Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2019-Q4

[Bjørn Petter Lindhom, Chief Executive Officer]

Good morning, everyone, and welcome to EMGS' fourth quarter presentation.I'm here with our new CFO, Anders Eimstad. Anders started working for EMGS back in 2006, in Houston. He has held several positions within our finance department and worked for EMGS both in the U.S. and Norway. Anders and I have worked closely together for a number of years now and it is a testimony to our strong organization that we are able to recruit executive management members from within.So disclaimer, and then we will start with our Q4 highlights.During the quarter, we completed a proprietary acquisition for Petronas offshore Borneo. The Atlantic Guardian worked in Mexico for Pemex during the entire quarter.Despite challenging operational conditions, we have operated without incidence and according to schedule. Our backlog at the end of the year stands at $58 million, of which $14 million is firm. The revenue in the quarter came in at $37 million, EBITDA of $25 million and adjusted EBITDA of $21 million. In terms of net income, this is our best quarter since the IPO, and we will get back to that in a second.We are still experiencing payment delays and delays in acceptance of new invoices under our contract in the Americas. In connection with year-end 2019, the outstanding balance was substantially reduced, and that is reflected in our year-end cash balance. However, the delay in payments and acceptance of new invoices has continued into the new year. It is important to note that we are talking about delays and that we do expect that the customer will eventually pay all the invoices.Since the end of the year, we have also received one additional call-off or work order for approximately $3.4 million. The Atlantic Guardian has begun working on this survey. Although no guarantees can be given, we expect to receive additional acquisition work orders and are therefore mobilizing the Petrel Explorer to Mexico, and we will talk more about that shortly.Moving on to operations, market and outlook. So we just started a new year, and today, we are presenting our fourth quarter results, so allow me to reminisce over the past year. We are -- we returned to profitability after 4 challenging years. We delivered revenue of $89 million, an adjusted EBITDA of $33 million and net income of $15 million for the year of 2019. If we compare 2019 to past performance, the year was not outstanding in terms of revenue. We have had 7 years with higher annual revenue since the IPO. However, this is our second most profitable year ever, only beaten by 2014, when we in comparison had $198 million in revenue and net income of $26 million.The fourth quarter is also our best quarter since the IPO in terms of net income. This shows that our cost control and spending discipline is yielding the results expected.It's also worth remembering that, during the year, we signed the fourth and seventh largest EM contracts ever. That was the $73 million with Pemex and the $24 million with Petronas, respectively. Our annual multiclient revenues ended up at just over $26 million, which includes prefunding, late sales uplifts and uplift settlements. It also includes 2 substantial multiclient agreements of approximately $8 million each, 1 with Equinor and 1 with an undisclosed customer in Norway.During the year, we kept 2 vessels working, with a combined utilization of approximately 59%, which compares to 33% utilization in 2018. The Guardian started in Suriname, mobilized in Norway for a series of smaller multiclient projects, before mobilizing to Mexico. The then-Thalassa, now Petrel Explorer, started a large regional acquisition project for Petronas offshore Sabah and Sarawak in Malaysian Borneo. And upon completion of this project, she started the long transit to Mexico.Moving on to vessel update and backlog. As mentioned earlier, our backlog at the end of 2019 stood at $58 million, of which we have call-offs or work orders for $14.3 million. And we expect to receive additional work orders as the acquisition progresses.We also want to give a quick update on our vessel movements. So the Petrel Explorer will shortly arrive in Mexico, and it will relieve the Atlantic Guardian. Based on the information currently available to us, we plan for the Petrel Explorer to stay in Mexico for several months. The Atlantic Guardian is scheduled to leave Mexico shortly. It will transit to Las Palmas for a series of upgrades to our Deep Blue system before starting on the previously announced contract for BP and partners in Mauritania and Senegal.Based on the inherent uncertainty associated with working under a call-off system, we have agreed with SeaBird to convert the 6-month optional charter period for the Petrel Explorer, which was originally running from April to end September, into 6x 1-month option periods. And I will talk a little bit more about our 2020 plans on the next slides.So we expect to operate 2 vessels in the extended Atlantic margin during 2020. We expect the Petrel Explorer to continue working in Mexico for several months. We also expect to deploy the Atlantic Guardian on a series of proprietary and multiclient projects in the Atlantic margin. Some of these, we have announced; and some will be announced as they become firm. What we can say is that the Atlantic Guardian will transit from Mexico to Mauritania and Senegal to work for BP and the partners. We also expect that she will be working in Canada, Norway and Namibia during the year. However, the sequence of these projects are still not decided. Our focus is to keep the Atlantic Guardian and the Petrel Explorer in operation and to ensure backlog for these 2 vessels.We also have our mobile acquisition system, and this will be deployed in Asia Pacific and/or the North Sea as needed. However, our focus is profitability, not growth; cash preservation; and making sure we deliver the best possible products to our clients.As previously presented, our current focus is technology adoption especially targeted to the super majors. A key ingredient in this is our well calibration project, which we have covered in previous quarterly presentations. Although the progress is somewhat slower than what we initially hoped, we are currently in discussions about acquisition projects for several of the super majors.And with that, I will hand it over to Anders to go through our financials.

