Aker ASA

OSE:AKER

Earnings Call Transcript 2018-Q1

[Per Kristian Reppe, Investment Manager & Head of Investor Relations]

Welcome, everyone, to Aker's results for the first quarter of 2018.My name is Per Kristian Reppe. We will start today's presentation with our President and CEO, Øyvind Eriksen, who will walk you through the main highlights of the first quarter and the key developments of our Industrial Holdings. Subsequently then, Aker's CFO, Frank Reite, will then go through the Financial Investments portfolio and the financial statements for the first quarter. After Frank's presentation, we will open up for Q&A. And we invite participants here at Fornebu as well as those following us at the webcast to submit questions.And with that, Øyvind, please.

[Øyvind Eriksen, Chief Executive Officer and President]

So good morning, and a hearty welcome to this presentation of Aker ASA's first quarter 2018 results presentation.Aker continues to make good progress. Year-to-date, our share price is up 41%, and our net asset value up 30% and dividend adjusted. In the first quarter -- the first quarter contributed with net asset value up 1.6% to NOK 42.4 billion or NOK 571 per share. Aker's share price rose 9.3%. Cash and liquid fund investments ended at NOK 2.9 billion, while Aker's liquidity reserve stood at NOK 5.2 billion. And we distributed a cash dividend of NOK 18 per share to our shareholders in early May.Activity remains high both in Aker and in other portfolio companies. In the quarter, Aker announced Aker Energy's agreement to acquire Hess Ghana. We agreed to terminate the agreement with Oceanwood, which comprised bidding for the shares in Norske Skog, as we couldn't agree on the terms for a joint bid. Aker completed the issuance of a new NOK 1.5 billion bond loan at record-low margin. Aker Solutions raised NOK 1.5 billion in the bond market. Aker BP increased the dividend in 2018 to USD 450 million and issued $500 million in a new senior note. And Ocean Yield completed the acquisition of 4 crude tankers and 7 dry bulk vessels. In addition, the company raised NOK 759 million in new equity. Aker has presubscribed for 50% but was diluted to give priority to other shareholders and to improve the free float in the Ocean Yield share. That reduced our ownership in Ocean Yield to 61.7%.Subsequent to the quarter, Aker announced that we have established a new property development company named FP Bolig, together with Geveran and Joh Johannson Eiendom. This is a strategic step for Aker's real estate development and a strengthening of our residential real estate initiatives. The transaction will release approximately NOK 360 million in cash to Aker. Finally, Akastor announced a $75 million investment in preferred equity issued by Odfjell Drilling as part financing of the drilling rig Stena MidMax.In the first quarter, we added NOK 654 million to our net asset value. Aker BP contributed with NOK 1.8 billion in value increase, partly offset by decline for the remaining part of the portfolio, of which Aker Solutions, Kvaerner and Ocean Yield stood for NOK 864 million.Turning to our share price development and value-adjusted balance sheet. Aker's share price rose 9.3% in the quarter, compared to the Oslo Stock Exchange bench market index, which fell by 1.1%. Subsequent to the quarter, the performance of Aker has been very strong. Year-to-date, our net asset value and share price are up 30% and 40%, respectively, dividend adjusted. As per the end of the first quarter, Aker held NOK 52.2 billion in gross assets. And total liabilities stood at NOK 9.8 billion, which equals a value-adjusted equity ratio of 81%.Well, this one works, not that one. I have the right slides, but obviously not you. Well, I think we have such a great audience that you don't need the slides. Let's move on then -- well, here we are. Oops, got it. Was that the right one [indiscernible], no? Sorry about that. Aker is well known for its technology, but we'll probably need a Cognite to do this