Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2020-Q3

[Bjørn Petter Lindhom, Chief Executive Officer]

Good morning, everyone. Welcome to EMGS' third quarter results presentation. My name is Bjørn Petter Lindhom. I'm the CEO of EMGS, and I'm joined by Anders Eimstad, our CFO, and together, we will present these results. On Slide 2, we have our standard disclaimer. And so we can move on to Slide 3. Fairly, an eventful quarter. The Atlantic Guardian was cold stacked for the entire quarter, and we continued our transition towards the low-cost setup. We are on schedule and on target of reducing the operational costs to lower than $3 million in the fourth quarter. Our third quarter revenues came in at $2.1 million with an EBITDA of negative $0.2 million and an adjusted EBITDA of negative $1.2 million. After closing the quarter, we reported multiclient sale -- multiclient late sales of $1.2 million, which will be recognized in the fourth quarter. We also announced a corporation agreement with Ocean Floor Geophysics of Canada, and I will talk a little bit more about that in the coming slides. Moving on to operations, market and outlook. A few words about our market outlook. We expect a continued slow return towards some kind of normalcy throughout 2021. However, we do -- we don't expect a real market recovery until 2022 at the earliest. In the meantime, we are working hard on putting together an acquisition campaign for the Norwegian continental summer season and also international opportunities thereafter. And we are cautiously optimistic that we will be able to do so. I am happy to inform you that we have secured the first prefunding. Our transition towards a local setup is on target and on schedule, and we expect our fourth quarter operational costs to be below the $3 million target previously announced. In the future, we expect our operational cost base to scale up and down with the activity level. I would also like to say a few words about collaborations. We at EMGS, the industry collaborations is key, especially in this market. This is not something new for EMGS. What is new is the importance of such collaborations. We want to cooperate to continue to build and expand the EM market. We also want to expand the application window of CSEM beyond only exploration. Collaborations are key to achieve this. We recently signed a collaboration agreement with OFG, Ocean Floor Geophysics for Vancouver, Canada. And they have announced that they are buying the PGS toll streamer CSEM equipment. And together, we are looking at places where we can combine the toll streamer with our nodes, especially in shallow water areas. Customers can now get surveys that combine the unparalleled data quality that only nodes can provide with the operational efficiency of the toll system. We also have a collaboration with a spin-off from the NTNU University of Trondheim called [ Time Lab Steel ]. And together with them, we are looking at developing this CSEM for reservoir monitoring markets. Also worth mentioning is that we have, and have had for many years, a collaboration with TGS in the Hoop area of the Barents Sea. And together, we will be promoting our CSEM data, which are relevant for Norway's 25th licensing round, which is expected to take place during 2021. I will now show some data from our Barents Sea library on the following slides. The Norwegian government has announced plans for Norway's 25th licensing round. They have proposed a total of 136 blocks, of which 125 are in the Barents Sea, and the remaining 11 are in the Norwegian Sea. We expect the round to take place during 2021, and we expect that the round will generate both late sales and new acquisition opportunities. We do expect that most of these opportunities will only materialize after the blocks have been awarded. This is because we expect the level of oil company interest and as a result of [ illness ] spend to be reduced as compared to previous licensing rounds. Of the 136 blocks proposed to be included in the round, EMGS' coverage within approximately 20 blocks, predominantly in the Hoop area, north of the Wisting, Hanssen and Mercury discoveries. The main exploration targets within the Hoop area are of Jurassic age. And EMGS has coverage over all the wells drilled in this area. So far, the CSEM data have been able to predict all the well results within the Jurassic. The figure to the right shows a subset of our data coverage in the vicinity of the Wisting field. 