Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2021-Q3

[Bjørn Petter Lindhom, Chief Executive Officer]

Hello, and welcome to this presentation of EMGS' Third Quarter Results. My name is Bjørn Petter Lindhom, and I'm joined by our CFO, Anders Eimstad. Please take notice of our disclaimer. We are very pleased with our operational performance in the third quarter. We completed the proprietary survey in Southeast Asia transited through the Suez Canal to Norway, and started the fully prefunded Utsira multi-client project in the North Sea. We'll go more into the details on this service later in the presentation. We record $12.7 million in revenue with an EBITDA of $9.7 million and an adjusted EBITDA of $7.6 million. Last quarter, we had revenues in excess of $10 million was in the first quarter of 2020. Back then, we had $11.3 million in revenue with an adjusted EBITDA of negative $1 million. Main difference between this quarter and that quarter is the significant cost reduction we have accomplished. We also have 2 financial events in the quarter, 1 positive and 1 negative. We initiated a bond buy-back program where we spent $3 million to buy back and redeem $4 million worth of convertible bond debt. The discount was there for 75% relative to par, thus reducing the balance from $32.5 million down to $28.5 million. We also experienced a very unfortunate event in Mexico. One of our banks, the Accendo Bank, had its license to operate revoked by the Mexican authorities. Accendo Bank is not EMGS' main bank in Mexico, but was used to facilitate certain day-to-day intra-group transactions. At the opening of the liquidation process, EMGS had deposits with the bank totaling approximately $2.1 million. The bank is now in forced judicial liquidation, and the funds we had deposited in the bank are no longer available to EMGS. Based on the highly limited information available to the company and uncertainty related to the amount and timing of liquidation dividends, if any, we have chosen to impair approximately USD 2 million. The impairment equals the full amount deposited with the Accendo Bank less a relative limited payment received from the Mexican bank savings protection fund. Despite this unfortunate event and after the impairment and the bond buyback, EMGS' cash balance was $14.8 million at the end of the quarter. Moving on to our operational updates, as already mentioned, we completed our Southeast Asia project on the 18th of August. During the project, we deployed 220 receivers, we transmitted or towed 930 kilometers with the Deep Blue source, all during the monsoon season. The revenues from the projects all recorded in this quarter was $7.3 million. We see an increased interest from our customers to use CSEM for appraisal, and especially for appraisal of gas discoveries in deepwater. This project had both appraisal and exploration objectives. After completion of the project, we transited to the Maldives for crew change and then onwards through the Suez Canal to Stavanger for crude change and mobilization of our ShelfXpress source system for the Utsira Multi-Client survey. This survey commenced on the 24th of September and was completed on the 2nd of November. We have deployed 348 receivers and towed or transmitted a total of 1,175 kilometers for the ShelfXpress source. The revenue from this service is expected to be recognized in the fourth quarter. Currently, we're doing a small test or proof-of-concept survey in the North Sea, and upon completion, we will warm stack the Atlantic Garden with a reduced layup rate until the spring when we expect to continue our campaign on the Norwegian Continental shelf. We will talk more about that in the future. Let's talk a little about our emerging marine minerals business. According to the International Energy Agency, IEA, the amount of minerals used in an electric car is about 6x of what is used in a conventional car with a combustion engine. And for power generation, we need almost 16,000 kilos of minerals to generate 1 megawatt from offshore wind, whereas around 1,000 kilos of minerals is needed to generate 1 megawatt from natural gas. It is quite clear that the transition from fossil fuels to renewables will require an increased mining output, probably beyond what conventional terrestrial mines can deliver. We believe that marine minerals are needed if the energy transition is to be successful. These metallic marine minerals have electric and magnetic characteristics that we can measure with CSEM. We believe that EMGS is uniquely positioned to be a dominant player in this market. We have the technology and experience needed. The system we have in mind is based on our current oil and gas setup with a few modifications and adaptations. It should be able to provide data in real time so that the operator can detect the mineral deposits as the vessel is passing over them. It will be based on our existing towing platform, providing us with virtually unlimited power at least compared with an AUV system. This power can then be used to transmit higher power signal or a broader frequency band. We're also looking at how our deep towed CSEM system can be combined with a surface towed high-resolution seismic system and multibeam echosounder. This would enable us to acquire all or most geophysical data needed in 1 go. So how realistic is it that EM methods will play a leading role in the marine mineral exploration business? In the oil and gas business, EM is a supplemental seismic. Here, we believe that EM will be the primary data set for exploration. The EU project, Blue Mining, delivered its report in 2018 and concluded that using bathymetry, seismic and EM, it is possible to estimate both volumes and tonnage of sulphide in extinct seabed massive sulphide mounds on the seabed. And that EM surveys are capable of determining thickness of deposits and detect buried deposits. These SMS deposits are created at the Mid-Atlantic Ridges, where hot mineral rich water from the earth's interior comes in contact with cold water. These are called black smokers. They have a surprisingly active pristine marine life and should be preserved. We need to find the extinct seabed massive sulphides, or eSMS. These are typically covered by a thin layer of sediment, and this sediment layer will increase as one moves away from the ridges towards, for instance, Norway or Greenland. It is the same type of deposits we often mine on land. In the Blue Mining report, they tested a towed EM system, and they concluded that it is possible to perform fast and reliable mapping for around EUR 25,000 per square kilometer. We believe we can do this even more efficient and at a lower cost. So what is the exploration challenge? Well, first, only extinct SMSs with sufficient mineral content will be our commercial interest. Very similar to oil and gas, we need to find the large ones first to justify the infrastructure and development which will be very expensive. According to the book by Ellefmo and Søreide from NTNU, there are currently 6 known SMS deposits in the [indiscernible] rich area. The estimate that there could be between 45 and 308 extinct SMSs with commercial mineral content on the NCS within an area of approximately 11,000 square kilometers. The exploration challenge is to find these in a cost-effective manner. The toolbox consists of EM methods, high-resolution seismic, other acoustic methods like multi-beam bathymetry and of course, actual sampling of the seabed. We expect EM methods to play a role throughout the whole exploration and appraisal cycle. That is detection or scanning, detailed mapping and appraisal of deposits when discovered. And very importantly, we can do this in an environmentally friendly manner and well below the EU target costs. With that, I will hand it over to Anders, who will go through our financials.

