BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Welcome to the BW Offshore Q4 2020 presentation. [Operator Instructions] Speakers, please begin.

Good morning, everyone. Welcome to the fourth quarter 2020 trading update of BW Offshore. My name is Marco Beenen. And I'm here with our CFO, Ståle Andreassen, to talk you through the presentation. I will cover the general part, and Ståle will run you through more details of the financials. I apologize that once more we have to do this update in a rather impersonal format as in a conference call. We obviously prefer to have a more personal interaction with our audience, but unfortunately, that's still not possible, and hopefully, this will change in the course of this year. Then I want to ask your attention for the disclaimer. Please take note. And I want to start this presentation with an update of the tragic accident which occurred on our FPSO Espoir Ivoirien on January 14 this year. This unit is located offshore Ivory Coast and is operated by us for CNR International. And the accident occurred around half past 1 in one of the cargo tanks which was isolated for repair and maintenance. And crude oil leaked inside the tank during a planned de-isolation activity, and this resulted in 2 personnel suffering fatal injuries. Immediately after the incident, we started an initial investigation, which has resulted in some immediate corrective actions. And together with the clients, we have worked towards a restart of the operation last week, 13th of February. Phase 2 of the investigation, a comprehensive internal investigation which is led by an independent investigator, is currently ongoing, with the aim to establish the root causes of the accident and also the generic causes that have allowed these root causes to exist. This investigation will be concluded next month, and it will lead to corrective actions to fix these root causes and also for recommendations to the wider global organizations which changes to address these generic causes. I can assure you that this accident has been a true shock for the whole organization of BW Offshore. And we are very committed to learn from this action and to ensure that it can never happen again in our operations nor in operations of others. We have committed to share our learning with our clients and partners and colleagues. With that, I continue to the next slide, which covers the highlights of 2020 and the fourth quarter. 2020 was obviously a challenging year from an operational perspective due to the COVID pandemic and forced us logically to focus on protecting our people and our operations. Despite that, the year has been financially solid. Our operational financial results have been good actually with a EBITDA results of $436 million and operating cash flow of $387 million; for the quarter, an EBITDA of $92 million and a operating cash flow of $90 million. We decided to make further impairments, during the fourth quarter, in the fleet of about $60 million and inventory impairment of about $22 million. And Ståle will explain you a bit more further down in this presentation. Another event was the Abo contract expansion, which extended the contract till end of this year, with options beyond that and very much in line with the expectations. While we were focusing on keeping our operations going through the pandemic, we very much focused as well on positioning ourselves for the other side of this pandemic. And we have progressed our position for FPSO tenders for large FPSO projects, and we're also focused on positioning ourselves in the emerging floating wind market. And we have created a new floating wind company called BW Ideol based on an investment in Ideol, and I'll come back to this topic as well further later in this presentation. Moving on to the next slide, operational update, and then starting with COVID, the impact of COVID. And it is still a challenge to keep our units COVID free, but in the fourth quarter, we did not have any impact. No units were impacted. However, this quarter, both in January and in February, we had one unit that was affected. And it concerns Polvo in Brazil and Abo FPSO in Nigeria. During the year, we managed to reduce our COVID costs. That is mainly because of the full implementation of PCR testing allows us to reduce the requirements for quarantine and also somewhat better mobility and allows us to reduce the amount of crew that we need to keep in country. This also reduced the crew costs. So we reduced from about $4 million mid-2020 towards $2 million on -- during the quarter 4 of last year. And we think that is also the level where we will continue. Or we will stay on that level during 2021 till this pandemic goes away through the vaccinations. On fleet performance and HSE performance. We had a challenging quarter in the third quarter, but in fourth quarter we recovered our uptime and trending in the right direction again, and similar for HSE. You do see that the statistics are trending upwards, which is obviously undesirable. There are 2 contributing factors there. One is more how the statistics works. We implemented the new definition in accordance with IOGP. That allows us to better benchmark industry-wide. And that results in that you divide by less 9 hours. Instead of 24 hours per day, we divide by 12 hours per day per person. So that obviously has an impact on the statistics, but also in absolute terms we have seen more incidents developing over the last 9 to 6 months. We are investigating that. We want to understand what the impact of COVID is towards this, but we also want to understand if there's any relation with the accident we saw on Espoir. Moving on to the next slide with short -- with a short update on some of our units. Catcher, first of all. We have seen some operational interruptions in the fourth quarter which affected the uptime. However, it did not affect the commercial uptime. And the reason is that the downtime and reduced production as a consequence were mainly related to planned -- a planned shutdown to remove calcium naphthenate out of produced water systems. And calcium naphthenate is a substance that comes with the well fluids. And we're trying to solve this problem working together with our client who operates the reservoir, finding the right chemical dosing solutions to reduce or eliminate these impacts to our produced water systems. It's not super straightforward. It's a trial-and-error process, and so we're continuing to optimize that and to reduce the impact of this substance. I discussed already the Abo extension. And then for Umuroa, in previous quarter, we announced that we [ did sign a ] last-minute solution with the New Zealand government to pay for our costs for staying in country and working with them on the development of the Tui field. And that means that now our disconnection costs are covered, and this is progressing well. We're planning now to complete disconnection late April, early May; and then demobilize the unit from New Zealand to Singapore. Next slide shows the fleet contract overview, a familiar picture for you, I'm sure. Not much changes, but what is worth notifying, although we did communicate that before, is that the client of Polvo, our client PetroRio, has decided