Argeo AS

OSE:ARGEO

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Trond Crantz, executive]

Good morning, everyone, and welcome to our Q3 presentation. It will be myself, Trond Crantz presenting today together with our CFO, Odd Erik Rudshaug. Please observe the disclaimer. So the agenda for today, we have a quite a lot of content to cover, so we'll get right into it.

Our highlights operational updates. We have a short discretion of commercial and business development, progress on technology, financials; and finally, the outlook for the company going forward. So let's start with the highlights. It's been an extremely busy quarter for Argeo, obviously reflected in the strong revenue growth.

We have carried out 2 projects at the same time during the quarter. So it's been quite work-intensive for everyone in the company. We've completed the NPD project and Stromar offshore wind project which reflects the revenue numbers. We have -- we have reported earlier, been less efficient and struggled with some technical issues, underway for the NPD project, which has delayed the sum, and this is the result of the lowered EBITDA for the quarter. Otherwise, we have secured our first major oil contract with Shell. This is a big thing for Argeo and qualifies us for a lot of significant projects going forward.

We'll say a bit more about that in later presentations, not today, but it's fair to say that the technology that we develop our sensors, the systems, and of course, the Hugin Superior, the vessels that we now have makes us a very attractive service provider in the offshore business. We have also secured a NOK 154 million contract with India's National Centre for Polar and Ocean Research, NCPOR. A project, both of them actually something that we work through the quarter to finalize a major achievement, of course, for Argeo and really puts us forward as the main global service provider in the marine mineral business.

We have a good backlog of NOK 240 million from Q4 until Q2 2024. We have an increasing tender volume, nearly NOK 1 billion. And as I'm sure everyone has seen, we have entered into a strategic alliance with Shearwater. We have purchased our next subsea vessel now called Argeo Venture. We have also submitted 2 -- being granted 2 new patents in the quarter. And concluded the purchase agreement of the new Hugin deal with Kongsberg.

Subsequent to the quarter, our first Hugin Superior is delivered. It's tested. It works amazingly. And with that, we have entered into the leasing agreement with CSI. We have finalized the conversion of Argeo Searcher or it will be in a week's time thereabouts. We have taken delivery of Argeo Venture was done 7th of November. That vessel is now at Halsnoy DOCS has started reactivation and conversion.

We expect that to be completed in Q1 next year. We have carried out a private placement, gross proceeds of NOK 250 million. Further to that, we have secured a bank loan credit facility of NOK 131 million, and as previously mentioned, secured an equipment leasing agreement of total NOK 275 million. So yes, a lot of successful events during the quarter, no doubt. So just to recap, what is it we do?

We provide services in the oil and gas business, mainly for greenfield, we do subsea inspections, pipeline inspections and so forth. In the offshore wind industry, we do most greenfield activities, basically ensuring that the players building out these projects have good foundation information for their projects when they start the infrastructure installation.

And finally, the marine mineral business, which is a fast-growing market, where we are a main player globally. So to the numbers, obviously, much higher revenues compared to last year, nearly 700% up, EBITDA lowered lower than we expected. And as I said earlier, this is a result of the operations being hampered by weather and some technical issues that we had during the summer.

On the upside, we have a very strong -- in fact, the strongest backlog ever in Argeo's history, which is up over 600%, NOK 240 million, and we will take a look at how we distribute that. And then finally, we have submitted tenders excess of NOK 1 billion going forward. So Argeo [indiscernible] we have adjusted our strategy. We started with that late last year. This is now completed. We are a service provider with subsea vessels. We have equipment, which we refer to as spreads.

And we populate that equipment with the proprietary technology that we develop internally in Argeo, mainly Argeo Whisper and Argeo Listen. Further to that, we have a digital platform, which act as a conduit, ship to shore with data and also used as a main decision-ready client interpretation platform for the data that we acquire in the oceans. So a lot of novel technology protected by IP in the global markets, an important drivers -- value drivers for the projects going forward.

