Aker ASA

OSE:AKER

Earnings Call Analysis

Aker's Q3 Showcases Strong Strategic Execution

Aker's Q3 2023 reveals a robust continuation of its strategic progression, showcasing strong operations and heightened activity across its portfolio. Notable developments included AMSC's sale of its Jones Act fleet and the dividend payout of USD 170 million. Additionally, the historic OneSubsea joint venture, a merger between SLB and Aker Solutions, will significantly contribute to Aker Solutions' cash flow. Aker also agreed upon refinancing Solstad Offshore, improving value prospects with potential dividend payments. Aker BP maintained strong production with new field developments on track, while the digital arm, Cognite, saw a 28% revenue increase, achieving NOK 1 billion in the last year. The quarter concluded with Aker announcing a dividend of NOK 15 per share, raising the full-year figure to NOK 30 per share, and Aker's net asset value standing at NOK 64.1 billion.

A Solid Balance Sheet with a Focus on Value Drivers

Aker ASA's balance sheet at the end of the third quarter paints a picture of stability and strategic value focus. The company's book value of assets rose modestly by NOK 83 million to a total of NOK 31.1 billion. The increase was largely thanks to growth in cash, Aker BioMarine, and assorted financial investments. However, a notable decrease in value for Aker Horizons partially offset these gains. The equity value ascended to NOK 22.1 billion, attributed partly to a pre-tax profit for the quarter, and the adjusted gross asset value stood at an impressive NOK 73.1 billion.

Reduced Debt and Healthy Cash Position

The net interest-bearing debt decreased to NOK 2.7 billion, down from NOK 3.3 billion, as a consequence of increased cash holdings. The company's loan-to-value ratio remained low at 10%, underscoring a conservative approach to leveraging, while 78% of the gross asset value was securely invested in listed assets and cash. The maturity profile of the average debt was 2.9 years, with an implied total loan portfolio maturity of 4.1 years considering available credit and loan extensions.

Positive Performance and Opportunities Amidst Geopolitical Challenges

The quarter's performance was robust, with a healthy profit before tax of NOK 179 million. Aker's strategy remains unperturbed by the intricate geopolitical landscape, focusing on both current value drivers in oil and gas and the longer-term transition to renewable energy. This approach ensures Aker's resilience and adaptability, leveraging opportunities in energy and digitalization, while also recognizing cybersecurity as a growing area of strategic importance. Omny, Aker's venture in cybersecurity, is positioned well to capitalize on increasing market demand.

Streamlining Operations for Stability and Growth

Aker Horizons, following some risk-driven challenges, has managed a turnaround by restructuring its loans in Chile and streamlining focus towards fewer, high-potential local projects. The aim is to position the company for a sustainable future, with an emphasis on cost reduction and balanced investment in key areas. Aker assesses investment opportunities based on potential for value creation and dividend yield, reflecting a strategic approach to capital allocation and growth prospects, despite not expecting dividends from Aker Horizons in the short-to-medium term.

The Appeal of Dividends and Strategic Investments

Aker's commitment to enhancing shareholder value is evident from the increased upstream dividends, rising to an estimated NOK 4 billion from NOK 2.8 billion the previous year. This trend signals a strong strategic focus on entities that can deliver regular and growing dividends. Aker BP, for example, plays a key role in this strategy and in driving upstream cash flow to Aker ASA. Furthermore, the acquisition of Solstad showcases Aker's dedication to investing in assets that offer both value creation and potential dividend yield as part of their holistic portfolio strategy.

Earnings Call Transcript 2023-Q3

[Fredrik Berge, executive]

Hi, everyone, and welcome to the presentation of Aker's Third 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 quarterly highlights and recent developments in the portfolio. Our CFO, Svein Stoknes, will then take you through the quarterly financials in more detail. After the presentation, we will host a Q&A session, and you can submit your questions via the online platform during or after the presentation.

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

[Øyvind Eriksen, executive]

Thank you, Fredrik, and good morning, everyone. We are approaching the end of the year marked by an increasingly complex geopolitical landscape, thus changing markets and business strategies in ways not seen for decades. Our task to create shareholder value is, however, unchanged. Our method of work is capital allocation and ownership including mergers and acquisitions as a tool for value creation.