to not exercise their option to continue. So this contract will now end by mid of this year. And then we will start decommissioning, disconnection and then demobilization to a Brazil yard where we then can start preparations for potential redeployments to the Maromba field operated by BW LNG. We're also looking at our layup fleet, where we do see value in redeploying a unit like BW Opportunity and also Umuroa, but we're also thinking that the current number is more than what we need, and it starts to make sense to consider the sale of some units and/or recycling. Moving on to the next slide, also familiar for you. We see the backlog which provides long-term financial visibility, about $4 billion at the end of Q4, with a firm backlog of $2.6 billion. And that's about 62% of the total, meaning the options cover about 37%, but with options we mean here not all options that will happen in the contract but only those where we have a very high confidence that they will be exercised by our clients because the field is performing well and the field life is still further out than the durations of the firm contracts. And there is a very high probability that these options [ will only be ] exercised. Last operational update is from BW Energy. The highlights of Q4 are that they have completed 2 listings successfully, and their average production during Q4 was about 13,500 barrels per day. For -- they're now preparing for 2021 to start a drilling campaign, which starts with an exploration well for the Hibiscus extension and then continue with completing the Tortue Phase 2 development. And remember this was stopped when the pandemic broke out, and instead of 4 wells, only 2 wells were hooked up to the Adolo FPSO. And it's now -- and they have now the intent to complete this, which will increase the production for Adolo, and that has a positive impact on the revenues generated by Adolo as well. All this, of course, is subject to the COVID-19 situation, as you I'm sure understand. And there was also a successful capital raise which took place in January of $75 million. That reduced BWO's ownership to just above 35% ownership now, which corresponds to NOK 13 per BWO share, linked to a market cap of BW Energy today of about USD 790 million. That concludes the operational update. And I'm moving on to strategy and outlook, Slide 13. And we have looked at the strategy going forward, during 2020, and this will now consist of 2 parallel tracks. First, we remain committed to our FPSO business as our core business, but in parallel we are also positioning ourselves to capture energy transition opportunities in adjacent, business areas. And both tracks needs to deliver to 3 clear financial objectives: first, a predictable return of our equity in investments of about 15%; needs to generate long-term cash flow visibility. And it needs to reduce our cost of capital. We focus on 3 areas of value contribution. I'm now on Slide 14. And first of all, contract extension and redeployments of our existing fleet and value creation from and with BW Energy. And then for those units where we don't see redeployment opportunities and -- we will consider a sale or recycling process. New investments, we will make in floating energy infrastructure projects. And that could be FPSOs for large field developments on long-term fixed-income contracts, but it could as well be large-scale floating wind developments or even other floating power production projects like, for instance, gas to power. And then third, we're also studying and -- where we should position ourselves for the future further out and in particular with a focus on opportunities for offshore clean fuel production from renewable energy and how we could combine that with large-scale floating wind developments. Moving to the next slide. As we communicated earlier, we are looking at FPSO investments for those large-scale oil field developments with long-term contracts and with investment-grade counterparties and based on cooperation with equity partners jointly owning and financing those new assets. Regarding BW Ideol. As announced on Wednesday, we are investing in Ideol to take a leading position in the emerging floating wind market. And with this move, we are creating what we'd like to call a floating wind champion by combining 4 decades of BW Offshore's deepwater experience with Ideol's technology and their pipeline of projects in these new markets. BW Ideol will be our vehicle to target and develop our projects on a global basis, and our ambition is to consolidate all our floating wind offshore activities over time in BW Ideol. Thirdly, we have been working on a joint venture with Invenergy. We have managed to agree on heads of terms with them. Invenergy is a U.S.-based renewable and utility company that has already developed more than 27 gigawatt of operational projects across Americas, Europe and Asia. And coupling a leading developer of a land-based renewable player together with BW Offshore as a established offshore production player makes a lot of sense from a strategic perspective when you look at actually developing a floating wind business. We're building already -- on our already existing Invenergy relationships through the BW Group and more specifically the successful FSRU project of Invenergy with -- management together with BW LNG. The mandate of this cooperation is quite clear. It is for BWO and Invenergy to jointly bid for floating wind assets in the ScotWind leasing round that is upcoming in the coming months. Then moving to the next slide with an update with regard to our new FPSO project FID which we target in the first half of 2021. I believe we are on track, and we are progressing our financing accordingly. We have now matured our partnership with global infrastructure equity investors and we're firming up our debt financing. We want to make sure that we have both our equity and the debt financing in place prior to taking [indiscernible] FID. And furthermore, we are ensuring project execution preparedness based on the Catcher project experience, selecting the same suppliers and yards as we did with that project which was executed successfully; and also by further detailing the engineering work we have built in the past years on our RapidFramework hull, which will be the basis for such large-scale FPSO projects. Moving on to Slide 17, explaining a bit more about the investment of -- or in Ideol. And this slide very much summarizes the presentation we already gave on Wednesday about this investment. In short, we are creating a global integrated floating offshore wind company, and we call it BW Ideol. And this growth and value creation in BW Ideol will be accelerated by BW Offshore as an industrial partner. We're targeting, [ both of us ], about 10 gigawatts of projects by 2030. And the aim is now to list BW Ideol on Euronext Growth before the end of next month, with BW Offshore as the anchor investor. And we expect to own about 50% after the capital raise. And then both BW Offshore; and the Ideol founders, which includes the CEO, will remain long-term owners in this new company. More news about this process will follow in due course. With that, I want to hand over to Ståle to run you through the financials.

