Aker ASA

OSE:AKER

Earnings Call Transcript 2019-Q3

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

Hello, everyone, and good morning. Welcome to Aker's Third Quarter 2019 Results Presentation. We will start today's presentation with Aker's President and CEO, Øyvind Eriksen. He will walk you through the highlights in the quarter and the development of our Industrial Holdings portfolio. Aker's CFO, Svein Oskar Stoknes, will then go through the Financial Investments portfolio and the third quarter accounts in more detail. After the presentation, we will open up for Q&A. And with that, I hand it over to Øyvind.

[Øyvind Eriksen, President & CEO]

Thank you, Torbjørn, and good morning. And welcome to Aker's third quarter results presentation. Let me start with the highlights from the period. The net asset value was NOK 43.1 billion at the end of the third quarter, down from NOK 44.8 billion at the end of the second quarter.Since December 2018, the net asset value has increased by NOK 1.4 billion. If we include paid dividend of NOK 1.7 billion, the year-to-date growth in net asset value for our shareholders has been 7.3%. Our share price decreased 1.4% in the third quarter. This compares to a 2.5% return in the same period for the Oslo Stock Exchange. And Aker's liquidity reserves is at NOK 5.2 billion, including NOK 2.7 billion in cash.The third quarter offered the following main events for our portfolio of companies. Ocean Yield successfully completed a hybrid bond issue of USD 125 million. Kvaerner established a new organizational structure, with 2 new focus areas beyond the current core, namely FPSO and Renewables. Together with the World Economic Forum, Aker launched the Centre for the Fourth Industrial Revolution in Norway, a technology center dedicated to harnessing technology advances to preserve the ocean and improve the environmental footprint of ocean industries. And last week, we launched 4 of the initial projects at the center, spearheaded by Aker companies.Subsequent to quarter end, Johan Sverdrup was brought on stream, more than 2 months ahead of the original schedule and NOK 40 billion below budget. The field will be a significant value contributor for Aker BP for years to come.In October, Aker Solutions launched its 20-25-30 strategy, whereby revenue from renewables, mainly offshore wind, is targeted to represent as much as 20% of revenues and low-carbon solutions as much as 25% of revenues by 2030.Also in October, Aker Energy changed its strategy in Ghana in order to derisk the Pecan development within the frames of the petroleum agreement already approved by the parliament and only with tie-ins already identified. This change in strategy is due to Ghana's acknowledgment that our long-term and holistic ambition in Ghana has triggered complexity and lack of progress in various regulatory and political processes.Finally, earlier this week, Aker announced the signing of a Memorandum of Understanding with Saudi Aramco for a strategic partnership on industrial digitalization and sustainability initiatives. The MoU constitutes an exciting business opportunity for combat, including plans to establish a joint venture with Saudi Aramco to enable a digital transformation of the industry at large in Saudi Arabia. I will revisit these and other highlights later on in my presentation. But first, more about our quarterly performance.As mentioned on Slide 3, Aker's net asset value decreased 4% to NOK 43.1 billion in the third quarter. Year-to-date, the net asset value is up 3%, but the real increase in net asset value was 7.3% adjusted for paid dividends. Of the negative value change in the quarter, Aker Solutions stood for NOK 974 million; followed by Ocean Yield, NOK 428 million; Kvaerner NOK 159 million; and Akastor at NOK 80 million. It was partly offset by Aker BP, which contributed with about NOK 494 million value increase.Moving on to Slide 4. The Aker share decreased 1.4% in the quarter compared to the 2.5% increase in the Oslo Stock Exchange Benchmark Index. Year-to-date, the Aker share has increased 9.6%, including dividend paid. Aker's gross asset value as of September 30 was NOK 54.1 billion, of which the Industrial Holdings portfolio accounted for 88%. Then deducting liabilities of NOK 11 billion, the value-adjusted equity ratio stood at 80%.Moving on to Slide 5. The Industrial Holdings portfolio currently consists of 8 assets, 5 listed and 3 nonlisted companies. The nonlisted companies, Aker BioMarine, Aker Energy and Cognite, are at book value, implying an upside to the Aker net asset value. The book value of Aker Energy rose