BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Welcome to the BW Offshore Q1 2021 Presentation. [Operator Instructions] Speakers, please begin.

Good morning, everyone, and welcome to the first quarter 2021 presentation of BW Offshore. My name is Marco Beenen, and I will give you a general update of the quarter. And then we have Stale Andreassen, our CFO, who will run you through the financials. Going to the -- please take note of our disclaimer. And then going to the highlights. Our first quarter of 2021 was a successful quarter, where we finalized 2 transformational agreements for the company. First of all, a very significant FPSO project for the Barossa gas development in Australia, which increases our backlog to USD 7 billion. And secondly, we positioned ourselves in a leading position for floating wind development through the acquisition of a majority shareholding in Ideol, followed by the launch of BW Ideol, which is now listed at Euronext Growth. Furthermore, our fleet delivered a healthy operational cash flow of USD 114 million, which justifies the continuation of a cash dividend of $0.035, which will be paid out in the next quarter. So, with these 2 new agreements and investments, we are on track to deliver on our strategy, and we focus on 3 areas. First, maximizing the value from our FPSO fleet, which we will do through the contract extensions and redeployment opportunities we see as well as the value creation in cooperation with BW Energy. We're constantly evaluating the opportunities to also sell or recycle units if redeployment opportunities do not materialize. I'll come back to that. In addition, we're looking for new investments we can make in energy infrastructure, either through long-term FPSO contracts or in the renewables segment through our new subsidiary BW Ideol. It could also be in other energy infrastructure markets like gas to power, where we could also re-apply our competence as FPSO player. And then thirdly, more for the future, we're exploring our position for new adjacent segments for the future, like offshore clean fuel production or like-for-like hydrogen or ammonia or carbon capture and storage facilities using our FPSO and floating wind segment competence. We're on track with executing this strategy. We, in our FPSO fleet, we generated strong cash flows. We extended the contract of Abo, and we sold the unit Berge Helene for recycling. The BW Energy, we're looking at increasing the production for Adolo. We're discussing Polvo for redeployments. And of course, there is the opportunity to capture the upside of oil price increases, as we saw in the last quarters and, over time, the future of dividend potential. We invested in FPSO, in FPSO infrastructure project Barossa. That contract is now finalized, and it adds $4.6 billion to BWO's firm contract backlog. It's a 15-year firm contract with 10 years of options and with samples as an investment-grade counterparty. There are more of those opportunities, and we are evaluating those very selectively and staying close to our investment criteria, like we did for the Barossa development. And then in the renewables, we invested in BW Ideol, which is now listed on the Euronext Growth and raised NOK 519 million of capital. BW Ideol is a leading company in floating wind, and we see several value triggers upcoming in the, in the coming years. As this is an emerging market, where typically projects needs 4 to 6 years to develop and mature, the amount of capital that's required in this development phase is relatively limited. Then a bit more about Barossa. We're obviously very pleased with our new contract for the Barossa gas development, which is a world class gas-condensate fields, which will be commercialized via the existing Darwin LNG infrastructure. The project is meeting all our investment criteria when it comes to firm contract duration, 15 years plus options; the investment-grade counterparty; the infrastructure nature of this project, which attracts then in turn infrastructure equity partners and that limits the amount of equity that we have to contribute to USD 125 million for this project. The Barossa contracts were signed end of March 2021. And we have already made significant progress both in firming up the equity and debt financing in addition to the prepayment of the joint venture. But also, we have locked in major subcontracts for a hull, turrets, boring [indiscernible] civil systems, topsides engineering and fabrications and also major tender packages. Yes. Then a bit more about BW Ideol. So, we've taken a 53% ownership in BW Ideol. And we're really looking for 1 plus 1 makes 3 combination, where we combine our track record and experience of large CapEx offshore projects with the proven technology of Ideol, which during the past 10 years, in addition to competitive technology, it has also developed a very interesting pipeline of projects in -- projects and partnerships with local utilities, and in particular in Japan, France, U.K. and the U.S. Together, this has created a floating wind company that is ready to grow. As explained, we have raised the capital, and BW Ideol has now signed an engineering contract and license agreement for the EolMed project but has also signed a partnership with a leading utility for the Brittany tender in France. And the Floatgen wind turbine that is installed actually in the same area as where the Brittany tender applies to. And that Floatgen wind turbine is performing very well since start of operation in 2018. And also, this quarter in 2021, the performance was actually outstanding. The cash positioning of BW