Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2020-Q2

[Bjørn Petter Lindhom, Chief Executive Officer]

Good morning and welcome to the presentation of EMGS' second quarter results. I'm joined by Anders Eimstad, our CFO. And together, we will present these results. So Slide 2, we have our standard disclaimer. So let's move on to Slide 3, second quarter summary and highlights. During the quarter, we completed the fully prefunded Martin Linge survey. Data has now been processed and delivered to the clients. And the data quality is excellent, and the results are very interesting. We also acquired a small speculative survey in the Liatårnet area. Upon completion of this survey, we demobilized the Petrel Explorer and redelivered the vessel to SeaBird, all before the end of May. We have also renegotiated our charter party agreement with NSS for the Atlantic Guardian. The new agreement substantially decreases the day rate during cold stack, reduces the operational rates and extends the firm charter with 12 months. On the financial side, we recorded revenues of $7.5 million with an EBITDA of $1.6 million and an adjusted EBITDA of negative $2 million. We have also fully secured the Pemex contract guarantee facility with $7.3 million in pledged cash in accordance with the agreement with our contract guarantors. This reduces our available cash but it also decreases our interest expenses going forward. Moving on to operations, market and outlook. So Slide 5, transition to low-cost setup. Due to the unprecedented negative market conditions resulting from the COVID-19 pandemic and the low oil price, we have been forced to transform EMGS into a low-cost setup. This transition is on target and on schedule. I already mentioned the renegotiated charter agreement for the Atlantic Guardian. We had a very constructive dialogue with NSS, and we feel that we have reached an agreement which is beneficial for both parties. The new agreement allows us up to 12 months of cold stack with substantially lower day rate. The operational day rate applicable when we go back to operations, hopefully sometime next year, has also been reduced. The firm charter has been extended with 1 year. This agreement, together with the redelivery of the Petrel Explorer and the cost reductions associated with not being in operations, reduces our operational cost to a minimum. The personnel reductions are drastic but necessary. We have gone from approximately 125 employees in Q1 to less than 20 in Q4. We are in the process and on schedule with closing down or hibernating our offices and organizations outside of Norway. We are retaining a network of our former employees who will work as consultants for EMGS when needed. Our financial costs have been reduced as well. The guarantee facility related to the Pemex contract is now fully secured. Our pledged cash and the interest expenses recorded -- reduced accordingly. And Anders will talk more about our expected costs going forward later in the presentation. The marine exploration market remains depressed in general, and the demand for CSEM acquisition is expected to be low or nonexistent for the remainder of 2020. As a result of this, EMGS will not acquire any additional data during 2020. Our goal is to return to acquisition in the spring of 2021 with a multiclient campaign on the Norwegian Continental shelf, followed by an international campaign at a later stage. We are still working on our campaign in Namibia, and we have been able to extend commitments and delay other opportunities into 2021. We are working to secure sufficient projects to be able to mobilize in Namibia during 2021. In general, I would just say that our lead inventory remains intact or even is increasing. With most projects being delayed, the challenge for us going forward is to string together enough projects to cover the cost of mobilization. And I want to stress that we are taking a very conservative approach to this. We will not -- we will rather walk away from projects than risking initiating campaigns that could turn out to be below critical mass. In our new business model with low fixed costs, our goal is not to maximize vessel utilization at any cost. We can actually afford not to be in operation for longer periods of time. In Norway, we expect the activity to be primarily driven by license rounds. We expect data sales to oil companies preparing applications and fulfilling committed work programs. In 2021, we will have 2 license rounds in Norway, the 25th license round and the annual APA round. I would also like to mention that during the second quarter, we completed our last major software project. We completed what is called tilted transverse isotropy or TTI for short, a module for our Gauss-Newton inversion code. This concludes a decade-long series of technology projects on both the hardware and software side, which includes the deep resource, the new receiver design and the Gauss-Newton inversion code, which is now capable of both VTI and TTI. We expect that our Gauss-Newton offering will continue to drive demand for reprocessing of old data. It is quite astonishing the uplift or improvement we see when reprocessing data with this new Gauss-Newton inversion code. In many cases, we are reprocessing data as old as 15 years and are able to image details we thought not possible. This was actually how the Martin Linge project started. It started with the reimaging of some older 2D lines in the area. Moving on to Slide 7. So reprocessing old data is important, and we tried to keep up when wells are drilled where we have existing CSEM data. So far this year, 3 wells have been drilled on the NCS, where we have data and where the target would have been suitable for derisking with CSEM. These wells are Grind, Gabriel and Sandia. All 3 wells have been announced as dry, and EMGS looked at all 3 prospects before they were spudded. And all 3 wells lack resistive anomalies. We presented our observations and predictions before the well results were announced publicly.On the left-hand side of the slide, we are showing the resistivity expression of these 3 wells with comparison to nearby wells even. Now the absence of resistivity does not necessarily mean absence of hydrocarbons. It just means absence of sufficient volumes of hydrocarbons to be detectable by CSEM. In general, EMGS is typically not privy to operators' volume expectations and their commerciality assessments. It is therefore not for EMGS to say that these wells should not have been drilled. In many cases, there might be good reasons for drilling wells to help resistivity. What we can say is that the expected volumes targeted by these wells should not exceed what would have been visible on CSEM, this for the simple fact that we do not see any resistive anomaly associated with the prospects. In the exploration business, available geophysical measurements like seismic and CSEM are typically undersampled and most geological models are uncertain. A robust derisking workflow should always strive to find a geological model that best covers all observations, including CSEM if available. We don't drill small traps expecting large volumes neither should we drill prospects without resistivity and expect hydrocarbon volumes larger than what would be visible on CSEM. Hydrocarbons are after all resistive. However, in these cases, as often is the case, we suspect that CSEM was not used in derisking of these wells. In our experience, a derisking workflow not taking CSEM into account is at best incomplete. And in general, wells without resistive anomalies can be valid targets but only if the volumes required for commerciality are below the sensitivity threshold of CSEM. With that, I will hand it over to Anders, who will go through our financial numbers.