And we see that it's a direct result of the contract wins that we just announced. The Argeo Listen system is superior to any other contactless cathodic protection system, for instance, for pipeline inspections, but also for mineral delineation in the marine mineral market. So we have an absolute advantage in our competitive landscape with what we do. Now we also have a robust strategy. We see that payments between the different verticals are quite similar, at least on the oil and gas and the marine mineral business. We see that renewables is struggling with costs, but we see that the larger floating offshore wind projects are coming along. And we see that the payment grade will be more or less the same in that market over time.

What we can say is that with all the projects that we have and going forward with, we are targets our EBITDA margins of about 30% or higher. So the first Hugin Superior delivered. We took this picture into the presentation just to show what a big vehicle this actually is. In graphics and designs, this looks like a small unit, but it's actually a massive unit. I think the big things with the Hugin Superior is its massive production capacity.

We do, more or less, more coverage of surveyed area with the Hugin Superior than we do with two others. So it's a big upgrade for the spreads that Argeo has offered clients going forward. Obviously, we have included also the integration of Argeo Listen in the Hugin Superior with very good results. So we have great expectations for this going forward. So hence, leading into the slide, Superior Capacity.

We now have the most advanced AUV fleet in the world. We don't have the biggest one, but the most advanced one. And we see that the client also take notice of that. We have two efficient subsea vessels now, Argeo Searcher, fully upgraded come end of November; Argeo Venture coming out of the docks in mid of February.

We now have the spreads as well. We have the two SeaRaptor. We have the Hugin 6000, which another one will be added to the fleet portfolio in 2025 and of course, the two Hugin Superiors. So we take on this, Argeo entered into an agreement with Shearwater towards the end of the quarter. We signed a master agreement for the purchase of Argeo Venture, totaled $6 million and 2.13 million Argeo shares. Argeo and Shearwater, now as a consequence, look to develop strategic transformative technology and products based on this partnership.

And of course, trying to influence the total product portfolio between two companies, and we have signed a capacity agreement with Shearwater. When we are available and when Shearwater has projects representing what the vessels can do. So what does the Superior give us? This slide really shows the production efficiency gain.

It's a bit like streamer seismic, where you add streamers, you get more capacity, and that's exactly what to do with the Superior. It has longer receiver rays, which means that we can cover twice as much area per day survey as the other units. So for instance, 2,000 square kilometers, takes the Hugin Superior 18 days for the others much longer time, and we can even increase that capacity that by putting the Hugin Superior together with its sister AUV, the other Superior and double that again.

So it's a big production capacity driver. And we use that, especially for projects where we have either [ lined ] or square kilometer rates or we have other business models that requires more capacity than normal, big areas. So commercial and business development. As indicated earlier, we have now galvanized our strategy within the company.

This is now proven throughout 2023. And we also see that this is a big driver for clients going forward. That means that we have increased our revenues, and we have expectations that, that will continue going forward as well. So strong volume of submitted tenders. This is the whole offshore industry. I think speaking to the acquirer here, but we see the same activity levels in the global markets.

Of course, for Argeo, it's the deepwater markets, which holds the biggest interest, which, again, means that we are a premier service provider in the Marine Mineral business. Oil and gas, West Africa, South America and so forth, big market for us, probably Asia Pacific as well given some time. And finally, we see that more innovative requests are coming from the offshore wind developers to get more carbon-neutral solutions going forward.

We expect a lot of answers on the tender portfolio coming throughout Q4 and early Q1 and this is continuing. So what we have done to operationalize all of this, Argeo Searcher coming out of conversion now in mid of November, we'll take on the Shell and the NCPOR project. So that is about NOK 260 million in contract for that particular vessel. Then we have two other projects in tender phase for Argeo Searcher going forward.

Argeo venture is undergoing conversion and reactivation as we speak. We expect this to be completed in mid-February, and we are tendering for some long projects for that vessel. Hugin 6000 continues its rental contract. We'll come off that contract in March, where we are looking at various containerized solutions, especially in the offshore wind business.

And we have a tender out for the SeaRaptors as well. For that, there will be a vessel opportunity and a containerized system for these two units. So just to bring attention to that note in the bottom of that slide, Argeo Searcher will be fitted with the first Hugin Superior and Argeo Venture will be fitted with the second Hugin Superior. So this is a slide we've used several times and from the previous slide in terms of backlog and activity.