job.Well, let's move on and because the next slide on this screen or the first one you can see today, unfortunately, is about our portfolio composition. There were no changes to our portfolio in the first quarter, with the exception of Aker's ownership in Ocean Yield, which was reduced to 61.7% from 66.2% as a result of Ocean Yield's equity issue. In terms of gross asset value distribution, E&P accounted for 59% of our values at the end of the quarter. Oil services and maritime assets accounted both for 13%, and marine biotech 6%.At the end of the quarter, Aker's cash and liquid fund investments amounted to NOK 2.9 billion, up from prior quarter as we issued a new NOK 1.5 billion bond. In addition, we had NOK 2.3 billion in undrawn credit facilities, bringing our liquidity reserves up to NOK 5.2 billion. Adjusting for a NOK 1.3 billion dividend distributed now early in May, our liquidity reserves stood at net NOK 3.9 billion. In the first quarter, we received NOK 521 million in dividends from our portfolio companies, and we are on track to reach in excess of NOK 2 billion in upstream cash from the portfolio companies this year.Turning to each of our Industrial Holdings.Starting with Aker BP. In the first quarter, Aker BP produced 158,600 barrels a day, up from 135,600 barrels in the fourth quarter last year, reflecting an increased exposure to Valhall and Hod following the Hess transaction here in Norway. Discovery of Frosk was announced, containing an estimated 30 million to 60 million barrels of oil equivalent resources. The 2 PDOs for the Valhall Flank West and the Skogul fields were approved by the Ministry of Petroleum and Energy in April. And the Ærfugl PDO was approved now also in April. And Aker BP raised $500 million in new senior notes in the U.S. debt market, further enhancing the company's financial position.It goes without saying that we're pleased by the performance in Aker BP, but even more encouraging is the amount of additional opportunities available to Aker BP. The company's priorities going forward are crystal clear. Aker BP shall continue to grow its portfolio and further improve its operations, which again will provide the foundation for growing cash dividend to Aker ASA and other Aker BP shareholders.Moving on to Aker Solutions. Aker Solutions reported solid figures in the first quarter. EBITDA adjusted for special items came in at NOK 384 million, while the order intake was NOK 8.6 billion. Over the last half year, Aker Solutions has succeeded in winning new contracts, for a total amount of NOK 22 billion. That's impressive, and it shows that the company has used the downturn well to enhance efficiency and improve its competitiveness. The market for Aker Solutions' products and services is gradually improving. And a strong foothold in key offshore regions such as Brazil and Norway supports the company's growth ambitions. The next upturn cycle in oil and gas activity has just started, but with the recent successes of Aker Solutions in mind, it will be encouraging to follow the company's development in the quarters and years to come.Turning to Akastor. In the first quarter, Akastor's portfolio company, MHWirth, reported an EBITDA of NOK 69 million and a book-to-billed as high as 99%. Subsequent to the quarter, MHWirth was awarded a $100 million contract from Keppel FELS for a complete drilling package, with options for further 3 packages. The formation of the joint venture between Mitsui and Akastor regarding AKOFS Offshore is progressing, with an aim to finalize the agreements in the second quarter this year. Upon completion, the transaction will release $142 million to Akastor. Finally, Akastor announced after quarter-end a $75 million investment in preferred equity issued by Odfjell Drilling at attractive terms. Aker's ownership agenda for Akastor continues to focus on improving the operating businesses in order to enhance competitiveness and win new contracts and to pursue new value-accretive investments.Kvaerner delivered yet