased to introduce HMH CFO and EVP, Tom McGee, that will take you through HMH fourth quarter earnings and key priorities going forward. So Tom, the floor is yours.

[Tom McGee, executive]

Okay. Thank you, you can go right to the next page. All right. Great. Thanks. As you can see, we had finished off a great year with a record quarter. Strong revenue with top line performance, but also we'll touch on it, strong margin and EBITDA performance. Like I said, record EBITDA, very solid bookings as our customers continue to thrive, rigs getting reactivated, day rates moving up and very interesting conversations going on about what else our customers can do. And of course, we've talked about publicly, we're now in a situation where we're bidding on new jackup orders, which is exciting to see. And as we talk, at the end, we'll talk a little bit more about land. We're making progress on land and seeing some good order inquiry there as well.

We accomplished our refinancing which gave us tremendous flexibility in terms of growth going forward, given the number of opportunities out there, both on the M&A and organic growth side, we're excited about that. But I think we're also excited that we did what we said we would do during that refinancing and really turned the corner on cash generation and David will talk a little bit more about that. But we got to the other side of the most challenging part of the GMGS project, and I think we've guided that we didn't make a lot of money on that. We made as much money as we thought we'd make. And that's something that, going forward, we will take a different approach. That was the bottom of the market pricing. We don't expect that to repeat. If we do get orders, we will get choppy working capital profiles with those orders. But at this point, we see a pretty smooth working capital profile going forward. And I think this was a big step in getting that head in the right direction.

And then finally, we expect the market to continue to be strong on the offshore environment, and we've got a lot of land opportunity that we're chasing as well. So when you look at the next page, you can see the growth off the bottom. And I think when you look at year-over-year comparisons, David is going to walk you through some quarterly, and I want to give you a little guidance on how to think about that.

But on the year-over-year, you can see very strong EBITDA growth. We've got a lot of the integration, really almost all the integration, ERP noise behind us. We've had some initiatives that aren't really even fully recognized in our numbers yet. So we're very happy with this performance and feel like we're finally exiting kind of the noisy phase and really getting into a growth mode. And I think you see that with the margins, and we're particularly happy with both the year-over-year margin improvement and also the quarterly margin improvement in terms of the margin we recognized in Q4, but you saw that throughout this year.

Now I'll give you a little bit of guidance on the quarter-over-quarter and how to think about that. Before David walks you through it, I would think about our Q4 and compare it to last year's Q4 because we do have some bonus payments in there that we talk about every year. And I would encourage you to look at Q1 and compare it to last year's Q1. And so I think we have to look at Q1, we still expect to be seasonally weak. That's just normal for us, but we'll be evaluating how we succeed versus Q1. So Q4 over Q4, Q1 over Q1. With that, David can walk you through some of the details.

[David Bratton, executive]

Great. Thanks, Tom. I will give you total company results, and then move into the segment details. Revenue for the quarter was $208 million, up 6% year-over-year and up 3% quarter-over-quarter, driven by increased aftermarket activity, partially offset by product and project volume. Adjusted EBITDA in the quarter was $44 million, up 49% year-over-year and up 24% quarter-over-quarter, driven by increased aftermarket service output and positively impacted by DLS bonus performance payout. Adjusted EBITDA rate was 21% in the quarter.

Orders for the quarter were $197 million, up 8% year-over-year, driven by aftermarket service increase, but down 5% quarter-over-quarter, driven by lower product orders.

Finally on cash, free cash flow in the quarter was positive $34 million, driven by key project milestone collections. We ended the quarter with $63 million in cash and cash equivalents on hand. Now I'll walk you through the segment results. In Aftermarket Services, revenue was $157 million in the quarter, up 12% year-over-year and up 7% quarter-over-quarter, driven by an increase in spares output and contractual service agreement activity.