The third quarter was no exception. Looking back on an extraordinary third quarter through Aker lenses, we experienced strong operations and high activity across the portfolio as we continue to progress on our strategy. We are continuing into the final months of the year with a strong momentum across our portfolio as we are executing on growth projects, driving progress towards higher and more sustainable energy production, leveraging new and existing partnerships, focusing on further diversification of upstream dividends and continuously finding ways to develop and deploy digital solutions.

Important strategic developments have taken place across the Aker portfolio in recent months, in line with Aker's strategy and focus on long-term value creation. AMSC sold its entire Jones Act fleet during the quarter, representing 10 of its 11 vessels and paid a dividend of USD 170 million following the transaction. Shortly after quarter end, Aker Solutions reached as a historic milestone when it closed the OneSubsea joint venture transaction. This merger of SLB and Aker Solutions individual subsea businesses creates a much stronger combination. And OneSubsea will, in my view, be the most prosperous subsea company in the world, measured not only by the quality of its offering but also its customer base and the global reach with the largest installed base of subsea Christmas trees in the industry. Aker Solutions will own 20% of this larger and significantly strong subsea company and receives a total consideration of USD 700 million as part of the transaction.

Going forward, the ownership in OneSubsea will be an important contributor to Aker Solutions' cash flow.

Another milestone after quarter end was Aker's agreement with Solstad Offshore. It's secured lenders and AMSC for an overall refinancing of Solstad. The refinancing will establish Solstad as a leading offshore operator with one of the most modern fleets of high-end vessels, significantly reduced financial risk and a healthy balance sheet, including NOK 4 billion of new equity, of which Aker will contribute a minimum of NOK 2.25 billion and underwrite a further NOK 750 million.

At Aker, we see a strong market outlook globally for offshore supply vessels both within oil and gas and for renewable energy. Combined with resolving the Solstad's refinancing needs, the immediate deleveraging provides a solid basis for increased value creation with a clear ambition to initiate quarterly dividend payments already next year. In line with our strategy and what I have communicated previously, this will further strengthen and diversify upstream cash flow and dividends to Aker.

During the third quarter, Aker BP continued to deliver strong oil and gas production, coupled with high operational efficiency and industry-leading low emissions. I'm happy to say that the new field developments remain on track. Aker Horizons has had a challenging ride in recent months. A step in the right direction was, however, that the portfolio company mainstreams project finance lenders voted to support and debt restructuring of the Andes portfolio in Chile. This is an important part of the ongoing process towards resolving the company's challenges in Chile.

In our digital portfolio, Cognite continued its growth trajectory with revenue up 28% year-on-year, driven by disproportionate growth in SaaS revenues. And it's very positive to see that the company has delivered a revenue of more than NOK 1 billion over the last 12 months. Another exciting event in our digital portfolio was Aramco Ventures investing in a 7.4% ownership stake in Aize. They are now evaluating the deployment of Aize's digital twin product on a selection of Aramco's large number of assets.

In sum, this all demonstrates that we are progressing well on our strategic objectives through active ownership and with a commitment to industrial development and partnerships. With a strong momentum across our portfolio. Aker's focus is to keep a steady course and deliver long-term shareholder value. Hence, our Board today announced the decision to pay a dividend of NOK 15 per share in the fourth quarter. This brings the total dividend paid to NOK 30 per share for the full year. At the end of the quarter, Aker's net asset value was NOK 64.1 billion. This was an increase of close to NOK 7 billion or 12% from the second quarter.

The increase was mainly driven by the value of our investment in Aker BP as well as Aker Solutions and Aker BioMarine, partly offset by value reduction in Aker Horizons. The Aker share price increased 8.4% in the quarter to NOK 659.5 per share. This compares to a 6.3% increase in the Oslo Stock Exchange benchmark index and a 22.6% increase in the Brent oil price. Aker's value-adjusted equity ratio was 88% at the end of the period, and our liquidity reserves stood at NOK 6.9 billion, of which cash amounted to NOK 1.5 billion.