another good quarter, reporting an EBITDA of NOK 193 million, corresponding to a margin of 10%. In the quarter, Kvaerner secured a number of new orders, of which the NOK 3.8 billion Kvaerner contract for delivery of the topside modules for the Johan Castberg FPSO, was the most important. Subsequent to the quarter, Kvaerner, together with Aker Solutions, was awarded a letter of intent with Statoil for the modification of the riser platform and the field center for the Johan Sverdrup development, valued at NOK 3.4 billion, split 50-50 between Kvaerner and Aker Solutions. Kvaerner ended the quarter with an order backlog of NOK 11.1 billion, up from 1 -- up from NOK 8.1 billion, 3 months earlier. That's a great point of departure for Karl-Petter Løken, who started as CEO earlier this week.Next, Ocean Yield. Ocean Yield delivered steady results in the first quarter and a growing dividend. In the quarter, the company invested more than $400 million in new vessels. All vessels were on long-term charters, providing additional diversification and dividend capacity in Ocean Yield. The current fleet now counts 51 vessels. And Ocean Yield's EBITDA backlog was $3.5 billion at the end of the first quarter this year.Aker BioMarine reported an EBITDA of USD 3 million in the first quarter. Operationally, the quarter was solid, with offshore krill mill production up 35% year-on-year. Aker BioMarine's underlying markets are improving, and the company is well positioned to capitalize on growing demand. Increasing profitability will still remain a key priority for Aker's ownership agenda for Aker BioMarine. Aker has supported Aker BioMarine financially over the last year in order to build scale through transactions and investments. In order to strengthen Aker BioMarine's balance sheet, Aker will in the second quarter convert NOK 1 billion in loan receivables to equity.Aker Energy and Cognite are still not reported as a part of our Industrial Holdings portfolio, but we believe there is a unique potential in each of our 2 new ventures. In the first quarter, Aker Energy signed an agreement to acquire Hess Ghana for a total consideration of $100 million, of which $75 million is payable upon approval of the plan for operation and development. In Aker Energy we are building on the lessons learned in Aker BP, and the ambition is to replicate the success factors behind our Norwegian E&P business. Jan Arve Haugan was appointed CEO in the first quarter. Jan Arve's background and experience will be a -- will be vital to the Aker Energy project. During the quarter, the governance structure was set up, and the team has now been scaled up to around 80 people. The goal is to submit a PDO for the project during the course of the second half of 2018. Before that, Aker Energy will perform exploration and appraisal activities in order to verify the significant resources that our geologists are expecting to discover in Ghana.Cognite, our digital company, continues to develop and grow at a pace that I've hardly seen before in any Aker company. Aker Solutions was signed as a customer in the first quarter. And the company is now in the process of expanding the portfolio customers and external clients as a part of the ambition to grow and diversify the revenue base. Significant time is still spent on Aker BP; and the results that Cognite has already delivered to Aker BP are, simply put, remarkable.For Aker, a year-to-date share price increase of 41% and an NAV uplift of 30%, respectively, only tells parts of the story. As an industrial investment company, our performance should primarily be measured in a wider context. One perspective is our performance since Aker was relisted back in 2004. The numbers speak for themselves, an average return -- an average annual return to shareholders of 29%. That's still a performance both compared to the Oslo Stock Exchange benchmark index, which was up 11% in the same time period and compared to industry peers. And with that, I leave the floor to you, Frank.