Okay, thank you, Marco. I will now move on with the financials. So from an operational point of view, 2020 has been challenging, as Marco mentioned earlier. However, the financial situation for the company remains really robust. We see the steadiness of our revenues, our EBITDA and operating cash flow for the full year of 2020 compared to previous year. It does prove how resilient the lease business model is in a challenging market. Revenues overall for full year came in at $886 million, which is [ $6 million ] below 2019, while our EBITDA, when you adjust for inventory impairments, came in approximately 15% below 2019 figures. So the overall EBITDA for 2020 has been affected by the extra spend of investments we have made to manage COVID to keep our units in operation, but we also had some shutdowns throughout the year, as well as CSV ended the contract in Q3 2020. Going through the quarter on Slide 20. Operating revenues increased by [ 14% ] to $223 million in the -- in Q4, while EBITDA, when you adjusts for inventory impairment, decreased by 16% to $140 million. So overall we see better financial performance from the field, as we've been able to take measures to reduce COVID quarter-on-quarter, in combination with more [indiscernible] crew, as Marco mentioned earlier. And also now we have contribution from Sendje Berge [indiscernible] production in October. And we have contributions from Umuroa as a result of the contract with the New Zealand. On top of this, we closed the negotiation for additional funding for 2020 related to Espoir in Q4. This was recognized in the same quarter and it gave us a positive EBITDA impact of approximately $10 million. In Q4, we have reviewed our inventory on the FPSO fleet. The inventory we have consists of a mix of high-value items and a significant number of smaller-value items which have relatively high turnover and similar to consumables. From 2021 numbers, we have decided that we will recognize the small-value items as operating expenses [ when they are purchased ]. And consequently, we have decided to write-off those small-value inventory items in Q4. In addition to this, we have also chosen to write-off all inventory on units that are in layup, which in total resulted in a one-off impairment of $22 million in Q4. And it's worth noting that this change in principle is not expected to have any impact on the fleet's EBITDA going forward. Moving to Slide 21 and the income statement, and I'll take you through the main items. So EBITDA after impairment came in at $91.9 million. And in -- I'm sorry. In Q4, we recorded an impairment on our FPSO fleet of 5 -- $59.6 million. The impairment affected the units Berge Helene, São Vicente and Espoir Ivoirien. So this is the second round of impairments on our FPSOs this year, and the impairments in quarter 4 was driven by that. We are still projecting a market where there will be less opportunities for redeployments of all the units than we predicted 12 months ago. The market for all the units -- or redeployments, I should say, mostly is a fit for more marginal developments. And although we see oil prices are coming back up and much higher than when we took impairments on our fleet back in Q1, we think the markets for these kind of redeployments continued to be uncertain. And as Marco mentioned earlier, we have several units that have come off contract, or some are coming off contract shortly as expected. And with limited possibilities to redeploy all of these units over the next few years, the impairments do reflect that we are considering certain of these units to be recycled in the near future. So looking at the operating result that came in at negative $30 million for the quarter. Our net interest expenses were in line with previous quarter, while for Q4 we had a gain on financial instrument of $23.2 million. This was predominantly a result of positive mark-to-market adjustment on our FX hedges and our interest rates swaps, as both we have seen a weakening of the U.S. dollar relative to Norwegian kroner and that we see that U.S. dollar swap rate has increased quarter-on-quarter. Other financial items were negative by $11.7 million predominantly due to revaluation of a bond loan which is denominated in NOK. So -- and the share of profit from -- or loss from equity-accounted investments, we had a negative impact of $2.8 million, which is the impact from the ownership we have in BW Energy. And overall, the result for the quarter came in at negative $43 million. Moving to next slide and cash flow overview. We started the quarter with $142 million in total. Operating cash flow for the quarter was $90 million, which is 10% better than in quarter 3. And this is despite the fact that the additional revenues I referred to on Espoir would not be paid before Q1 and has not been captured in the current operating cash flow number. We continued to see limited investments on the fleet with overall $7 million in the quarter, while we continued to reduce on our debt. We overall reduced our debt with $54 million in Q4. $25 million of this was scheduled installments on our facility, while the remaining $25 million was [ repayments we did under the corporate facilities ]. As in today's environment, we basically get 0 interest from having surplus cash on hand. We're very focused on minimizing working capital by repaying on the RCF as often and as much as we can. So when we take into account that we paid approximately $13 million in interests, we paid $6 million in dividends and $12 million under the preference share arrangement we have with ICBCL, we had a cash position of $140 million by end of the year. Going to the next slide and balance sheet. So our balance