Ideol is EUR 51.4 million by the end of March. What you see here is the value profile of floating wind projects, and I want to emphasize that with the EUR 51.4 million cash position that BW Ideol has, it is in a good position to go through these development phases where the need for capital is relatively low, as explained. And we see in this graph this -- the values goes up obviously after FID when you go into the EPCI phase, which is typically 4 to 6 years out. Moments where there are opportunities to recycle the capital from the value creation to farm downs makes sense around FID and also after the EPCI phase, so at COD when operations start. During this value cycle, cash flow streams will be generated from service agreements, from technology royalties, but also from operations after COD, as I just mentioned. And that is then to either partial or full investment from the SPVs. Then moving on to the operational update of the fleet of FPSOS. As mentioned in previous quarter, we experienced a tragic accident in Ivory Coast, and that cost -- that resulted in 2 fatalities, which is obviously a dark chapter from a safety performance perspective. But despite that, the rest of the fleet did not have any LTIs or HPIs in the first quarter. Espoir accident, obviously had also an impact on the fleet uptime as it took a month before we fully understood what has happened and we completed the investigation so that we could assure ourselves that we could restart operations again. Turning into a couple of units. First of all, the Catcher production is steady around 55,000 barrels per day, which seems to be a bit the maximum we can currently produce given the current water cut that we are facing. We had some operational interruptions in gas systems and water injection systems and also some issues with the ongoing formation of calcium estimating the produced water systems. But all in all, still a good commercial uptime of 99%. Secondly, Polvo is coming off contract in Brazil, and we are preparing her for redeployment. Yes, redeployment together with BW Energy. She is a good candidate for the Maromba development, given the fact that he has been operating very close to Maromba fields. Espoir, I already mentioned the accident and the 30-day shutdown. We have now completed the internal investigation, which included involvement of independent external experts. And we are now kicking off a change program to address the lessons learned and to take a step back to address the more systemic issues that we identified. Berge Helene, she has been sold for recycling in accordance with Hong Kong Convention and also to our own BW Offshore recycling standards. We have appointed Grieg Green to ensure strict compliance with these standards so that we know that this recycling will meet all relevant environmental standards and also safety standards. And finally, Umuroa, which now after a decommissioning and demobilization [ funding ] agreement with New Zealand authorities, completed a very efficient execution projects of disconnection and demobilization. And she's now on her way to Indonesia and Singapore. Turning to backlog. Our backlog has received a very significant boost from the Barossa long-term lease contract, adding $4.6 billion to the firm backlog, which now stands around USD 7 billion. Total backlog, including the probable options, adds then up to USD 8.3 billion. And probable options, we define as options, which we deem very likely to be exercised. On the right side of this slide, you see the significance of the Barossa backlog, and you see that we have now 84% of our backlog as firm backlog. The other 3 major contributors to the backlog are BW Catcher, BW Adolo and BW Pioneer. They have relatively long-term contracts as well. This is further visible on this slide, the fleet contract overview. You see Barossa on top and then Catcher, Adolo and Pioneer. You may expect that in the media that VAALCO, our client in Gabon for our FPSO Petróleo Nautipa, they have expressed their interest to replace the FPSO with an FSO and make upgrades on their production platforms, which then naturally would mean that the -- that we will not go into a new contract with VAALCO for Nautipa beyond September '22, which is the expiration date of the current contract. And then likely Petróleo Nautipa will also be prepared for recycling. Already talked about Polvo coming off in end of June. Yes, I think then we can move on to the next slide, which is an update on COVID. We're quite pleased that we have managed to significantly reduce the cost that we spend on managing COVID, which was mainly related to quarantine durations of crew and other logistical costs keeping crew in country. That has all -- the situation has improved from that perspective. Still it's a daunting task to really keep units COVID-free. They had 3 units affected again in the first quarter of 2021. But we have a very effective response protocol, and that reduces the uptime impact on those units. Furthermore, we're taking our lessons learned of 1 year managing COVID into a Pandemic Management Framework, which we have currently under development. In the offices, we also see improvement, both in Singapore and Houston, 2 of our main offices. Things are going much more back to normal. And I also hope that in Oslo office, we can gradually normalize our operations with more presence in the office. The return to the office in Singapore is, of course, very important in view of the Barossa project, and that allows us to enable to ramp up in accordance with our plan. With that, I'm handing over to Stale to run through the finance.