to NOK 925 million in the quarter, following a NOK 65 million investment. As per September 30, E&P accounted for 66% of our gross values, oil services stood at 8%, maritime assets 10%, while seafood and marine biotech remained at 6%.Slide 6. Aker's liquidity reserves stood at NOK 5.2 billion at the end of the quarter, of which cash amounted to NOK 2.7 billion. Aker's dividend income was NOK 850 million in the third quarter, and we remain on track to reach in excess of NOK 3.5 billion in upstream cash to Aker this year, which will represent a new milestone for Aker.Moving on to more details in our Industrial Holdings portfolio, and starting with Aker BP on Slide 7. Aker BP made up 65% of our gross asset value as per September 30. In the third quarter, production averaged 146,100 barrels per day, 15% up from the second quarter, but below plan due to delayed well stimulation and consequently delayed start of production from new wells Valhall following the planned maintenance shutdown this summer. Aker BP reported an EBITDAX of $550 million compared with $583 million in the second quarter. And Aker BP paid a quarterly dividend, of which Aker received NOK 667 million.During the quarter, Aker BP made a large new oil discovery in the NOAKA area named Liatårnet. The preliminary estimates suggest 80 million to 200 million barrels of recoverable oil reserves. Aker BP's ownership in Liatårnet is 90%, making this a high-impact discovery for the company.Liatårnet can increase the company's resource base significantly and lay the solid foundation for further production growth in Aker BP. The company saw good exploration results with both the Shrek and Ørn discoveries during the quarter and its field developments progressed as planned. This is paving the way for a significant increase in production in the coming months, especially with the Johan Sverdrup field now on stream. The plateau production at Johan Sverdrup will produce up to 660,000 barrels of oil per day, making up 1/3 of all oil production on the Norwegian Continental Shelf. Johan Sverdrup will be a significant value driver for years to come and will contribute to Aker BP's ambition to triple production by 2026. This field is also a large value to Norway, noting that the breakeven even price is one of the lowest among any global oil projects at below $20 per barrel. This low breakeven price makes the project economics very robust for future oil price fluctuations.Johan Sverdrup field also shows the massive impact of new technology and industrial digitalization. The field has a record-low Q2 emissions, well below 1 kilo per barrel. This is momentous for the entire industry. And as an active owner, we are pleased to be a part of making the Norwegian Continental Shelf an industrial -- an international benchmark for safe and profitable oil and gas production that is as sustainable as possible.Furthermore, we are reminded to keep a steady course, focused on our long-term objectives and spend time on our true value drivers. Our ownership agenda in Aker BP remains focused on lowering breakeven costs and on reducing production costs.Moving on to Aker Energy on Slide 8. Aker Energy continues to be a priority for Aker. The intention from day 1 has been to develop a business including local industry and corporate social responsibility beyond minimum requirements that is attracting both our shareholders and to the people of Ghana. In the Plan for Development and Operations for the main reservoir, Pecan, Aker Energy has assumed that all resources, including future tie-ins and new discoveries in this prosperous area, will be produced as part of an area development similar to best practice in other offshore oil and gas regions. We underestimated, however, the complexity of such a holistic approach to the entire block. The strategic direction impacted issues like regulatory framework, technical concepts prepared for increased recovery and execution models based on alliance contracts with global suppliers.Norway has played a pivotal role in developing Ghana's oil and gas regulatory framework through the Oil for Development program. Nevertheless, there are some significant differences between the Norwegian and the Ghanaian systems. One prime example is how, in Ghana, all contracts with a value above a certain threshold have to be approved by the Petroleum Commission other than by a license approval of a work program and budget. In a field development like Pecan, the number of contracts to be approved by the Ghanaian Petroleum Commission could exceed 2,000.Such regulatory differences impacted risks, business cases, progress