sheet at the end of 2020 continues to be solid. We have a steady strong cash flow from the fleet, and we have used that to continue to reduce our net debt. And if you compare the net debt we have in Q1 after we have spun off and listed separately BW Energy -- and so end of the year, we have reduced our net debt by approximate 13%. The leverage ratio continued to trend at 2.1x, when you look at last 12 months EBITDA over net debt. And I will say the important part here is that, with this leverage ratio and the contribution from the [ fleet ], it continues to give us flexibility to leverage as part of creating new accretive business; and as we have an intent to secure new FPSO projects in particular in the near term, as also highlighted by Marco. The equity ratio decreased by 1% and stood at 36.5% by end of Q1 -- sorry, Q4, and it's predominantly driven by the impairments we recorded in Q4. Going to the next slide, Slide 24, looking, taking a look at the installment profile. You will see that the graph shows that we have ample time to plan our financing needs. And we have flexibility to time the market, as we have no significant debt maturities for the next couple years. We will continue to amortize on our loan facilities with approximately $120 million per year for the next couple of years. And then as we can see on the back end, we start getting into maturities on our bonds in 2023 and 2024, [ but similar as it has been, our intent is ], at the right time, we will work on the maturities and we will stretch these. And we will refinance both loan facilities and bonds at the right time. Going to the next slide. We've said it before and we continue to reiterate that we think it's important to maintain financial flexibility to ensure we have capacity to be agile when the market opportunities are there and have capacity to create growth for the long term. And as Marco mentioned, we are progressing well to secure a new FPSO project during the first half of 2021. We have spent a lot of time maturing our relationships with a limited number of global infrastructure equity investors. What's important is that these investors are investors that understand our business and they have an approach to project opportunities we are looking at which will allow them to co-invest with us from the time the project is secured as opposed to later. And this does provide us with early access to equity and facilities risk sharing [ with project sales ]. And not only that, it also supports our capacity to grow as it reduces the equity required [ for the development of each ] project. And it does support us in recycling our capital from projects during the project phase and free up liquidity earlier, as compared to previous projects that BW Offshore has done. Although we have not significant debt maturities for a couple of years, we will continue to explore how we can manage maturities early and how we can free up liquidity from the existing fleet. As it is expected, some of the units will continue to provide us significant free cash flow for a number of years to come. And lastly on this, I want to emphasize that, as a large shareholder and, as Marco mentioned, a large shareholder in BW Energy, we do have significant value on our balance sheet in a company that we believe will continue to grow in a very disciplined way and have significant dividend cash flow -- or dividend capacity, I'm sorry. And this is capacity that can be used for growth opportunities or return back to shareholders if and when received by BW Offshore. Our liquidity continued to be robust. We had $370 million by the end of the quarter, of which $230 million is coming from our revolving credit facility. We continue to be very focused on actively managing our liquidity and we have a number of things that we're focusing on. We -- you see we have limited planned fleet CapEx in 2021 on the existing fleet with only 25% -- sorry, only $25 million planned and when you exclude any new potential projects. We have come to the end when it comes to settlement for Cidade de São Mateus. And we expect that the $40 million settlement, which we have highlighted some time, will be settled and paid well within the end of the first half of 2021. And as Marco referred to and has been announced a couple of days ago, we do plan to invest EUR 60 million, which is equivalent to just over $70 million, in the transaction for Ideol. And as we're aiming for the transaction to close and have the company BWO -- BW Ideol listed by end of March, this will be liquidity that will be utilized within the first quarter of '21. And lastly, when it comes to our shareholder returns, we continue to pay dividends, with $0.035 per share being paid in Q1 '21. And we continue to stay behind our plan of paying an annual dividend of $25 million. And when you look at the various transactions over the last 12 months, when you include the dividend in kind in relation to the BW Energy IPO, the buyback program and the dividends we paid, we have returned $135 million to our shareholders over the last 12 months. And as mentioned a little bit earlier, our progress on work with partners both for FPSO projects and now also going forward through Ideol, we believe, is a model that will help us enhance our [ asset ] returns. It will allow us to progress our intent to invest in accretive projects and opportunities, which we think over time will help us lower our cost of capital. It will increase value per dollar spent. And the fact that we can -- it will allow us for early recycling of capital can give growth potential to our already announced annual dividend over time. So with that, I'll hand it back to you, Marco, for summary and outlook.