Aker's gross asset value stood at NOK 73.1 billion at the end of the quarter, an increase by close to NOK 7 billion from the previous quarter. Our Industrial Holdings portfolio accounted for 82% of the total gross asset value, while financial investments and cash accounted for 18%. Aker BP remains the largest asset in our portfolio at NOK 39.6 billion, representing 53% of our asset base.

The company continues to be an important source of liquidity for Aker, delivering strong production levels and providing valuable upstream cash as we continue to invest in and develop our portfolio along macroeconomic trends. With 78% of our gross asset value in listed assets and cash, Aker's portfolio remains liquid. In total, renewables and green technology, software and seafood and marine biotech accounted for 21% of Aker's gross asset value in the quarter.

Aker continued to experience strong operations and high activity across our portfolio during the third quarter, both in the bread-and-butter businesses and in our new ventures, and our portfolio remains well positioned along important global megatrends. Energy security, efficiency and transition continues to be a crucial macroeconomic importance in an increasingly complex geopolitical landscape, and it remains an important part of Aker's industrial portfolio. Data, software and automation already play a significant role in our portfolio, and industrial digitalization and artificial intelligence will undoubtedly play an increasingly important role globally going forward. Industries that were traditionally offline are connecting their operational technology at an increasing rate. And Aker's industrial software companies, Cognite in particular, are addressing this huge market potential in a big way.

One example is our cybersecurity company, Omny, working to address the rapidly increasing risk of cyber attacks on critical infrastructure in a shifting and volatile geopolitical landscape.

Sustainable proteins and nutrition including offshore fish farming is another growing segment in our portfolio. The world needs to find solutions to produce healthier and more sustainable food and nutrition with less resources and with minimal environmental footprint. SalMar Aker Ocean is addressing this issue with the world's first offshore fish farm called Ocean Farm 1. To put it in perspective, this single facility holds to 1.5 million salmon, which is the equivalent to nearly 30 million meals per year.

In summary, the strong momentum continued across our portfolio during the third quarter, and our task to create shareholder value remains unchanged.

Our strategy and active ownership agenda through the year has been to execute on growth projects especially in Aker BP while simultaneously driving growth in other segments, including increased and diversified upstream dividends to Aker as a main strategic objective. This focus remains as we head into the final months of the year and into 2024. And I'm confident in Aker's strong portfolio composition, powered by evolving trends and robust long-term trajectories.

This concludes my portion of today's presentation. I now hand it over to Svein Oskar Stoknes, who will take you through the quarterly financials.

[Svein Stoknes, executive]

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

The financial investments portfolio accounted for 18% of Aker's total assets or NOK 12.9 billion, up NOK 717 million from the previous quarter. This was mainly due to an increase in cash holdings of NOK 578 million. As before, the main components on the financial investments are cash, listed financial investments, other equity 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 2% of Aker's gross asset value or NOK 1.5 billion. This was up NOK 578 million from the previous quarter. The cash inflows were primarily dividends received from Aker BP of NOK 745 million and from AMSC of NOK 32 million, in addition to repayment of NOK 235 million loan from Aize. The main cash outflows in the quarter were primarily payments for operating expenses and net interest of NOK 219 million, in addition to a loan issued to Aker Property Group of NOK 165 million and an equity investment in Gaia of NOK 34 million.

Listed investments included in our financial portfolio represented about 3% of Aker's total assets at the end of the quarter or NOK 2.5 billion. The total value of this portfolio increased by NOK 131 million in the third quarter, mainly driven by value increases in Solstad Offshore and Akastor. During the quarter, Aker posted a total dividend income from AMSC of NOK 46 million.

Next, other financial investments that, combined, represented 12% of Aker's gross asset value or NOK 8.9 billion in total. Aker's real estate owning, Aker Property Group, stood at a book value of NOK 1.2 billion at the end of the quarter, up from NOK 993 million in the previous quarter. The increase was driven by a loan issued of NOK 165 million. 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. During the quarter, Aize repaid its loan to Aker of NOK 235 million. Interest-free assets totaled NOK 1.6 billion, including a NOK 1 billion earnout from the sale of Aker Energy in April of this year. Other equity investments remained at NOK 1.6 billion, and a further breakdown of this value can be found in the supplemental schedules in the appendix of this presentation.

