BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Hello, and welcome to the BW Offshore Q2 2020 presentation. [Operator Instructions] Please go ahead with your meeting.

Good morning, good afternoon, ladies and gentlemen. Welcome to the second quarter presentation of BW Offshore. My name is Marco Beenen. And together with our CFO, Ståle Andreassen, I will provide you a general business update as well as a financial update and then a short outlook in the end. Moving to Slide 2, our disclaimer, please take notice. And then Slide 3, our highlights. It's clear that the COVID-19 response is far from over and certainly not for a company that operates globally. So it's really all hands on deck to safeguard our people and operations. But despite these challenges, and thanks to the whole organization stepping up, we have been able to deliver a solid operational and financial performance. And I'm very pleased with that. EBITDA and operating cash flow in the quarter of USD 116 million and USD 120 million, respectively. And the higher operational cash flow is due to some one-off payments. Other highlights are the contract extensions: a short extension for Cidade de São Vicente in Brazil to allow for decommissioning and demobilization from the fields; and also a 1-year extension signed for the Petróleo Nautipa FPSO in Gabon, very much expected also, as explained in previous quarters. And during the quarter, we completed the share buyback program. And the Board also has approved the cash dividend payout for the next quarter as our financial results proved that this is sustainable. Then moving to Slide 4. COVID-19 requires continuous proactive response to the new situations as they evolve, onshore, offshore and country-to-country. Risk management, planning and procedures were all put in place already in the previous quarter. And we greatly benefited from that in this quarter. However, I think no system is watertight to protect against the COVID-19 infections. And it's, in particular, difficult in countries where the situations are not really under control. And in some of these countries, we are operating as well. So while we have put maximum efforts in preventing to get the COVID-19 infections onboard, we knew it would come one day, and we were prepared for that. So we have now had 4 cases of outbreaks on our 11 operational FPSOs, 2 in June and 2 in July and then 0 again in August so far. Those outbreaks are managed via a strict protocol of deep cleaning the facility and changing the crew. And such process is completed in 7 days. And it was the case on all 4 units. So the impact on the commercial uptime is actually relatively limited. And each case has led to further improvements in our protocols. The main challenge we have is to manage the crew logistics with all the travel restrictions. And this results in approximately USD 3 million extra costs per month. This cost -- these extra costs are partly offset by less traveling, reduced manning and reduced activities onboard as a consequence of the COVID restrictions. Then next, Slide 5. It sums up really how we manage our business continuity. A COVID-19 Task Force was mobilized early in March already and was responsible for the development of a business continuity plan framework, which was then implemented on each FPSO, focusing on the safeguarding of our people, our operation and our partners. And a similar framework was activated in all onshore offices as well. The main change to the protocols that we put in place in the previous quarter is the implementation of the PCR testing before entering our FPSOs. And we use even the local medical facilities or if those are not available or reliable, we're setting up our own equipment. I think it's key that we drive our own destiny in these days. And where we've got outbreaks, it also became apparent that sometimes we're too dependent on third parties. And with this implementation of the PCR testing worldwide, this has now reduced the required quarantine time, which is a significant improvement for the -- of the situation of our offshore personnel. Then in the next slide, Slide 6, I'll give you a short illustration how we use our protocol in case one of -- one or more of our people onboard is suspected to be infected by the COVID-19 virus. First of all, it starts with a sharp and proactive clinical assessment onboard. And then suspected cases are isolated in a dedicated quarantine areas onboard and then medevacs to medical facilities onshore. The unit then shuts down to prepare for deep cleaning of the facility. And we bring in a specialized third party. And obviously, all these people are tested before they come onboard. After the deep cleaning, new crew is mobilized to complement to the required manning levels and then the production can start again. And this whole process takes about 7 days in total. So key here is and the key message is really that it's being prepared, having strict protocols and respond effectively. And in that way, when outbreaks occur, we can actually take and keep control of the situation. Then moving over to a more generic operational update on Slide 8. First of all, our HSE focus shows continuous improvement of the high potential statistics. That's the orange line in the right graph. And this metric is the only metric which gives a true forward-looking perspective on safety performance. And therefore, I'm pleased to see that this continues to reduce. The other 2 curves show the total recordable incident frequency, which is the blue line, and the lost time injury frequency, the