Aftermarket order intake was $147 million in the quarter, up 8% year-over-year and up 1% quarter-over-quarter, driven by contractual service agreement activity, partially offset by lower SPS. In Projects, Product and Other, revenue in the quarter was $51 million, down 8% quarter-over-quarter, driven by progress on projects. Next, moving on to net interest-bearing debt. We ended the quarter with net debt of $159 million. During the quarter, HMH performed a full refinancing of its debt structure. The $150 million senior secured floating rate bond was replaced by a new 3-year $200 million senior secured fixed rate bond. There's a tap capacity built into the bond framework allowing for a further issue of $75 million subject to market conditions.

In addition, the term loan was fully repaid and the senior secured revolving credit facility was replaced by a new super senior secured RCF of $50 million. We anticipate our RCF to be fully repaid down by the end of Q1 2024. Overall, we're really proud of the team's performance in 2023 and 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]

Okay. Great. Just to touch a little bit on the team here. I think you're seeing really strong execution across the board. And I think we have a team that's really built to run a rig business and deep expertise there, but also an expertise around global growth. And if you look at what we're doing, we're making a lot of progress on land in the Middle East, Mexico, North America. We've got initiatives there. We've got some great technology initiatives. And I think we're just seeing execution all the way around by this team with deep experience in this industry. And so we really, really appreciate that. I think you're seeing that in our margin performance in particular.

And I think given that we've gotten the other side of integration, we've got a new capital structure in place. I think you -- you're going to see us have a lot of flexibility this year in terms of where we can continue to grow this business, and we're excited by the opportunities that this market is presenting to us. So with that, we will wrap it up and wrap up a great year and pass it back over.

[Øyvind Paaske, executive]

Thank you very much, Tom. I will then take you through the Akastor's financials, starting at Slide 11 here with our net capital employed. HMH, of course, remains our largest investment. And through Q3, we saw our carrying value of HMH decreased somewhat, mainly driven then to FX and the USD/NOK rate. Our book value related to AKOFS Offshore was also reduced in the period, driven by negative net profit in Q4, affected by a specific noncash tax asset write-down. However, and as mentioned also previously, negative net profit is expected for AKOFS going forward as a result of the current contracts.

The net capital employed of NES and DDW remained around the same level as last quarter. The book value of the DRU positions also then remained stable in dollar terms through the quarter. If an award is received before filing of our annual accounts in March, this will then have a potential effect on valuation of these positions and could thus have 2023 P&L effect. 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 within Other increased by NOK 92 million in Q4, driven by increased valuation of the old failed warrant structure and the reclassification of a payable towards HMH from accounts payable to interest-bearing debt.

If we then turn to the next slide for an overview of the net debt movement in the period. Net bank debt increased by NOK 8 million in the quarter. Here, Other cash flow in the quarter includes a positive noncash foreign exchange effect of NOK 36 million. With this, reported total net bank debt came in at NOK 1.184 billion per the end of Q4.

This then includes the net debt position of DDW Offshore of NOK 165 million, slightly down from last quarter. Through Q1, we expect DDW net debt to increase as a result of the ongoing SPS for Skandi Peregrino, which is then, as Karl mentioned, expected to be completed by the end of this quarter. Net interest-bearing debt per end of Q4 was NOK 675 million, including then our net 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 for end of December, slightly down in NOK compared to Q3, driven by FX, partly then mitigated by corporate cash flow through the period. In addition, we had NOK 40 million draw under the subordinated liquidity facility from ACRE Holding AS per end of December.

For end of Q4, our undrawn corporate credit facilities was NOK 335 million in addition to NOK 144 million of cash held through DDW. For the first quarter, we have worked with our banks and have secured a firm commitment regarding extension of our revolving bank facilities to June 2024. Likewise, the subordinated liquidity facility from Aker Holding will be extended through July. We are targeting to refinance our current corporate financing based on DRU proceeds and are in advanced discussions with our banks on this matter. This discussed structure together with our expectations regarding the proceeds related to the DRU positions should provide good headroom until further realizations. If the DRU award be significantly delayed compared to what we now believe or if the award should come in at a level significantly below our expectations, this could affect our financing need and potentially also affect targeted sources of capital.

