Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2022-Q1

[Bjørn Lindhom, executive]

Good morning, and welcome to the presentation of EMGS' First Quarter 2022 Results. I'm here as usual with our CFO, Anders Eimstad, and he will go through our financials. Please take note of our disclaimer.

We warm-stacked Atlantic Guardian after the completion of the Utsira High multiclient survey last year. And it remained laid up throughout the entire first quarter of this year.

The revenues for the first quarter came in at $6.2 million, of which $4.9 million were multiclient revenues in the form of late sales and transfer fees.

Our EBITDA was $4.5 million, and the adjusted EBITDA was $3.7 million. This compares to $0.1 million in EBITDA and negative $1.5 million in adjusted EBITDA for the first quarter of 2021. The improvement is a result of increased multiclient revenue.

The free cash balance at the end of the quarter was $8.2 million. We also extended the maturity date of our bond loan with 24 months from May 2023 until May 2025. And the current balance is approximately $24.5 million.

Our equity remains negative, but it improved from negative $2.5 million at the end of the year to negative $0.9 million at the end of the first quarter.

In addition, we have a few subsequent events worth mentioning. We have secured approximately $2.8 million in prefunding for surveys for Norway. And as a result, we mobilized the Atlantic Guardian at the end of April and started acquisition of the fully funded surveys in North Sea.

Moving on to our operations, market and outlook section. The market conditions for oil services are improving as a result of higher oil prices and a renewed focus on energy and security as a consequence of the war in Europe. The importance of gas, both as part of the energy transition but also in the energy security of Europe, is now very clear. So the fundamentals of an up cycle is clearly present.

But the capital discipline within the oil companies remains tight, and exploration budgets have not, in most cases, been revised upwards as a result of these improving market conditions. What we do see is an increase in oil companies requesting modeling and survey design studies. These are paid studies where we simulate an actual survey and provide the EM response to a series of geological scenarios.

For instance, what is the EM response to a reservoir with residual or low gas saturation as opposed to a reservoir with full saturation. Seismically, these scenarios look very similar. But EM would see a resistive anomaly if the reservoir was fully saturated and no anomaly for the reservoir with only residual saturations.

These studies are great in improving customer understanding of EM and its value proposition. But it also leads to a longer sales cycle. The interest in our multiclient library remains high, and we are very pleased with the performance of the library so far this year.

So our multiclient library continues to perform, and we are continuously adding new surveys to it. Our multiclient revenues announced so far this year up until yesterday, the 19th of May, stands at $7.7 million. This consists of $4.9 million in uplifts and transfer fees recognized in the first quarter and a $2.8 million yet to be recognized in announced prefunding. This will be recognized upon data delivery.

As previously mentioned, Atlantic Guardian is currently acquiring data on a multiclient campaign in the North Sea. One of the areas we see an increased and renewed interest in using CSEM for is in field appraisal and especially appraisal of gas discoveries. The graph on the upper right shows the relationship between water saturation in the reservoir and resistivity on the left and seismic velocity on the right. At close to 0 water saturation, which means close to full gas saturation, you have a very high resistivity.

And as you increase the water saturation and then drops the hydrocarbon saturation, the resistivity falls off quickly. However, the seismic velocity changes very little. It is only when you approach full water saturations, which means very low gas saturations, that the seismic velocity changes drastically.

This means that CSEM is good at distinguishing between a reservoir with high gas saturations and one that has low gas saturations or which reservoir segments have low and which segments have high gas saturations. It can provide information about the reservoir quality as good reservoir sands typically allow for higher saturations. All of these have implications for positioning appraisal wells and how many wells are needed.

In summary, the size of the CSEM anomaly is related to the volume of hydrocarbons. We see that it is much easier for the oil companies to trust the CSEM data in an appraisal setting than in a typical exploration setting where the question is always, what other lithologies besides hydrocarbons can produce a resisting anomaly. In the appraisal setting, the oil company know what was found in the discovery well and can compare that to the CSEM response at the same location. They have a calibration point, which is not often the case in frontier exploration.

We expect that a tightening rig market should contribute towards additional demand for using CSEM for appraisal projects. We also expect that as we do more of these projects, that word will spread and create an additional interest. We have several of these types of projects moving through our sales funnel.

And finally, it is, of course, not only for gas. It works equally well for appraisal of an oil discovery. The image on the bottom right is from the Wisting field and shows the 100% track record for CSEM in predicting high oil saturation.

And with that, I will hand it over to Anders to go through our financials.

[Anders Eimstad, executive]

Thank you, Bjørn Petter. The total revenue for the first quarter was $6.2 million. The graph on the upper right shows the quarterly revenue development.

From this graph, you can see that the revenue has slightly increased from the previous quarter but has increased significantly as compared to the first quarter of 2021. Of the $6.2 million in revenue in the first quarter, $4.9 million were related to multiclient sales, $64,000 were contract sales and $1.3 million were other revenue. All of the $1.3 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 the first quarter. The Atlantic Guardian spent the entire quarter in warm stack. The Atlantic Guardian was mobilized at the end of April to commence a fully prefunded multiclient survey in the North Sea.

We recorded an EBITDA of $4.5 million 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. EBITDA has increased as compared to the previous quarter and is the fourth consecutive quarter with a positive adjusted EBITDA. The adjusted EBITDA in the first quarter was $3.7 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 and vessel and office lease expenses are added to the cost base.

The operational cost base for the first quarter was $2.5 million. The operating cost base in the first quarter was $2.2 million lower than in the fourth quarter of 2021. The operational cost base was lower in the first quarter as a result of the Atlantic Guardian being warm-stacked for the entire quarter. Employee expenses and other operational expenses remain consistent with the previous quarter.

Free cash decreased in the first quarter by $1.6 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 $9.9 million. The components increasing the cash position during the first quarter are shown in dark blue, whilst the components reducing cash position are colored red. Free cash at the end of the first quarter was $8.2 million.

The adjusted EBITDA of $3.7 million increased the cash this quarter, while vessel and office leases were $0.8 million. The increase in trade receivables from $1.3 million to $4.5 million decreased the cash this quarter by $3.2 million. The decrease in trade payables from the previous quarter in the amount of $0.4 million further decreased free cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $0.4 million in the first quarter.

Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Lindhom, executive]

Thank you, Anders. That concludes our presentation today. Please e-mail your questions to [e-mail]. Thank you.