[Anders Eimstad, Chief Financial Officer]

Thank you, Bjørn Petter. On the next slide, you'll see an overview of the second quarter performance. The total revenue for the second quarter was $7.5 million. And the graph on the upper right shows the quarterly revenue development. From this graph, you can see the further revenue deterioration in the second quarter after the abrupt decrease in the revenue over the first quarter. Of the $7.5 million in revenue in the second quarter, $1.2 million were contract sales, $4.9 million were multiclient and $1.4 million were other revenue. All of the $1.4 million in other revenue is related to revenue recognition of Deep Blue partner contribution, which has no cash effect. We had 2 vessels on charter at the beginning of the quarter. However, only the Petrel Explorer and the multiclient surveys in Norway contributed to the 23% utilization rate. During the quarter, the Petrel Explorer completed the Martin Linge fully prefunded multiclient survey as well as the unfunded Liatårnet survey. Upon completion of the Liatårnet survey, the Petrel Explorer was demobilized and returned to the vessel owner upon expiry of the contract. The Atlantic Guardian completed transit from Las Palmas, Norway and was cold stacked in the beginning of April. We recorded an EBITDA of $1.6 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 adjusted EBITDA in Q2 was negative $2 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 was significantly decreased in the first quarter and has maintained its depressed levels over the second quarter. 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 expense, 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 second quarter was $9.5 million compared to $12.1 million in the previous quarter. The decrease in operating costs are a result of minimal activity as well as returning of the Petrel Explorer. The target operational cost base for the fourth quarter has been lowered from $4 million to $3 million and is dependent upon certain assumptions which may or may not prove to be accurate. The savings are a result of returning the Petrel Explorer in the end of May, cold stacking and completed renegotiations of the Atlantic Guardian charter party agreement, terminating all employees and consultants with the exception of an approximate 15-person skeleton crew, closing offices and also reducing other 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. The next slide provides an overview of the free cash development. Free cash decreased in the second quarter by $6.2 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 first quarter of $16 million. The components increasing the cash position during the second quarter are shown in dark blue while the components reducing the cash position are colored red. Free cash at the end of the second quarter was $9.8 million. The positive EBITDA of $1.6 million increased the cash this quarter while payment of vessel and office leases of $3 million reduced the cash. The decrease in trade receivables from $14.2 million to $6.6 million increased the cash this quarter by $7.7 million. The reduction in trade payables from the previous quarter in the amount of $2.9 million and deposits through a pledge account as part of a cash sweep mechanism included in accounting guarantee as well as other guaranteed security further reduced free cash in the amount of $4.9 million. Investments in the second quarter totaled $1.1 million while the interest paid in the quarter on a convertible bond amounted to $600,000. And now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Petter Lindhom, Chief Executive Officer]

Thank you, Anders. So moving on to the summary. We are pleased to inform that our cost reduction program is on target and on schedule. We expect the quarterly operational cost base to be around $3 million towards the end of this year and into the next year while the Atlantic Guardian is cold stacked. Our short- to medium-term financial situation remains challenging. However, our going concern assumption is still intact, and we will -- and the reduced cost base and improved flexibility gives us a good starting point for future growth once the market allows. So with that, I would like to thank you for your attention, and we now move on to Q&A. Thank you.

[Bjørn Petter Lindhom, Chief Executive Officer]

Okay. So let's see if we have got some questions. So there is a question about the pledged accounts and the $7.3 million that is in that account and when it can be released. So the way this works is that during the validity of the contract, we have put a guarantee in place for 10% of the total contract value. That guarantee we have secured with cash and dispatched accounts. At the end of the validity of the contract, that will be transformed from a performance guarantee of 10% to a quality guarantee of the actual executed value of the contract. So we expect, at the beginning of next year, approximately 50% of this cash will be released in conjunction with that. And then the remaining 50% will be released in the beginning of 2022. And then there is also a question about Pemex payments, so whether we have received any additional payments after the close of the quarter. So in general, we don't comment on individual payments. However, what we can say is that we expect this Pemex payment delays to persist. And it is one of the risk factors that we are highlighting in the quarterly report. Let's see if there's any other questions. So there's a question about revenues during cold stack of the Atlantic Guardian. So again, in general, what we can say is that, of course, when there is -- of course, no acquisition revenues during cold stack, so revenues would be limited to late sales and service revenue. So the nature of that is that. We expect them to be less than -- of course, than if we had acquisition. But our goal is to survive that until we can get back into acquisition.There's a question about the financial expenses and whether those can be reduced further in the future. And that's something that we're not commenting on. And if so happens, then, of course, it will be announced to the market. A question about backlog and what part of the backlog that we expected still to materialize. So the backlog that is not related to Pemex is a mix of well calibration studies and also an announced project in Namibia. Another question about our predictions on LinkedIn and whether there are signs that E&P companies are becoming more receptive. So in general, yes, absolutely. I think we have -- over the last few years, we have managed to get CSEM on the radar and agenda for -- certainly for all the oil companies in -- active on the Norwegian Continental Shelf but also internationally. And we felt that we had very good traction on this up until the corona pandemic struck. Give it a little bit more time to see if there are any additional questions. So there doesn't seem to be any additional questions. So then, I just want to thank everyone for listening in. And yes, thanks a lot.