Aker ASA

OSE:AKER

Earnings Call Transcript 2018-Q4

[Operator]

Welcome everyone to Aker's Presentation of the Fourth Quarter and Preliminary Annual Results for 2018. My name is Per Kristian Reppe.

We'll start today's presentation with Aker's President and CEO, Øyvind Eriksen, who will walk you through the highlights and the industrial holdings portfolio. Aker's CFO, Frank Reite, will then go through the financial investments portfolio and the financial statement in more detail. After that, we will open up for Q&A session.

And with that, I leave the floor to Øyvind.

[Øyvind Eriksen, President and CEO]

Good morning and welcome to Aker, both, to you here at Fornebu and to all of you watching the webcast. The short version of my presentation today is a good 2018 of course quarter impacted by oil price decline and market turmoil and a prosperous start to 2019.

First, the full year. 2018 was yet another year with an attractive value creating to our shareholders and a strong industrial development across the Aker portfolio. Aker share price, adjusted for dividend rose 19.1% compared with the reference index, which was down 1.8%. Net asset value was NOK41.7 billion, on par with year-end 2017.

Aker’s liquidity reserves, stood at NOK5.2 billion, including NOK1.9 billion in cash. We received a record high NOK2.2 billion in upstream cash from our portfolio companies and the board of directors proposes a cash dividend of NOK22.5 per share, equal to full percent of our net asset value and as 4.9% direct yield, as the closing values of 2018.

Next, the fourth quarter. After a significant low increase in the first nine-months of 2018, our financial performance in the fourth quarter was impacted a 35% drop in oil price, increased volatility and market turmoil.

All-in all that led to our share price decline of 37.1% while of net asset value 34% in the quarter. 2019, however, started out well. Our share price is up 33% and our net asset value has so far increased 26%.

Overall, rather extreme reminder about the volatility in oil and gas. Our response was once again steady course, enabled by financial investments. And our portfolio companies made good progress also in the fourth quarter last year. Aker BP acquired 77.8% interest in King Lear from Equinor for $250 million and received a $150 billion refund of tax losses in Hess Norge and Ocean Yield invested in two chemical tankers, a long-term charter contract.

Subsequent to quarter end, Aker BP announced a new dividend policy, in which the Company will distribute $750 million in 2019, up from $450 million paid in 2018 and the ambition is to increase the level by not $100 million annually through 2023.

Aker Energy, our E&P Company in Ghana, announced a successful drilling operation of the first Pecan appraisal well, verifying gross, contingent resources between 450 and 550 mmboe, with additional volume upside, we’re drilling two more wells in this quarter. And this week Kvaerner's proposed a dividend of NOK1 per share for the fiscal year 2018.

In 2018 our net asset value ended at NOK41.7 billion, largely unchanged from a year earlier. In addition, we distributed in May NOK1.3 billion in dividend to our shareholders. Aker BP was the main value driver during the year, contributing NOK3.8 billion to our net asset value, partly offset by a value decrease of the other holdings.

In the fourth quarter, the net asset value decreased by a 34% of which Aker BP stood for the majority of the decline. Despite the value decreased in the fourth quarter, 2018 turnout to be a favorable year for our shareholders. The share price adjusted for the loan grows 19.1% in 2018. With compares to the reference index which held 1.8% in 2018.

So far in 2019, the capital markets have improved and oil prices have increased, which again has impacted our values positively. As per yesterday, Aker share price stood at NOK614, up 33% since quarter end, while Aker’s net asset value is up 26% year-to-date.

Fourth quarter was also a good reminder of the solidity of Aker’s benefit. As for the end of December, Aker held NOK61.2 billion in gross assets. And these value adjusted equity ratio stood at 82%.

There were no changes to our portfolio composition in the fourth quarter. Due to the oil price decline, the distribution however changed. As for quarter end, E&P accounted for 62% of our values, down from 69% in prior quarter. Oil services stood at 12%, Maritime asset at 12% and Marine Biotech 6%.

Aker's liquidity reserves stood at NOK5.2 billion at the end of the quarter or which cash amounted to NOK1.9 billion. Increasing absolute cash flow to Aker is a clear financial objective. It's perfect at this time material rather than absolute requirements to each individual company.