Then let's move to the third quarter financial highlights for Aker ASA and holding companies. And let me start with the balance sheet. The book value of our assets totaled NOK 31.1 billion, and in our accounts, we use the lowest of historic costs and market values. This was up NOK 83 million in the quarter, mainly explained by an increase in cash of NOK 578 million, a positive value change in Aker BioMarine of NOK 358 million and listed financial investments of NOK 161 million. This was partly offset by a value decrease in Aker Horizons of NOK 1 billion. And the book value of our equity was NOK 22.1 billion, up NOK 178 million explained by the profit before tax in the quarter. The fair value adjusted assets or gross asset value totaled NOK 73.1 billion. This was an of NOK 6.8 billion in the quarter, mainly explained by the positive value development in Aker BP of NOK 5.9 billion and in Aker Solutions of NOK 834 million. Subtracting for debt, the net asset value was NOK 64.1 billion at the end of the quarter. This equaled NOK 862 per share, and the value-adjusted equity ratio was 88%.

Aker had total liabilities of NOK 9 billion at the end of the quarter that mainly consisted of bond debt and bank loans totaling NOK 8.7 billion. Aker's financial position remains robust with a total liquidity buffer of NOK 6.9 billion, including undrawn credit facilities. Our net interest-bearing debt was NOK 2.7 billion at the end of the quarter, down from NOK 3.3 billion in the previous quarter due to the increased cash position.

Our loan-to-value was 10%, and 78% 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 2.9 years. We currently have NOK 5 billion of bonds outstanding, and our bank loans of NOK 3.7 billion consists of a U.S. dollar-denominated loan of NOK 1.6 billion, a Norwegian kroner-denominated loan of NOK 1 billion and a NOK 1.1 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 4.1 years.

Then to the income statement. The operating expenses in the third quarter were NOK 97 million. The net value change in the quarter was negative NOK 533 million, mainly explained by value reductions in Aker Horizons of NOK 1 billion, offset by value increases in Aker BioMarine of NOK 358 million and listed financial investments of NOK 161 million. During the quarter, Aker booked a total dividend income from Aker BP and AMSC of NOK 787 million.

Our net other financial items were positive NOK 30 million, mainly explained by a net currency exchange gain of NOK 81 million, partly offset by net interest expenses of NOK 51 million. And the profit before tax was then NOK 179 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, executive]

Thank you, gentlemen. Now moving to Q&A. [Operator Instructions]. So, the first question, referring to your CEO letter, Oyvind. You discussed the increasingly complex geopolitical landscape which is changing markets and business strategies. Could you please elaborate a bit on how Aker navigates this environment? And how does it impact your strategy or method of work?

[Øyvind Eriksen, executive]

Well, the main reference point is the Aker strategy, which is unchanged. Part of the strategy is to allocate capital to global trajectories with significant growth throughout cycles. The main global trend lines of relevance to Aker are a growing demand for energy, an expectation that more and more of the energy should be from renewable sources. And the third trajectory of relevance to us is digitalization and automation. The fourth is increasing demand for proteins.

So the question is how does the current geopolitical turmoil impacts both the said trajectories and our respective businesses within the various fields? As far as Aker ASA is concerned, the short answer is that we will stick to our current strategy, and at least a short-term effect is increased opportunities rather than the other way around. So we see more and more opportunities in the energy space. Short and medium term, oil and gas seems to be, by far, the most prosperous segments. But longer term, the change to renewable energy is also unchanged.

And in the software space, automation and digitalization accelerate also in various industry segments, helped by cloud services and technologies like CDF. So overall, increased geopolitical risks, but so far, without significant adverse impacts on the Aker portfolio, maybe rather the other way around.

[Fredrik Berge, executive]

Thank you. And a follow-up question related to your CEO letter, where you also address cybersecurity in this volatile times with the risk of cyber attacks on critical infrastructure rapidly increasing, are you seeing an interesting addressable market for your portfolio company, Omny, in this respect?

