Aker ASA

OSE:AKER

Earnings Call Transcript 2022-Q2

[Joachim Bjorni, executive]

Hi, everyone, and good morning. Welcome to this presentation of Aker's Second Quarter and Half Year Results for 2022. We'll start today's presentation with Aker's President and CEO, Oeyvind Eriksen, who will walk you through the highlights in the quarter and how the industrial holdings portfolio developed. Our CFO, Svein Stoknes, will then cover the financial investments portfolio in the second quarter and accounts in more detail. There will be a Q&A session following the presentation. [Operator Instructions]

And with that, I hand it over to Oeyvind.

[Øyvind Eriksen, executive]

Thank you, Joachim, and good morning, everyone. The first half of 2022 has been marked by market share from volatile macroeconomic and geopolitical developments. The war in Ukraine has pushed energy prices to new highs. And questions around energy security are at the top of the agenda, which, in turn, is impacting both the pace and the path of the energy transition.

Despite the uncertainties over the last few months, the macroeconomic realities are becoming more and more clear. The world population is growing by about 80 million people or a new Germany every single year. Combined with increased urbanization and a growing middle class, the world is facing an exponential increase in food consumption and energy demand. The world needs enormous investments in new power generation projects to rapidly decarbonize global energy systems. However, 80% of the global energy consumed still originates from fossil fuels, and investments are still needed in oil and gas to keep up with global energy demand. It's an incredibly nuanced discussion. But one thing is certain. The energy transition is enormous, complex, costly and will take time.

Preparing Aker for both long-term developments as well as unexpected events and market uncertainties has been a main objective in recent years. We are as a result able to manage the volatility without compromising the positioning of Aker to take advantage of the global trajectories relevant to us.

While Aker share price has not escaped the global sentiment in the second quarter, we are coupling our strong industrial foundation with new technologies, IDs and partnerships. Halfway through the year, long-term efforts are bearing fruit and new shoots taking roots.

In the second quarter, Aker's net asset value decreased by NOK 2.8 billion, including a NOK 1.1 billion in dividends paid to NOK 72 billion or NOK 968 per share. For the first half of this year, Aker's net asset value increased by NOK 2.2 billion, net of dividends paid in the period. The value increase was mainly driven by Aker BP, which was up 29.2% in the first half of this year, favorably impacted by sustained high oil and gas prices.

The Aker share decreased 4.9% dividend adjusted in the quarter to NOK 756 per share. This compares to a 7.2% decrease in Oslo Stock Exchange Benchmark Index. Aker's value-adjusted equity ratio at the end of the period was 88%. And our liquidity reserve stood at NOK 6.6 billion, of which cash and cash equivalents amounted to NOK 2.1 billion. Aker's gross asset value decreased from NOK 84.9 billion to NOK 81.6 billion in the second quarter. With 80% in listed assets and cash, the Aker portfolio is still highly light liquid.

Our industrial holdings portfolio accounted for 86% of our gross asset values. Aker BP remains the largest asset in our portfolio at NOK 45.8 billion and continues to be an important source of liquidity, providing valuable upstream cash as we continue to invest in and develop our portfolio along macroeconomic trends. In total, renewables, software, seafood and marine biotech made up around 27% of Aker's gross asset value in the second quarter.

Aker has growth platforms in multiple segments, while hydrocarbon-related industries still account for the majority of our industrial holdings. We are allocating more and more resources to renewables, industrial software, seafood and marine biotech.

For Aker BP, the acquisition of Lundin Energy's oil and gas activities in Norway was completed on 30th of June this year. Aker BP is now the largest E&P company focusing purely on activities on the Norwegian continental shelf and it's also the second largest operating oil and gas company in Norway. Aker continues to be the largest shareholder in Aker BP with a 21.2% ownership and has, together with the 2 of the main shareholders, BP and the Lundin family, undertaking a 6-month lockup on our shareholdings from closing.

Through the transaction with Lundin Energy, we have created an E&P company positioned with a world-class asset base offshore, industry-leading low cost, low CO2 emissions, profitable growth and an even more attractive dividend policy. As part of the Lundin transaction, Aker BP consume the operatorship and a 65% ownership in Edvard Grieg and increased its ownership in the world-class Johan Sverdrup field to 31.6%, which strengthens the company's vision of being an E&P company for the future. Further, cash flow from Johan Sverdrup will be an important contributor to support Aker BP's growth ambition and policy to return increasing dividends to shareholders.

The company has a target of net zero emissions by 2030 and is offering a reliable and secure source of energy. Aker BP will continue to drive the digital transformation of the oil and gas industry with the aim to increase productivity and reduce costs as well as CO2 emissions. Aker's industrial software companies will play an important part in delivering software solutions, enabling this transformation.

Next is Aker Solutions, which experienced another positive quarter in oil and gas. It secured an important contract extension for its MMO business in Norway with ConocoPhillips and announced 2 new contracts for delivery of subsea production systems to Vår Energi and to Equinor, respectively.