green line. And you see that these are more or less flat. In Q2, we had 1 LTI, which was actually a case in the Oslo office, where somebody tripped on the stairs and broke his arm. Our uptime was above 99% again in the second quarter, where it should be. And also, that is where we are in average over the last 5 years. Then moving to unit updates on Slide 9. Taking Catcher first, which is our most important unit. As mentioned in May, Catcher was shut down to a gas leak in April for 20 days. We had to carry out a thorough investigation to understand the root cause of this gas leak before we could start up. Since then, we had a very strong and very high uptime afterwards. But obviously, this shutdown in April had an impact on the production and on the commercial uptime. But as we could fully use our excess production capacities to catch up thereafter, we achieved above 100% commercial uptime in the other 2 months. So in average, over the quarter, we still ended up around 100% of the commercial uptime. And we could also catch-in some of the excess productions against the barrel tariff. Looking forward to the Varadero infill well, which is expected to come onstream in September. And that will help to extend our current plateau production level. Then Sendje Berge in Nigeria. You may have followed our communication around the piracy attack on our facility on July 2. And that resulted in the kidnapping of 9 Nigerian nationals. Fortunately, all 9 have been released again on the 7th of August and are now at home on leave and in good conditions. The production was already shut down at that time for maintenance and repairs since mid-May. And after, obviously, this significant delay, we're now planning to restart production by mid-September. We already talked about the 1-year extension of Petróleo Nautipa. This is the last option of our client VAALCO, that they can declare. So now we have time until September next year to negotiate a new contract for the remaining duration of the life of the field, which could be 7 to 10 years in addition. Vicente was already discussed, so not much news to mention there. But then Yùum K'ak'Náab, I do want to report that we had a situation where the shuttle tanker came in contact with the FPSO during an offloading early in July. It resulted in minor damage. And after an initial hull assessment, the FPSO was back in operation, but with some reduced storage capacity until the repairs are completed. And then Umuroa, our unit in New Zealand. She is in warm lay-up on the Tui field over the southern hemisphere winter. In the meantime, the New Zealand government has assumed field ownership, which is good news. And we're now discussing plans with them to carry out the field development project, including the FPSO, as well as some funding to bridge the time until they are ready to start that project. Moving to Slide 10. Our operations on the Dussafu field in Gabon to our associated company, BW Energy. We are maintaining high uptime with our FPSO Adolo. And the production over 2020 will be in the range of 15,000 to 16,500 barrels gross per day over the 4 wells. First of all, from the remaining 2 wells of the Tortue phase program is now expected to be in the second quarter of next year. So basically, COVID-19 has moved out the program with 1 year as so far it was effectively impossible to run any drilling operation efficiently due to the COVID restrictions. The rest of the planned developments are now on hold, pending the ease of the COVID-19 restrictions. It is more or less impossible currently to run the logistics that such project would need to run it efficiently. But as soon as restrictions are lifted, we will be ready to move on. In the meantime, the regulatory approval process for Maromba is progressing. The integrated strategy rationale with BW Energy remains robust. It's based on short-cycle investment, phased developments and the derisk development. And that is, we believe, still very relevant in the current times. And redeploying the existing FPSOs is the enabler for this. So our long-term ambitions for joint value creation remain. I think we just have to be a bit more patient right now, given the circumstances. Then moving to Slide 11, the contract overview. We already discussed the extensions of Petróleo Nautipa and Cidade de São Vicente. The next one coming will be Abo as every year. So that's towards the end of this year. Polvo may not be extended by PetroRio as they may tie-in the field with an adjacent operation that they acquired. But as it operates also very close to the Maromba field, we consider her a very good and actually even better match for that development. So overall, we consider to develop the Maromba field once she comes off the Polvo field. And then over to Slide 12, the backlog. Not much changes to previous quarter as we replenished partly with the contract extensions. So we have a total backlog of USD 4.4 million (sic) [ USD 4.4 billion ], which gives a good longer-term financial feasibility. USD 2.8 billion of this is firm, USD 2.8 million (sic) [ USD 2.8 billion ] is firm. And we only had option backlog, which we deem very likely to be exercised based on the remaining field life assessments. So conservatively, we don't include all contractual optional backlog. In average, if you take a weighted duration, it gives about 9 years of operations of 11 FPSOs. Or if you would not include -- if you would only include the firm backlog, it would be 5 years. And with that, I give over to Ståle Andreassen to run you through the financials.