[Øyvind Eriksen, executive]

Cyber risk is nothing new. We have been, as individuals and as the industry, exposed to cyber risk for several years already. But what has changed in the recent year is increased exposure for industrial operations. So the hackers seem to be more and more interested in how they can impact industrial operations and ultimately take over control of an industrial facility. That's, by far, a more serious risk than being compromised on your e-mail or your IT system.

In order to detect and defend business against the said cyber risk, technology is a very vital tool. Software tools also in this space need access to all relevant data. Hence, the relevance of a technology like CDF. And the fact that Cognite built that technology was also the reason why Telenor invited Cognite and Aker to the Omny joint venture. So it's early days. But talking about the global trajectories, cyber risk is a very particular and a rapidly growing segment within the digital space.

Together with Telenor, I think we have some -- identified some exciting opportunities to be pursued by Omny in the years to come.

[Fredrik Berge, executive]

Thank you. And your next question is regarding Aize from Ola Eikanger at SEB. Very stellar performance from Aize in Q3. Can you provide some details around the significant step-up in revenue and EBITDA margin?

[Øyvind Eriksen, executive]

Aize is in the process of developing its core technology in close collaboration with other Aker companies, Aker Solutions and Aker BP in particular. So the financials of Aize are partly a reflection of development collaboration with other Aker entities, partly sale to third-party customers. And as far as the last quarter is concerned, Aize also divested certain software applications which has boosted the quarterly results.

[Fredrik Berge, executive]

The next question, from [ Johan Brian ]. Given that you have a 67% stake in Aker Horizons as well as having committed NOK 3.2 billion in debt instruments in Aker Horizons, are you considering to buy out the minority stake and refinance? Which one could assume would be cheaper?

[Øyvind Eriksen, executive]

So in the quarter, our main focus was to help Aker Horizons to turn around its business and manage some significant risks. Hence, we are pleased to share with the markets that mainstream reached an agreement with its lenders in Chile and has established a fresh point of departure for value creation going forward. And we also appreciate the fact that Aker Horizons is in the process of reducing cost and streamlining its portfolio, including focusing on a limited amount of hydrogen and ammonia projects in Norway compared to the large number of opportunities the company pursued a few months ago. So a more streamlined company, lower costs, a restructured balance sheet will be important to create runway going forward.

We will never answer questions about or individual future transactions. But generally speaking, Aker will apply the same allocation principle to any investment opportunities in our existing portfolio and externally. And that's partly potential for value creation and part of the potential for a dividend to Aker shareholders. And as far as dividend is concerned, Aker does not expect short or medium-term dividend from Aker Horizons. So hence Aker Horizons doesn't fit with all our allocation criteria, we see more dividend potential from other portfolio companies.

[Fredrik Berge, executive]

thank you. Talking about upstream dividends, we see a positive trend where this year, estimated NOK 4 billion of upstream dividends, which is up from NOK 2.8 billion last year and NOK 2 billion the year before. So a very positive development. And in your presentation today, you said that increased and diversified upstream dividends to Aker is a main strategic objective. Could you please elaborate a bit on your plans related to this?

[Øyvind Eriksen, executive]

As I just said, increased upstream dividend marker is a main allocation criteria for Aker ASA. And it's not new. We have pursued that strategy for some years now. And we highly appreciate the role Aker BP has played and continues to play as a value driver and as a main source of upstream cash from -- to Aker ASA. And the dividend strategy of Aker BP is, as you probably remember, to increase the dividend paid to Aker and all the shareholders year-by-year.

So a fantastic asset in our portfolio. Last quarter, we added Solstad to the portfolio exactly for the same reason. We see a potential to both create good shareholder value, but also to put the company finally in a dividend-paying position, which will, short term, be balanced with repayment of debt. Because the main lesson learned for that industry is that you need a rock solid balance sheet to adopt to market volatility. But with NOK 4 billion in new equity, Solstad will be well positioned to manage both an attractive shareholders to us and other shareholders and to repay debt, and hence, fit very well into our allocation strategy going forward.

And the same line of argumentation, the same strategy will be applied to the entire Aker portfolio and to any external opportunity introduced to us in the years to come.

[Fredrik Berge, executive]

Thank you. Now that's the final question that we have received from the audience here today. So then I would like to thank you all for listening in. See you next time.