and ultimately production. Hence, as part of the Pecan PDO, Aker Energy, supported by the other international oil companies operating in Ghana, proposed amendments to the regulatory framework to make development and operations more predictable and robust. Aker Energy believes that such an approach will be to the benefit of the host country, Ghana, but also would enable operators to take a strategic perspective beyond individual fields. Some regulatory changes are likely to be proposed by the Government of Ghana, though not to the extent requested in the PDO. Hence, Aker Energy is now changing its approach. Going forward, the priority will be to work with Ghanaian authorities to further optimize and derisk development of the already discovered 450 million to 550 million of contingent resources in the Pecan reservoir and tie-ins with the -- within the applicable regulatory framework and the agreements from 2006. Our sole objective will be to make the Pecan development more economically robust from a stand-alone basis. Opportunities to simplify the technical concept, reduce the amount of investment and cost reductions will be implemented. Furthermore, execution models including enrollment of local industry and commercial terms offered by alliance partners will be benchmarked against proposals from other suppliers.The Petroleum Agreement already approved by the Government of Ghana contains a stability provision protecting Aker Energy from adverse consequences of changes in regulation or administrative practices after the agreement was approved also by the Parliament in 2006, like the above-mentioned requirements to approved contacts. The change in strategy is likely to trigger delays, but I'm confident that it will derisk the project, and hence, protect our significant values in Ghana. The next milestones will be to have the Pecan PDO approved under the Petroleum Agreement and regulations from 2006, and ultimately make a final investment decision. Aker Energy will, in parallel, explore M&A opportunities that may grow and diversify the portfolio beyond the organic approach we have pursued to date.Slide 9. In the third quarter, Aker Solutions reported NOK 553 million in EBITDA and an order intake of NOK 5.7 billion. As for the end of the quarter, the backlog stood at NOK 27.4 billion. Highlights for the quarter included the work to get the Johan Sverdrup field ready to start production, where Aker Solutions was involved in the early phase from the front end through design, construction and hook-up. The market is still competitive, but tender activity remains high. The company's main priority for the coming quarter is to build a backlog, while remaining cost-efficient and maintaining capital discipline. Aker Solutions expects to see slightly lower revenues and margin next year, mainly driven by the order intake in 2019 and the phasing of contracts won. During the quarter, Aker Solutions launched its intelligent subsea offering designed to accelerate field development and maximize performance. At its quarterly presentation last week, the company also presented its 20-25-30 strategy, whereby it aims to derive 20% of its revenue from renewable energy and 25% from low-carbon solutions by the year 2030. The oil and gas industry remains Aker Solutions' biggest market, but the company will have a more balanced portfolio in the face of the ongoing energy transition.Moving over to Akastor on Slide 10. MHWirth continues to see a muted rig newbuild market, while aftermarket revenues continued its positive trend through the third quarter. The AKOFS vessels operating in Brazil delivered revenue utilization of 94% and 96%, respectively, in the third quarter. The AKOFS Seafarer is currently in the yard in Norway for upgrades and preparations with contract with Equinor. Akastor continues to work closely with its portfolio companies to support cost-saving programs, operational improvements and strategic initiatives to further enhance their competitiveness.Slide 11. In the third quarter, Kvaerner delivered revenues of NOK 2.5 billion and an EBITDA of NOK 138 million. The order backlog stood at NOK 8.3 billion as per the end of the quarter. In the third quarter, the company established an updated organizational structure with 2 new focus areas beyond the current core, FPSO and Renewables. Kvaerner's focus remains on project execution excellence, coupled with increase in cost efficiency in order to secure even more work. The balance sheet remains strong with NOK 2.4 billion in cash in addition to undrawn credit facilities of NOK 2 billion, providing strategic