Thank you, Marco. I'll take you to Slide 14. And as usual, we start with an overview of the financial figures. It has, as Marco said, been a challenging quarter. But financially, we are pleased to say that we continue to do very well. We achieved stable results in the second quarter with a total EBITDA contribution from the fleet of $116 million. This is although a reduction of about 10% compared to quarter 1. We are impacted by COVID-19. And we have estimated approximately $9 million in additional COVID-related costs for the quarter, although somewhat offset by less travel and similar type of cost as mentioned again by Marco earlier. We have also completed the amortization of revenues related to the life extension work linked to Abo by end of Q1, which on a like-for-like basis has reduced the EBITDA run rate with approximately $10 million from second quarter end onwards. And lastly, we closed out a segment related to the former P-63 project carried out for Petrobras. And this gave us a one-off, $8 million positive one-off payment, which was recorded and received in Q2. Top line came in at $211 million. And as you can see, it's so much lower than Q1, which was driven by revenues from reimbursable FEED activities for the Sea Lion project that we completed and charged to the income statement during that quarter. Going to Slide 15. Starting at depreciation, as you can see, depreciation was $63.2 million for the quarter. Depreciation has reduced significantly as a result of the impairment we took in quarter 1, but also as the amortized revenue for Abo had a CapEx component that's been fully depreciated by end of Q1. Combine this will lower the run rate depreciation going forward for the company. Net interest expenses came in at $15.2 million, just slightly lower than Q1 and as expected as we continue to amortize on our debt. We had a gain this quarter on financial instruments of $10.3 million as a result of positive mark-to-market adjustment on our FX hedges due to strengthening of Norwegian krone versus U.S. dollar. And under other financial items, we marked a negative effect of $9.5 million due to revaluation of our Nordic high-yield bond denominated in NOK due to the same reason, i.e., the strengthening of Norwegian krone versus U.S. dollar in the quarter. We had a minor loss from equity accounted investments of $2.1 million. This is BWO's net share of the results from our investment in BW Energy. And tax expenses came in at $6.8 million for the quarter. This was more or less in line with our expectations on the basis of the results we delivered this quarter. However, as you can see, it was significantly lower than previous quarter. And I just want to remind you there that the Q1 was high predominantly as we made some one-off adjustments for other tax provisions related to our West African operations. And overall, as you can see, net profit for the period came in at $29.7 million. Moving to Slide 16 and cash flow overview. As you can see, we started the quarter with a total cash position of $172 million. Operating cash flow was good this quarter. That's despite the challenges we have had on the operational side, we have had a steady inflow of cash from our clients. And do note that $120 million do include the one-off $8 million settlement from Petrobras related to P-63 as well as part payments of the reimbursable FEED that was closed down in Q1 mentioned earlier. We have reduced investments to a minimum in offshore. But due to natural lag on payments on services and goods, we had cash out equal to $17 million in Q2 on investments. We are continuing to amortize on our debt. We paid $29 million on the Catcher facility in the quarter. And we paid $17 million overall net -- in net interest. The share buyback program that was launched in late March was completed and we bought back shares for a total of $10 million. And we paid approximately $6 million in total dividends in Q2. Then with the $8 million, we paid to ICBCL as part of the preference share arrangement we have with them. With that, we ended the quarter with $206 million in cash. Moving on to Slide 17. With a portfolio of FPSOs on contract, we continue to generate significant free cash flow. And it does give us a solid financial position. Net debt has, as you can see, reduced further and stood at approximately $1 billion by end of the second quarter while the leverage ratio, based on the last 12 months' EBITDA, had trended flat and continued at 2x EBITDA by end of Q2. On the right-hand side, you could see that the equity ratio trended upward. We ended the quarter at 35.8% as compared to 35% by end of Q1. The debt servicing capacity is significant and combined with a strong balance sheet, it does enable us to pursue growth opportunities, which can yield attractive and significant returns for the long haul. Moving on to Slide 18. We have a gross debt position of $1.2 billion by the end of second quarter. But when you exclude the regular amortization of debt on the Catcher and PNA facility, you can see we have no major debt maturities before late 2023. And with a fleet that currently produces free cash flow in the ratio of $100 million on a quarterly basis, it gives a lot of flexibility. And importantly, it does not prevent us from balancing debt servicing with having capacity for new long-term growth and consistently providing shareholder returns. Going to Slide 19. We stay committed to building financial flexibility and we have done so through extending all the major debt maturities, as I just mentioned. Deleveraging allows us to use our balance sheet and be ready for the growth opportunities that we are currently working on and which Marco will mention later on. Having almost $390 million in available liquidity, of which $183 million is from available committed credit lines, provide ample room for growth as well as giving us assurance as we're still in a very challenging environment with COVID and still also allow us to stand by our commitment to return capital to shareholders. We continue to be very focused on managing OpEx and CapEx on the existing fleet. As we mentioned earlier, we are incurring additional cost related to COVID. And we are foreseeing that we're going to do that for some time going forward. But it's important to keep in mind that this money is spent to ensure we continue to deliver high uptime on our fleet and is a way of securing consistent revenues. At the same time, we are still evaluating life extension CapEx on the existing fleet. We are at minimum money. And we expect there to be a relatively low level of investments in an offshore environment going forward. And on this basis, we do expect that remaining CapEx for the second half of 2020 to be limited in the range of $20 million in total. We remain committed to providing shareholder returns and returning cash to our shareholders. We continue to pay out dividends. We will do so this quarter as we did in quarter 2. We have completed our $10 million share buyback program, where we purchased back approximately for 4,180,000 shares at a weighted average price of NOK 24.6 per share. And we stay -- we're still committed to evaluating how we best allocate our capital. We truly believe we have project opportunities in the near term that can provide long-term return on capital above 15% and which will meet our hurdle requirements. But of course, depending on how this progresses, we will, on a continuous basis, evaluate dividend and share buyback. With that, I will leave it back to you, Marco.