[Anders Eimstad, Interim Chief Financial Officer]

Thank you, Bjørn Petter.The next slide gives an overview of our fourth quarter performance. The total revenue for the fourth quarter was $37.2 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see the positive development over the full year. Of the $37.2 million in revenue in the fourth quarter, $21.6 million were contract sales. $6.6 million were other revenue, and $9 million were late sales. Of the $6.6 million in other revenue, $3.9 million is related to revenue recognition of Deep Blue partner contribution which has no cash effect.We had 2 vessels on charter in Q4. Both vessels were working on proprietary acquisitions for the majority of the time, with a total utilization of 80%. During the quarter, the Petrel Explorer completed the $24 million survey in Southeast Asia and started the mobilization towards the Atlantic on December 12. The Atlantic Guardian continued the Pemex survey in Mexico throughout the quarter.We recorded an EBITDA of $24.8 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 had adjusted EBITDA. The adjusted EBITDA in Q4 was $20.9 million. The quarterly development of the adjusted EBITDA is shown at the graph at the bottom right of the slide. Like revenue, the adjusted EBITDA has increased in every quarter this year. The adjusted EBITDA margin for the fourth quarter was 56% compared to 43% in the third quarter.The next slide gives more detail on operational costs. 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 fourth quarter was $16.3 million. While the cost base has been fairly stable over the year, Q3 and Q4 are higher than the preceding quarters due to the higher operational activity as well as operating on high-cost projects.We are required to pay withholding tax on certain costs in Mexico and Malaysia. These withholding taxes are included in the charter hire, fuel and crew expenses. We also had to pay $640,000 in "no cure, no pay" legal fees as part of the Brazilian municipal service tax verdict. The legal fees are included in the other operational expenses in Q4.Cost optimization remains to be a focal point for EMGS and will continue to be so in the future. The increased revenue and stable cost base has had a positive effect on our cash position. The cash development in Q4 is shown on the next slide.Free cash increased in the fourth quarter by $16 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 third quarter of $3.8 million. The components increasing the cash position during the fourth quarter are shown in dark blue, while the components reducing the cash positions are colored red.Free cash at the end of the fourth quarter was $19.7 million. The positive EBITDA of $24.8 million increased the cash this quarter, whilst the payments of vessel and office leases of $3.9 million reduced the cash. The increase in trade receivables from $20 million to $23.5 million decreased the cash this quarter by $3.5 million. Interest increased cash by $300,000 in the fourth quarter. This is related to $1.7 million in interest income received as part of the Brazilian municipal service tax verdict. The offsetting amount is comprised of interest on a $32.5 million convertible bond loan as well as other interest and guarantee fees.Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Petter Lindhom, Chief Executive Officer]

Thank you, Anders.So moving on to the summary. So we delivered a strong fourth quarter with revenues of $37.2 million, adjusted EBITDA of $20.9 million. The full year revenue was $89.4 million, unaudited, still unaudited. Our cash position continues to be adversely affected by delayed payments. It was $19.7 million at the end of 2019. And finally, the order backlog at the end of last year was $58 million, of which we had specific work orders and call-offs for $14 million.So with that, thank you so much, and then we will move on to Q&A.

[Bjørn Petter Lindhom, Chief Executive Officer]

Okay. So then moving on to Q&A. So we have received a number of questions, so I will try to go through each and every one of them. So the first question we have is what is the difference between EMGS of today versus maybe 10 years ago? So I think one of the things that we have -- or EMGS as of today, we have grown up. We have -- maybe in the past we probably misjudged a little bit what effort and work was needed to bring this technology into the mainstream. I think now we fully understand what is needed, and we are working on that and executing on that. We also, together with the whole industry, have learned the importance of cost discipline and keeping the fixed costs down. So maybe those are the 2 main differences I see, EMGS today, yes, versus 10 years ago. On the positive side, this can-do spirit and the fantastic staff we have is the same as then. And of course, that's something that we plan to keep going forward.Next question is about that, 10 years ago, we also received a number of large contracts, for instance, by Pemex, $150 million contract that we signed about 10 years ago. And why has it taken them so long to come back? And why now? So that's not entirely correct. We have had 4 contracts with Pemex, starting in the first one in 2007, late '07, I think, until the one we signed last year. We signed 1 in 2010 of $150 million. And then in 2013, we also announced a $100 million one. And several of these contracts have been extended. So we are very proud that we have been working with Pemex, more or less, on and off continuously for the last 10 years or so.And then there is a question about competition. So there is -- on the acquisition side there is a couple of smaller outfits that compete with us, not necessarily using the same type of acquisition technology but using CSEM nonetheless. And then on the processing side there is an -- CGG is a competitor on the processing side, and also to some extent or potentially Schlumberger. So there are a number of companies that are in the EM space. Yes, I think that's that question.And there's a question about contract pricing and price increase over the last few -- or from last year to this year. So for EMGS, the most important thing for us is to keep our vessel fully utilized, so that's really what is driving our results. There is -- it's difficult to compare prices from 1 year to another because there are so many variables, but in general what we can say is that the prices are slightly increasing from last year to this year. But maybe more important is that the demand is increasing.And then there is a question about the well calibration project and what it means in terms of revenue. We haven't said too much about that. We have announced that the one we do with Equinor is about $1 million in revenue. The most important thing for us with these projects is not -- it's not really the revenue. It's more the acceptance and the promoting the technology within the companies that we are conducting these studies with.Then there is a question about Canada. So we said that we are looking at operating in Canada during 2020, and that's as much as we want to say at this point. We will we -- come back with more information once it becomes possible to do so.And then there is a question about the Pemex contract and how that has progressed financially versus plan. And it's more or less on schedule and at the end of 2019. It was more or less on schedule.Then we have a question about North Sea multiclient that we have talked about in the past, the Martin Linge survey. So what we can say about that is that it is a fully prefunded multiclient survey. There are some restrictions on when it can be acquired, especially due to fishing activity. So at the moment, we are expecting to acquire that in the fourth quarter.I think that's all the questions that came in. So thank you so much.