Aker ASA

OSE:AKER

Earnings Call Transcript 2020-Q1

[Torbjørn Kjus, Chief Economist & Head of Investor Relations]

Hello, everyone, and good morning. Welcome to a presentation of Aker's First Quarter Results for 2020. We will start today's presentation with Aker's President and CEO, Oyvind Eriksen. He will walk you through the highlights in the quarter and the development of our Industrial Holdings portfolio. Aker's CFO, Svein Stoknes, will then go through the Financial Investments portfolio and the first quarter accounts in more detail. And after the presentation, we will open up for a Q&A.And with that, I hand it over to Oyvind.

[Oyvind Eriksen, President & CEO]

Good morning, and thank you all for attending this presentation of Aker's first quarter results for 2020. It's difficult to know where to begin to describe the first quarter of this year. It's been some weeks unlike any of us have ever experienced. Truly something for the history books. Very few of us can remember a time when we were asked to make a collective sacrifice for the greater good. In Norway, the restrictions imposed over the last few months are described as the most invasive since wartime. Over the course of the first quarter, millions of people across the world have lost their jobs, and some have lost loved ones. All of us have felt the profound effects of social distancing. In our country, we are fortunate that society is preparing for a slow return to some sense of normalcy, although it will certainly be a new normal. The impact will be felt for a long time to come.The pandemic caused governments to lock down societies and businesses. And the immediate consequence was plunging oil demand and, at the same time, Russia and Saudi Arabia started an oil price war. This created the perfect storm for oil prices, and we witnessed the biggest quarterly percentage decline on record, and the global economy has been shaken to its core. Aker is positioned to -- and exposed to industries that have been hit especially hard. This forms the backdrop for our performance in the first quarter of 2020. The short version is that Aker's net asset value ended at NOK 24.1 billion in the first quarter, down 52% from NOK 50 billion at the end of the fourth quarter. Aker's share price fell 57% to NOK 235.6. This compares with a 65.5% drop in oil price and a 24% decrease in the Oslo Stock Exchange benchmark index.So far, in the second quarter, our net asset value is up 24.6% to NOK 30 billion, and our share price is up 21.4% to NOK 283 per share. Aker is prepared to weather difficult times, and our liquidity reserves stood at NOK 6.1 billion by the end of the first quarter, including NOK 4.4 billion in cash. This week, we added another NOK 1 billion to the liquidity reserve as we restructured and amended our U.S. dollar loan with Nordea to a NOK 2 billion facility. Hence, Aker has now immediate access to approximately NOK 7.2 billion in cash from bank deposits and credit facilities.Let's take a closer look at the key changes for Aker's net asset values for the past quarter. As we all know, the oil sector has been hit especially hard by the COVID-19 pandemic and the drop in global oil demand. The number that stands out is the decrease -- or the decreased value of our investment in Aker BP of NOK 21.6 billion for the quarter.The oil service companies have also been -- also seen a poor quarter dropping in value by about NOK 2.8 billion. Ocean Yield has not been spared either and has fallen in value by NOK 2.5 billion. The value reductions in the oil and oil service part of the portfolio was partly offset by an increase in Aker BioMarine. The increase in value is a reversal of earlier write-downs of the equity investments in Aker BioMarine. The background is evaluation of the company by an independent third-party prior to Aker transferring the equity investment of our wholly owned subsidiary -- to our wholly owned subsidiary Aker Capital. Aker BioMarine continues its positive development and an external valuation concludes that there is no need for impairment anymore. The investment in Aker BioMarine is now booked at cost.The per share net asset value amounted to NOK 325 at the end of the first quarter compared to NOK 673 at the end of 2019. Aker maintains financial flexibility through a solid liquidity reserve, which stood at NOK 6.1 billion at the end of the quarter. Cash amounted to NOK 4.4 billion of the liquidity reserve.Today, our liquidity buffer is even higher, NOK 7.2 billion in total due to the already-mentioned restructuring and amendment of our U.S. dollar loan with Nordea to a NOK 2 billion credit facility.Aker's gross asset value was NOK 37.7 billion as per the end of March, of which the Industrial Holdings portfolio represented 77%. When deducting liabilities of NOK 13.5 billion, the value-adjusted equity ratio was 64%.The Industrial Holdings portfolio currently consists of 8 assets: 5 listed and 3 nonlisted companies. The total net asset value as per the end of the first quarter was NOK 24.1 billion. There have been some significant changes in Aker's gross asset values after the oil price collapse during the first quarter. The largest value of the portfolio still consists of oil exploration and production, representing about 53% of gross asset value.The second largest value is now marine biotech. After the impairment of Aker BioMarine was reversed, cash represents as much as 12% of gross asset values, illustrating Aker's solid liquidity position. Oil services, which a few years ago used to represent the largest share of the portfolio, is now only about 4% of the gross asset value. Listed assets and cash is 75% of the gross asset value.Let us then dig somewhat deeper into our listed industrial portfolio. Aker BP has consistently been the greatest contributor to net asset value in Aker. At the beginning of the quarter, Aker BP issued USD 1.5 billion in senior notes at an attractive price, reflecting its favorable access to low-cost capital following its upgrade to investment grade by S&P and Fitch.In response to the COVID-19 crisis, Aker BP has updated its investment program and financial framework during the first quarter in order to secure additional financial optionality. While production levels have mostly been exempted from lockdown measures to date