Yes. Thank you, Ståle. I will take you to Slide 21 for a short -- a few words on strategy and outlook. So while we navigate through the COVID-19 challenges, we're also looking at the other end of this crisis. And we're engaging in a handful of prospects of FPSO newbuilds in Australia and Americas. And those are projects with solid counterparties that have the ability and also the nature of the project is such that those can withstand the current oil price and the COVID-19 challenges. And we expect that in 2021, we can take an FID for one of those targeted FPSO projects. So we're very active there in that part of the FPSO segment. In the other parts of the FPSO segment, extensions and redeployments. Regarding extensions, the situation is actually still very good, as expected. Extensions have always shown resilience and have a track record to be exercised also in oil price downturns. And we've showed again the same thing in 2020. So far extensions have come in as planned. And of course, the main reason is that the breakeven on the fields are relatively low. The cash breakevens are in the range of 20 -- $10 to $30 per barrels. So while the current oil price is still low in absolute measures, but relative to the extension business, it's actually not a problem. It's different for redeployments. There, you see clearly an impact of the lower oil price and the E&P CapEx reductions. Redeployments are, in particular, interesting for the more marginal development and smaller E&P companies. And for them, it's not possible today in the current situation to progress their projects. So that has also reduced a bit of the visibility of the time it will take to redeploy some of our laid-up units and that has been reflected in the impairment we took on the idled fleet. But I do expect that this will rebound as soon as the oil price rebounds itself. So this really goes with oil price. And we are actively discussing various prospects. So when the oil price comes back, this will start to move again as well. Then over to Slide 22. Our strategic development since we -- the way we got out of 2019 was setting us up for growth again in the FPSO segment. We delivered good financial results in 2019. We completed the debt refinancing. We strengthened our financial flexibility. And then early 2020, we listed BW Energy as a separate company. So we're ready to jump on the FPSO prospects in a market where a lot of capacity was already taken out, but the demand was certainly there. Then came COVID. That's clearly a distraction and then delayed things. But it doesn't take you -- it doesn't change our view on where we -- why we can grow and how we should grow. We're focused in a selective but determined way on targeting longer-term infrastructure-like contracts, which will then significantly grow our backlog with long-term contracts and long-term revenue streams. In the meantime, we're also focusing on shareholder returns through our cash dividend and share buyback as appropriate and actively positioning for an FID already in 2021. So summarizing, obviously, a lot of efforts and focus goes to the -- to navigating through the COVID-19 pandemic. But we do deliver -- our fleet continues to deliver strong performance as we have also shown in Q2. At the same time, we're looking at the other end of this COVID crisis actively but selectively pursuing new prospects, which meets our required risk-return criteria, as Ståle also explained. And the target of one FID for a new FPSO project in 2021 remains and we think is realistic. With that, we can go over to questions.

