Aker ASA

OSE:AKER

Earnings Call Transcript 2023-Q2

[Fredrik Berge, Head of Investor Relations]

Hi, everyone, and welcome to the presentation of Aker's Second Quarter Results 2023. My name is Fredrik Berge, and I'm Head of Investor Relations. We will start today's presentation with Aker's President and CEO, Oyvind Eriksen, who will take you through the highlights of the quarter and recent developments in the portfolio. Our CFO, Svein Oskar Stoknes, will then take you through the financials for the quarter in more detail. Following the presentation, we will host our prepared Q&A session. And in case you have further questions or feedback, please do not hesitate to contact me after the presentation.

And with that, I hand it over to Oyvind Eriksen.

[Oyvind Eriksen, President and CEO]

Thank you, Fredrik, and good morning, everyone. Aker is today summing up second quarter and the first half 2023. The bullet point version is: One of the strongest operating results on the record for some of our main industrial holdings, Aker BP and Aker Solutions, in particular; continued struggle in renewables with Mainstream Chile as the biggest issue; good progress in our software portfolio with the launch of Cognite AI as a possible game changer; and valuations adversely impacted by external factors such as declining energy prices, inflation concerns, war in Europe, regional bank failures, a debt ceiling debate, continued concerns about how climate change may impact markets and the globalization, changing supply chains and trade patterns. Aker's net asset value for the second quarter declined 2.3% down from the first quarter or NOK2.5 billion, of which NOK1.1 billion was dividend paid. For the first half of the year, the decline was NOK9.7 billion or 12.8% adjusted for dividend. The decline was mainly driven by Aker Horizons and Aker BP, both impacted by the current market situation in their respective parts of the energy industry. The Aker share decreased 7.2% in the quarter adjusted for dividend to NOK608.50 per share. This compares to a 5% decrease in the Brent oil price and a 1.7% increase in the Oslo Stock Exchange Benchmark Index. Aker's value adjusted equity ratio at the end of the period was 86% and our liquidity reserves stood at NOK6.3 billion, of which cash amounted to NOK900 million.

Aker's gross asset value decreased from NOK68.6 billion to NOK66.3 billion in the second quarter. With approximately 75% in listed assets and cash the Aker portfolio is still highly liquid. Our Industrial Holdings portfolio accounted for 82% of our gross asset value. Aker BP remains the largest asset in our portfolio at NOK33.7 billion. Despite a quarterly decline, it continues to be an important source of liquidity, recording a record high production in the quarter and providing valuable upstream cash as we continue to invest in and develop our portfolio along macroeconomic trends. In total, renewables and green technology, software, seafood and marine biotech made up around 26% of Aker's gross asset value in the second quarter. Energy, decarbonization, digital, proteins and nutrition are long term market trajectories of global scale. Aker is positioned to take advantage of all of them with strong portfolio companies, highly skilled workforces, great customers and world class partners. Energy continues to be our largest industry segment with portfolio companies positioned to provide energy security in the short and medium term with strong oil and gas production while simultaneously playing a role in the longer term energy transition. Energy companies are increasingly displaying capital discipline and revising strategies and time lines to grapple with current market uncertainties. Aker is no exception. Oil and gas supply and demand forecasts would normally indicate an upside. However, other factors including the continued fear of recession and energy transition mechanism still way down prices. This is just one example of why our priority is to maintain a steady course and consider a multitude of factors and scenarios as we execute our active ownership.

We recognize the uncertainty of the future of energy markets. I'm mindful of wide ranging oil demand predictions for the long term, the widening gap between policy regulations and commercial concerns, supply chain constraints, impacts of urbanization and growth of various technologies such as carbon capture and storage and artificial intelligence. Along the way, I'm encouraged to see such strong operational performance in the bread and butter of our portfolio, including Aker BP, which reported record high production in the second quarter and Aker Solutions with a robust order intake and strong revenue projections. Aker strives to ensure that Aker BP continues its strong focus on profitable growth and maintains an attractive and predictable dividend policy. A key focus in Aker's ownership agenda is to ensure solid and predictable project execution of Aker BP's new field developments on the Norwegian continental shelf. These projects will add significantly to growth and value creation. Through Aker Solutions, we are positioned as a supplier in both oil and gas and in renewables based on our engineering and project execution capabilities, thus, capitalizing on both near term market growth and for longer term structural changes in energy markets. Our ownership agenda for Aker Solutions is to continue to strengthen its competitiveness and drive further development and growth of the company as a digitally driven engineering business with a focus on its core oil and gas business while transitioning over time to new renewable and clean tech segments without compromising on earnings or risk reward balances. A key priority for Aker is to ensure that Aker Solutions continues its strong cash generation and profitable growth and that it maintains capital discipline, financial robustness and an attractive and predictable dividend policy.