and already sanctioned projects are looking robust due to ongoing cost and efficiency improvements, the company has placed nonsanctioned field development projects on hold, reduced exploration spending by 20% this year, with further reductions planned for the next couple of years, and it is continually working to lower production cost.Subsequent to the quarter end, Aker BP decided to reduce its quarterly dividend payments with 2/3, and the Norwegian government decided that Norway will cut production to help cope with the current global oil market oversupply. Aker BP's production will only be marginally affected by these cuts.The oil service companies, Aker Solutions, Akastor and Kvaerner have, along with the rest of the sector, been hit especially hard by the crisis. The virus outbreak has impacted entire value chains, and regular operations have become increasingly difficult. Aker Solutions, Akastor and Kvaerner are operating in the industry segments, which we already expected to be muted for a long period of time. The decline in oil demand and commodity prices is resulting in a significant slowdown in activity with hardly any new greenfield projects in sight. Swift and brutal actions have been -- have already been taken to adapt to this reality. As an example, the Norwegian workforces of Aker Solutions and Kvaerner have almost been cut in half, and plans are being prepared for further large reductions in the months to come.The Norwegian government has suggested some temporary changes to the petroleum tax rules in order to incentivize oil producers to invest in new projects. The intention is to help secure activity, capacity and competency in the Norwegian oil service industry. The proposed temporary changes to the petroleum tax regime may improve the short-term cash flow for oil companies in 2020 and 2021, but it will not incentivize investment activity at scale, partly due to tight -- time limits and partly because the total payable tax for greenfield projects increases. Hence, changes to the proposals are required in order to avoid significant and permanent reduction in capacity and competency for the Norwegian supplier industry. If not, Kvaerner will run out of business within the next couple of years, and life cycle services will be the main remaining activities for Aker Solutions and MHWirth, respectively.Ocean Yield continues to evaluate opportunities for its FPSO Dhirubhai-1, but the process is taking much longer time than envisaged. During the quarter, the company acquired 3 vessels on prepaid charter hire. The COVID-19 demand collapse has led to financial challenges for some counterparties and such developments were taking into account when the Board decided this week to reduce a quarterly payment of dividend to $0.05 per share. Let me then continue to our nonlisted industrial portfolio, which operates in 3 segments: E&P, industrial software and marine biotech. In the first quarter, Aker Energy's Pecan project in Ghana was put on hold due to the market consequences of COVID-19. This is in line with postponement of projects seen across the global oil and gas industry and in understanding with the Ghanaian authorities. Measures have been taken to adapt the company to the current change in circumstances, including a rightsizing of the organization. The company now exists of a small core team that is working on optimizing and simplifying the field development in light of the new oil market realities. This work is being led by the new CEO, Håvard Garseth. The target is to reduce the breakeven price of the projects in order to earn an attractive return on the investment in a normalized market.For our industrial software company, Cognite, customer deployments are progressing well. COVID-19 has had limited impact on operations. In fact, the company has seen an increase in productivity among programmers and data scientists during the period of home office. Cognite reported revenue growth during the quarter, supported by its fast-growing customer base. The company has secured new commercial agreements with several of the world's largest oil and gas companies in the quarter, and has also strengthened its solid pipeline of potential new customers across other asset-intensive industry verticals. The company continues to scale its international presence through offices in Tokyo and Texas, and both offices signed their first customer engagements with large industrial companies in the quarter. This is another milestone for the company that will further enable Cognite to scale and establish itself as a leading software provider for digitalization of asset-intensive industries. The organization continues to grow fast and, by the end of the first quarter, stood at 305 employees compared to 151 employees a year ago. Commercial discussions with Saudi Aramco continue to progress following the October 2019 announcement to establish both a bilateral collaboration with the world's largest producer of energy and a joint venture with Aramco for other business opportunities in the region.Aker BioMarine revenues and EBITDA are growing. During the quarter, the company saw a positive development in net profit mainly due to higher sales, increased margins and full inclusion of Lang, which was acquired in the first quarter 2019. The company has undertaken necessary investments over the past few years to utilize their operational leverage and support the growth. Aker BioMarine owns and controls the entire value chain from the krill harvesting fleet operating in the Antarctic, logistics operations in Montevideo and krill oil factory in Houston. COVID-19 has so far not had any material negative effect on Aker BioMarine, but the company has taken measures to reduce operating expenses and has postponed projects for over USD 20 million in 2020 to preserve cash.Revenues are expected to grow going forward by further development of existing segments, but also new verticals like the human protein consumer market with krill-derived protein and has benefits of the current protein sources. Hence, Aker maintains a positive outlook for Aker BioMarine's core products and markets.So this ends my presentation this morning. And now I pass on the word to our CFO, Svein Stoknes, who will take you through Aker's financial investments and financial statements.

