BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Okay. Welcome. Welcome, everyone. Welcome at the Q4 trading update and the full year 2019 financial results. As usual, I will give a general reflection and operations update, and then Ståle Andreassen, our CFO, will run you through the financials. Note our disclaimer and then the highlights 2019, and this is not coming as a surprise, as you have followed us because 2019 has been a really good year for BW Offshore. We had a record revenue and record EBITDA. We sealed the success of the BW Energy story, our field development strategy with an IPO, and raised the capital that we need for the next development. And we could resume to start to pay dividend in quarter 1. Starting with BWE shares of a value of $100 million, so that was dividend in kind. And we have now the plan to pay dividends, cash dividends starting from quarter 2. Our EBITDA in the quarter was $169 million and the operating cash flow, $135 million. Those were good numbers, a bit in between the Q3 and the Q2 results. We had 2 liftings of BW Energy that obviously contributed positively to these results. We also had to -- we could not have any income from Umuroa because of the bankruptcy situation in New Zealand. So that was putting the results slightly down. And so we ended up between quarter 2 and quarter 3. We also successfully completed the refinancing of the Nordic high-yield bond portfolio that was concluded in January, and that also allowed us to start to resume the payments of dividends. More than $1 billion, $1.1 billion revenue; EBITDA, USD 710 million. And you see in this graph also, the trend that gives a bit of a historical perspective as well, why we are so pleased with the '20s, clearly upwards. And you also see that this is the result really of the combined results of E&P and the FPSO segment. You see a happy crowd there. That was the first day of the listing on 19th of February on the Oslo Stock Exchange. We -- despite the difficult market, obviously, we managed to complete this IPO successfully. We raised the capital that we needed to finance BWO Energy stand-alone towards the first oil of Maromba. And the second objective, obviously, was to have direct access to the equity market for new investments going forward. And those objectives were met. And it's -- in combination, we were able to pay $100 million dividend in kind to the BW Offshore shareholders with BWE shares. And that is, to put it in perspective, that is the result of basically a strategic shift we made 3 years ago, only 2 years ago, to invest in field developments using our own FPSOs. And that has allowed us now to return more than $100 million to our shareholders. And it also facilitated the target of establishing a 25% free float on the Oslo Stock Exchange for BWO Energy. It's also the first dividend that we distributed since 2015. So I think this marks also a -- this is turning a pace from that perspective as well. After the IPO, BW Offshore remains the largest shareholder with close to 39% and BW Group keeps their 35%. What we really achieved now is that we have both companies financially independent and both companies can pursue attractive opportunities we see in the market, including the synergies between the 2 segments of field developments and FPSOs. Then operations. Our priority above everything else is safety, and I'm quite pleased to see that we now have the trends in the right direction on safety after an increase in 2018 of the LTIs. We studied those, we took action. We put improvements in place and the trend is in the right direction. The target is 0 compared to -- we had 5 LTI incidents this year compared to 9 last year, and we will trend this down to as close to 0 as practically possible for the size of operations we have. Also fleet uptime, very pleased, very stable. We have an average of 99% over the last 5 years and we will continue to deliver that. Then unit updates. Catcher was not as good as previous quarter, slightly below 100% uptime this time and slightly below the 60,000 barrels per day. Had to do with a shutdown and also some water injection issues that we're working through. We're facing also calcium naphthenate issues from the reservoirs. So we're working with Premier to -- a client to work through these issues. It's still very good results, but just slightly below what we were reporting last quarters. So there's no contribution to the excess production agreement in this quarter. Premier is working towards tie-ins early 2021, so early next year. And that will have 2 positive effects. One is, of course, that the plateau of the maximum production will be extended, but also the total amount of reserves to produce by BW Catcher will increase. And we're also working with Premier now to see how we can -- and we're actually progressing towards that to increase the production to about 72,000 barrels per day