Over to renewables and Aker Horizons. Not unlike our peers, we have hit snags in the buildup of our renewable business. Negative performance in the renewable sector does not change Aker's strategic direction. However, it impacts the ambition level, capital allocation and pace of development and deployment. The current market environment forces industry players across the globe to reckon with the fact that the energy transition is capital intensive, infrastructure reliant and require strong public private collaboration. Aker's ownership agenda for Aker Horizons is to continue to develop the company that selectively pursues decarbonization opportunities through shareholdings in companies that develop and deliver industrial solutions. The ambition is still to build a platform for long term value creation where Aker Horizons can benefit from technologies, industrial expertise, partnerships and industrial software solutions that enhance productivity and mitigates risks. An important priority for Aker Horizons in the near term is working closely with its portfolio company, Mainstream, related to current [challenges] being experienced in the Chilean market where the increase in renewable production and the lack of flexibility of the power transmission system has caused significant headwinds.

As the energy industry develops, it will also have to couple existing domain expertise with digital solutions and artificial intelligence or AI, which, in record time, has propelled into a powerful catalyst for growth, including across the Aker portfolio. I agree with the notion that generative AI is probably overhyped in the short term but underhyped long term. We are still in the early stage of realizing AI's full potential. However, it's [fast] becoming an integral part of every aspects of our lives and our businesses. Forecasters at PwC predict that AI could boost the global economy by our over $15 trillion by 2030. However, industries have yet to fully exploit AI's transformative potential. The application of AI can harness data to become more efficient, lower costs, innovate and adapt to the ongoing transition to a lower carbon future. Cognite's recently released products, Cognite AI, couples generative AI with its core product, Cognite Data Fusion and thus with accurate, timely, contextualized data. Aker BP, Aker Solutions and Aker BioMarine are already generating excellent use cases. As Girish Rishi, CEO of Cognite put it, this is the moment that Cognite was built for. I look forward to following the continued AI journey.

The sustainable protein space, including offshore fish farming is another growing segment in the Aker portfolio. Within 2030, the world needs to produce significantly more food with less resources and with a minimal environmental footprint. Oceans cover more than two thirds of the world's surface. However, only 2% of the food energy for human consumption comes from the sea. SalMar Aker Ocean aims to sustainably produce 150,000 tonnes of salmon per year at fish farms far out to sea. Achievements of its production targets in 2030 will make it one of the world's largest producers of farmed salmon. The industry is currently evaluating the impact of changes after we launched SalMar Aker Ocean like cost inflation and the regulatory framework, including the tax regime which is expected to be put in place during the second half of this year. Lastly, managed assets, including Industry Capital Partners or ICP. The company will make available clearly defined investment strategies across relevant asset classes that seek to contribute to the global transition to net zero greenhouse gas emissions by 2050 from seed funding of clean technology to renewable energy infrastructure projects. The ICP structure consists of different funds under the umbrella investment company, each targeting different opportunity areas within the net zero challenge and is planned to consist of independent fund managers covering venture capital, listed equity and infrastructure. Our hope is that companies like ICP can contribute to more closely integrating the capital required to succeed in the green transition with industry players like Aker Solutions to manage risks and opportunities in a more value accretive way than what the situation is today. Over time, we also hope to see a more integrated public private collaboration that will be required in different regions and industry segments to improve the risk and reward balance and attract private capital to green projects at scale.

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 Oskar Stoknes, CFO]

Thank you, Oyvind, 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 18% of Aker's total assets or NOK12.2 billion, down NOK419 million from the previous quarter. This is mainly due to a decrease in listed financial investments of NOK246 million and in our cash holdings of NOK286 million. As before, the main components on the financial investments are cash, listed financial investments, real estate, interest bearing receivables and noninterest bearing assets, all of which I will now go through in some more detail. Then as usual, starting with cash. Our cash holdings represented 1% of Aker's gross asset value or NOK876 million. This is down NOK286 million from the previous quarter. The cash inflows were primarily dividends received from Aker BP, Aker Solutions and AMSC of the equivalent to NOK1 billion. The main cash outflows in the quarter were primarily dividend payment of NOK1.1 billion and payments for operating expenses and net interest of NOK174 million.