Okay. Thank you, Marco. And I'll start with an overview of the financials, as usual. So, I just say, financially, first quarter has been a strong quarter. Revenues came in at $219 million, which is almost on par with fourth quarter. EBITDA came in at $111 million for the quarter. And although we had some downtime on Espoir, as Marco mentioned, overall, the fleet has delivered quite well. We had somewhat lower maintenance costs in the quarter and deliver a solid EBITDA contribution. It's also worth mentioning that implication of COVID has reduced, and with $4 million a quarter, it is supporting overall better financial performance. Before I go through the financial statement, I just want to highlight that as a result of the finalization of the acquisition and IPO of the BW Ideol, where BW Offshore owns just over 52% (sic) [ 53% ], it is the find that we will be regardless having control of BW Ideol from an accounting perspective, and as a consequence, we had from first quarter fully consolidated the results of BW Ideol and we'll continue to do so going forward for as long as our ownership acquisition stay at the current level. The overall results of BW Ideol has limited impact on the overall results of BW Offshore. You can find more details about that in the trading update that they have published on their website. So, go to the details of the income statement. You can see that we recorded an impairment of $4.2 million in relation to the recycling of Berge Helene. With the measures we have taken to ensure environmental recycling of the units, we netted out approximately $16 million, which is about $4 million below net book value. And this is driven by the additional measures we have taken have resulted in a slightly lower price being achieved for the recycling of the unit. And with this, we continue to deliver an operating result for the quarter of $41.4 million. If you move down, we'll see gain on financial instruments were $22.1 million in quarter 1. We see now that with activity levels continue to increase. We see interest rates are coming up, and this translates into positive mark-to-market effects on, in particular, our interest rate swaps that we have in place to hedge our debt portfolio. Other financial items were negative to $2.5 million, which is due to revaluation of the bond loan we have, which is nominated in NOKs. You will see that our investment in BW Energy gave a positive contribution of $8.3 million in quarter 1, primarily driven by underlying better results and on the back of recovering oil prices. Income tax expense this quarter was positive with $40.3 million. BW Offshore has had a long-standing tax loss in Australia related to one of the operations that were taken over as a result of the acquisition of Prosafe Production. Since 2012, we have had no operations in Australia, and this tax loss that we had as a result of that been recognized at 0 value in the balance sheet, but it's a tax loss that can be carried forward indefinitely. It just haven't been recorded with any value as we have had no operation that any kind of tax -- where tax profits could have been offset against these tax losses. With the firming up of the FPSO contract Barossa, it is now expected that we can use this. We could offset these tax loss against future profits from that operation. And as a result, we have recognized a deferred tax income of $48.8 million in quarter 1. So, when you take this out, you will see that underlying taxes from operations were in line with expectations and previous quarter. So overall, we delivered a net profit for the period of $97.2 million in total. Going to the next slide on the cash flow. As you can see, we started the year with a cash position of $140 million. And likewise, as with the EBITDA, you also see that the cash flow from operation was good this quarter with $140 million when we exclude settlement for Cidade de Sao Mateus. As you can see here, we, we paid $43 million to Petrobras in quarter 1. This represents a full and final settlement related to the contract we had for the lease of Cidade de Sao Mateus. And this settles any outstanding related to that. Investments were relatively low in quarter 1. Approximately 2/3 of this is related to Barossa and mainly engineering activities. But as I will come back to, this will increase in the quarters to come. We completed the transaction with Ideol in quarter 1, and the company was listed under the name of BW Ideol in March. In total, we have, as you can see, investment $72 million when we include that we participated in the IPO. As we own a controlling stake and we consolidate the numbers, we have also here included net proceeds from the share issue, which is selling with BW Ideol. But if you look at the right-hand side of this graph, you will see that we have tried to illustrate the cash position being held by Ideol, and although we include their cash position in our consolidated figures, thereby excluding what's held by them, you can see that BW Offshore