In 2018, we received NOK2.2 billion upstream cash from other portfolio companies. That's up from a NOK1.6 billion in 2017. In 2019, we focused the dividends will increasing further. This is important by occupancy new dividend policy, which will provide us a little bit an additional $120 million and cash compared to 2018 level, and some additional dividend also from krill oil. Combine, that should provide Aker with other NOK3 billion in absolutely cash in 2019.

Growth in upstream cash and a strong balance sheet allows Aker to both carryout value equity investments and to pay an attractive dividend to other shareholders. Other dividend policy is to pay between 2% and 4% of net asset value annually. For the fiscal year 2018, the proposal is to pay a cash dividend or NOK22.5 per share, which equates to a 4% of our net asset value and 4.9% direct yields based on closing values as per the end of 2018.

Moving on to our industrial holdings portfolio, starting with Aker BP. In the fourth quarter Aker BP produced 165,700 barrels a day, reported an EBITDAX of $692 million complete in the acquisition of King Lear from Equinor and a portfolio of 11 licensees from total low rates for a combined concentration of $465 million received $1.5 billion in the recent of tax losses in Hess Norge and to paid a quarter dividend of which Aker receive NOK378 million.

Subsequent to year-end, Aker BP held its capital market day, where it's announced and ambition for triple production to around 450,000 barrels a day in 2025 based on its existing portfolio or assets on that. Aker BP has made good progress and reducing the costs for its non-sanction portfolio. And the current estimate is that around, around 800 million barrels now have a breakeven have $35 per barrel oil. And organic growth will be highly profitable in the current price environment.

In addition, Aker BP will at the same time return more cash to shareholders through its new dividend policy. With the new dividend trajectory, Aker BP will distribute approximately 40% of its current market cap over the next five years, of which Aker is expected to receive over NOK16 billion through our 40% owners interest.

Furthermore, Aker BP announced the award of 21 new production licenses on the Norwegian continental shelf of which 11 as operator. An Aker BP made a new and highly profitable discovery in the Alvheim area.

Our ownership agenda in Aker BP remains unchanged. Focus is on realizing the organic growth potential in the Company and to carry out more value accretive transactions that could add to the already attractive production profile. Increasing cost efficiency is also at priority, with an ambition of reducing production costs down to $7 per barrel.

Aker Solutions ended 2018 by reporting NOK483 million in quarterly EBITDA, corresponding to a margin of 7%. Good progress is made in Aker Solutions to increase competitiveness in a market showing signs of improvement.

For the full year, revenues ended up NOK25.2 billion, up 12% year-on-year, while the order intake for the year was NOK25.4 billion up 8%. Fourth quarter order intake was reported by the award of as NOK1.7 billion contract to deliver subsea production systems and umbilicals to CNOOC in China. Aker Solutions most important priority is to continue increasing competitiveness through its cost efficiency program, targeting to achieve 50% cost efficiency versus 2015 and volumes levels.

After several years with investment in offshore oil and gas. The level of activity is gradually improving. Aker Solutions is currently tendering new contracts with total of revenue potential north of NOK45 billion. Hence Aker Solutions expects further top line growth and this and coming years.

In the fourth quarter, Akastor announced the merger between its portfolio company, First Geo and AGR, to create a strongly well and reservoir service company. Akastor will hold 100% of the shares in the Company and 55% of the economic interest. Furthermore, Akastor refinance its revolving credit facility into a new NOK2.5 facility, providing flexibility and a robust financial platform.

Across those main assets, image that delivered unacceptable quarter reporting an EBITDA of NOK73 billion in the continued challenging drilling market. This week Akastor announced the appointment of Pete Miller as Executive Chairman of MHWirth and Eirik Bergsvik as the new CEO. As main shareholder in Akastor we look forward to collaborating with both Pete and Eirik to strengthen in it with organically and through transactions with an ultimate goal to IPO the business in the not too distant future.

Turning to Kvaerner's, Kvaerner's continue to deliver good operational performance. In the fourth quarter EBITDA came in at NOK77 million. In the quarter Kvaerner's reached also mechanical completion of the utility of living for the platform for Johan Sverdrup Phase 1 and started construction on the FPSO topside for Johan Castberg and the utility module for Johan Sverdrup Phase 2 riser platform.

Order intake for the quarter was NOK1.7 billion supported by the NOK900 million contract for the steel substructure for Johan Sverdrup Phase 2 process platform. The order backlog and they had NOK10.6 billion up 32% from a year earlier.

With the solid results delivered last year, large project derisk and an improved outlook, Kvaerner's Board of Directors has proposed NOK1 per share to be paid in cash dividend to it's shareholder for the fiscal year 2018.

