Electromagnetic Geoservices ASA

OSE:EMGS

Earnings Call Transcript 2020-Q4

[Bjørn Lindhom, executive]

Good morning, and welcome to this recorded presentation of EMGS' fourth quarter results. I'm here with our CFO, Anders Eimstad, and together we'll take you through the quarter and a few subsequent events. Please take note of our disclaimer.

The Atlantic Guardian was cold-stacked during the entire quarter, and the company finalized the remaining cost-cutting and organizational changes during the quarter. We announced the signing of a prefunded multiclient project in Mexico. This project will start in late March or beginning of April, and is scheduled to take 1 to 2 months. The customer is an existing customer, but EMGS has not worked for this customer in Mexico before. Upon completion, we will transit back to Norway in time for the Norwegian summer acquisition season, and we plan to start our prefunded Utsira High survey.

On the financial side, we recorded revenues of USD 4 million, of which $2.3 million were late sales. The EBITDA came in at $1.5 million, and the adjusted EBITDA came in at positive $0.6 million.

There were a few significant and positive subsequent events. We received a payment on one of the significantly overdue invoices related to our previous project in Mexico, and the total cash value of outstanding overdue invoices from this project is now approximately USD 1.1 million. The pledge account balance of approximately USD 7.3 million related to the performance guarantee of the Mexico project was released. EMGS expects to put up new guarantees for approximately USD 3.6 million for quality guarantee that is required by the contract.

Moving on to operations, market and outlook. At the last quarterly presentation, we mentioned that we had received prefunding for a multiclient survey in the North Sea. The area where we are planning this multiclient project is Utsira High area. And more specifically, the area south of the Grane field and north of the giant Johan Sverdrup.

In the latest APA license round, 2 licenses were awarded in this area, PL 1095 operated by Equinor and PL 1096 operated by Vår. The PL 1096 operated by Vår has a firm CSEM work commitment, whereas PL 1095 has CSEM feasibility in the work program. The survey will cover these 2 licenses and also large open areas to the east. The plan is to acquire this project during the North Sea summer acquisition season and have fast track data available for the 2021 APA license round.

The project will be acquired with the Atlantic Guardian upon returning from Mexico and on completion of the prefunded Mexico multiclient project. We will use our surface-towed ShelfXpress source, with approximately 7,000 ampere, and we will acquire a 2x2 kilometer receiver grid as shown on the map.

We would like to talk a little on how we generate projects like this. In fact, the origin of this project stretches back to the infancy of CSEM and EMGS as well, and to the first CSEM survey ever acquired in the North Sea, a 2D calibration line acquired over the Grane field back in 2003 for then Norsk Hydro. Back then, the processing was very simplistic and we did not have imaging capabilities.

The plot on the top right shows the deliverable from back then. An oilfield should have manifested itself with a positive bump between the 2 vertical bars, marking the extent of the reservoir. However, we saw the opposite. We saw a depression. The industry back then concluded that CSEM does not work in shallow water.

However, EMGS has since then developed a shallow water source, the ShelfXpress, and algorithms addressing the shallow water issue like up-down separation. These developments have opened up shallow water, and we now routinely acquire data in all water decks and including shallow water.

A few years back, we entered into agreements with many of the companies that had proprietary legacy CSEM data on the Norwegian continental shelf to be able to process and market this service to the industry. This included several 2D lines in the Martin Linge area and also the 2D line over the Grane field from 2003.

We have reprocessed and inverted both surveys using our state-of-the-art Gauss-Newton inversion, and we were able to image both the Martin Linge and the Grane field. In both cases, the reprocessing and successful imaging resulted in new multiclient data acquisition projects.

The Martin Linge multiclient survey was acquired last spring, and we will acquire the Utsira High multiclient survey this summer. Both are good examples on how we continuously mine our data library, both the 2D and 3D libraries, for IDs for new multiclient projects. In general, we tell customers that they should reprocess and really enrich data that is older than 2 to 3 years.

On this slide, we show the Grane field from the legacy 2D CSEM line acquired for then Norsk Hydro back in 2003. We can see the increased resistivity in the Heimdal reservoir, which was penetrated by the 25/11-18 well and below the regional resistivity increase of the Shetland group.

With that, I will hand it over to Anders, who will go through some more details on our financial numbers.

[Anders Eimstad, executive]

Thank you, Bjørn Petter. The total revenue for the fourth quarter was $4 million. The graph on the upper right shows the quarterly revenue development. From this graph, you can see the slight improvement from the previous quarter. However, revenue remains low as a result of low activity.

Of the $4 million in revenue in the fourth quarter, $0.4 million were contract sales, $1.4 million were other revenue and $2.3 million were late sales. All of the $1.4 million in other revenue is related to revenue recognition of Deep Blue partner contribution, which has no cash effect.

We had one vessel on charter in Q4. The Atlantic Guardian was cold-stacked for the entire quarter at reduced charter rate. We recorded an EBITDA of $1.5 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 Q4 was $0.6 million.

The quarterly development of the adjusted EBITDA is shown in the graph at the bottom right of the slide. Low cost in the quarter coupled with higher revenue has resulted in a positive adjusted EBITDA.

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 $3.4 million. The increase in operating costs as compared with the previous quarter is the result of impairment of spare parts in the fourth quarter in the amount of USD 1.7 million. Management will continue to focus on keeping costs low while preparing for the upcoming project in the Gulf of Mexico and subsequent multiclient campaign in Norway.

The next slide shows the movement of free cash in the fourth quarter. Free cash decreased in the fourth quarter by $113,000. 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 $4.3 million. The components increasing the cash during the fourth quarter are shown in dark blue, while the components reducing the cash position are colored red. Free cash at the end of the fourth quarter was $4.2 million. The adjusted EBITDA of $600,000 increased the cash this quarter, of which vessel and office leases were $900,000.

The decrease in trade receivables from $6.3 million to $6.2 million increased the cash this quarter by $100,000. As previously mentioned, EMGS continues to experience payment delays from Pemex on the completed acquisition contract. However, this status has significantly improved as a result of additional payments in the amount of $3.9 million subsequent to the end of the quarter.

The increase in trade payables from the previous quarter in the amount of $0.4 million further increased free cash. Additionally, as of the 2nd of February, $7.3 million, which was previously held in a pledge account, has been released and has now moved from restricted cash to cash and cash equivalents. Upon reaching certain conditions, EMGS expects to issue a time-limited guarantee secured by cash in a pledged account in the amount of approximately $3.6 million.

Now Bjørn Petter will give a brief summary of the presentation.

[Bjørn Lindhom, executive]

We have then reached the summary. So in summary, our cash position has improved, especially after the end of the fourth quarter. This is a combination of several late sales, receiving payments on past due invoices and the release of the balance from the pledged account.

We have an acceptable backlog for the first half of this year with our Mexico and Utsira High multiclient projects. And on the financial side, we recorded a positive adjusted EBITDA in the fourth quarter. And EMGS is well positioned for market recovery, with a cost level adjusted for the rather challenging current market conditions.

With that, I thank you for listening to us. If you have any questions, please e-mail us at [e-mail]. Thank you.