[Operator Instructions] Our first question comes from Bendik Engebretsen from Danske Bank.

This is Bendik Engebretsen from Danske Bank. Congratulations with yet another quarter with strong cash flow. I wondered if you could elaborate on the new FPSO project that you are targeting. Do any of the handful of projects that you mentioned, do any of them include this project that we have previously been introduced for as Sea Lion? Or are these entirely new projects? And how do the scale of these new projects compare to that of Catcher?

Yes. Thank you. Good question. I can take it. So to answer the first question, Sea Lion is not one of those. The Sea Lion project has been shelved by a client, Premier Oil, in view of the low oil price and the financing constraints for that project. So we -- as Ståle explained, we have completed a reimbursable FEED and we're basically moving on towards new projects. Your second question was -- sorry, could you repeat that?

Yes. I wondered if you could elaborate on the scale of the other projects, if they are not comparable to Sea Lion.

Yes. No, they are comparable to Sea Lion and plus. So it's Sea Lion and Sea Lion plus scale, so quite large newbuild facilities. And that reflects the nature of the contract that comes with them. And what we see in the market right now and what we also find interesting to invest in is the longer -- the larger projects with long-term contracts and long-term revenues that comes with that. Because that's -- those developments are done by the stronger counterparties in this market and have a scale or nature -- and/or nature of projects that are less dependent on oil price. And that's why these projects can still progress and can be financed. But then naturally, that comes also with larger facilities.

[Operator Instructions] Our next question comes from Haakon Amundsen from ABG.

Yes. Haakon from ABG here. Two questions, please. First of all, the extra cost related to COVID-19, is that kind of a $9 million per quarter run rate a fair assumption when you go into Q3 and Q4? Or how should we think about that? And my second question is regarding the competitive environment you see on these larger newbuild projects. As far as I've understood, the environment was quite positive when you -- prior to COVID-19. Has this changed in any way? Has any competitors kind of stopped tendering for these, given the demanding situation? Or how should we think about that?

Yes. Thanks, Haakon. The -- first, on the additional cost per quarter on COVID, I think you said that you understood it was $9 million per quarter, but then maybe we have not been clear. But it is $3 million per quarter or has been so far. And this is very much related to the travel limitations that we had, meaning we need to keep people in-country and have them take their leave in-country as well. So we rotate more in- and out-country and all the logistical costs that comes with that. Now -- so how will that develop? Well, that's very much linked to how COVID develops. And I think -- well, the whole world sees now that COVID is not something that radically improves from one quarter to the other quarter in some cases, to the contrary, and importantly, in some of the countries where we operate. However, I have some optimism that we will get more to a new normal with COVID, where still things normalize and meaning that there is at least some travel possible and we will be less constrained in the way we can rotate our people in- and out-country. We have a large degree of nationalization in many places, not so much though in the Gulf of Mexico. So there, we -- a lot depends on also how things develop there. But as COVID normalizes and travel restrictions reduce, then so will our additional COVID cost, too.

Marco, basically -- I think you said that it's $3 million per quarter. It is -- as you also said earlier, $3 million per month, approximately $9 million for the quarter.

Yes. Okay. I misunderstood that.

Yes.

Yes. No. So the statement of Haakon was correct. Yes. The other question about the competitive landscape is we -- well, I think the situation is a bit the same because in 2018 and 2019, there was a high demand for FPSO and a lot of capacity was taken. And then some other players were more financially constrained. So it was a combination of capacity and financial constraints on the supply side of the market. Of course, COVID reduces a bit the demand side logically. But I think on the supply side, it's still the same constraints apply, if not worse from a financial side. So I think it's still a good balance. And in any case, we're quite clear about our expectations on returns and we have been disciplined with that in the past years. And so that doesn't change. But I do think we have interesting propositions to our clients. And I don't see the landscape as very competitive at the moment.