flexibility.Yesterday, Kvaerner signed a contract with Equinor to deliver 11 floating concrete hulls for offshore wind-powered turbines, and in addition, execute marine operation services for the Hywind Tampen project. This will be the world's largest floating offshore wind farm and is vital for industrializing solutions and reducing costs for future offshore wind projects. Kvaerner's contract is worth about NOK 1.5 billion.Slide 12. In the third quarter, Ocean Yield extended its agreement with Aker Energy to 31st of September 2019, where Aker Energy has an option to bareboat charter the FPSO Dhirubhai-1 for a period of 15 years. Ocean Yield is, in parallel, pursuing other employment opportunities for the FPSO. The value of Dhirubhai-1 is subject to a write-down of $68 million in the third quarter accounts due to the delay of Aker Energy's activities in Ghana and the current assessment of alternative market opportunities. As a consequence, quarterly dividends could be reduced to USD 0.15 per share from 2020. For Aker, this represents an annual reduction in received dividend of approximately NOK 150 million, which is already included in our forecast, as I mentioned previously in my presentation.During the third quarter, the company acquired a handy-size dry bulk newbuild for a purchase price of $18 million with a 10-year bareboat charter towards Interlink Maritime Corp. The company also completed a hybrid bond issue of $125 million, carrying a coupon of 3 months of LIBOR plus 6.5% per year with quarterly interest payments. The net proceeds from the bond issue will be used for general corporate purposes, including new investments. The hybrid bond is accounted for as equity.The company's estimated EBITDA backlog stood at USD 3.2 billion for the end of the third quarter 2019, and the average remaining contract tenor was 10.7 years. The company declared $0.191 per share in dividends in the quarter, unchanged from prior quarter.Slide 13. In the quarter, Aker BioMarine revenues ended at $69 million, with an EBITDA of $21 million corresponding to a margin of 30%. Superba Krill Oil contributed positively our growing year-to-date sales, whereas Qrill Aqua has seen a sideways development versus last year. Aker BioMarine's operational performance remains solid with all-time high production and harvesting volumes. The company maintains a positive outlook on demand for its core products and market.Finally, on Page 14, Cognite, Aker's industrial software company. In the third quarter, Cognite reported NOK 90 million in revenues compared to NOK 52 million in the same period last year, supported by a growing customer base. Key projects are progressing according to plan, and the company has a solid pipeline of potential new customers in the oil and gas sector and in other asset-heavy industries, like manufacturing and power and utilities.In the third quarter, the company opened an office in Austin, Texas, as well as a satellite office in Houston. This global expansion enables Cognite to scale into new geographies and establishing itself alongside leading software providers for digitalization of asset-intensive industries. The geographic expansion will continue into the current quarter with an office in Tokyo scheduled to open before the year-end 2019, the new offices. Cognite's organization continues to grow at a rapid rate. In the third quarter, the company added another 25 employees and now has a total of 253 employees compared with 116 employees a year ago.Just a couple of days ago, Aker signed a Memorandum of Understanding with Saudi Aramco for a strategic partnership on industrial digitalization and sustainability initiatives, 2 complementary areas that are fully aligned with our long-term strategic focus. As part of the MoU, Saudi Aramco, which has an ambition to be the world's leading digitalized energy corporation by 2022, will also establish a joint venture with Cognite for the deployment of their leading industrial software to enable a digital transformation of the industry at large in the Kingdom of Saudi Arabia. The joint venture will couple Saudi Aramco's expertise and culture of innovation with Cognite's experience in developing and deploying leading industrial software, including Cognite Data Fusion, a software package that accelerates use of artificial intelligence and advanced analytics for the industry. Cognite Data Fusion enables scaling of the digital transformation program across Saudi Aramco.That marks the end of my presentation today. I now hand it over to Aker's new CFO, Svein Oskar Stoknes, who, for the very first time, is presenting Aker ASA's financials.