in the future, which, obviously, both companies will benefit from. So good news there. Adolo, stable, stable production. The field is naturally declining a bit, so that's why the production on Adolo also declines a bit. Uptime, close to 100%. And now next month, we are -- the FPSO is ready and the fields will be ready to get first oil from the Tortue Phase 2 developments. So we have, the second production well is now completed. So next month, we're aiming for first oil there. And that will about double the production on Adolo, and that triggers also higher revenues as the production increases. No news really on Berge Helene. That's depending on the progress of the field development of Maromba. And once FID is taken, then we'll progress with -- further with Maromba. On Umuroa, last quarter, I reported that we had a client, Tamarind Resources, that was in voluntary administration. And in December, that turned into liquidation. And consequently, we did not receive any income anymore from Tamarind in the fourth quarter. We received a bit more than $1 million from the administrators, but that was it. So there was an impact in 2019, which we guided already in previous quarter of $23 million, and that came in as expected. We're now progressing the demobilization. We plan to sail-away next month, sail-away back to Singapore and prepare Umuroa for redeployment. And the cost of that demobilization will be in the order of magnitude of $20 million. We're obviously pursuing all claims we can possibly get both to parent companies and also government, but it is very difficult to predict any chance of success or any timing of success. So we have made a reservation for these months, and they are included in the results. Those are the units that we have to grow our portfolio in the FPSO of existing units. So the 5 units that we have for extensions. 4 of those are in this -- as you know, on this rolling year on extensions, and 2 of those have already been extended again for a year, which is Polvo and Abo. Vicente has just started up a new early production program for a field in Brazil for Petrobras. That was a bit delayed. So probably, that program will also delay a bit. So there is a potential for another extension, but it's a bit uncertain how much and when exactly. Nautipa, the next extension will be declared in around the third quarter of this year. Then of course, the big one is Pioneer. And that contract now expires on the 18th of March. We have, in principle, agreed a new 5-year contract plus options, but we're working -- both legal teams are working very hard now to conclude all the Ts and Cs before the 18th. So hopefully, in a couple of weeks, I can tell you more how that exactly ended. And then, of course, the redeployments. Umuroa is a prime candidate, and we are still searching opportunities for Athena. That results in this backlog hasn't much changed, that's a familiar picture for you. What you see in firm and option durations for most units that very much meets the expected field life where they operate or field life is beyond those terms, which gives confidence in those options. Where that is slightly different is perhaps Polvo because beyond 2022, the field is still there, but our clients bought an adjacent field within existing FPSO, and that's quite unique to have 2 fields with 2 FPSOs, so close to each other. They bought that field. And so then it is not unlikely that, over time, one of the 2 FPSOs will disappear. And if that would be the case after 2022, then we will, of course, use Polvo for new opportunities in Brazil. And it isn't -- plus, of course, to have already a unit imported in Brazil complying with Brazil regulations. And the other one is what I already -- the one I already talked about was Vicente and then Pioneer, Umuroa we also discussed. Our E&P segment through BW Energy still a very great story and still, we continue to exceed our own and external expectations. 2019 was a good year, $192 million EBITDA. I refer to the update that was given yesterday by BW Energy. So this is really the summary of the highlights. The Tortue production was exceeding the higher end of the guidance for 2019, 4.3 million barrels. We had 2 liftings, and then we sold 1.3 million barrels at an average price of $65.1 in the fourth quarter. The production cost slightly increased as the production decreases a bit, so that's now about $22.8 per barrel. But of course, we're looking forward to next month when we bring in a lot of new production as part of Phase 2, and that will then drop the cost per barrel operating cost. Tullow exercised their back-in right with 10%. And that means that the ownership of BW Energy in the -- [ due to full ] license now is 73.5%. But the good news, again, second production well was completed, and that puts us in a position to be ready to bring on new production in March. Then over to finance, Ståle?