[Svein Oskar Stoknes, Chief Financial Officer]

Thank you, Oyvind, and good morning. So I will start out spending a few minutes on the Aker financial investments before I go through the first quarter results in some more detail. So the financial portfolio accounted for 23% of Aker's total assets or NOK 8.7 billion, which is up NOK 1 billion from the previous quarter. This was mainly due to the increase in cash holdings in the quarter. As before, the main components on the financial investments are cash, listed financial investments, real estate investments and interest-bearing receivables, all of which I will now go through in some more detail.Starting with cash, our cash holdings represented 12% of Aker's gross asset value of NOK 4.4 billion. This is up NOK 0.7 billion from the previous quarter. The main cash inflows were dividends from primarily Aker BP and Ocean Yield of the equivalent to, in total, NOK 1 billion. The main cash outflows in the quarter were NOK 253 million in increased funding to portfolio companies in the form of interest-bearing receivables mainly through Aker BioMarine and FP Eiendom. Payments in the quarter for operating expenses and net interest were NOK 202 million. Other cash movements in the quarter represented NOK 123 million, mainly explained by foreign exchange adjustments on cash held in foreign currencies.Our liquidity reserve at the end of the first quarter was NOK 6.1 billion, including undrawn credit facilities of NOK 2 billion. And as Oyvind has already mentioned, Aker has received a committed offer from its existing lender to refinance its USD 200 million master term loan agreement into a 3-year NOK 2 billion facility. The new facility consists of a NOK 1 billion bullet term loan refinancing the drawn tranche and NOK 1 billion RCF available for drawing for general corporate purposes. The facility is subject to documentation and is expected to be closed in Q2. And this improves Aker's current liquidity reserve to about NOK 7.2 billion.Moving to listed investments included in our financial portfolio, represented about 2% of Aker's total assets at the end of the quarter or about NOK 739 million. The value of the equity investment in the American Shipping Company decreased by NOK 157 million in the quarter. In addition, the total return swap agreements related to American Shipping Company had a negative value development of NOK 251 million in the quarter. In the first quarter, Aker posted a dividend income of NOK 23 million from American Shipping Company.The values of Philly Shipyard and REC Silicon were fairly stable considering the market turbulence at the end of the quarter. And subsequent to the quarter, Philly Shipyard announced the contract award for the construction of 2 National Security Multi-Mission Vessels. The contract includes options for 3 additional vessels. Should all 5 vessels be built, this contract will have a total value of approximately $1.5 billion. Securing this award is a major milestone for the company strategy to reposition the yard for government and commercial projects. Engineering and planning work is already underway and final design and procurement has already commenced, with scheduled production start on the first vessel in early 2021.Next, real estate and other financial investments. Combined, the 2 represented 9% of Aker's gross asset value or NOK 3.6 billion in total. Other financial investments is mainly comprised of receivables against Aker BioMarine and Estremar Invest, airplanes and unlisted equity investments. The NOK 373 million increase in book value in the quarter is mainly explained by increased funding to Aker BioMarine of NOK 142 million and foreign exchange adjustments of the receivables denominated in U.S. dollars. In the quarter, NOK 100 million loan was issued to FP Eiendom, and the book value of the real estate investment increased to NOK 703 million. Then let's move to the first quarter financial highlights for Aker ASA and holding companies. Let me start with the balance sheet. The book