[Svein Oskar Stoknes, Chief Financial Officer]

Thank you, Øyvind, and good morning. So I will start on spending a few minutes on Aker's financial investments before I go to the third quarter results and some more detail. The financial portfolio accounted for 12% of Aker's total assets or NOK 6.4 billion, which is down NOK 0.7 billion from the previous quarter. This is mainly due to the settlement of the AKER12 bond, partly offset by cash dividend received from Aker BP and Ocean Yield 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 then with cash. Our cash holdings represented 5% of Aker's gross asset value or NOK 2.7 billion. This is down NOK 0.8 billion from the previous quarter. The main cash inflows were dividends from primarily Aker BP and Ocean Yield of the equivalent, in total, NOK 843 million. The main cash outflow in the quarter was the NOK 1.4 billion settlement of the AKER12 bond at maturity. In addition, we provided NOK 64 million in financing through Aker Energy. And our receivables against portfolio companies increased by NOK 48 million, mainly explained by further loans to Aker BioMarine.Payments in the quarter for operating expenses and net interest were NOK 162 million. And our liquidity reserve at the end of the third quarter was NOK 5.2 billion, including undrawn credit facilities of NOK 2.5 billion.Continuing then with listed investments included in our financial portfolio, which represented about 1% of Aker's total assets at the end of the quarter or NOK 723 million. The net decrease in the quarter was NOK 47 million. This is mainly explained by the value decrease of shares in Solstad Offshore of NOK 50 million, and a value decrease of shares in American Shipping Company of NOK 24 million. This was partly offset by a NOK 13 million value increase of shares in Philly Shipyard and the NOK 14 million value increase of shares in Cxense. The total exposure towards American Shipping Company also includes 2 total return swap agreements with a value decrease of NOK 36 million in the quarter to minus NOK 28 million presented as part of interest-free liabilities. In the quarter, we also posted a dividend income from American Shipping Company of NOK 22 million, and the Cxense shares were realized in the beginning of October with cash proceeds of NOK 20 million. Next, real estate and other financial statements. Combined, the 2 represented 6% of Aker's gross asset value or NOK 3 billion in total. There has been no changes in the quarter to our real estate investment, FP Eiendom, which has a book value of NOK 568 million. Other financial investments is mainly comprised of receivables against Aker BioMarine and Ocean Harvest Invest, airplanes and unlisted equity investments. There were no major changes to the other financial investments in the quarter and the NOK 91 million increase is mainly explained by the increased loans issued to Aker BioMarine and foreign exchange adjustments.Then let's move to the third quarter financial highlights for Aker ASA and holding companies. Let me start with the balance sheet. The book value of our investment was down NOK 169 million in the quarter, mainly explained by the value reductions of the Solstad Offshore investment and our direct investment in Aker Solutions and Akastor. This was partly offset by increased investment in Aker Energy. The total book value of our assets was NOK 25 billion. And in our accounts, we use the lowest of historic costs and market values. Share prices of our investments continue to be volatile, and this quarter, we faced a negative fair value adjustment of NOK 1.8 billion, bringing it down to NOK 29.1 billion. This is, however, NOK 1.6 billion higher than at the year-end 2018. The gross asset value stood at NOK 54.1 billion at the end of the quarter. Aker's liabilities mainly consisted of bond debt of NOK 4.7 billion, U.S. dollar-denominated bank loans of NOK 5 billion and NOK 990 million euro-denominated loan. The book equity was NOK 14 billion, up NOK 111 million from the second quarter, mainly explained by the net profit before tax for the third quarter. If we adjust for the fair value of our listed assets, we get a net asset value of NOK 43.1 billion at the end of the third quarter, down NOK 1.7 billion from the second quarter. The net asset value per share was NOK 580 and the value-adjusted equity ratio was 80%.Our total interest-bearing debt was NOK 10.7 billion, which is down by NOK 1 billion for the previous quarter due to the repayment of the AKER12 bond, partly offset by foreign exchange adjustments. As before, we have significant headwind with regards to our debt covenants and we had net interest-bearing debt of NOK 6.8 billion at the end of the third quarter, down from NOK 7.2 billion from the previous quarter.Then to the income statement. The operating expenses for the third quarter were NOK 67 million. The net value change in the quarter was negative NOK 233 million, mainly explained by negative value adjustments of our investments in Solstad Offshore and our direct investment in Aker Solutions and Akastor.Net other financial items were positive NOK 410 million in the quarter, mainly explained by dividend income of NOK 850 million, partly offset by negative foreign exchange adjustment. And finally, the profit before tax was NOK 104 million in the quarter.Thank you. That was the end of today's presentation, and we will now open up for any questions.