Yes. Good morning, everyone. I'll start with taking you through some of the income statement highlights, starting with the overall consolidated figures. Top line came in at $303 million for Q4, which is significantly up from last quarter, while EBITDA was $169 million versus $162 million that we delivered last quarter. The improvement is mainly driven by the 2 liftings that Marco was referring to where we sold 1.3 million barrels of crude this quarter compared to about 600 million in Q3. Also, the fact that we achieved slightly better price for the cargo. We achieved an average $65 -- just over $65 a barrel for the crude in Q4 versus just above $61 last quarter, had an effect on this. Then, despite this, of course, we had the negatives on Umuroa where we made $13 million of provisions in Q4. We have basically now not recognized any revenues at all. And we also made full provisions for any unpaid revenues. So kind of all exposure related to that now is removed from our financials. The only kind of income that we had in Q4 was about $1.3 million, which we got from the administrators related to this. The results are also slightly affected by lower commercial uptime on Catcher this quarter. Unit is obviously quite important. And a slight dip in commercial uptime from 100% to 98% has an impact on our results. The same as you have seen on -- when you look at the FPSO segment alone where operating revenues came in at $228 million, which is about $10 million lower than previous quarter and where EBITDA was $118 million versus $133 million in Q3. The E&P segment, which is now BW Energy, they did really, really well in the quarter. Significant increase, both on the revenue side and EBITDA and EBIT side across the border, again, mainly driven by just more cargo sold during the quarter. Looking at the income statement as a whole. I'm just covering kind of what has been covered already. Net interest expenses for the quarter was in line with previous quarter, as expected. We had a gain of $8.8 million on our financial instruments, to a large extent, driven by settlement of swaps as we were -- which were linked to the Nordic high-yield bonds that we had in our portfolio, which we started to purchase back in later part of the quarter. Taxes were a bit lower than previous quarter. Reason being basically that we have reversed some accruals on taxes. So no cash impact there. And this gave us a net profit of $30.6 million in total in Q4. On the total side, for the year, 2019, as Marcos said, we are extremely pleased when you look at the overall picture of the year, delivering $710 million EBITDA, which is about 45% better than 2018. So that's -- we're extremely pleased with the results overall despite the situation with Umuroa that we just talked about. And overall, we had a net profit of $106 million for this year, which is also significantly better than last year, again, despite the situation in Umuroa. But also, to note the fact that this includes also that we have taken about $30 million in kind of losses on mark-to-market effects on interest rate swaps in this number, which is a large number and noncash. Taking a look at the balance sheet. Net debt stood at roughly the same level as Q3, $997 million, and the leverage ratio also at the same level. So very, very solid. It's trending flat, but that's predominantly driven by -- we have also paid back, as I mentioned, some of our swaps. And that's not included in the interest-bearing debt. As such, we have spent some cash, which doesn't kind of influence the leverage ratio here. Equity ratio had a bit of a jump in Q4. In addition to the equity contribution you get from the results in Q4, when we did the convertible bond, the convertible bond per se, since it's an instrument with a convertible, you have to calculate an equity component in this instrument. And this has basically added $50 million to equity. So there's a calculated equity component that's been added here -- on that convertible, and that drove equity ratio to 43.3%. On the cash flow, and we're focusing on 2019 now as we're at the end of the year. There's a similar graph in the appendix for those who want to look at Q4. Operating cash flow for the year was $609 million. Again, very, very good operating cash flow from the fleet and the E&P business combined, the increase, for those of you that compared to '18, is, of course, to a large extent, driven by a full year of operation from our Gabon oil field. We spent almost $100 million on the E&P business mostly linked to development of Dussafu plus $30 million paid as an initial