You can see why we have used this as a guide in terms of our strategic build-out and scaling. So as we said, targeting 80% utilization will generate full spread. That means vessel and equipment and EBITDA of NOK 100 million per year. Now we see that, that is a good target to have. And we are in a good situation to make that a reality. Of course, meaning that we add to our fleet with more vessels and with the equipment that we have on order, that means that this will become a very good story over the next year.

So the growth plan for 2023 already done. We are looking to 2024, of course, led by business, obviously, but we do work on -- in the planning stage of adding vessel #3 to our fleet. And given success of that, obviously, another one in 2025. But of course, as I said before, this is led by successful business, of course, before decisions are taken.

So a couple of words on technology. Argeo Listen, a very successful sensor system, a main value driver for the NPD project. It was the first one with Argeo Listen in commercial use. It worked very well and now is the biggest value driver for both the NCPOR project where we require electromagnetic data to delineate possible marine mineral deposits. And for the workforce Shell, where we use it for contactless cathodic protection. So that means that we can say something about the risk of corrosion on the pipelines itself.

Deepwater, of course, really high efficiency. We can do this in 5 to 7 kilometers per hour and fly above targets with 8 to 10 meters. So it's a fantastic tool. Then we are commercializing now Argeo Whisper. We're using it with some prominent customers in the offshore wind market, and this is used for everything related to inspection and maintenance of electrified cables, but we can use it in mineral market for detection. We can use it for UXO detection and we can use it for mineral exploration as well.

And finally, Argeo Discover. This is currently not a big focus for the company as we have a lot of other things to deal with, but it's a patented system and being developed in a sequence of Argeo Listen and Argeo Whisper. Argeo SCOPE, our digital solution, has gone through a lot of development. It can now seamlessly handle all of the data types that we acquire. Fully cloud setup, but also going forward, we will offer an on-prem solution as well. Full 3D model and really a very nice and easy platform to use.

Works for your web browser. All of our clients that we worked for thus far has been using it throughout the projects. So it gives us a very good flow of communication and activity between the technical team, the operations offshore, the land-based team in Argeo and the clients. So I will now give the word to Odd Erik. And after the outlook, we will do a Q&A session as well.

[Odd Rudshaug, executive]

Yes. Thank you, Trond. So revenue in Q3 this year was NOK 49 million. This came from the project we had for NPD in the Northern Atlantic from the Stromar offshore survey offshore U.K. And from this long-term contract, we have on the Hugin 6000. We have had Argeo Searcher charter from earlier this year. And in Q3, we also had a vessel -- an additional vessel on charter for the Stromar survey. So operating cost increased to NOK 53.8 million in Q3.

EBITDA was minus NOK 31.6 million in Q3. Net financial items, minus NOK 0.5 million and we had a loss in the period of NOK 31.6 million. Total noncurrent assets, NOK 258 million in the end of September. This includes NOK 36.7 million in intangible assets, which is development cost for Argeo SCOPE and these are the development projects we have. Muti-client delivered NOK 7 million; property, plant and equipment NOK 209 million, this is mainly the 2 main SeaRaptor, Hugin 6000 and the Argeo USV. We had NOK 1.2 million in cash at the end of September.

Equity was NOK 156 million. Long-term debt NOK SEK 94 million is sellers credit we have on the 3 AOEs and the loans we have from Innovation Norway. Move to the cash flow statement. Net cash from operating activities in Q3 was minus NOK 1.4 million. We had a positive effect from the share issue we did in June. This cash was received in July. So there was a positive effect of NOK 43 million, but this was offset by an increase in receivables of NOK 33 million.

Net proceeds from the share issue, from subsequent offering in July was NOK 6.5 million, and we paid NOK 5.9 million in debt during the quarter. So with that, I think we will open up for questions.

[Operator]

Yes. Okay. So we've had quite a few questions today. Well, let's just quickly see. We will start with -- just one moment. We will start with one of the questions from the net. Can you say something about the margins on the contracts you've won in the last weeks?

[Odd Rudshaug, executive]

Yes, we -- when we do our tendering and bid on projects, we aim for a 30% EBITDA margin. So yes, I think that is what we can say about those projects.

[Operator]

Excellent. And how does Argeo work towards getting new projects within the area Marine Minerals?

