Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2021-Q1

[Bjørn Petter Lindhom, Chief Executive Officer]

Welcome to the presentation of EMGS' first quarter 2021 results. My name is Bjørn Petter Lindhom. And I'm as usually joined here by our CFO, Anders Eimstad. And together, we will go through the numbers and some key events. On Slide 2, we have our standard disclaimer, which you can study at your convenience. We start with a summary of our operational highlights. During the quarter, we mobilized Atlantic Guardian from cold stack and transited to Mexico. The first project after an extended idle period is always associated with elevated operational risk. In this case, we also had the other complexity of having gone through a significant organizational restructuring. But I'm happy to announce that despite these challenges, the Mexico multiclient project was completed ahead of schedule, with good data quality and minimal downtime. Our cash position improved significantly during the quarter. If you recall, we ended 2020 with a free cash balance of $4.2 million. During the first quarter of 2021, the $7.3 million held in a pledged account to secure the performance guarantee associated with the Pemex contract was released, and EMGS also received payments of all outstanding invoices under the Pemex contract. At the end of the first quarter 2021, our available cash balance was $12.1 million. During the quarter, we received a contract award for a proprietary project in Southeast Asia. This project will be the first acquisition project for this customer. The project will take between 1 to 2 months, and the scope consists of both appraisal of a discovery and exploration of nearby prospects. The value of the contract is between $6 million and $7 million. On the financial highlights, our revenue came in at $1.6 million. We had a negative EBITDA of $58,000 and a negative adjusted EBITDA of $1.5 million. We are proud of the execution and completion of the Mexico multiclient project. This was an acquisition project that was fully prefunded by the operator of an exploration license on behalf of the license group. The survey consisted of 3 small 3D surveys and 1 regional 2D line in the Cordilleras Mexicanas or the Mexican Ridges area of the Mexican Gulf of Mexico. We acquired both CSEM data and recorded magnetotelluric data. Process data we would deliver to the customer during the second quarter. And EMGS expects to recognize approximately $7 million from the project. The project faced its fair share of challenges. Initially, we struggled with obtaining permits as a result of the Mexican permit authority's working on a reduced capacity due to the ongoing COVID-19 pandemic. However, after a short delay and some help from the Norwegian Embassy, we managed to secure all necessary permits and commence the project. We experienced less-than-expected technical and weather-related downtime. And we were able to complete the project ahead of schedule despite these delays caused by permitting. Mustering crew in the midst of a pandemic is not trivial either. Travel is complicated, and plans had to be changed several times. A rigorous COVID testing and quarantine regime was put in place. The Atlantic Guardian has now departed Mexico and is in transit to Southeast Asia. And we expect to start acquisition of the next project in the end of June or early July. The expected duration is between 1 to 2 months. Our transition to low-cost setup and a flexible and scalable organization was completed last year. The Atlantic Guardian is now back in operation after nearly 1 year in cold stack. Our goal is to keep her in continuous operation, but we have the option to put her back in cold stack for shorter or longer periods while waiting for additional work. The successful execution of the Mexico multiclient project is a testament to the motivation, dedication and experience of EMGS staff and our contractors. The current backlog consists of the Southeast Asia project and the Utsira High multiclient project in Norway. We expect start-up in Southeast Asia at the beginning of July, and we expect the Utsira High project to start late September and last for about 1 month. We are currently working on securing additional work following the Utsira High multiclient project. However, failing that, we have the option to put Atlantic Guardian back in cold stack with the associated savings. We have received a lot of questions about what EMGS is doing in the seabed or marine minerals segment and how the CSEM technology can be used to explore for these minerals. So we want to say a few words about that. Marine minerals have been identified as a potential supply source, in addition to recycling and traditional onshore mining, for metals needed in the energy transition. The Norwegian Parliament has enacted a law governing the exploration and exploitation of seabed minerals, and the NPD has announced an intention to launch the first concession or license round in 2023 or 2024. In EMGS, we have been looking at the emerging marine minerals market for some time. We have already acquired 2 data sets across the Mid-Atlantic Ridge, one survey of the Mohns Ridge and Lokis Castle and one survey of the Knipovich Ridge, both in collaboration with NTNU. The results of the Lokis Castle survey were published in Nature. Electromagnetic methods are widely used in the onshore mining business to locate ore deposits. In a marine environment, the ability of CSEM to detect marine minerals has been demonstrated on research surveys, by, for instance, GEOMAR or on small-scale commercial surveys by Ocean Floor Geophysics. However, these systems are not fit for large-scale commercial exploration of the vast areas along the ocean spreading ridges. EMGS is developing a commercial deep-towed EM system that can provide high-resolution images of the shallow subsurface and that can be deployed in the exploration for marine minerals. A first prototype will be developed by upgrading our existing CSEM source technology and towed receiver technology. We expect this system to be tested next year and full commercial system to be available well in advance of the first license round in Norway. So with that, I will hand it over to Anders who will present our financials.