Listed investments included in our financial portfolio represented about 4% of Aker's total assets at the end of the quarter or NOK2.4 billion. The total value of this portfolio decreased by NOK246 million in the second quarter, explained by value decreases of our positions within listed investments. During the quarter, Aker posted a total dividend income from AMSC of NOK48 million. Next, real estate and other financial investments. Combined, the two represented 13% of Aker's gross asset value or NOK8.9 billion in total. Aker's real estate holding, Aker Property Group, stood at a book value of NOK993 million at the end of the quarter. Interest bearing receivables totaled NOK4.3 billion, including a NOK2 billion loan and a NOK1.2 billion convertible loan to Aker Horizons. Other equity investments totaled NOK1.6 billion, down from NOK2.6 billion last quarter. The decrease is mainly explained by the sale in April of the shares in Aker Energy to AFC Equity Investment. The consideration for the share purchase by AFC is an earn out model based on potential sales and/or production proceeds from the Pecan project. As of Q2, this earn out is presented as part of fixed and other interest-free assets at the value of NOK1 billion.

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 assets totaled NOK31 billion. And in our accounts, we use the lowest of historic costs and market values. This was down NOK1.9 billion in the quarter, mainly explained by a negative value change in Aker Horizons of NOK1.2 billion and Aker BioMarine of NOK327 million. The book value of our equity was NOK21.9 billion, down NOK879 million, explained by loss before tax in the quarter. The fair value adjusted assets or gross asset value totaled NOK66.3 billion. This was down NOK2.4 billion in the quarter, mainly explained by the negative value development in Aker BP of NOK602 million, excluding the dividends received and in Aker Horizons and Aker BioMarine as already mentioned. Subtracting for debt, the net asset value was NOK57.2 billion at the end of the quarter. This equaled NOK770 per share and the value adjusted equity ratio was 86%. Aker had total liabilities of NOK9.1 billion at the end of the quarter that mainly consisted of bond debt and bank loans totaling NOK8.7 billion. Noninterest-bearing debt is down NOK1.1 billion in the quarter due to dividends paid. Aker's financial position remains robust with a total liquidity buffer of NOK6.3 billion, including undrawn credit facilities. Our net interest bearing debt was NOK3.3 billion at the end of the quarter, up from NOK2.9 billion in the previous quarter due to a slightly reduced cash position. Our loan to value was 12% and 75% of our gross asset value is in listed assets and cash.

In terms of our debt maturity profile, the average debt maturity at the end of the quarter was 3.1 years. We currently have NOK5 billion of bonds outstanding and our bank loans of NOK3.8 billion consists of a US dollar denominated loan of NOK1.6 billion and Norwegian kroner denominated loan of NOK1 billion and NOK1.2 billion euro denominated Schuldschein loan. Taking into account available credit lines and extension options on the bank loans, the implicit maturity of the total loan portfolio is 4.4 years. Then to the income statement. The operating expenses for the first quarter were NOK96 million. The net value change in the quarter was negative NOK1.7 billion, mainly explained by value reductions in Aker Horizons of NOK1.2 billion and Aker BioMarine of NOK327 million. During the quarter, Aker booked a total dividend income from Aker BP, Aker Solutions and AMSC of NOK1 billion. Our net other financial items were negative NOK154 million, mainly explained by the net interest expenses of NOK48 million and loss on the AMSC total return swap of NOK46 million. And the loss before tax was then NOK883 million in the quarter.

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

[Fredrik Berge, Head of Investor Relations]

So your first question is about Aker delivering a strong operational quarter this quarter. And if we start with the oil and gas part, Aker BP delivered yet another quarter with record high production levels with the Johan Svedrup as one of the main drivers. Aker BP owns more than 30% of this field. Can you tell us a bit more about how attractive and important Johan Svedrup is for Aker BP and Aker?

[Oyvind Eriksen, President and CEO]

We are really grateful about the fact that Aker BP owns 31.6% Johan Svedrup. It's probably one of the most attractive offshore oil and gas fields in the world, touching 755,000 barrels a day in production. And just to put it into perspective, the production from Johan Sverdrup only accounts for 30% of Norway's daily oil and gas production and it represents equivalent of between 6% and 7% of Europe's daily demand for oil. And even more importantly, the production cost is a record low around $4 per barrel and the CO2 emissions is record low, 0.67 kilograms of CO2 emission per kilogram. So not only measured by size but also by efficiency. Johan Svedrup is a jewel in both the Aker crown but also in the Norwegian oil and gas history.

[Fredrik Berge, Head of Investor Relations]

Very impressive. And Aker Solutions also delivered a strong set of results in the first half of the year and activity is high and increasing in its main markets. How is the project execution progressing with the company's record high backlog, including the large new field developments for Aker BP, and what is the latest status on the subsea JV transaction?