Next Ocean Yield. Ocean Yield first quarter results were impacted by one of items relating to the two offshore supply vessels on lease to Solstad Offshore and to the FPSO Dhirubhai-1, which ended its contract with Reliance in September last year.

Nevertheless, for 2018, Ocean Yield delivered and adjusted net profit of $122 million. In the quarter. Ocean Yield made an investment into chemical tankers on long-term charter contracts for $51 million.

Most all management's time spent on redeployment opportunities for the FPSO. Let's meet Ocean Yield announced that it has enter into an agreement with after energy regarding an option to starter the FPSO for 15 years.

Ocean Yield distributed a cash dividend of $0.191o per share in the quarter, on par with prior quarter. At the end of the quarter the EBITDA backlog stood at $3.6 billion with an average duration of 11 years.

Aker BioMarine showed continue progress in 2018. Revenues for the full year came in at $155 million, up 24% from the prior, while EBITDA ended up $33 million. Over the last year, Aker BioMarine with support from Aker has made substantial investments to accelerate growth. In general Aker BioMarine took delivery of its new built harvesting vessel that will also contribute to more profitable harvesting of krill.

The Company recently also signed a contract for the construction of a new support vessel. The omega-3 market is improving and Aker BioMarine should be in good position to capitalize on that trend. In addition to the management investment, Aker BioMarine has increased its capacity of the krill oil factory in Houston and was granted and you harvesting license both strengthening the platform for growth. Our own agenda continues to focus on creating a larger and more robust Aker BioMarine and to drive the long-term value through growth and profitability.

Moving on to Aker Energy, one of the value triggers in our portfolio not yet listed. In general, Aker Energy announced the successful drilling operation of its first appraisal wells at water depth or more than 2,600 meters. That's a great achievement considering that the Company did not expect a year ago. The objective of the well was to confirm deepwater contact, which was prudent. Based on the results and analysis, Aker Energy now estimates that the existing recoveries hold between 450 million and 550 million barrels in growth contingent resource.

Aker Energy is now in process of drill two additional wells. Total potential of these two wells is estimated by Aker Energy to be between 150 million and 450 million barrels. In parallel to the drilling operations, Aker Energy continues to work on a plan of development to be filed by the end of March this year. After the PoD is approved, the plan is to invite other investors to participate through an IPO or another transaction in order to enhance the equipment, equity portion of the project until first part. Needless to say, exciting times I have also at Aker Energy.

Next Cognite, another asset in our portfolio, only available for the time being to investors through the Aker share. Cognite had a remarkable year in 2018, as an increasing number of asset intensive company started seeing the value of Cognite industrial data platform. During the year, 16 new customers were signed of which DEA and Statnett, became part of the portfolio in the fourth quarter. Statnett also represents a new industry vertical for Cognite in the power and utilities sector.

Activity runs high in the Company and the ambition in 2019 is to double the revenue base by increasing presence in existing domain and expanding geographically. Opening new hubs in markets such Japan and the United States are part of the business plan. And in order to prepare of the increasing activity level, Cognite has continue to scale its organization now comprising more than 160 employees.

Starting from the first quarter this year. Aker will report Cognite and Aker Energy, as part of our industrial holdings portfolio. A change in reporting which reflects the two companies' role as important value figures in our portfolio of investments.

Finally, The World Ocean Headquarter, our ambition to position Norwegian as a global center of competency for a more sustainable development in there. The initiative has however been turn down by a majority of the political parties, Bærum municipality due to reactions treated by the heights of the Big Blue. At proposed 64 floors and 250 meter tall building. And Aker acknowledges that’s the Big Blue will never be materialize Bærum as proposed by Aker.

Our ambition remains however unchanged. The world is in desperate need for a center that can facilitate and coordinate public and private initiatives to save the old. Aker will therefore now engage with politicians and other stakeholders in Bærum and elsewhere to share our concern and ambition. Our conclusion is likely to be made within a year.

Our assumptions for that process that’s the World Ocean Headquarter will be established. The activity will be housed in a property, which we also serve the role and the purpose of a symbol and a reminder of the important task at hand and last but not least, the headquarter will be established in collaboration rather than in conflict with politicians and authorities in the host country and host municipality.