There appears to be no further questions. So I'll hand back to the speakers for any remarks.

We have some written questions that have been coming in. The first one is from Øystein Vaagen from Fearnley Securities. He is asking, how much CapEx could you potentially save by using Polvo versus Berge Helene for the Maromba field development? I'm not sure -- I know it's a bit difficult to give an exact answer on that, Marco. But maybe you want to elaborate a little bit around it.

Yes. So that's too early to say. I think all we can say is Polvo is a candidate for Maromba. That's an interesting candidate because it has been operating for the last decade on an adjacent field, so exactly in the same area and also have the crew. So it's a unit that was designed for similar type of fields as the Maromba field. And for that matter, it's just a better starting point, which is quite essential or is very beneficial in a redeployment strategy. So now Polvo seems to become available, that's a very interesting candidate to look at. But what the exact reduction would be, I think, depends on other things as well, condition assessment, et cetera. So it's too early to say.

Okay. And the next question came from [ Nick Lemme ], if I'm saying that right, from a [indiscernible]. Do you think any of your existing FPSOs could be suitable for the Sea Lion project? I think you have already answered generally that, where we've kind of have left that for the time being. And I'm not sure you want to comment on that, Marco, beyond that.

No, that's correct. But obviously, there's one that's very suitable for a first-time project and that would be Catcher. Contractually, we will be on contract for still many years to come. So it's not really relevant. But if Sea Lion would be developed in 10 years from now, yes, Catcher could be a good candidate. Yes. There's not much more to say about that.

Okay. Then we have a question from Frederik Lunde from Carnegie. The market is clearly split by big investments in new FPSOs. Could you provide a clear framework for return requirement, project funding and how investments will be balanced versus returning cash to shareholders? Do you want me to start and then you can add on?

Sure.

Well, we tried to make reference to this in the presentation earlier. We expect any of the projects we take on to provide a long-term return on equity above 15%. And we believe that the project opportunities we are working on are opportunities that could provide returns beyond that run rate. When it comes to project funding, generally, as far as we have kind of communicated with lenders, we see there is appetite for the right type of projects. And we think, given we have strong counterparties, combined with good field economics and [ big investment ] value risk, we believe there is adequate capacity in the market for project funding. And secondly, I can say that we also have good dialogue with potential coinvestors that we're engaging with. And that is for some of these projects which are large on an isolated basis. And we believe these are good project opportunities for us to work with coinvestors on to provide overall funding for the projects. And when it comes to balancing investment versus return to shareholders, obviously, and back to this, if we cannot get the projects that meet our hurdle rates, then we will need to look at how we utilize the cash flow that we generate and the cash that we're building up. We have no intention of sitting on cash, and we're well aware of the cost of capital as such.

Maybe to add, Ståle, is the -- we're making these investments to expand and change basically our portfolio of the FPSO backlog towards much longer contracts and long-term revenues, which will likely allow us to create better returns to shareholders after that. And we feel this is needed for the FPSO segment. And that's why we want to make these investments, but we will make them in a disciplined way.

And then another question here is, not sure if it's the full name, [ Alex Buehrer ]. The question is what is BW Cidade de São Vicente contribution to the net profit? And that's a good question on the unit. I think we can say for the second quarter, it was between $4 million and $5 million for the -- but I think, more importantly, going forward, as you know, the contract will end in October. And we're in the midst of planning for the demobilization of unit. So going forward, of course, the contribution will disappear as we get into fourth quarter. And there will be a lay-up cost for the unit, which we, for the time being, were planning to lay up at the yard in [indiscernible]. Anything you want to add there, Marco, you can add.

No. As you said, we'll go to the yard. We prefer to lay up at the yard because we're better able to preserve value. It's a very -- with that low manning cost because we can use the facilities at the yard. And then we're looking at a redeployment in the first place in Brazil.

And there is no further written question we have received. I'm not sure if there's anything else -- any other questions from the audience that's listening in?

No, there appears to be no further questions.

Okay.

Okay. Well, if there are no further questions, then I want to thank everyone for their interest in BW Offshore and for your participation in this call. Thank you very much.