[Oyvind Eriksen, President and CEO]

Well, Fredrik can hardly think about Aker Solutions without reflecting on the importance of the temporary changes in the Norwegian and petroleum tax system, which was introduced during COVID. That tax incentive has initiated a large number of projects on the Norwegian continental shelf. As a consequence, Aker Solutions is almost fully booked. And Aker BP is a very important customer as it is capacity as operator of a large number of greenfield developments. So it goes without saying that flawless execution of the said greenfield portfolio, both by costs and by time, is of vital importance both to Aker BP and Aker Solutions and other operators and license holders on the Norwegian continental shelf. And so far so good. We have a world class team in the Aker Group both in Aker Solutions and in Aker BP, collaborating to execute the said project in a rather challenging market environment due to supply chain bottlenecks. But if anyone should be able to execute flawlessly it's the great people of the Aker Group. And so far, they have really delivered.

[Fredrik Berge, Head of Investor Relations]

Excellent. Now switching gears to renewables. Aker Horizons owns 58% of Mainstream renewable power, which has experienced some significant issues in Chile. Could you tell us a bit more about what these issues are and how the company is working on solving this?

[Oyvind Eriksen, President and CEO]

Well, it's truly a dilemma in the bigger picture. Our oil and gas activities are progressing very well with record operating results. And in the bigger picture, our renewable portfolio, not only in our horizons but also in other parts of the group is struggling. But Mainstream Chile is a particular situation, mainly due to external and more structural issues, partly about oversupply of renewable energy, partly about bottlenecks in the grid and other infrastructure, partly due to inflation and partly due to other factors. So the short version is that Mainstream is in process of renegotiating with third parties, including lenders. And we also engage -- we are also engaging in dialog with the regulators in Chile to find a holistic solution in order to get the renewable business in Chile, including mainstream Chile back on track and in order to pull off the enormous potential of renewable energy production, both wind and solar in that part of the world.

[Fredrik Berge, Head of Investor Relations]

Next question is about artificial intelligence. So in your presentation and your letter to shareholders, you discussed the significant potential of AI. How is Aker positioned to take advantage of AI?

[Oyvind Eriksen, President and CEO]

Well, we are positioning in the AI space basically from two different angles. One is deployment of AI to further improve the product ability in our Industrial Holdings portfolio, Aker Solutions, Aker BioMarine and Aker BP as examples and partly as a new opportunity for our software businesses, stand-alone, Cognite in particular. And since we reported the first quarter results, I think one of the really exciting news from the Aker Group is the announcement of a new Cognite product, Cognite AI, which has attracted a lot of interest from existing and new customers and partners. So what's the magic about? Well, we have all read a lot about hallucination and as a limiting factor or a bottleneck for deployment of artificial intelligence because it's just a simple fact that no algorithm will ever be more intelligent than the data you are putting into the system. And I think it's also a fact that most business leaders will be reluctant to deploy artificial intelligence or other software tools to an industrial process [and] if you're running this risk of hallucination.

The Cognite Data Fusion technology is unique when it comes to how data are liberated from, in principle, all relevant industrial sources and put together, contextualized in safeguarded and harmless way, which will enable the user to deploy AI and other replications on top of a clearly defined and very safeguarded data set. Hence, the risk of hallucination will be significantly reduced by deployment of AI on top of Cognite Data Fusion technology. And what I just briefly explained is probably the main reason why some of the driving forces in the AI development for the time being, like Microsoft, like Accenture and other partners, see an even bigger potential in collaborating with Cognite going forward than what we had already identified before the AI hype happened a couple of months ago because we should all realize that it's still early days. One of the key innovator in this space said the other day that AI is probably overhyped short term but underhyped long term. And I'm keeping that in my mind when I advise the different Aker industry companies about how to maneuver in this new but also game changing landscape.

[Fredrik Berge, Head of Investor Relations]

Thank you. So your final question is regarding ICP. So what is the latest status with establishing the funds?

[Oyvind Eriksen, President and CEO]

Well, overall, we're progressing according to plan. We have decided to launch a few clearly defined investment platforms and venture capital firm in industrial technology, an investment vehicle for listed equity and infrastructure an investment vehicle. And the first funds will start raising capital during the second half of this year. And all the said platforms have now hired key members of their respective teams and all the said platforms are already in the process of identifying and analyzing investment opportunities. So the next six to 18 months will be very important and decisive for ICP. ICP is, to a certain extent, exposed to the same headwinds in the green industry segments as we are in other parts of the Aker Group, but that's not particular for a relatively immature industry. It has happened over and over again and it's in periods like now, the winners and the losers are defined. And my hope and belief is that ICP can leverage the access to the industrial domain expertise in the Aker Group in a way which differentiates ICP from the peers and increases the chances of success.

[Fredrik Berge, Head of Investor Relations]

Thank you very much. So that was the end of our presentation today, and I wish everyone a nice rest of the Tuesday and the rest of the week. Thank you.