Our primary role is to build a stronger office for generations to come. We do that by leveraging on our current capabilities and network. In parallel, we are open minded to change the influenced by trends, knowledge and opportunities. That's exactly why The World Ocean Headquarter is also a vital important to the longer term development of market.

That ends my presentation this morning. Frank will now walk us through the portfolio financial investment and our financial statements in a greater level of detail.

[Frank Reite, CFO]

Thank you, Oyvind, and good morning everyone. I will spend some minutes on Aker's financial investments before I go through the fourth quarter accounts.

The financial portfolio accounted for 11% of Aker's total assets, or NOK5.6 billion. This is up NOK200 million from the previous quarter. The main components under financial investments or cash listed investment, real estate investments and interest bearing receivables.

Let's look into the details of the financial investment portfolio. Starting with cash. Our cash holdings represented 4% of Aker's gross asset value, or NOK1.9 billion. This is up NOK712 million from the previous quarter.

The main cash inflows where the NOK552 million in dividends from Aker BP, Ocean Yield and American Shipping Company, we also had the cash gain from the renewal of our TRS exposure on American Shipping Company of NOK291 million and NOK175 million from divestment of liquid fund investments.

The main cash outflows in a quarter, we had NOK167 million in increased investments in Aker Energy and we paid 165 million in operation expenses and net interest. Our liquidity reserve at the end of the quarter was up NOK0.6 billion from the previous quarter to NOK5.2 billion including undrawn credit facilities of NOK3.2 billion.

Listed investments included in our financial portfolio represented 1% of Aker's total assets or NOK701 million. The net value decrease in the quarter was NOK288 million mostly explained by the value decrease or Philly Shipyard of NOK186 million and Solstad Offshore of NOK123 million.

This was popular offset by value increase from American Shipping Company of NOK27 million. In addition, we received 21 million in dividends from last investment. And as mentioned, the TRS agreements were rolled forward in November and also got the cash release of 291 million. The new TRS agreements had a negative value of 32 million at the end of the quarter.

Next, real estate and other financial investments. Combined the two represented 6% of Aker's gross asset value or NOK2.9 billion, the increase in a quarter of 186 million, it's mainly explained by increase cash funding of Aker Energy of 167 million an increased loan to Aker BioMarine by 52 million. This was partially offset by an impairment of the trick identity investments of 89 million. I'll now go through the fourth quarter financial highlights for Aker ASA and holding companies.

Let me start with the balance sheet and please note that these figures on the slides are after dividend allocation of NOK23.50 are part of share. The book value of our investments was down and 482 million in the quarter mostly explained by the value decrease of Solstad Offshore and our direct investments in Aker Solutions and Akastor. This was partially offset by increased investments in Aker Energy.

Total book value of our assets was 23.7 billion and in our accounts, we used the lowest of historic costs and market values. The fourth quarter was a rough quarter on the stock exchange and the fair value adjustment on our related assets was reduced by 21.3 billion to 27.5 billion. The gross asset value was reduced to 51.2 billion. Aker's liabilities mainly consist of mandate of 6.2 million and U.S. dominated bank loans of 3 billion. As well as dividend allocation of 1.7 billion for 2018, representing $22.50 per share.

The book equity was 12.5 billion down 2 billion from a previous quarter explained by the net loss before tax and the dividend allocation. We adjust for fair value on our listed assets, we get our net asset value of 14.1 billion at the end of the fourth quarter, down 23.2 billion from previous quarter. The net asset value per share was NOK540 after dividend allocation and the value adjusted equity ratio was 78%.

Our total interest bearing debt stood at NOK9.2 billion, which is up 0.3 billion from the previous quarter, mainly due to changes in the FX rates. And as before, we have significant headroom with regards to our loan covenants. We had net interest-bearing debt of 6.2 billion at the end of the quarter, down from 6.6 billion in the previous quarter.

Then to the income statement. The operating expenses for the fourth quarter were NOK58 million. The net value change in the quarter was negative NOK628 million, mainly explained by the value decrease of Solstad Offshore and the direct investments in Aker Solution, and Akastor.

Other financial items were positive NOK410 million, mainly explained by dividends received of 588 million , partly offset by net foreign exchange losses of NOK102 and net interest expenses of NOK76 million.

The loss before tax was NOK281 million in the quarter. For the full year, the profit before tax was NOK1.5 billion mainly explained by dividends received from our portfolio company.

And with that, we open for questions.

