Argeo AS

OSE:ARGEO

Earnings Call Transcript 2023-Q2

[Trond Crantz, executive]

Good morning, and welcome to our second quarterly presentation for Argeo. Let me just start with an apology that we had to push this quarterly presentation. It seems COVID has not left the building. So that is basically the reason for it. Please observe the disclaimer. So we're going to go through some highlights, the short introduction.

We're going to give you an operational update to the project that we've been working on for the quarter and also some of the ongoing stuff, which is desservably a short update. We're going to take you through some commercial and business development in addition to updates on technology. And finally, Odd Erik is going to present the financials before we take the Q&A at the end. So quite a few things to cover in these short 20 minutes or so.

So some highlights. Strong revenue growth over the second quarter up 173%. So the numbers are basically more or less 100% where we guided in June, more or less the same on the EBITDA. We have a strong order book, NOK 130 million secured to date. We were awarded the Deep-Sea mineral project for the Norwegian Petroleum Directorate, which we are currently working on. Additionally, the 6-month extension for the Hugin 6000 system was confirmed in the quarter.

We completed the mid-Atlantic massive sulphides exploration project for the Polish Geological Institute. We also had time to start on the multi-client program and which will be completed in Q4 and as earlier announced, quite a few new patents have been granted to Argeo.

Finally, at the end of the quarter, we completed a private placement of NOK 43 million and subsequent events, the Stromar project for Orsted has been started up now in the summer. And we completed a subsequent offering of NOK 7.3 million. And finally, an unloaded patent was granted to Argeo at the end of the quarter.

So we obviously know that there is a lot of expectancies on Argeo and news information. We hope that we would be able to bring some new news flow for this quarter, but we didn't have time to complete it all. But fear no evil, there's going to be a lot of great stuff coming from us over the next few weeks. So stay tuned and we will keep the project going accordingly. So more as we talked about earlier, our strategy adjustment is proven by the day almost, this basically shows the revenue curve. From 2021 to 2023, we do see now that the complete package offering that we provide with full-scale subsea services is working really well.

So some facts in numbers, we have a strong revenue growth. We have a record order book. New to describe this to include our tender pipeline. And this is tenders that is actually submitted and where we are awaiting response in a very short time frame. Several of these will be decided in September and some in October as well. And so we expect that the order book will fill over in Q4, more or less where we have anticipated earlier on. So for the revenue numbers for the quarter, NOK 25.4 million and EBITDA within the range that we previously discussed, slightly lower. And this is really a result of some of the projects taking longer time than anticipated.

So Argeo in brief, we have continued building the company with establishing a further grip especially in Brazil with the activities we planning to start up there. Also in Houston and of course, the well-known activities that we have in Norway. Let's say, the most interesting markets for us now is oil and gas. That's where we see the biggest uptick over the next few years, combined with the marine mineral activities and of course, renewables.

So this is well-known slides. We have our assets and our vessels, and we will talk a bit more about how we plan to expand those capabilities at a later slide. So at the outset of the quarter, we picked up the marine mineral project for the Polish Geological Institute, in the Mid-Atlantic. This was a very complex project. It took longer time than we expected, more or less because of most of the activities taking place at 4,000 meter to 5,000 meter water depth. So of course, making use of all of the sensor systems employed in the AUVs, including our own, time and pressure with deep water activities, basically coupled with a very tough terrain, makes this a very challenging project.

The great news is that not only did we complete it with exceptional results, the client is very satisfied and it also launched our Argeo SCOPE, our digital platform as a first time commercial use for the client, which was really a good example of how the digital front of what we deliver in terms of data and how that is brought from the vessel to our onshore management headquarters and to the clients at the same time with a fantastic achievement.

So as I mentioned in the first slide, the Hugin 6000 contract is extended with a minimum of USD 2 million. We expect to have this back in March. And then the Stromar survey contract was extended, both in terms of work scope and time. So basically, now we are running 2 parallel large-scale operations, one for the Petroleum Directorate, up northwest of Svalbard and another one in the West of Scotland, where we have hired a vessel for that project due to the scale of the activities. So the NPD job, it is going. We had anticipated a total of 8 weeks duration for this. We see that we are a little bit delayed, mostly due to technical challenges in the greater depths and the continuous operation that we are running.