With this debt, I'll turn over to the next page for our consolidated P&L. As always, bear in mind that nearly all of our holdings, including HMH and AKOFS Offshore, are not consolidated in Akastor Group financials, and thus, our consolidated revenue and EBITDA represent a very minor part of our total investments. DDW Offshore delivered revenues of NOK 80 million in the quarter, increased compared to both last quarter and year-over-year, driven by utilization and increased average rate levels for the 2 vessels in operation.

In addition, revenue was affected positively by approximately NOK 10 million related to certain one-off cost reimbursements received in period. DDW EBITDA with that came in at NOK 40 million in Q4, significantly higher than last quarter, driven by the effects mentioned. With that, full year 2023 revenue and EBITDA of DDW came in at NOK 231 million and NOK 84 million, respectively, both well up from 2022. Other EBITDA includes corporate costs in the period and was improved compared to last year, driven by lower DRU legal costs accrued in the period. With that, our total consolidated revenue and EBITDA for the fourth quarter was NOK 87 million and NOK 23 million, respectively.

If we then look a little bit closer at our net financials. Net financial items came in at a negative of NOK 24 million in the period. Odfjell Drilling here contributed positively with NOK 45 million, driven by an updated valuation of the warrant structure. The final strike date of this instrument is May 30 of this year, where share price above approximately NOK 30 per share, give Akastor the right to buy a predefined number of shares in Odfjell for $0.01. You'll find more details in the appendix to this presentation.

Positive effect from Other investments of NOK 10 million relates to share price developments for our holdings in ABL, Maha Energy and Awilco Drilling in the period. Net FX effects were negative NOK 54 million in Q4, driven by the strengthening of the NOK versus the USD during the period, which then has negative accounting effects on our dollar holdings. This has since quarter close, reversed. Share of net profit from equity-accounted investees contributed negatively with total NOK 151 million consisting then of our 50% share of net profit in HMH and AKOFS Offshore.

AKOFS Offshore contributed negatively NOK 80 million in Q4. That's more negative than last year, affected by the mentioned noncash tax write-down in AKOFS of approximately $9 million in total booked in the period. Despite a solid EBITDA, HMH also delivered a negative net profit in the period with an effect for Akastor of negative NOK 69 million, affected by one-off costs related to the refinancing closed in the period as well as a noncash impairment related to estimated proceeds from liquidation of Step Oiltools. With that, I'll pass the word back to Karl. Please Karl?

[Karl Kjelstad, executive]

Thank you, Oyvind. Let me down the road of this presentation with some ownership agenda reflections for our portfolio companies. From 17, our portfolio of investments remains unchanged since the previous quarter, and we continue to hold investments in 9 companies in addition to the DRU claim.

Let's move on to Slide 18, HMH, where most has already been covered in Tom's presentation. As HMH owners, our key focus, together with our co-owner, Baker Hughes, is to support the HMH management's efforts to grow the company, both organically and through M&A with a clear target of making our investment in HMH liquid in due time. When it comes to HMH's readiness for a liquidity event, the successful completion of the Wave 2 of the ERP implementation in the fourth quarter was an important milestone in addition to the completion of the refinancing with a new HMH $200 million bond.

We continue to believe that HMH at some point will be an attractive company for equity market based on HMH track record of robust recurring revenue that is delivering double-digit margins, strong cash conversion, enabling growing dividend capacity combined with further growth potential, both organically and also through M&A.

HMH is on track to be ready for a potential equity event. But of course, it remains to see whether the equity market is offering attractive valuation for the oilfield sector in general and specifically for HMH. No decisions have been made, and we are assessing our options together with our co-owner. For the time being, both peer valuation and the IPO sentiment is somewhat weaker than we ideally would have liked and we probably will need to see some improvement here before a liquidity event makes sense for us.