[Magnus Olsvik, Kepler Cheuvreux]

Magnus Olsvik of Kepler Cheuvreux. First on Aker Energy, just wondering if you plan to finalize the result of the two appraisal wells before the POD, if so the timeline by the end of March looks a bit stretch to me?

[Øyvind Eriksen, President and CEO]

Well, that’s great, that’s we’ll drill the two wells during the course of this month and at least the first well will be analyzed, we’ll have verified results available plan through PoD. Then, the drafting of the PoD is well aligned with local authorities. So, if we have not verified all the facts and figures we need in order to include appropriate proposal for this third well. And our expectation is that we will find a way to update the PoD subsequently.

[Magnus Olsvik, Kepler Cheuvreux]

Okay, and then on Cognite, so far or obviously it’s a interesting part of your portfolio but so far limited numbers disclose. Can you tell us anything about 2019 for you in terms of number of customers, revenues or so on? And there is some significant growth in 2019, what is that more specifically?

[Øyvind Eriksen, President and CEO]

Significant growth this year is an addition to double revenue at least. And then as you know Cognite start with a number of Aker companies as customers Aker BP and Aker Solutions in particular that’s added a large number of customers last year ’16. So, but in order to facilitate the expected doubling this year, we will and even large number of non-Aker and companies and to list customer measured by pilots.

[Magnus Olsvik, Kepler Cheuvreux]

Thank you.

[Øyvind Eriksen, President and CEO]

And by the way of including Cognite as well as again the portfolio in industrial investment is obviously to provide even more greater level of transparency also those two and unlisted assets.

[Haakon Amundsen, ABG]

Haakon Amundsen from ABG. Back on Aker Energy, could you get some color on the long-term strategy for Aker Energy? And also on that note would you expect there to be any more inorganic growth in relation to the capital raised that do you plan to do over that's specifically be the current filed development?

[Øyvind Eriksen, President and CEO]

Aker will apply exactly the same method of work to Aker Energy as we apply to builder industrial buildings in the portfolio including Aker BP. And growth both organically and by M&A will be a part of the discussion and process internally in the years to come. However the short-term Aker Energy will focus on what I just described drilling activities and PoD for what we called the northern block then we announced over the and when we Aker Energy.

As we see an opportunity to combine the northern block with the southern block, Aker block can go on by our main shareholder that's will require full transparency on a proper power process in order to avoid questions of criticism that's higher on our agenda. So that's an opportunity already identified and by Aker Energy and but in our base case today it's developing northern block and file and we get the PoD and get it approved and then raise capital asset just to describe in my presentation.

And then all transaction including a possible consultation with the southern block and is likely to be subsequently helped.

[Frederik Lunde, Carnegie]

Frederik Lunde from Carnegie. Quick question on the strategy for Aker Energy and I go back to Haakon's question, are you going to be peaceful so Norway. It's Aker Energy going to be limited to Ghana or do you see older geographies long-term posted in the Aker Energy or new entity?

[Øyvind Eriksen, President and CEO]

We have no plan for the time being to expand beyond the borders of Ghana. We see so many opportunities and let country. And we have over the establish structure by good dialogue and relationships with different authorities and stakeholders in Ghana. So we will go deep, even deeper in Ghana before we consider and expanding into other geographies, so low geographical expansion is in our plans for 20.

[Frederik Lunde, Carnegie]

So I'll turn 25 as long time array. You're reasonable minimize production today that will be Norway and Ghana?

[Øyvind Eriksen, President and CEO]

We can't switch to Norway and Ghana.

[Frederik Lunde, Carnegie]

And also just on the Solstad, I think you described it as a small high risk option when you entered into the few years ago and on hindsight that was correct? What is the -- what is the opportunity Solstad as you see today with regards to financing?

[Øyvind Eriksen, President and CEO]

Next couple Solstad to completing the ongoing negotiations with its creditors and Aker will await that processing that conciliation. And then we will decide on the best way for it.

[Frederik Lunde, Carnegie]

[Indiscernible] from SEB. On Aker energy again now seems that you will have early phase production or potentially at least -- sorry in 2021. Can you talk a little bit about how you see the full development of the DVD block and the development solutions in different phases and timing all those?

[Øyvind Eriksen, President and CEO]

That's a part of ongoing and preparation PoD and including the target date for first oil. So, I'm hoping that you're correct on your time estimate, but you have to be verified and the set process.

[Operator]

It seems to be no further questions. So thank you all for attending in the call and wish you all a great day.