Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2021-Q2

[Bjørn Petter Lindhom, Chief Executive Officer]

Good morning, and welcome to the presentation of EMGS' second quarter results. I'm here as usual with CFO, Anders Eimstad, and together, we will present the results. Please take some time to study our standard disclaimer. Operational highlights. We completed the fully prefunded Mexico multiclient project, and we are recognizing USD 7.2 million from the project in the second quarter. After the completion of the project, we started the long transit to Southeast Asia. We arrived on survey location and started the projects in the last days of June. However, the entire project revenue will be recognized in the third quarter. We also announced $0.8 million in multiclient late sales, $1.2 million in prefunding and a multiclient frame agreement during the quarter. Our revenue came in at $9.4 million. Our EBITDA ended up at $7 million. And the adjusted EBITDA was $4.6 million. We are quite proud of the turnaround and the restructuring we have completed. And we feel that this quarter is a good example of our flexible business model in action. We are able to scale up operations during projects and then scale back down again when the project is completed. The challenge for EMGS in the past was not project margins. Our project margins have always been quite good. Rather, the problem was high fixed cost and low utilization, a common problem in the geophysical industry. After the close of the quarter, we announced multiclient late sales of $1.1 million from our Norway library and a late sale of approximately $2.5 million from our international multiclient library on the previously announced multiclient frame agreements. Finally, we announced a partial bond buyback where we spent $3 million in cash to buy back bonds at a 25% discount, resulting in a reduction of our convertible loan from $32.5 million to $28.5 million, a $4 million reduction. Moving on to the operational updates. Acquisition on the fully prefunded Mexico multiclient project was initiated in late March and completed after approximately 5 weeks at the end of April. We experienced record low weather and technical downtime, which is something we are very proud of since this project was the first project after we changed to a low-cost business model with project-based offshore crew and after the vessel had been nearly 1 year in cold-stack. High-quality data was delivered to the prefunders, and USD 7.2 million are recognized as prefunding revenue in the second quarter. The vessel then started the long transit to Southeast Asia, completed the mobilization and started the project at the end of June. The project is now completed, and all the revenue from the project will be recognized in the third quarter. The Atlantic Guardian is now in transit back to Norway, where we expect start-up on the fully prefunded Utsira multiclient project late third quarter or early fourth quarter. We have secured approximately USD 3 million in prefunding for these projects. A few words about the multiclient library. We started acquiring multiclient data in the Barents Sea in 2008. And now almost 1.5 decades later, our multiclient library has more than 100,000 square kilometers of 3D CSEM data, a significant amount of 2D CSEM data and it includes data in Norway, Mexico, Brazil, U.S., Canada, Uruguay and Indonesia. Current book value is less than $1.5 million, which means that when we sell data from the library, most of it has already been fully amortized. Our multiclient revenue, including prefunding, late sales, uplifts and transfer fees reached a high in 2014 and a low in 2020. Looking at the year-to-date recognized multiclient revenue and announced backlog for the second half of this year, we are already about 2x of last year's multiclient revenue. We will continue to invest in financially sound multiclient projects, and we will continue to harvest from previous investments. I think it was Niels Bohr that said, "It is difficult to predict, especially about the future." Here, we will not try to predict oil demand, let alone oil price, but we do expect there to be a demand for services to the oil and gas exploration and production industry for years to come, and this will continue to form the cornerstone of EMGS' business. Our main business is and will continue to be in reducing drilling risk and cost for the energy companies. We believe that efficient exploration will become more important, not less, because of the energy transition. Additionally, we see that the industry is starting to recognize the potential that CSEM has as a tool to improve the cost efficiency or appraisal programs, especially for gas discoveries, where seismic is not able to distinguish between high and low gas iterations. The Southeast Asia project that we just completed includes appraisal of an existing discovery as one of the survey objectives. And we expect after appraisal that the 4D market will develop. The Carbon Capture Utilization and Storage industry is growing fast to help decarbonize hydrocarbon production and consumption. CSEM responds to high gas operations. The response of CO2 and natural gas are indistinguishable. What matters is the gas saturation. We are starting to receive requests for information related to potential CO2 projects. However, the industry where we see the largest potential for our services beyond hydrocarbon exploration is the emerging marine mineral industry. We believe that EM will be the most important geophysical measurement to find and appraise so-called massive sulfide deposits, or SMS for short. After all, the most important distinguishing properties of minerals are their electric and magnetic properties. That is why EM is widely used on land by the mining industry. EMGS has the technology and experience needed to develop the marine minerals exploration market. We have the experience in acquiring geophysical data close to the seabed in deep water. We [ tow or source in ] deep water almost daily. Our record source time is in 3,600 meters water depth. And trust me, a lot of things can go wrong at those water depths, high water pressure and high power electronics are not a trivial combination. With that, I will let Anders go through our financials in some more detail.

[Knut Anders Eimstad, Chief Financial Officer]

Thank you, Bjørn Petter. The total revenue for the second quarter was $9.4 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see that revenue has increased significantly from the previous 3 quarters. Of the $9.4 million in revenue in the second quarter, $8 million were related to multiclient sales, $111,000 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 Q2. The Atlantic Guardian started the quarter completing the multiclient survey in Mexico. After completing the multiclient survey in Mexico, the vessel began transit towards Southeast Asia. Prior to the end of the quarter, the Atlantic Guardian completed the mobilization for the upcoming proprietary survey in Southeast Asia. We recorded an EBITDA of $7 million this quarter. EBITDA excludes the capitalized multiclient expenses as well as the vessel and office lease expenses. If we add these expenses to 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. The improvements to the adjusted EBITDA as compared to the previous quarters is a result of higher revenue in this quarter compared with continued focus on cost controls. The adjusted EBITDA in the second quarter was $4.6 million. The next line 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 second quarter was $4.9 million. The increase in operating costs as compared with the previous quarters is a result of increased activity as the vessel finished the multiclient survey in Mexico and completed its transit to Southeast Asia. Management will continue to focus on cost controls. The next slide details the movement of free cash in the quarter. Free cash increased in the second quarter by $1.1 million. As 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 $12.1 million. The components increasing the cash position during the second quarter are shown in dark blue, while the components reducing cash position are colored red. Free cash at the end of the second quarter was $13.2 million. The adjusted EBITDA of $7 million increased the cash this quarter, while vessel and office leases were $2 million. The increase in trade receivables from $2.4 million to $3.9 million decreased the cash this quarter by $1.5 million. The increase in trade payables from the previous quarter in the amount of $0.1 million slightly increased the free cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $0.6 million in the second quarter. Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Petter Lindhom, Chief Executive Officer]

In summary, we delivered what we think is a very good quarter with a healthy and positive adjusted EBITDA. Please e-mail us at [e-mail] with questions. Thank you for your attention.