[Trond Crantz, executive]

Well, I mean, it's not very different from how we work with -- in the other verticals. We get -- of course, it's about getting on by the clients, which we are now. So now it's more responding tenders as we have done with NCPOR, for instance. Otherwise, from that, of course, we do also some level of business development as well. So more or less the same as in the other verticals.

[Operator]

There's a question about the Shearwater partnership. What does the partnership with Shearwater mean to Argeo? And what will it mean for the future? Also, have you already seen any effects?

[Trond Crantz, executive]

Yes. I think for now, we -- this is just a deal which is made. We need to spend time together and try to hash out synergies going forward. There are some obvious things that we are working on. And in addition to that, we have Andreas Aubert in our Board now as well. So we have a good connection with Shearwater. So it's a development, and it's a roadmap that we will get back to at a later stage.

[Operator]

And there's a question from [indiscernible]. Is there a lockup period? This is in regards to the private placement. Is there a lockup period for those participating in the private placement?

[Trond Crantz, executive]

In the...

[Odd Rudshaug, executive]

Yes, there is a lockup for the main shareholders in the company and for the executive management.

[Operator]

Okay. And there's another question in regards to that from [indiscernible], I think. When do you think Argeo will be uplisted on Oslo Bors?

[Trond Crantz, executive]

Yes, yes, do you want to take that as well?

[Odd Rudshaug, executive]

We commented that in the material for the sale we just had now in October, and we plan to do that within the next 12 months. And yes, that is still the objective.

[Operator]

And we're going to go back to operations. What are your -- well, commercial anyways, what are your expectations in regards to demand in Argeo's key markets?

[Trond Crantz, executive]

I think there are 2 things that points out, obviously. The first one is the activity going forward in oil and gas. And this is not sort of a fling or 1-year event, this will continue over the next 6 to 8 years. A lot of investments have been put on hold through the crisis, which is now being reactivated. There is a very little -- well there is no oversupply. It's a huge undersupply on the service side, obviously. So this is a big vertical and a big market, an important one for Argeo as well. We see that the same pay maker [indiscernible]. And with that -- what I mean that is basically that the rates that we are able to secure in oil and gas and marine minerals are quite the same. And this is obviously led by the fact that we have the same equipment, the same vessels and so forth and customers are working to start to implement the exploration programs. We see, as I said, the cost issue related to offshore wind. But on the longer term, the LCOE will be improving, and we see that major projects are coming as well in that market. So yes, it's looking very good.

[Operator]

You may have answered some of this before, but we'll keep the questions in any way. What are the main value drivers enabling Argeo to close contracts like the ones you have announced in the recent weeks?

[Trond Crantz, executive]

So obviously, we have spent time and is taking longer time than we expected, of course. That is to qualify the technology, the operation and the system. So that's one thing that we worked hard on in 2022 and 2023. So that's one part of it. The other one is the vessels and finally, the equipment. But what we deliver as a service to the clients is what is generated by the sensor systems that we have ourselves develop. And for both Shell for the pipeline inspection project, a major value driver there was the contactless CP system that we have from Argeo Listen. The other one is NCPOR, where we use the same sensor, but for another purpose. We use that to indicate potential deposits of deep-sea minerals. So that is the unique competitive advantage that Argeo has and that we talked about when we went to market. And while we have spent money developing that.

[Operator]

And I've said the last question is from Magnus said, what are you expecting -- sorry, this is not the right one. What is Argeo's focus going forward?

[Trond Crantz, executive]

Obviously, you can answer a part of it, but obviously, it is maintaining or increasing margins in the projects increasing efficiency, which eventually will result in better performance and positive cash flow going forward. You want to...

[Odd Rudshaug, executive]

To make this backlog, we have now profitable. That's the main focus going forward.

[Trond Crantz, executive]

At the same time, was there any more questions?

[Operator]

No, we're kind of running out of time as well.

[Trond Crantz, executive]

Okay. So just one point I've been asked about that nearly on a daily basis. The message or enhancement regarding the subsequent prior placement will come towards the end of this week or [Foreign Language], as you say. So there are news coming on that later.

[Operator]

Thank you.

[Trond Crantz, executive]

Thank you.