[Knut Anders Eimstad, Chief Financial Officer]

Thank you, Per Petter. The total revenue for the third quarter was $12.7 million. The graph on the upper right shows the quarterly revenue development. From the graph, you can see that revenue has increased significantly over the last 2 quarters. Of the $12.7 million in revenue in the third quarter, $4 million were related to multi-client sales, $7.4 million 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 the Deep Blue partner contribution, which has no cash effect. We had 1 vessel on charter in the third quarter. The Atlantic Guardian started the quarter acquiring data on a proprietary survey in Southeast Asia. Upon completion of the proprietary survey, the vessel transited to the North Sea and commenced acquisition on a fully prefunded survey in Norway prior to the end of the third quarter. We recorded an EBITDA of $9.7 million this quarter. EBITDA excludes the capitalized multi-client 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. The improvements to the adjusted EBITDA as compared to the previous quarters is a result of a higher revenue in the quarter, coupled with a continued focus on cost controls. The adjusted EBITDA in the third quarter was $7.6 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 multi-client expenses and vessel and office lease expenses are added to the cost base. The operational cost base for the third quarter was $5.2 million. As a result of the similar activity levels, the operational cost base remains relatively consistent between the second and third quarter. The operating cost base in the third quarter was $0.3 million higher than in the second quarter of 2021. The next slide details the movement in free cash over the quarter. Free cash increased in the third quarter by $1.5 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 second quarter of $13.2 million. The components increase in the cash position during the third quarter are shown in dark blue, while the components reducing the cash are colored red. Free cash at the end of the third quarter was $14.7 million. The adjusted EBITDA of $7.6 billion increased the cash this quarter, while vessel and office leases were $2.1 million. The decrease in trade receivables from $3.9 million to $1 million increased the cash this quarter by $2.9 million. The increase in trade payables for the previous quarter in the amount of $0.8 million increased the free cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $0.5 million in the third quarter. Free cash flow was reduced by $3 million as a result of the bond buyback. Also, an impairment of the Accendo Bank deposit reduced free cash by an additional $2.1 million in the quarter. Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Petter Lindhom, Chief Executive Officer]

Thank you, Anders. In summary, and despite 1 unfortunate event, we delivered a very good quarter both operationally and with regards to late sales. I think this quarter really shows the potential of our new business model. If you have any questions, please e-mail them to [e-mail]. And with that, thank you for your interest, and have a good day.