Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2023-Q2

[Bjørn Lindhom, executive]

Welcome to the presentation of EMGS' second quarter 2023 results. I'm here with our CFO, Anders Eimstad; together, we will go through this presentation. Please take note of our disclaimer.

In summary, a fairly uneventful quarter, we were not able to secure any acquisition projects for Atlantic Guardian, and it remained warm-stacked for the entire quarter. Our revenues were $0.2 million. Our EBITDA was negative $1.1 million, and the adjusted EBITDA came in at negative $1.8 million.

Moving on to our operations and market section. The Atlantic Guardian continues to be in extended warm stack in Norway. Widened warm stack lowered variable charter rates for the Atlantic Guardian applied. The reduced variable rates, together with other reduced costs as a result of the warm stack resulted in significantly lower cash expenses until new backlog is secured. Securing backlog, while being a top priority for EMGS, has proven to take significantly longer than expected.

While EMGS is buoyed by the level of interest expressed by our customers, transforming customer interest to secure backlog has taken longer than expected and visibility for the remainder of 2023 remains low. EMGS continues to believe that the general market upturn in oil and gas sector will positively influence the EM market and that EMGS is well positioned to capitalize on this potential upturn.

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 still focus on short-term cash flow and are not willing to invest in frontier exploration. Their focus is infrastructure-led exploration where EM has less of a role to play. In addition, recent merger and acquisition activity and exits have reduced the number of oil companies that are exploring offshore Norway.

The ongoing APA license round in Norway includes new areas in the Western Barents Sea. This should be positive for EMGS and the interest in using EM offshore Norway should increase. Outside of Norway, we see increased exploration activities from Majors and National Oil Companies, all of which is positive for the interest in EM. But however, we also see an increased sales cycle.

On the positive side, we see an increased interest in using EM for non-hydrocarbon applications, including carbon capture and storage, marine mineral exploration, geothermal, geotechnical and various applications of magnetotelluric surveying. Despite a disappointing quarter, our financial position remains strong. Our available cash at the end of the second quarter was $13.5 million. The convertible bond remained constant at $19.5 million. We can also mention that the book value of the multi-client library was $1.2 million, and our equity remains positive at $5.9 million.

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 or image the subsurface using electromagnetic energy, we need to transmit an electromagnetic signal with 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 attenuates 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 Ampere 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 Gauss-Newton 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 of 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 thrust fold 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 and integration workflow, which allows us to integrate the information derived from EM to update prospect risk and volume estimates and also provide input into the oil companies' 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. And then I will hand it over to Anders to go through our financial numbers in a little bit more detail.

[Anders Eimstad, executive]

Thank you, Bjorn Petter. The total revenue for the second quarter was $0.2 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see that the revenue has decreased from the previous quarters. Of the $0.2 million in revenue in the second quarter, $119,000 was contract sales, while $75,000 was related to multi-client sales. We had 1 vessel on charter in the second 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 negative $1.1 million in the second quarter. The EBITDA excludes capitalized multiclient expenses as well as 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. The adjusted EBITDA in the second quarter was negative $1.8 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 second quarter was $2 million compared to an operational cost base of $2.6 million in the first quarter. The low operational cost base reflects the low activity level over the last 2 quarters.

The next slide details the movement of free cash in the second quarter. Free cash decreased in the second quarter by $0.8 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 $14.2 million. The components increase in 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 $13.5 million. The EBITDA of negative $1.1 million decreased the cash this quarter. Vessel and office leases decreased cash by $0.7 million. The decrease in trade receivables from $3.5 million to $0.8 million increased the cash this quarter by $2.7 million. The decrease in trade payables from the previous quarter in the amount of $0.2 million decreased free cash. The investment in property, plant and equipment of $0.4 million in the second quarter further decreased cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $0.5 million in the second quarter. Now Bjorn Petter will give a brief summary of the presentation.

[Bjørn Lindhom, executive]

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