installment as we acquired the Maromba field in Brazil and then offset for monies we received when Gabon oil company and later this year, Tullow, backed into the license in Gabon. We have spent $130 million on the FPSO fleet. The main spend buckets are Adolo, where we have done modification work for tie-in of Tortue Phase 2 in Gabon. We're also spending money on the repair work for Cidade de São Mateus as we are replacing the off section of that FPSO. And the remaining part is linked to life extension activities on the existing fleet. Well, it's worth to mention that, to a large extent, this is covered by clients paid through the rates or reimbursable from them. Debt overall. Of course, we have taken up a new corporate facility. We have raised new debt through convertible bond and a new high yield bond, and we repaid an existing facility, the existing old -- or the old corporate facility plus part of the Nordic bond portfolio. So overall, we reduced our debt with about $136 million in 2019. We paid $98 million in net interest and lease liabilities. We paid $38 million to noncontrolling interest parties and we ended the year with $250 million in cash. And as we are now into 2020, I think we are maybe not surely in isolation but also looking at the market, I think we are quite pleased with that. We've been able to carry out the activities we plan to do already, that we are already done with this now. And that -- we took the jump to move ahead with the refinancing of our bond portfolio in November last year, raising -- issuing the CB as well as a new Nordic high-yield bond and having that sorted. So very pleased with being able to close out the activities we plan to do. As Marco mentioned, since we have now refinanced the bond portfolio and it paid off the last part of the old legacy bonds in January this year, we have now removed that kind of absolute dividend restriction that we had prior to this. Again, as everyone is familiar with, we have completed the IPO for BW Energy. We raised $125 million through that IPO. And we have paid about 37 million shares in kind to existing shareholders of BW Offshore, which is valued at approximately $101 million at the time of the IPO. When it comes to the reserved-based lending facility that we've been working on for BW Energy, this work continues to kind of drag out that it delays a little bit. We are -- we see that this probably now slips into second quarter, although we're making okay progress. But it's still worth noting that we don't see this slip to have any impact on that -- on the progress plans for BW Energy in terms of this being a cash flow, creating any kind of issue for them in terms of timing. Overall, looking at the liquidity and the balance sheet situation. I think we feel quite comfortable with $625 million in liquidity for the company as a whole, also having in that $375 million undrawn on our corporate facility. The backlog, as expected, when we don't add to the fleet with new business, so we are eating into the existing backlog, and it's been reduced from $5.8 billion to now about $5.5 million (sic) [ $5.5 billion ] combined when you look at both firm and probable backlog. And on the E&P side, just a 1 million adjustment, which is basically also there just reducing it from 248 million to 247 million as we have produced about 1 million plus barrels in Q4. This leads us to dividends. And referring back to what I mentioned earlier about being able to remove all the dividend restrictions. As we now have been able to carry out the financing initiatives we planned for, we are now in a position where the company is able to pay dividends. It did result in the first dividend in about 4 years through the shares we distributed in kind to existing shareholders of BWO in February. And going forward, and Marco will come back to this when it comes to our growth ambitions, it's quite clear that the company has ambitions to do new activity beyond just the redeployment of Berge Helene. And taking everything into consideration, we want to make sure that when we announce a dividend, is the dividend that sustainable given our growth ambitions. This is something we can predict still having quite ambitious growth targets. So the Board has, on this basis, proposed that we will pay an annual dividend of $25 million initially. That's an annual dividend of $25 million and that we will pay this as a cash distribution to shareholders starting from second quarter this year, which is then equivalent to USD 0.034 per share per quarter. Then I'll turn it back to Marco for the strategy and outlook.