5 wells encountered hydrocarbons and two were dry, all correctly predicted by CSEM. The map also shows a few undrilled anomalous within the Wisting license, and we hope that these will eventually be tested and added to the Wisting resource base. Further north, there are another 5 wells, including Apollo and Germany North, which are also in full agreement with the CSEM predictions within the Jurassic. Within our existing data coverage, relevant for the 25th round, we see several resistive anomalies that are likely to be caused by hydrocarbons, both in the Jurassic level and also in the deeper Triassic level. It is my personal opinion that exploration -- that exploring and the Jurassic in this area without using CSEM is almost exploration malpractice. In our second quarter presentation, we gave an update on wells drilled on our multi-client library and the targets within the CSEM sensitivity window. We mentioned 3 wells, Grind and Gabriel and Sandia, all of which were dry and also without a CSEM anomaly and predicted, therefore, to be drying. Since then, a fourth well has been drilled. This one was called Mist and as the 3 proceeding wells, this one did not have a CSEM anomaly, and it also came in as dry. This outcome was predicted by EMGS and clearly communicated in advance. One can say that it's not easy to find oil and gas. However, it is virtually impossible to find significant volumes of hydrocarbons when you have a negative CSEM response, provided that we are within the CSEM sensitivity window. And this can readily be determined prior to any data acquisition or late sale purchase. In order to efficiently discover the remaining resources on the Norwegian continental shelf, the oil and gas industry need to make use of all available and proven technologies, including CSEM. If the oil companies continue to ignore CSEM and drill prospects that could have been condemned by CSEM, the authorities should step in and encourage or mandate the use of the appropriate technology. Reducing dry wells will improve oil company profitability, reduce environmental impact as well as save tax payment funds. 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. The total revenue for the third quarter was $2.1 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see the continued decline in revenue over the last quarter. Of the $2.1 million in revenue in the third quarter, $0.6 million were contract sales, $1.4 million for other revenue and $0.1 million related sales. All of the $1.4 million in other revenue is related to revenue recognition of Deep Blue partner contributions, which has no cash effect. We had 1 vessel on charter in Q3. The Atlantic Guardian was cold stacked for the entire order at a reduced charter rate. We recorded a negative EBITDA of $0.2 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 Q3 was negative $1.2 million. The quarterly development of the adjusted EBITDA is shown in the graph at the bottom right of the slide. While revenues declined over the last 3 years, the adjusted EBITDA has improved slightly over the last quarter as compared to Q2 as a result of the cost-cutting program. 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 third quarter was $3.3 million. The decrease in operating costs are a result of decreased activity as well as cost cutting measures. EMGS is on track to reach the target operational cost base in Q4 of less than $3 million. The fourth quarter target operational cost base is dependent upon certain assumptions, which may or may not prove to be accurate. Management is continuing to explore other ways in which the operational cost base can be reduced while maintaining the required operational capabilities. Free cash decreased in the third quarter by $5.5 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 second quarter of $9.8 million. The components increasing the cash position during the quarter are shown in dark blue, while the components reducing the cash position are colored red. Free cash at the end of the third quarter was $4.3 million. The negative adjusted EBITDA of $1.2 million decreased the cash this quarter, of which vessel and office leases were $1 million. The decrease in trade receivables from $6.50 to $6.3 million, increased the cash this quarter by $0.2 million. As previously mentioned, EMGS continues to experience payment delays from Pemex on the completed acquisition contract. The reduction in trade payables from the previous quarter in the amount of $1.3 million further reduced free cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $600,000 in the third quarter.

[Bjørn Petter Lindhom, Chief Executive Officer]

We will now provide a quick summary of the presentation. In summary, our cost reduction program is on schedule and on target. We expect an operational cost base of less than $3 million in the fourth quarter. The prediction strength of the CSEM method further underline with the correct prediction of the Mist well in the Barents Sea. And finally, EMGS is well positioned with multiclient CSEM data coverage in the Hoop area of the Barents Sea, which has been proposed to be included in the upcoming 25th licensing round in Norway. With that, ladies and gentlemen, we conclude the presentation of our third quarter results. Thank you. And if you have any questions, you can e-mail us at [e-mail]. Thank you.