Let's move on to Slide 19, NES Fircroft. NES Fircroft is the clear global leader with its niche. And as mentioned, the company continued to deliver strong growth, in fact, double-digit year-on-year growth. We are pleased to see that the growth, the last 12 months are strong, also in the non-Oil segment, continuing diversifying the NES Fircroft exposure. We expect to see continued organic growth going forward as well as potential add-on with M&A in specific niches and geographies.

NES Fircroft is, as mentioned before, in our world exit ready with different exit alternatives being explored, including a potential IPO [indiscernible], that equity market is offering attractive valuation for a quality company like NES Fircroft.

Then on Slide 20, AKOFS offshore. AKOFS' key focus going forward continue to be to deliver high-quality operations with high revenue utilization of all its 3 vessels. To the quarter, as mentioned, Seafarer, Santos and Wayfarer was on contract for the full period.

Wayfarer delivered a revenue utilization of 96% in the quarter, while Santos delivered 90% and AKOFS Seafarer ended the quarter with a revenue utilization of 91%. With these top revenues for the first quarter -- for the quarter, AKOFS added up at least NOK 37 million with an EBITDA of NOK 13 million, both up compared with the previous quarter as a result of Wayfarer being on contract for the full quarter. Through the first weeks of this quarter, the first quarter of 2024, AKOFS have experienced certain operational issues, which has led to some downtime on Santos.

Seafarer has been affected by the harsh weather conditions seen in the North Sea this year, which affects utilization as waiting-on-weather rate is only 50% of the agreed rate with the client. Turning on utilization going forward and based on the current liquidity situation in AKOFS, there is a risk that further funding from the owners could be required.

Then let's move on to DDW Offshore. As mentioned, following the refinancing of DDW Offshore in 2023, Akastor now is focusing on optimizing the DDW Offshore values and thereby optimizing a future realization of the 3 remaining vessels.

In the quarter, Skandi Atlantic and Emerald delivered full utilization with increased average charter rates compared with previous periods as new contracts commenced in the third quarter. Skandi Peregrino arrived at the yard in Denmark in December to undergo its special periodic survey as we speak. And as mentioned, we expect the vessel to be ready for the market late in this quarter. DDW Offshore's contract with Petrofac was extended in the first quarter with Skandi Emerald to replace Skandi Atlantic on this contract in March as Skandi Atlantic will undergo its class renewal in Singapore.

Atlantic expected to be available for new contracts by the end of April this year. Our strategy for DDW Offshore is to capitalize on the strong momentum in the market with attractive day rates that generate attractive cash flows combined with continuously monitoring the market to optimize realization of the 3 remaining vessels.

Finally, let's go to Slide 22, key priorities for Akastor going forward. Regarding the DRU case, we are still, as mentioned, impatiently waiting for the award from the Arbitration Institute. Going forward, we target further realization of our holdings with our financial investments, such as, for example, monetizing our shareholding in NES Fircroft and the base case here, as I mentioned, is an IPO this year. For HMH, the option is, as mentioned, to do a separate listing of the company as soon as the equity market is offering attractive valuations of the oil sector in general and for HMH specifically.

As mentioned also, no decision has been made, and we will carefully assess the market and our option here together with our co-owner, and we'll revert to the market once a decision has been made. With that, we are through the presentation, and we will move over to the Q&A session. And I believe [indiscernible] we will pause for a minute or two to provide time for questions. Thank you.

[Øyvind Paaske, executive]

Thank you. We'll revert in just a few seconds. Okay. We'll start with the question for HMH. Can you please elaborate around the momentum you see in the service business and how you see this develop into 2024?

[Tom McGee, executive]

Yes. I think we touched a little bit on how we compare it. And we get seasonality, we get some weird rates, order rates, particularly around ERP implementation. So we continue to step back and look at quarter-over-quarter comparisons and see growth on a quarter-over-quarter comparison on the order side. I think that looking forward, everything we see is a strong market. And so we anticipate that to continue for the base business to grow -- outside of a lot of our other initiatives, for that base service business to grow, you do have to have rig reactivations which we continue to think are likely. And so we're looking at that as the primary driver, but again, our order rate is still looking good on a quarter-over-quarter basis when you compare it this time last year.