value of our investments fell by NOK 645 million in the quarter. This is explained by write-downs related to our direct and indirect investments in Aker Solutions, Akastor and Kvaerner, totaling NOK 2.7 billion. Other investments were written down below cost with a total of NOK 0.5 billion. And as already mentioned, these value reductions were partly offset by a NOK 2.6 billion reversal of previous impairments for the investment in Aker BioMarine and the investment is now booked at cost.Total book value of our assets was NOK 27.2 billion. And in our accounts, we use the lowest of historic costs and market values. In addition to the write-downs of book values, just mentioned, we also faced a negative fair value adjustment of NOK 25 billion, bringing it down to NOK 10.5 billion. The decrease is mainly explained by value reductions of the investments in Aker BP and Ocean Yield. The gross asset value stood at NOK 37.7 billion at the end of the quarter, down from NOK 61.9 billion at year-end 2019. Aker's liabilities mainly consisted of bond debt of NOK 5.8 billion, U.S. dollar-denominated bank loans of NOK 5.8 billion and NOK 1.2 billion euro-denominated loan. The book equity was NOK 13.6 billion, down NOK 1.1 billion from the fourth quarter, explained by the net loss before tax in the quarter.If we adjust for fair value of our listed assets, we get our net asset value of NOK 24.1 billion at the end of the first quarter, down NOK 25.8 billion from the fourth quarter. The net asset value per share was NOK 325, and the value-adjusted equity ratio was 64%. The balance sheet remains strong despite an unprecedented negative first quarter with a book equity ratio of 50% and a cash holding of NOK 4.4 billion.Our total interest-bearing debt was NOK 12.7 billion, which is up NOK 1.1 billion from the previous quarter due to foreign exchange adjustments. Remaining Aker 10 and Aker 13 bonds of, in total, NOK 1.35 billion will be settled at maturity during the second quarter. Following these 2 debt maturities, the next debt maturity is not until 2022. We still have significant headroom with regards to our debt covenants, and we had a net interest-bearing debt of NOK 6.7 billion at the end of the first quarter, on par with the previous quarter.Then to the income statement. The operating expenses for the first quarter were NOK 62 million. The net value change in the quarter was negative to NOK 677 million, as already explained. Net other financial items were negative NOK 299 million in the quarter, mainly explained by negative foreign exchange effects of NOK 0.9 billion and the negative value change around the American Shipping Company TRS agreements of NOK 259 million. This was partly offset by the dividend income of NOK 1 billion in the quarter, and net interest expenses were NOK 84 million. The loss before tax was then NOK 1 billion in the quarter.Thank you. That was the end of our presentation, and we'll now move on to...

[Torbjørn Kjus, Chief Economist & Head of Investor Relations]

Yes. I think before we open up for questions through the phone, we have a question through the net-based solution here. So the question is from [ Renaud Soler ], and it goes like, would you consider buying back in the market the undervalued bonds of your subsidiaries?

[Oyvind Eriksen, President & CEO]

Well, our strategy is to operate as an active shareholder and to primarily invest in equity rather than bonds. However, in a turbulent market like now, we'll obviously consider alternatives. But we have no immediate plan to buy bonds in our portfolio.

[Torbjørn Kjus, Chief Economist & Head of Investor Relations]

Okay. We don't have any other questions through the net-based solutions. So I think, operator, we can open up for questions through the phone.

[Operator]

[Operator Instructions]

[Torbjørn Kjus, Chief Economist & Head of Investor Relations]

Okay, operator, then since we don't have any questions through the phone, I think we will end the session here. And thank you all for the attention. Thank you.