Thank you, Ståle. And then I will conclude with the summary and outlook. As you are well aware, COVID-19 is still affecting everyone's personal lives as well as business, and this is no different for BW Offshore, but we are prepared to deal with this as we have been doing in 2020. And I am confident that it will not impact our EBITDA. We will be able to continue to deliver a stable EBITDA performance. And we have -- we can build on our strong financial flexibility that we have created over the years, which allows us to progress new and accretive FPSO prospects. In parallel, with our combination -- or through our combination with Ideol, we're now creating this new integrated floating wind company. And then we're setting it up straightaway correctly to make sure we can grow this with the right capital and the right cost of capital by listing BW Ideol next month's on the Euronext Growth. And that concludes this presentation, but Ståle and I are happy to take your questions.

[Operator Instructions] There appears to be no audio questions at this current moment in time, so I hand back to the speakers.

Okay, we have a question that's come in via the web. And the question is, are you considering any buybacks in 2021? I'm not sure. Marco, do you want to [ go on that one ]?

No, you can take them, Ståle. That's fine.

Well, yes, no. I think we haven't discussed it. We have been very focused on the transaction related to Ideol; and on progressing on our ambition to secure new projects, FPSO projects, in the first half of '21, but again it depends on what would happen going forward. We have a good liquidity overall and would, yes, just look at it in terms of development on the projects side, on whether buybacks would be appropriate.

Yes. What I can add is I think we're very committed to the dividend that we have been paying past quarters. And we intend to continue with that in the coming quarters, but indeed share buyback is, I think, a bit more particular and depends on a lot of factors whether that would actually make sense. And as we announced, we're also focusing now on making some interesting investments in both the FPSO segment and the floating wind segments. So it's probably not the immediate thing to do right now. Are there any further questions?

No more questions on the web. I guess maybe the moderator can check if there's any more or any questions coming in via the phone.

[Operator Instructions] There are currently is -- no questions posted for the audiocast -- apologies. There is one question registered, comes from Frederik Lunde from Carnegie.