Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2020-Q1

[Bjørn Petter Lindhom, Chief Executive Officer]

Welcome to the presentation of EMGS' first quarter results. I'm joined here by Anders Eimstad, our CFO, and together, we will present these results.On Slide 2, we have our standard disclaimer, so we can then move on to Slide 3.We were here 3 months ago, presenting the fourth quarter of 2019 and the 2019 annual numbers. 2019 was one of our best years ever. And at that point, the future looked really bright. Now it feels like we live in a completely different world. And in many ways, we do live in a different world. And the Q4 seems like it was ages ago.We have a tumultuous quarter behind us. EMGS has really been hit hard, and I say that we have been struck by a triple blow. The first blow came when Pemex notified us that they would not issue additional work orders for acquisition. That is when we started our restructuring and cost-cutting process. So when we were hit by the second and third blow, being the COVID-19 situation and the oil price collapse, we had already started our restructuring process. And we will talk more about that on the next slides.After receiving the notification from Pemex, we took the Petrel Explorer to Norway, where it started on the fully prefunded Martin Linge survey. This survey is now completed. We mobilized the Atlantic Guardian through the Canary Islands for the BP Mauritania-Senegal Survey just as the European countries started to close their borders. Due to the uncertainty and limited visibility surrounding the COVID-19 situation in Mauritania and Senegal, BP chose to cancel this survey.These developments, together with a number of other negative developments, which I will revert to later, forced us to make the tough decision to change the way EMGS operates, going from a fully integrated acquisition and processing company with an international presence and start to transition towards a low-cost setup. This includes cold stacking the Atlantic Guardian until we can rebuild the backlog. We do not expect to acquire additional CSEM data in 2020. We made this tough decision based on the unprecedented developments in the oil service markets and in an effort to protect shareholder value and the interest of all our stakeholders. And again, I will revert to this later in the presentation.Revenues for the quarter came in at $11.3 million and adjusted EBITDA at negative $0.8 million. After the quarter ended, we made an important late sale agreement in connection with the change of control events. The net revenue to EMGS from this sale was $1.7 million. We have also reduced our credit facility from $10 million to $2.5 million as part of our comprehensive cost-cutting program.And now onwards to the operations, market and outlook on the next slides. So as already mentioned, we have been struck by triple blow. One of these blows I'm confident that we could have withstood, 2 of them maybe, but not all 3 at the same time. The first block came back on the 20th of February with a notification from Pemex. With the effects of the second and third blow, our healthy backlog evaporated and vanished within a very short period of time.We were informed by BP that the planned Canada acquisition would not go forward and that the Mauritania and Senegal program was canceled. Our Namibia multi-client campaign has been delayed and none of the planned multi-client service on the Norwegian continental shelf did materialize, except for the already-committed Martin Linge survey. Other promising client negotiation stalls. So this means that we are not going to acquire any additional data in 2020. And the situation has forced us to implement the most comprehensive cost reduction in EMGS' history and move to a low-cost setup.So on Slide 6, what do we mean by a low-cost setup? Well, we are redelivering and demobilizing the Petrel Explorer at the end of the firm charter period at the end of this month. We have cold stacked the Atlantic Guardian and are in the process of reducing the vessel cost to an absolute minimum. We are also closing all our international offices, and we are laying off approximately 90% of our employees. At the beginning of the year, we employed around 150 people, including contractors and consultants, and we expect this to be reduced to around 15 towards the end of this year.We are not seeing a return to normal within a reasonable amount of time. We think that this situation will last well into next year and maybe much longer. We are, therefore, permanently laying off our employees instead of using temporary layoff or furlough that could have been used if we expected the situation to be temporary in nature. This means that the cost reduction takes longer time as most employees have a 3-month notification period. We are also consolidating our remaining employees in Oslo.On Slide 7, we are looking at the financial outlook. So preservation of liquidity is our main focus. The ongoing cost reduction process is aiming at reducing the quarterly cash costs to around $4 million a quarter at the end of this year. The Pemex payment delays have persisted into 2020. There has been a slight improvement as of late, but this remains one of our main concerns going forward.Our goal is to build a 2021 acquisition campaign, focused around already-identified opportunities on the Norwegian continental shelf and combining these with the international work that we are currently discussing. In the meantime, the company will have to live on late sales from the existing library. This situation is very serious, but we remain cautiously optimistic that we will be -- that we will make it through and be able to rebuild the company once the world and oil price stabilizes.The EMGS that eventually emerges on the other side of this health-induced financial crisis will naturally be a very different EMGS. The new EMGS will have a slightly -- will have a significantly lower cost base with a more flexible organization. At the same time, the new company will retain the cutting-edge technology and its leading market position. We will continue to have a DeepBlue source, and we will process data with our gas mutant 3D inversion project. These were the 2 technological step changes that enable the recent industry adoption.And now Anders will go through the financial numbers. So over to you, Anders.