However, the data that we have brought back is of an immaculate quality. So that gives insight into a whole new area for the potential future marine mineral exploration and the environmental data that we seek to use this foundation for decisions going forward. So this has basically been a slide that shows the Argeo Searcher with the integrated launch and recovery system for the SeaRaptor at the stern. This is working fantastically well. The Searcher is a perfect operating platform for our activities, stable large vessel providing a very good coverage in terms of sea state and at the same time, being a very fuel and economic vessel to run.

So a few words about tenders where we see the biggest tenders, as I mentioned, is in oil and gas. And these tenders, this is not pipeline. These are projects that we are waiting for customer feedback on. So for the marine mineral projects, we have basically projects in 2 fronts. One is the Pacific area where there is a lot going on and the other one is in Asia. Now we expect to have at least 50% of those all set within the end of September at the latest.

For oil and gas, again the same thing, these are projects which is currently submitted for evaluation for our customers, so a total of $53 million and project startup commencement basically for Q4, the earliest ones and leading all the way into 2024. The same thing here. We expect 50% decision of the $53 million of tender activities within September and early October, and then finally, we also have continued to progress with our renewable activities, mostly United States activities, but also Europe as well.

These are all 2024 projects but the good news is that we expect a good conversion rate from all of these tenders and the commencement is expected -- the earliest commencement is expected from October and onwards. So what does that make for the project backlog? We see that we have about 3 months, which is still undecided for Argeo Searcher. Now we expect that to change fairly soon, maybe in a few weeks already. The Hugin 6000 is running into March as earlier mentioned. We have the Ventus, which is basically our survey vessel on charter 4 project in itself. But purely for that project, it's running until end of October. And then we have Argus where we are looking at this as a force multiplier for an oil and gas project.

For the quarter, about 62% utilization for Searcher. This is basically reflected by transit longer-time mobilizing between projects and so forth. So we expect the utilization to go up as we develop as a company.

Okay. So we do see that the market requirements going forward is in a strong growth cycle. We see that 2024 is probably up in the largest sector of our activities in oil and gas, about 5% growth, all in all, globally. The same thing is happening at a slower rate for renewables and minerals. For 2025 and 2026, we see an even stronger growth. So that means that we are laying very good plans for expansion of both assets and vessel in a smart way, of course.

Going forward, we will see that total package that we provide our clients is a combination of vessel and the assets that we utilize, combined with the technology that we developed both on the sensor side and the digital front. So this is a very good image of all our operating platforms going forward.

So just to recap, why did we adjust our strategy going back to 2021 where we had planned for containerized systems that could be strategically positioned around the world. What has changed? So a much, much higher demand for everything basically. We see this is a case for people. We see it as for assets and for vessels. So big undersupply for services through all the markets that we operate in. And of course, that creates a huge pressure on rates. So the higher rates that means that all of the global assets are busy. It was very difficult to be able to secure short-term vessel activities for the project.

So hence, we decided to have fixed vessels that we can employ using our assets and deliver projects to our clients. And this has now proven really well towards the clients and we are even furthering the population of services on board these vessels together with very strong partners, which we expect to announce shortly. So that said, it's pretty obvious that we need to expand the fleet going forward.

So what does that mean in numbers? So Argeo target is 80% commercial utilization for full spreads and we see that is coming. Yes, it will be the case for the year-to-date as well. This implies that we will see an EBITDA of NOK plus 100 million per spread per year and, of course, depending on the financial structure for the next vessel. So that's what basically the graph on the right-hand side here illustrates.

