Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2023-Q1

[Bjørn Lindhom, executive]

Welcome to the presentation of EMGS' First Quarter 2023 results. I'm here with our CFO, Anders Eimstad. And together, we will present these results. Please take note of our disclaimer. This quarter is our eighth consecutive profitable quarter, which is the first for EMGS and another testimony to our flexible cost model.

The revenue for the quarter came in at $5 million, almost all of which are late sales from our multi-client library in Norway. Our EBITDA was $3.1 million and the adjusted EBITDA, $2.4 million. The net income was $0.5 million. There were no changes to our convertible bond loan during the quarter, and it remains at approximately $19.5 million. Our free cash at the end of the quarter was $14.2 million, which is up from $11.4 million in the previous quarter. Our financial position remains strong.

Moving on to our operations and markets section. The Norwegian market for EM has been a disappointment so far this year, and it is considerably slower than before COVID. There are many reasons for this, but one of the main drivers is that the oil companies focus on short-term cash flow and are not willing to invest in frontier exploration. Their focus has been infrastructural-led exploration, where EM has less world to play. In addition, recent M&A activities and exits have reduced the number of oil companies that are exploring from Norway.

Our late sales from the library have been and are still dominated by sales of the Barents Sea library. The interest for exploring the Barents Sea peaked in 2014 and has been in decline since, partly because of the downturn and partly because of the lack of exploration success. Could this now be changing? Is the exploration in Barents Sea due for a revival? Well, the current geopolitical situation with war in Europe and the stop in Russian gas supply to Europe has forced European countries to focus on energy security. Norwegian gas is playing a key role and Norway is now the largest supplier of gas to Europe.

If Norway wants to retain its position in the long run, we need to find and develop more gas. The Barents Sea has a lot of gas. With the lack of hard client and the fact that the LNG facility at Melkøya will have no spare capacity for decades, means that discovering gas in the Barents Sea has had limited commercial value. Maybe this could be changing.

The Norwegian authorities have initiated a reassessment of the gas transport alternatives from the Barents Sea and the pipeline connecting the Barents Sea with existing export pipeline network that currently ends at Aasta Hansteen in the Norwegian Sea, is now seriously being considered. The recently announced APA license round in Norway included new areas in the Western Barents Sea. This should be positive for EMGS and the interest in using EM offshore Norway.

Outside of Norway, we see increased exploration activities from the majors and the national oil companies. We see that rigs are becoming scarce and rates are going up. In India, for example, they are opening new areas for exploration, setting ambitious goals for the national oil company, ONGC and inviting the majors to come and join in the exploration efforts. For India, energy security seems to be more important than emission reductions at the time being. After all, India has only pledged to reach a net 0 target by 2070.

We see renewed interest in exploration in Africa and South America as well. All of this is positive for the interest in our EM services in the long run. Let's spend some time talking about 3 relatively recent developments within the EM technology and their importance for the future. Let's start with the fundamentals. If you want to map for a mutual subsurface using electromagnetic energy, we need to transmit an electromagnetic signal, a specific frequency content suited for the specific subsurface conditions we are trying to image. In EM, the source power is extremely important because the transmitted signal attend units much faster than an acoustic signal in the subsurface. The notation is frequency dependent and the higher the frequency, the more it attenuates and the shallower, it penetrates the subsurface.

Lower frequencies can therefore image deeper but with lower resolution as well. Therefore, in EM, it is critical to have as much power available as possible so that we can see as deep as necessary with the highest possible frequency to ensure the highest possible resolution. Our Deep Blue source has 1.5 megawatts of power available, and it is capable of transmitting current up to 10,000 amp and you can do this at 4,000 meters below the sea surface. It is about 10x as strong as any other deep-towed source available.

We now have many examples where Deep Blue is seeing targets that could not be seen or solved using a weaker source like our conventional source. The second key development we would like to talk about is our gas inversion and imaging algorithm. This is the EM equivalent of the seismic full-waveform inversion, and this has really been a step change in imaging quality compared to previous imaging algorithms. The latest improvement of this algorithm is the capability to also solve for dip geological layers and not only the resistivity. This has proven to be crucial in areas with steeply dipping geological layers. As you can find in the trust fall belts, for instance, offshore Borneo, Nigeria or in the Perdido area of Gulf of Mexico. But it's also important in areas with less dips, but higher electrical anisotropy, like the Barents Sea or offshore Eastern Canada.

The last development we would like to mention is our interpretation integration workflow, which allows us to integrate information derived from EM to update prospect risk and volume vestments and also provide input into the oil company's quantitative interpretation in terms of hydrocarbon saturation and net pay. This is being applied on several of our latest projects, including the Woodside project with good results. We have received extremely good feedback from our customers on these 3 key developments. And this is why EM can now do more than ever before.

[Anders Eimstad, executive]

Thank you, Bjørn Petter. The total revenue for the first quarter was $5 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see that revenue has decreased from the previous quarters as there was no revenue generated from vessel activity. Of the $5 million in revenue in the first quarter, $0.2 million were contract sales, $4.8 million were related to multi-client sales. We had 1 vessel on charter in the first quarter. The Atlantic Guardian was warm stacked for the entire quarter, resulting in a vessel utilization of 0% for the quarter.

We recorded an EBITDA of $3.1 million in the first 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 also decreased as compared to the previous quarters. However, it is the eighth consecutive quarter with a positive adjusted EBITDA. The adjusted EBITDA in the first quarter was $2.4 million. The next slide details the movement in the operational cost base. In the graph to the left, you can see the quarterly development of 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 $2.6 million compared to an operational cost base of $7 million in the fourth quarter. The $4.4 million decrease in operating cost base is primarily a result of decreased activity in the quarter. Other operational expenses remained consistent with the previous quarter.

Next slide details the movement of free cash in the first quarter. Free cash increased in the first quarter by $2.8 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 $11.4 million. The components increasing the cash during the first quarter are shown in dark blue, while the components reducing cash position are colored red. Free cash at the end of the first quarter was $14.2 million. The EBITDA of $3.1 million increased the cash this quarter, while vessel and office leases decreased cash by $0.7 million. The decrease in trade receivables from $7.9 million to $3.5 million increased the cash this quarter by $4.4 million. The decrease in trade payables from the previous quarter in the amount of $2.2 million decreased free cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $0.6 million in the first quarter. Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Lindhom, executive]

Thank you, Anders. That wraps up our presentation for today. Please e-mail your questions or comments to [e-mail]. Thank you.