[Anders Eimstad, Chief Financial Officer]

Thank you, Bjørn Petter. If we move to Slide 9. The total revenue for the first quarter was $11.3 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see the abrupt decrease in the revenue over the last quarter related to the global pandemic and the general downturn in the market. Of the $11.3 million in revenue in the first quarter, $9.6 million were contract sales, $1.4 million were other revenue and $0.27 million were late sales. All of the $1.4 million in other revenue is related to revenue recognition of DeepBlue partner contribution, which has no cash effect.We had 2 vessels on charter in Q1 and as a result of delayed and terminated projects, the quarter was defined by low utilization of 26%. During the quarter, the Petrel Explorer completed transit and mobilization for the acquisition project in Mexico. Upon notification that there would be no additional acquisition work, the Petrel Explorer started transit towards Norway to commence the fully funded Martin Linge multi-client survey in Norway. The Petrel Explorer arrived in the survey area on March 21.The Atlantic Guardian completed the Pemex survey in Mexico on February 15 and transited to Las Palmas in preparation for the BP Mauritania and Senegal proprietary survey. Subsequent notification of termination from BP, the Atlantic Guardian started transiting on March 26 for Norway and was cold stacked upon arrival.We recorded an EBITDA of $3.1 million this quarter. The EBITDA excludes the capitalized multi-client expenses as well as the vessel and office lease expenses. If we add these expenses to the EBITDA, we get an adjusted EBITDA. The adjusted EBITDA in Q1 was negative $0.8 million. The quarterly development of the adjusted EBITDA is shown in the graph at the bottom right of the slide. Like revenue, the adjusted EBITDA has decreased significantly this quarter as compared to the previous quarters.If we move to Slide 10. The next slide details the movement in the operational cost base. In the graph to the left, you can see the quarterly development and the components of EMGS' operational cost base. The components are charter hire, fuel and crew expenses, employee expenses and other operational expenses. In addition, the capitalized multi-client expenses and vessel and office lease expenses are added to the cost base.The operational cost base for the first quarter was $12.1 million. The decrease in operating costs are a result of decreased activity as well as the reversal of a bonus accrual made at the end of 2019. The target operational cost base for the fourth quarter is dependent upon certain assumptions, which may or may not prove to be accurate.The savings are a result of returning the Petrel Explorer, cold stacking the Atlantic Guardian, terminating all employees and consultants with the exception of an approximate 15-person skeleton crew, closing offices and reducing costs as much as possible. Management is continuing to explore other ways in which the operational cost base can be reduced while maintaining the required operational capabilities.And now we'll move on to Slide 11. The free cash decreased in the first quarter by $3.7 million. This is illustrated in the graph to the left. The light blue bar to the left shows the free cash position at the end of the fourth quarter of $19.7 million. The components increasing the free cash position during the first quarter are shown in dark blue, whilst the components reducing the free cash position are colored red.Free cash at the end of the first quarter was $16 million. The positive EBITDA of $3.1 million increased the cash this quarter, whilst the payment of vessel and office leases of $3.9 million reduced the cash. The decrease in trade receivables from $23.5 million to $14.2 million increased the cash this quarter by $9.3 million. The reduction in trade payables from the previous quarter in the amount of $3 million and deposits to a pledge account in the amount of $2.8 million as part of the cash sweep mechanism included in a counter guarantee further reduced the free cash. Interest paid on the convertible bond amounted to $600,000 in the first quarter.Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Petter Lindhom, Chief Executive Officer]

Thank you, Anders. So in summary, we have initiated a drastic cost reduction program, which includes, amongst other things, the redelivery of the Petrel Explorer and cold stacking of the Atlantic Guardian. We are not planning to acquire additional data in 2020 but are working on building a 2021 multi-client campaign on the Norwegian continental shelf. Our financial outlook in the short to medium term is challenging, but we are confident that we can weather this and that we will return as an acquisition company next year.And with that, I say thank you, and we now move to Q&A.

[Bjørn Petter Lindhom, Chief Executive Officer]

Yes. We have not received any questions yet. Give it a little bit more time.So we've received a question on -- a few questions. So one question about the mobile acquisition set that can be [Audio Gap]we have. It still is an option -- sorry. So there's a question about the mobile acquisition set and whether it is still available for -- to be deployed.So yes, we still have that. And we are -- it could be deployed if the opportunity arises. However, at the moment, our focus is to build the backlog for the Atlantic Guardian that we have on charter for 2021.Then there is a question about the BP work and whether that could resume in 2021.We -- as we said, the BP Mauritania-Senegal contract was canceled due to the uncertainty surrounding the COVID-19 situation. It is something that we will discuss with BP and see if there is a possibility to do that survey at a later stage. But so far, that has not been resolved.And then there is a question about the convertible bond and whether we will look at improving liquidity.And we are looking at all options to improve liquidity. So that's as much as we want to say about that.Any other questions?No. If there is no other additional questions, then thank you so much. And -- yes. We'll be back next quarter. Thank you.