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

Before we open up for the phone questions, we have to take a look at what's come in through the web. We have one question that's come in that goes as follows, "Could you shed some light on the time frame for a new PDO in Ghana and the direction of a new development concept?" So if you want to answer that Øyvind.

[Øyvind Eriksen, President & CEO]

Sure. I'm happy to do so. As I said in the presentation, we have already discovered 550 million to 650 million barrels in the Pecan reservoir with identified tie-ins. And that's a significant resource and the main reservoir in the area. So we are -- continues to see Ghana in general and the Pecan development, in particular, as a highly attractive E&P asset in our portfolio going forward.The main shift approach and strategy is that going forward, Aker Energy will optimize the Pecan developments stand-alone and the parked discussions about how to prepare for future tie-ins and subsequent phases in this area. As a consequence, I expect that the Pecan development concept can be simplified and that the amount of investment can be reduced. I'm not able today to quantify the expected reduction in investments simply because this is a work in progress as we speak involving our engineers and our project team. Another consequence of the change in strategy is that Aker Energy will no longer focus on amendments and legislation required in order to prepare for subsequent phases and subsequent tie-ins beyond what has already been identified. That's simply due to the fact that the request for regulatory changes has triggered a more complex process and dialogue with the authorities in Ghana than what Aker Energy anticipated. Hence, the Pecan stand-alone development can be approved based on the legislation and the Petroleum Agreement from 2006, and Aker Energy will be protected by the stability clause, which is a part of that Petroleum Agreement already approved by the Ghanaian Parliament. So our expectation is that the change in strategy will simplify the dialogue with the authorities in Ghana and enable us to have a constructive dialogue about how we can get the Pecan development on stream as soon as possible.As we, in hindsight, have been so optimistic in our guiding on timing in the past, well, today, I'd rather draw your attention to the next milestones, which is first to have the PDO approved with the new approach and under the 2006 Petroleum Agreement, as I just said, and thereafter, make the final investment decision.

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

Okay. We have no other questions on the web as for now. So operator, can you open up for potential phone questions?

[Operator]

[Operator Instructions] We will now take our first question from Haakon Amundsen from ABG.

[Haakon Amundsen, Lead Analyst]

Two questions from me this morning. First of all, with respect to Aker Energy, you're also saying that you would like to explore M&A opportunities. And I wondered is this statistically at the area around in Pecan and in Ghana? Or this is a broader kind of geographic strategy? That's my first question.

[Øyvind Eriksen, President & CEO]

Okay. Let me answer the question then about M&A. And the answer is the main focus will be to grow the business in Ghana and to -- and diversify the portfolio of assets in Ghana. And I will not rule out that M&A could also include assets in neighbor countries. But the main focus will be to grow our business, Aker Energy and our business in Ghana, beyond an existing fields.

[Haakon Amundsen, Lead Analyst]

All right. That's pretty clear. And then my second question. Aker Solutions has been gotten involved in offshore wind farm project in Korea. And I just wondered, does Aker ASA have any plans of becoming or taking ownership in offshore wind farms or similar renewable projects directly?

[Øyvind Eriksen, President & CEO]

First and foremost, Aker ASA as the principal shareholder of both Kvaerner and Aker Solutions strongly supports the strategy in the 2 said the companies to grow in offshore wind. Aker Solutions and Kvaerner will primarily focus themselves as suppliers of technology and project management and installation services. But Aker Solutions, as you said, has also taken some equity position in Korea through PPI, also a project in California. To what extent the group will also move into the utility part of the value chain as a developer or ultimately, also, as an owner is a question or an opportunity we're exploring as we speak. I will not rule it out. But the short-term priority, we are supporting Kvaerner and Aker Energy, respectively, and we're gaining useful experience also from the development part of the value chain through the projects already in their respective portfolios.

[Operator]

[Operator Instructions] It appears we have no further telephone questions at this time.

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

Okay. There's no more questions on the telephone and there's no more questions on the web, so we will conclude our presentation for today. And we thank you for the opportunity to present to you and for your attention this morning. Thank you.