[Knut Anders Eimstad, Chief Financial Officer]

Thank you, Bjørn Petter. The total revenue for the first quarter was $1.6 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see that the revenue has declined from the previous quarter, and it remains low as a result of low activity. Of the $1.6 million in revenue in the first quarter, $93,000 were contract sales, $120,000 were late sales, and 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 one vessel on charter in Q1. The Atlantic Guardian was cold stacked at the beginning of the first quarter but was taken out of cold stack to complete her 20-year class prior to transiting to Mexico. We recorded an EBITDA of negative $58,000 this quarter. EBITDA excludes the capitalized multiclient expenses as well as the vessel and office lease expenses. If we add these expenses to the EBITDA, we get an adjusted EBITDA. The quarterly development of the adjusted EBITDA is shown in the graph at the bottom right of the slide. While costs for the quarter remained low, the revenue was insufficient, resulting in a negative adjusted EBITDA of $1.5 million. 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 multiclient expenses in vessel and office lease expenses are added to the cost base. The operational cost base for the first quarter was $3.1 million. The decrease in operating costs as compared with the previous quarter is a result of impairment in the previous quarter as well as maintenance days used during the 20-year class in the first quarter of this year. Management will continue to focus on cost controls. However, operating costs will increase as activity increases. The next slide details the movement in free cash during the quarter. Free cash increased in the first quarter by $7.9 million. This is illustrated in the graph to the left. The light blue bar to the left shows a free cash position at the end of the fourth quarter of $4.2 million. The components increasing the cash position during the first quarter are shown in dark blue, whilst the components reducing the cash position are colored red. Free cash at the end of the first quarter was $12.1 million. The EBITDA of negative $58,000 slightly decreased the cash this quarter, while the vessel and office leases were $1.4 million. The decrease in trade receivables from $6.2 to $2.4 million increased the cash this quarter by $3.8 million. EMGS has now received payment for all outstanding invoices from Pemex. In the first quarter, $7.3 million were released from a pledged account, increasing free cash. This is included in the change in other working capital. The increase in trade payables from the previous quarter in the amount of $0.8 million further increased free cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $0.5 million and $0.3 million, respectively, in the first quarter. Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Petter Lindhom, Chief Executive Officer]

Thank you, Anders. I will now provide a quick summary of today's presentation. Our cash position was significantly improved during the quarter as a result of 2 main events. First, the cash held in the pledged account as collateral for the Pemex contract performance guarantee was released. This amounted to $7.3 million. We do expect to have to put up a new quality guarantee of approximately $3.6 million with cash held in a pledged account in the near future. This cash will then be released latest in February next year. The second event that substantially improved our cash position was that Pemex paid all outstanding invoices. We ended the quarter with $12.1 million in available cash. Subsequent to the end of the quarter, we completed the fully prefunded multiclient projects in Mexico and started transit towards the next project, which is a proprietary contract in Southeast Asia. With that, I would like to thank you for listening and remind you that you could send us your questions at [e-mail] e-mail. Thank you.