[Frank Ove Reite, Chief Financial Officer]

Thank you, Øyvind. And good morning, everyone.I will spend some minutes on Aker's Financial Investments before I go through the quarterly accounts.The financial portfolio accounted for 14% of Aker's total assets or NOK 7.3 billion. This is up NOK 1.5 billion from the previous quarter, primarily due to the cash from the new bond issue in January. However, most of this will be used to repay the AKER11 bond in June. The main components in the Financial Investments are cash, listed investments and interest-bearing receivables. Let's look into the details of the financial investment portfolio.Starting with cash and liquid fund investment. Combined, the two represent 6% of Aker's gross asset value or NOK 2.9 billion. Of that, NOK 2.5 billion was cash, up from NOK 1.2 billion at the end of the previous quarter. The main cash inflows were the NOK 521 million in dividends from Aker BP, Ocean Yield and American Shipping company; as well as NOK 1.5 billion from the AKER14 bond issue. The main cash outflows in the quarter were a loan issued to Aker BioMarine of NOK 261 million, investment in Aker Energy with NOK 150 million as well as NOK 172 million in operating expenses and net interest paid. Aker also repurchased AKER11 bonds for NOK 96 million. Our liquidity reserve at the end of the first quarter was NOK 5.2 billion, including undrawn credit facilities of NOK 2.3 billion.Listed investments included in our financial portfolio represented 2% of Aker's total assets or NOK 1.1 billion. There were a slight value decrease in all of our listed financial investments during the quarter. We received NOK 19 million in dividends from American Shipping company. Philly Shipyard is currently building 2 container vessels. These are the last 2 ships in their order backlog. Philly Shipyard is continuing to pursue new construction projects, but so far no projects have been secured. Accordingly, Philly Shipyard has reduced workforce and will continue to reduce their activity level going forward.Next, real estate and other financial investments. Combined, the two represent 6% of Aker's gross asset value or NOK 3.3 billion. The investment was up EUR 339 million during the first quarter, mainly from increased loan to Aker BioMarine and Fornebuporten, with a total of NOK 281 million. Total loan to Aker BioMarine at end of the quarter was just about NOK 1 billion, and we plan to convert most of this to equity during the second quarter.Fornebuporten had an eventful start to 2018. I'll use the following slide to highlight 2 transactions related to Fornebuporten. In late March, a 50-50 joint venture was established with OBOS to jointly develop 2 residential land plots at Fornebuporten. The next step was taken in April when Aker announced the establishment of the residential development company, FP Bolig Holding, together with 2 partners. Aker's ownership in the new company is 37.55%. And the company's purchase portfolio consists of a land bank of approximately 1,000 apartments. Aker participated in the new company by selling the Koksa 2 land plot and its 50% share of the OBOS joint venture. This gave Aker an accounting gain of NOK 190 million and a cash release of approximately NOK 360 million. In addition to the ownership in FP Bolig, the real estate portfolio includes land plots for commercial development at Fornebuporten and in Aberdeen as well as a commercial real estate building at Fornebu and then portfolio of residential projects close to completion.I will now go through the first quarter financial highlights for Aker ASA and holding companies. Let me start with the balance sheet. Please note that the figures on these slides are after dividend allocation of NOK 18 per share.The book value of our investments was on par with prior quarter, as the NOK 150 million invested in Aker Energy was offset by value reduction below historical costs on our direct investments in Aker solution, Akastor and Solstad Farstad. The fair value adjustments increased by NOK 392 million, mainly explained by positive value changes from Aker BP, partly offset by value reduction on our investment in Ocean Yield; and our indirect investments in Aker solution, Kvaerner and Akastor. Total book value of our assets was NOK 24.2 billion. In our accounts, we use the lowest of historic costs and market values. Adjusted for fair value on our listed assets, we get to our gross asset value of NOK 52.2 billion, an increase of NOK 1.8 billion.Aker's liability mainly consists of bond debt of NOK 6.8 billion and U.S.-dominated bank loans of NOK 2.7 billion; as well as dividend allocation of NOK 1.3 billion for 2017, representing NOK 18 per share. The dividend was paid to our shareholders last week.The book equity was NOK 13 billion, up NOK 262 million from previous quarter. The increase is explained by the net profit before tax of NOK 266 million. If we adjust for fair value on our listed assets, we get to our net asset value of NOK 41.1 billion at the end of the first quarter, up NOK 654 million from previous quarter. The net asset value per share was NOK 553 after dividends, and the value-adjusted equity ratio was 79%.Our total interest-bearing debt stood at NOK 9.5 billion versus NOK 8.3 billion at the end of the prior quarter. The increase is explained by the new AKER14 bond of NOK 1.5 billion, partly offset by repurchase of the AKER11 bonds and foreign exchange adjustments. And as before, we have significant headrooms with regards to our loan covenants. We had a net interest-bearing debt of NOK 5.3 billion at the end of the quarter, down from NOK 5.6 billion in the previous quarter.Then to the income statement.The operating expenses for the first quarter were NOK 68 million. And the net value change in the quarter was negative NOK 179 million, mainly explained by the value reduction on our direct investments in Aker solution and Akastor, as well as value reduction of Solstad Farstad. Other financial items were positive NOK 516 million, mainly explained by dividends received of NOK 521 million and net foreign exchange gains of NOK 94 million. This was partly offset by net interest expenses of NOK 60 million and other financial expenses of NOK 39 million.The profit before tax was NOK 266 million.And with that, we open for questions.