Within renewables, Aker Solutions recorded a loss provision for renewables projects, driven by the sign changes and increased cost. This illustrates that we need to rethink our supply chains and execution models as supplier companies are seeing diminished margins and cost pressure from developers who themselves need to keep costs down to achieve adequate economic return on renewable energy projects. Aker increased its ownership in Aker Solutions during the quarter to 39.41%.

Moving on to Aker BioMarine. In the quarter, the company experienced increased krill harvesting compared to last year and delivered increased EBITDA and a positive net profit. Overall, the company was negatively impacted by macroeconomic events and supply chain disruptions in the quarter, impacting sales of Superba and Lang products.

Now on to Aker Horizons. The company completed the structural transformation announced in the first quarter through the merger with Aker Clean Hydrogen and Aker Offshore Wind, and after the quarter end, the merger between Mainstream and Aker Offshore Wind. As a result, Aker Horizons now has a clear ownership agenda, including within asset development and the portfolio consisting of the renewable energy company, mainstream and the decarbonization company, Aker Carbon Capture. Aker Horizons also has an ambition to accelerate the development of large-scale hybrid decarbonization projects. After the completion of the transactions, Aker holds 67.3% of the shares in Aker Horizons and Aker Horizons holds 58.4% of the shares in Mainstream.

Moving on to our unlisted assets, starting with our industrial software portfolio. First, Cognite. During the quarter, we were very pleased to reach a major milestone when Cognite finalized its agreement with Saudi Aramco to establish the joint venture, CNTXT, headquartered in Riyadh. CNTXT will provide digital transformation technologies and services, enabled by the Cognite Data Fusion core technology. In addition, CNTXT will provide advanced Google cloud solutions in the Kingdom and be an important vehicle for driving profitability and sustainability for the regional industries. The partnership with Aramco is an example of how strong collaborative relationship developed over many years can bring parties together to drive growth and value creation.

Our other software company, ACE, is an industrial software company enabling businesses to visualize, navigate collaborate and work on a digital representation of an asset through ACE digital workspace. In the quarter, the company form a strategic partnership for assets in operation with Aker BP. Further, the company is actively working on the NOAKA development alongside Cognite, Aker Solutions and Aker BP. We believe this can be a landmark project for the use of industrial software in asset heavy industries at large.

Aker Energy of our oil and gas company in Ghana has completed FEED and prepared a revised plan of development for the Pecan project. However, due to uncertainties like the consequences of the war in Ukraine and Lukoil's 38% interest in license, the plan of development will not be submitted until the challenges have been resolved.

Lastly, SalMar Aker Ocean. The company is sizing up its organization to support its growth ambition. Ocean Farm 1, the world's first offshore salmon farming unit, is currently at Aker Solutions yard in Verdal for maintenance and upgrade. The next production cycle is planned to commence in the second quarter of 2023. The company has the ambition of taking an investment decision for a new semi offshore unit, Ocean Farm 2, towards the end of this year. Further, the company is committed to investments in additional offshore salmon farming units as soon as a regulatory framework is in place here in Norway.

So that concludes my portion of today's presentation. I now hand it over to Svein Oskar Stoknes, who will take you through the financials for the quarter in a greater level of detail.

[Svein Stoknes, executive]

Thank you, Oeyvind, and good morning. I will start out spending a few minutes on Aker's financial investments before I go through the second quarter results in some more detail.

The financial investments portfolio accounted for 14% of Aker's total assets or NOK 11.5 billion, down NOK 1.9 billion from the previous quarter. This is mainly due to a reduction in cash holdings of NOK 2.4 billion, partly offset by value increases of our listed financial investments of NOK 330 million and the American Shipping Company total return swap agreements of NOK 167 million.

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.

Then as usual, starting with cash. Our cash holdings represented 2% of Aker's gross asset value or NOK 2 billion. This is down NOK 2.4 billion from the previous quarter. The cash inflows were primarily dividends received from Aker BP, Aker Solutions and American Shipping Company of the equivalent to NOK 670 million and a NOK 141 million loan repayment from Aker Energy in the quarter. The main cash outflows in the quarter were dividend paid of NOK 1.1 billion and investments in portfolio companies of NOK 1.1 billion, of which NOK 809 million in Aker Solutions, NOK 95 million in Aker Asset Management, NOK 50 million in Omni and NOK 50 million in Saga Robotics. Other cash outflows were primarily debt repayment of NOK 944 million.

Payments for operating expenses and net interest were NOK 146 million in the quarter. And our liquidity reserve was a solid NOK 6.6 billion, including undrawn credit facilities of NOK 4.5 billion.

Listed investments included in our financial portfolio represented about 3% of Aker's total assets at the end of the quarter or NOK 2.3 billion. The total value of this portfolio increased by NOK 330 million in the second quarter, mainly explained by value increases of our positions in Solstad Offshore of NOK 241 million and in American Shipping Company.

The equity investment in American Shipping Company had a value increase of NOK 99 million in the quarter. The TRS agreements related to the same company increased in value by NOK 167 million. In addition, Aker posted a total dividend income from American Shipping Company of NOK 35 million in the quarter.

