Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2023-Q3

[Bjørn Lindhom, executive]

Welcome to the presentation of EMGS' Third Quarter 2023 Results. As normal, I'm here with Anders Eimstad, our CFO, and together, we will present these numbers.

Please take note of our disclaimer. A fairly uneventful quarter in terms of acquisition projects. We were not able to secure any acquisition projects for the Atlantic Guardian and it remained warm-stacked for the entire quarter. Our revenues were $1.6 million. Our EBITDA was $41,000 and the adjusted EBITDA came in at negative $0.7 million.

Subsequently to the closing of the quarter, we announced a contract award for a project within the renewable energy infrastructure segment. We'll talk a little bit more on that later.

Moving on to our operations and market section. Securing backlog with Atlantic Guardian is of utmost importance for EMGS. It is our top priority. However, despite all our efforts, it has taken significantly longer than expected. And now we do not expect that the Atlantic Guardian will get it back into operations until during the first half of 2024. That said, we are encouraged by the volume of requests and discussions regarding potential projects for 2024. And we have a positive outlook for 2024 in general and especially for the Norwegian continental shelf. We know that several companies have applied with EM in the work program in the annual APA licensing round, where awards are expected in mid-January next year. We also believe that the expansion of the acreage available in the Western Barents Sea for licensing under the APA regime, combined with the authorities focused on gas exploration and gas to Europe is positive for EMGS. We are currently engaged in discussions about several projects on the NCS in 2024.

There is also significant interest in EM outside of Norway. Many of the projects discussed outside of Norway are large, but unfortunately, we have seen an increase in the length of the sales cycle relative to pre-COVID situation.

Finally, we see an increased interest in using EM for non-hydrocarbon applications, including carbon capture and storage, marine minerals exploration, geotechnical, geothermal and using MT for deep crustal and mantle imaging. We recently secured our first project within the renewable energy infrastructure sphere. We will talk a little bit more about that in the upcoming slides.

When we talk about using EM outside of the oil and gas sector, we are talking about a variety of different applications, some of which require us to think very differently in terms of how we operate and how we acquired it.

We have talked about CCS before, and there is a considerable interest in understanding how CSEM can play a role in the monitoring of injected CO2 into subsurface reservoirs. We are about to undertake our first paid feasibility study for CCS. Within the marine mineral exploration segment, we have conducted acquisition for the ATLAB consortium on 3 different occasions. And we expect that to be an interest from companies bidding in the first concession round within the Norwegian Exclusive Economic Zone, which is to be organized by NPD sometime in the next few years.

There are also ongoing discussions with several companies about the use of EM on licenses outside the Norwegian Exclusive Economic Zone. However, the challenge is often that these projects are too small to cover vessel mobilization and demobilization.

We're also engaged in early discussions about using MT for marine geothermal applications. This would primarily be a small operation with the use of a local vessel.

Finally, we see interest for using EM within the geotechnical and renewable energy infrastructure area. We recently announced our first project within this segment, and I'll talk a little bit more about that on the next slide. Before then, I would like to just mention that these new applications are often on a different scale than the typical oil and gas projects. And in order to address many of these applications, we need to be able to tailor-make custom solutions and often without using our standard setup with the Atlantic Guardian. We are talking about chartering local vessels using the clients' vessels, providing a smaller crew to operate a few receivers with or without a source. We're not talking about using the DeepBlue source, but rather using our conventional source or maybe the ShelfXpress. We are currently preparing for a small project for Mexico, where EMGS will provide our ShelfXpress source and a small crew to operate it.

As announced earlier, EMGS recently entered into its first acquisition contract related to renewable energy infrastructure. The contract has a value of up to approximately USD 2 million. However, there is no minimum scope of work. We are not able to go into much details about this contract, but we can say that we will be acquiring resistivity data based on the magnetotelluric, or MT, to physical method offshore Southeast Asia, and it is for an undisclosed customer. We will chart a local vessel, and we will be using approximately 25 of our electromagnetic receivers to acquire MT data at more than 100 locations. The survey will be operated by small EMGS field group.

I would like to spend a little time talking about the magnetotelluric method. In contrast to control source EM or CSEM, we are not using a source when we are acquiring MT data. Instead, we are relying on the variations in the Earth's magnetic and electric field as the source. The resolution of the MT method is significantly lower than compared to the CSEM method. But the depth of investigation can be orders of magnitude larger.

The picture on the top of the slide is a composite image, illustrating the Aurora Borealis on other lights and the actual subsurface resistivity image obtained applying the MT method on one of the ATLAB service.

Despite a slow quarter, our financial position remained strong. The available cash balance at the end of the quarter stood at USD 11.5 million. The convertible bond loan is unchanged and it remains at $19.5 million approximately. The book value of our multi-client library is $1.1 million, and our equity is $4.1 million.

With that, I will hand over to Anders, who will go through our financial numbers in a little bit more detail.

[Anders Eimstad, executive]

Thank you, Bjørn Petter. The total revenue for the third quarter was $1.6 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see that revenue has increased from the previous quarter. Of the $1.6 million in revenue in the third quarter, the $82,000 was contract sales, while $1.5 million was related to multi-client sales. We had 1 vessel on charter in the third 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 $41,000 in the third quarter. EBITDA excludes the capitalized multi-client 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 bottom right of the slide. The adjusted EBITDA in the third quarter was negative $0.7 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 $2.3 million compared to an operational cost base of $2 million in the second quarter. The low operational cost base reflects the low activity level over the last 3 quarters.

The next slide details the movement of free cash in the third quarter. Free cash decreased in the third quarter by $1.9 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 $13.5 million. The components increasing the cash position during the third 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 $11.5 million. The EBITDA of $41,000 slightly increased cash this quarter. Vessel and office leases decreased the cash by $0.8 million. The increase in trade receivables from $0.8 million to $1.5 million decreased the cash this quarter by $0.7 million. The increase in trade payables from the previous quarter in the amount of $0.2 million increased free cash.

The investment in property, plant and equipment of $0.1 million in the quarter decreased free cash. Interest paid in the quarter on the convertible bond and other interest expenses amounted to $0.7 million in the third quarter. Now back to Bjørn Petter.

[Bjørn Lindhom, executive]

Thank you, Anders. That concludes our presentation. And as always, please e-mail your questions to [e-mail]. Thank you.