[Per Kristian Reppe, Investment Manager & Head of Investor Relations]

Okay, let's take a few questions here from Fornebu, first.

[Chr. Frederik H. Lunde]

Frederik Lunde, Carnegie. Just on Aker Energy you obviously have very ambitious plans there and a very ambitious time frame, but I was wondering if you're considering adding assets to the company in parallel with the development of the Cape Tano field?

[Øyvind Eriksen, Chief Executive Officer and President]

Sure. Aker has made an investments in Aker Energy, so we are currently a 50% shareholder in Aker Energy. And Aker Energy has, as I said in my presentation, entered into an agreement to acquire Hess Ghana. So that's one, an asset 1 field. When we made the announcement about Aker Energy, we also shared with the markets the fact that this opportunity has been -- we have been introduced to this opportunity by TRG, our main shareholder, which owns the neighbor field. So the priority now for Aker and Aker Energy is to develop what we call the Hess block, but as a subsequent transaction, we have also opened up for a dialogue with TRG about a merger or a consolidation of the 2 blocks. If we decide to do so, the transaction terms will be benchmarked and verified through a third-party transaction in parallel. That will be a great point of departure. We believe that the potential of the Hess block could be as high as Johan Castberg in Norway. And if we add on the neighbor block currently owned by TRG and -- the potential is even higher. So that's a huge task in hand, but I expect interests from other industrial partners in that area to -- and we have had some initial discussions already about potential collaboration, co-investments in the blocks or different corporate transactions. We have not spent much time on it yet, but there's definitely a wide range of options available to us, provided that the reserves in our existing fields are verified during the exploration and appraisal campaign in the second half of this year.

[Chr. Frederik H. Lunde]

Yes. Are you being approached today by, as you say, other asset holders in West Africa? I assume there's a big transaction market for oil assets in the region.

[Øyvind Eriksen, Chief Executive Officer and President]

I said we have had dialogue with oil companies and -- holding fields in the same area, both in Ghana and in neighbor countries, but that's a core business for us. We always have that kind of high-level dialogue with good colleagues in the industry. So the focus now is solely on how to develop our existing fields. And that's the, by far, best way to unlock the value potential also in this part of our E&P portfolio.

[Magnus Olsvik, Equity Research Analyst]

Magnus Olsvik, Kepler Cheuvreux. Just to follow up on Ghana, can you say anything about the near-term plans? You mentioned some drilling plans now during this year. How many wells, so on and timing of these et cetera.

[Øyvind Eriksen, Chief Executive Officer and President]

So we have 2 or 3 parallel working streams as we speak. The first one is actually to close the Hess transaction. And approvals from the Ghanaian authorities are required in order to close the Hess acquisition and should be just around the corner. So we expect to close the acquisition and, as a consequence, become the operator during course of the second half this year. Then -- and the other main working stream as we speak is to prepare the plan for operation and development of what we call the Hess block, and that's an ongoing piece of work. And we'll -- and we expect to file the POD in Ghana and during the course of the second half of this year. In parallel, both Aker Energy; and TRG or AGN, the neighbor block, will do some exploration and appraisal activities also during the course of the second half of this year.

[Per Kristian Reppe, Investment Manager & Head of Investor Relations]

Any more questions here from Fornebu? We'll have a separate media session afterwards. And seems to be no further questions from the web either, so I thank you all for attending. And I wish you all a very good day.