Next, real estate and other financial investments. Combined, the 2 represented 9% of Aker's gross asset value or NOK 7.2 billion in total. Aker's real estate holding, Aker Property Group, stood at a book value of NOK 958 million at the end of the quarter. Interest-bearing receivables totaled NOK 4.1 billion, including a NOK 2 billion loan and a NOK 1.2 billion convertible loan to Aker Horizons. Other equity investments totaled NOK 1.2 billion, of which the main components are related to our investments in the company's Seetee, Abelee and Clara and, from the second quarter, Aker Asset Management.

Fixed and other interest-free assets totaled NOK 1 billion. The decrease in interest-bearing receivables is mainly explained by the loan repayment from Aker Energy of NOK 141 million. The decrease in other equity investments is mainly explained by negative value development in Seetee, partly offset by investments in Aker Asset Management. We have also invested NOK 50 million in Omni in the quarter in addition to NOK 50 million in Saga Robotics.

The increase in other interest-free assets is mainly explained by positive value development of the previously mentioned TRS agreements related to American Shipping Company.

Then let's move to the second quarter financial highlights for Aker ASA and holding companies. And let me start with the balance sheet. The book value of our investments is down NOK 1 billion in the quarter. This is mainly explained by negative value changes in Aker Horizons of NOK 2.1 billion and Seetee of NOK 230 million. This is partly offset by the increased investment in Aker Solutions of NOK 0.8 billion and positive value change in Solstad Offshore of NOK 241 million. The total book value of our assets was NOK 36.5 billion. And in our accounts, we use the lowest of historic costs and market values.

The fair value adjustment, illustrated in gray color on this slide, was only slightly down in the quarter to NOK 45.1 billion. This is mainly explained by negative value adjustments in Aker Solutions of NOK 0.6 billion and in Aker Horizons of NOK 1.1 billion. And this was partly offset by positive value adjustment in Aker BP of NOK 1.5 billion. The gross asset value stood at NOK 81.6 billion at the end of the quarter, down from NOK 84.9 billion at the end of the first quarter.

Aker's liabilities mainly consisted of bond debt of NOK 5 billion, a U.S. dollar-denominated bank loan of NOK 2.5 billion and the Norwegian kroner-denominated bank loan of NOK 1 billion in addition to a NOK 1 billion euro denominated loan. The book equity was NOK 26.9 billion, down NOK 1.6 billion, explained by loss before tax in the quarter.

If we adjust for fair value, so for our listed assets and Cognite, we get our net asset value of NOK 72 billion at the end of the second quarter. The net asset value per share was NOK 968 and the value-adjusted equity ratio was 88%.

Our total interest-bearing debt was NOK 9.5 billion, which is down NOK 514 million from the previous quarter due to repayment of debt, partly offset by foreign exchange effects.

In April, we refinanced our revolving credit facility at Aker ASA and our 2 secured bank loans at Aker Capital, both on favorable terms. The new structure has 2 unsecured multicurrency RCFs of NOK 4 billion each, both now at Aker ASA level. A total of USD 100 million was repaid upon closing, so that the NOK equivalent of about NOK 3.5 billion of bank loans is currently outstanding, with approximately NOK 4.5 billion available to draw.

The average debt maturity at the end of the quarter was 2 years. Maturity of the new bank facilities are 3 years, with two 1-year extension options for NOK 4 billion and 5 years maturity for the remaining NOK 4 billion. Taking into account available credit lines and extension options on the bank loans, the implicit maturity of the entire portfolio is then 4.4 years.

And today, we are pleased to announce that Aker ASA has been assigned an investment-grade rating of BBB- with stable outlook from Scope Ratings. Scope has also assigned a first-time rating of BBB- to Aker's senior unsecured debt and an S2 short-term rating. In Scope's Rating report, Scope notes that the rating is driven by Aker's low leverage and its controlled cost coverage, balancing cash inflows and outflows and that the liquidity of Aker's assets further benefits the rating. We see this rating as a recognition of Aker's resilient financial performance, and it will further strengthen our position in the credit markets going forward.

Then to the income statement. The operating expenses for the second quarter were NOK 94 million, reflecting a continued high activity level. The net value change in the quarter was negative NOK 2.1 billion, mainly explained by value reductions in Aker Horizons of NOK 2.1 billion and in Seetee of NOK 230 million. This was then partly offset by value increase in Solstad Offshore of NOK 239 million.

Our net other financial items were positive NOK 543 million, mainly explained by dividend income of NOK 664 million and positive value development in the TRS agreements in American Shipping Company of NOK 156 million. This was partly offset by foreign exchange effects of NOK 232 million. And the loss before tax was then NOK 1.6 billion in the quarter.

Thank you. That was the end of today's presentation, and we can then move on to take questions.

[Joachim Bjorni, executive]

Thank you, Svein Oskar. Let's give the viewers a couple of minutes to post your questions.

Okay. So there seems to be no questions today. Thank you, both Oeyvind and Svein Oskar. And thank you all for joining us today.

[Øyvind Eriksen, executive]

Thank you.