Yes, a few slides then on strategy and outlook. Maybe first, to look back briefly, we've said for the past year that we will be selective and we will have a selective investment approach to enhance our financial performance. And I know many companies say that, but I think we have really done it. We basically have made 3 investments. One is in the FPSO segment with BW Catcher, and it has confirmed our ability to deliver these new high-value FPSO projects, and you have all seen what a positive, significant positive impact such a project and operations gives. And then the second big investment was actually our E&P segment, the launching of BW Energy and using an FPSO in the FPSO segment for BW Adolo, the redeployment of BW Adolo. And all those 3 investments have been very successful. And they are the basis. The reason why 2019 is a good result is that all those 3 investments really, at their full potential, have contributed to the results in 2019 and the graphs reflect this. These have been investments that actually do create the returns and do provide the increase in operating cash flow. Now if we now look at what happens in the market and what has happened in the market in the past years. And in this graph, you see the FPSO orders basically split over EPC and lease contracts in connection to the oil price fluctuation. And maybe I should use a pointer here -- but in any case, what you see there is, of course, the oil price dip resulted in a complete standstill in new orders in the FPSO segment in '15, '16, and that was when we decided to shift our strategy and kind of do an anti-cyclical investment in fields and field developments, taking benefit of this oil price and also taking benefit of FPSOs that we saw coming available. And so in those 3 years, we have built now this E&P segment and -- which was then sealed with the listing of BW Energy. And in the meantime, the FPSO market also picked up, but it picked up at the time that everyone wanted new projects. So we felt that was a very highly competitive landscape, where there were quite a few projects, but it was much more interesting to build out our E&P segment than joining this big competitive crowd for new projects. And it resulted in a -- quite a few projects have been awarded. And that means there's quite a bit of FPSO capacity taken out of the market. And there's still a good demand for FPSO going forward, as you see, but it is in a market where the supply/demand has changed quite a bit. And we now see a few -- quite a few attractive investment opportunities and we want to focus on those. So when you talk about FPSO growth, there are 3 paths basically for us to do that. And this is our -- this is the tool kit to do it. We talked already about extensions. That's a way of growing your backlog and Pioneer here is, of course, the most significant one. We talked about redeployments, which we do for BW Energy. And we have other units available, where we can either replicate what we have been doing in BW Energy or with other oil companies that get inspired by the success of phase development using existing FPSO. So both is possible, there are opportunities there. But there's definitely also now new opportunities with newbuilds and repeating another Catcher project and we're focusing on that. Logically, of course, a repeat of Catcher, and then you can think about projects in the U.K. but also Falklands or Australia. And we have developed a very comprehensive package, bold engineering project execution package to do such an undertaking in the past years or in other areas, if you would need larger-scale FPSOs. We'll develop a modular concept, which you call rapid framework where we can develop newbuild holes and adapt to the size of those projects. And then you have to think maybe more about West Africa or Brazil. Our target is to land one of those new opportunities within the next 12 months, and that's beyond the Berge Helene redeployment. So we are delivering on our strategic priorities. The foundation remains the FPSO backlog, which delivers this long-term cash flow visibility. In addition, we will have the extensions, and those extensions will take place also in fluctuations in the oil price even as we see today. We have seen that in the past. And we have confidence that, that continues because the operating costs typically of the fields where we operate are below the fluctuations in the oil price. But then the FPSO market has tightened. There's an interesting supply/demand balance now for FPSOs. And we want to actively pursue a new FPSO project while continue with the value generation through redeployments in field developments together with BW Energy. And we're very pleased, as Ståle also pointed out. And if you look at the dynamics that we have today and in past weeks, we're very pleased that we have used 2019 to really create a very solid financial position. We've refinanced our corporate facility. We've refinanced our bonds and we have listed BW Energy, and we have a very good liquidity position. And it's a very comfortable position when there's so much turmoil going on that all that is done, and we can really look forward and we don't have to be bothered by the [ tactic ] of the day in the financial markets. So wrapping up, the 2019 achievements have laid a good foundation for long-term growth. We delivered good financial results, record financial results. We have improved our HSE performance. We have a strong financial position now. Ståle showed you the debt position, no more than 1.4x our EBITDA. The listing is completed, BWO shareholders received $100 million dividend and we'll start paying out cash dividend next quarter and we're positioned to growth in the FPSO segment investing -- making a new investment target in the next 12 months. That brings us to Q&A.

Haakon Amundsen from ABG. I wondered if you can give some more color on the tighter supply/demand balance, how that is reflected? Are you seeing just higher IRRs when you bid in day rates on new projects? Is it more direct negotiation, risk sharing? Can you give some color on that, please?

Yes. Well, it's more the latter. So I think the -- there have been quite a few awards being taken place in the past year. And so most of the active competitors have a very high backlog now and it will be a bit more difficult for them to compete or they will be quite demanding on their expectations on returns. And also, we prefer actually more direct negotiations and different risk reward models, taking more proactive positions in sharing risk while understanding the fields because that's our focus and you need to have to predict on the right field. And through our E&P competence, we're very well placed to assess that. And so for that matter, we also have something different to offer. So where we focus on this is really that. And there's not so many players that can offer that.