Incremental EBITDA over time, an incremental net profit provided by these assets. So we are now reviewing the expansion opportunities and indicative CapEx between NOK 250 million and NOK 300 million per full spread, which gives an EV/EBITDA of less than 3x at 80% utilization. So currently, looking at scale, Argeo currently has one full spread operational. And in addition, as I mentioned, we now have a temporary second spread running the Orsted Stromar project. This will be running until October, where it's demobilized but the target is 80% utilization and that implies an EBITDA per full spreads close to NOK 100 million per year per operating unit.

So technology, it has been quite a lot of news on the patent side for the technology company and Argeo robotics, which is great news, of course. This means that we are cornering the market in all the segments with new technology, which will make a big impact for all our customers. So our first pattern was a subsea electromagnetic remote-sensing system and this is basically rolled over on all the other patents as well.

The second was a method for tracking and detection of pipelines and power cable, so everyone can understand the importance of that, but we can do it at any depth, and we can do it without contact to any objects as well. So that means that the efficiency that we will have doing this is going to be tremendous.

And then finally, we also had the patent #3, which is detection of buried objects. So that could be unexploded ornaments, it could be detection of buried pipelines, cables, any warfare object as well. And we do that not only on the AUV side, but also we can employ all of these technology systems on ROVs and other systems as well. And finally, which is the major production system for marine mineral discovery called Argeo discovery, of course, which is an electromagnetic system to be able to say something about the prospectivity of the minerals -- potential minerals in the area that where we explore.

Short update on Argeo SCOPE. So this is now full in production digital platform. The great news for us is that we see that we have hit the mark with this digital platform. We are contributing to this all the time with new functionality, new data types. And a hallmark of this is basically that all the customers that we have done and are doing projects for are taking this platform into use. New for this is basically that we can run this platform as an on-prem solution, not only a cloud solution. And we have confirmed the utmost security of all the data and the users within the platform itself.

So what we are doing now, we have Starlink systems on board a vessel and we can pipe data from the vessel directly into the cloud system where this platform is having its home where the people onshore can access all of the data types immediately for evaluation and for further investigation. So we're now using that. We have that operating for oil and gas, and we can use it for contact CP measurements, we can use it for pipeline inspection and many other things, 4D effects and so forth.

And of course, already in use for the deep sea mineral projects that you're running at the same time. So a very versatile platform that can be used in all the segments that we operate in and for all the customers in those segments. So it's a very exciting new technology and tool that we provide our customers globally. So I will now give the word to Odd Erik to go through the financials.

[Odd Rudshaug, executive]

Yes. Thank you Trond. So revenue in the second quarter this year was NOK 25.4 million. This came from the 2 deep sea mineral projects we had for PGI and NPD and also from the Hugin 6000, which started on this long-term contract in September last year. So NOK 25.4 million is a significant increase, as Trond mentioned earlier from the same quarter last year when we had NOK 9.3 million. Operating cost, NOK 29.5 million and compared with the same quarter last year, it was NOK 13.2 million. So the reason for the increase in the operating cost is Argeo Searcher, which we took on shortly in January this year.

Employee expenses NOK 14.8 million. So that is more or less the same as we had in the same quarter last year. We capitalized NOK 9.7 million to the balance sheet in the quarter, NOK 3.1 million was from the multi-client project we started on and the remaining is development cost for Argeo SCOPE and for our sensor technology.

Net financial items of minus NOK 3 million includes NOK 2.8 million in unrealized currency exchange loss on the debt, which we have in U.S. dollars and EBITDA minus NOK 15.1 million compared to minus NOK 12.4 million in the same quarter last year. And we had a net loss of NOK 27.8 million for Q2.

So we move over to the balance sheet. Total noncurrent assets was NOK 259 million in the end of the quarter and this includes NOK 33.3 million in capitalized development cost, NOK 7 million in multiclient library and NOK 212 million in property, plant and equipment. So this property, plant and equipment includes mainly the 2 Searaptors AUVs we have and the Hugin 6000 and Argus USV. We did a share issue in June on NOK 43 million. And this proceeds were received in July. So NOK 43 million is included us other current assets in the end of June and not as cash. Cash was NOK 12.4 million in the end of June. Equity was NOK 182 million. We had NOK 101 million in long-term debt, which is mainly the sellers credit on 3 AUVs but also the loans we have from Innovation Norway.