[Øyvind Paaske, executive]

Thanks, Tom. Then another question, which you can probably also answer. With regards to cash flow in HMH, after a quite weak 2023, we see a good cash flow in Q4. How do you see this develop going forward? And how is this affected by net working capital?

[Tom McGee, executive]

Yes. I think -- and we spent a lot of time on -- we were talking -- on the bond road show, talking about this. And the GMGS project was the big contributor as was integration expense. And so we had a lot of our cash eaten up by ERP implementation and a variety of other things we're doing around integration. So that was a big number. The other big number was the timing on the GMGS payments. We're on the other side of both of those. I expect the business itself, aside from some land opportunities, which might create just a tiny bit of noise because they're going to not be as smooth on working capital profile, the base business has a very smooth, predictable working capital profile. And so what you're seeing is a return to that.

What would change that? What would change that would be a big project cycle. If we win some project orders, that's where it starts to cloud the picture and you get into some uncertainty around that. But the base business performs in a very predictable way from that standpoint. So with all that said, we continue to be optimistic and consistent with what we said during the bond road show. And I think Q4 reflected that. I think our statement around getting the revolver fully paid reflects that as well. So I think we're on track to -- with the noise behind us, to get back to our historic cash conversion rates.

[Øyvind Paaske, executive]

Thanks, Tom. That's very helpful. One last question to you, Tom. Referring to your perspectives on peer pricing in HMH. What peers do HMH management consider the most relevant.

[Tom McGee, executive]

Yes. I think -- I mean trying to think about how to answer this without making [indiscernible]. But I think -- I would say -- I think that if you look at the rig business and you think about other rig businesses in the world, NOVs comes to mind and some others. I think that's something that we look at in terms of our primary competitors. So for us, that's our primary competitor. There's a whole host of -- again, I think you're looking at international and offshore names. It's really what I'd steer you to, broad global portfolios, which is really what we're set up to produce. And so I think that's all I can probably say on that.

[Øyvind Paaske, executive]

Thanks, Tom. Then we have a question on the refinancing, so I can answer that. How do you assess the upcoming refinancing? And what is the targeted sources of capital for Akastor?

So I'll start by saying, as mentioned, we have in place now this extension of our corporate facilities that takes us to June, July this year. And then as mentioned also before that, we expect proceeds from realizations and then more specifically related to the DRU arbitration award and based on sort of the expected amounts from that process, we have already been in discussions with banks and Aker for a new structure is to be formally put in place upon the receivable of the DRU proceeds then.

And based on our current expectations regarding the DRU case and the cash forecast, this structure will then provide sufficient headroom until further realizations. That, of course, depends on the size of the DRU award. And in an event the value differs significantly from our expectations, we will then need to reassess our current base plans with the banks. And assess also potentially other forms of capital, for instance, a bond which could be relevant in such a case. The goal in any case would, of course, be to put in place a capital structure that is suitable for Akastor's current strategy, which is targeting realization of assets. Yes. So that's that.

Then we have a last question to HMH that just came in, Tom. So it's from Evan Hagen of Arctic. What sort of revenue growth do you expect in HMH for 2024? And do you already have visibility on another year of growth. So it's a little bit back to the first question, but with a twist. So maybe you can take that as well.

[Tom McGee, executive]

Yes. I don't think we can say more than that, I mean, than what we said. I think again, we're going to look at Q1 over Q1 in terms of evaluating that. I think you understand the drivers. I think qualitatively, we're making great progress on stuff outside of the core business in terms of land and mining, but we can't give that level of guidance.

[Øyvind Paaske, executive]

Thanks, Tom. With that, I think we are through. And I'd just like to thank you all for your attention, and I'm welcoming back for our presentation of the first quarter results on April 24. Thank you very much.