Net cash from operations was minus NOK 38.8 million in the quarter. And this is mainly caused by this unpaid share capital from June, which is included in change in current assets with minus NOK 43 million. We raised NOK 39.7 million in this share issue, but also the net amount. And we received a new loan from Innovation Norway of NOK 20 million in Q2 and we repaid NOK 10.1 million on the sellers credit we have on AUVs. So with that, I think we will open up for Q&A.

[Operator]

Okay. Well, a few questions coming in during your presentation. Let's address the first one. When can you expect some news coming in regarding new contracts?

[Trond Crantz, executive]

Yes. As I said, we expect things coming in over the next few weeks, actually, but it's not sort of one blast of news. There will be a rolling activity. So September and October and even November as well for some contracts. Okay.

[Operator]

There's a follow-up on that one. Can you elaborate on potential contract sizes and project length?

[Trond Crantz, executive]

It depends. We have contracts which has months and we have contracts which are several months. Typically, everything from $5 million to $15 million. It's a very typical contract size of the short space, but the longer yearly contracts obviously becomes much, much bigger.

[Operator]

This one is for you Trond. Considering Argeo strong market presence, do you have enough assets to meet your customer demand?

[Trond Crantz, executive]

Yes, we are always evaluating that, of course. We have a very good plan for how we can expand. And we will time that obviously with both the market contracts and so forth, but there is a lot of great news coming from us in a very short time frame, which is going to I think, yes, some interesting stuff.

[Operator]

One more regarding growth. Can you comment on your expectations for growth in the next 2 to 4 years?

[Trond Crantz, executive]

It's a dangerous game trying to anticipate that. But what we are seeing in the market is basically that it's a huge uptick in oil and gas and offshore in general. So everyone sees that. But what is perhaps less known is that it's increasing, right? So what we are about is to time expansion to be on the front foot when the market is ready for new assets or new vessels and so forth to make sure that we can study the growth and build the company as fast as the market allows. But obviously, it's a super cycle and it's hugely interesting for us to look at the potential that we are working on now.

[Operator]

There's another asset related question. Is the Hugin 1000 technically outdated or cold stacked.

[Trond Crantz, executive]

Yes, I would say cold stack is a good word for it, even though it's one. But it's not outdated as such. It's just that we have so much going on and in terms of capacity, most of our activities is more than 1,000 meter, which the name implies. So basically, that means that we don't have the real projects comparable to everything else that we do, which is so much larger in size and money worth. So at the moment, it's an engineering platform, we can say. But yes, we'll see where we make use of it going forward.

[Operator]

Another one regarding 2 assets. How do you plan to secure vessels for new spreads? Do you buy or lease? You have disclosed EBITDA of NOK 30 million for a new spread and CapEx of a new spread of NOK 275 million. Do you think that this is attractive economics? What are your cost of capital when you decide on investments?

[Trond Crantz, executive]

Yes, cost of capital, not -- it's too early to comment on, but there are certainly many opportunities in terms of long-term leasing. So that is obviously one way of going, but we haven't finalized any plans yet. And when that time has come, we will obviously do that. But there are many good opportunities for us and we will, of course, try to be smart as practically possible to make sure that we bring the expansion in accordance with the expectations of our owners and investors and so forth.

[Operator]

You are not disclosing the Board members shareholding on your website. According to public information, neither Mr. Datland or Ms. Holm, or Ms. Kjorsvik our shareholders in Argeo, only Mr. Grimnes participated in this year's share placement. Why do you choose to have Board members without shares in Argeo and how do you align interest between the Board and your shareholders?

[Trond Crantz, executive]

Well, I mean, first of all, both Jan Grimnes and [indiscernible] are major shareholders in Argeo. Jim and Geir, and Arne do have shares options. And those are communicated going back to the earlier IPO of the company back in April 2021. So I think going back to that stage, it's easy to see. Yes. So that's the comments we have to that.

[Operator]

And that's also the end of the questions for today.