net had a cash position of $149 million by end of first quarter. The rest of the figures, I think, are self-explanatory, so I will move on to the next slide. As we closed out the settlement case with Petrobras, and we also finalized the transaction with Ideol, which in total took out $150 million in liquidity, we have not been able to reduce our net debt in quarter 1, which stood at $931 million. And as we ramp up activity on Barossa in the coming quarters, we should expect to see that both net debt and leverage ratio will increase from current levels. And our previous last 12 months EBITDA for the leverage ratio, this will also increase when you draw on new debt for that project. However, that with that deal supported by the future income we will get from that contract, then the unit gets into operation in a few years' time. Equity ratio increased by approximately 3% in Q1, driven by the strong net profit that was delivered. In particular, on the back of the tax adjustment we made on [indiscernible]. The installment profile on our debt continues to show that we have ample time to plan our financing needs, and we have some flexibility as to when we need to start addressing our debt maturities. However, as we have secured a large project in Barossa, we want to plan ahead and both working our maturities in a structured way to ensure we have good visibility on our liquidity at any time. And as some of you might have seen today, we have announced our intent to issue our first senior unsecured green bonds. As we have executed on our strategy to create a foothold in the renewable sector, we're now also taking the step to widen our toolbox of financing alternatives for the company by doing our first green bonds. So, as you can expect, we have been very busy the last quarter working on financing, the overall financing for the Barossa product. We are now pretty well advanced on a $1.1 billion combined construction and post-delivery financing for the projects, that together with prepayments from the Barossa JV and equity will fund the construction of this. The facility will be a 14-year facility and we include the construction period. And we've been working with a syndicate of international banks to put this together and expect that we are able to close out the facility in the near term. At the same time, we're also finalizing agreements with partners for participation in the project, although we can't disclose details before agreements are completed. And finally, we can say that we're very pleased with enabling these partnerships. And we see this as a sample quality for the Barossa project, where we're able to offer an investment model that offers a good long-term return for our investors. And worth mentioning also that the partnerships will start at an early phase of the project and partners will invest side-by-side with BW Offshore during construction, which provides access to equity and facilitate good funding for the project in re-construction. So, despite the capital we spent in first quarter, we retained almost $300 million in available liquidity for BW Offshore. We're still very actively trying to manage our liquidity. I mentioned the liquidity outflow related to CDSM and BW Ideol. But we on the back of that, we are kind of continuously evaluating cost of holding assets and layup versus opportunities we have as there is an option value that you need to consider at any given time in terms of how long we will hold units before we decide to recycle if the right opportunities doesn't come out. On the existing fleet, we continue to see relatively low levels of life extension CapEx and still see this to be in the range of $25 million for the full year of 2021. And as we started on the Barossa product, that will be the most important liquidity element to manage going forward. As Marco mentioned earlier, we're making good progress on locking in significant contract packages for the project. And as we're doing so, we will be making milestone payments and spend will pick up during the second half of 2021. As of today, we estimate we will have a spend by in total $0.5 billion by the end of 2021. And going forward, we will expect spend levels to be high at similar levels for the next couple of years, '22, '23. And then it will start tapering off as we are getting towards sail away from the integration yard and we'll start the process of getting ready for start-up during the first half of 2025. So, with the recent investments in BW Ideol and securing the contract for Barossa, we believe we have made a good foundation for a number of value creators in the company. And while Barossa provides for long-term stable cash flow, BW Ideol provides for significant growth potential in a new and fast-growing world market. And with the strategic activities on track and funding for these well advanced, we have also decided to pay a quarterly dividend of $0.035 per share, to be paid also in second quarter. So, with that, I'll hand it back to you, Marco.

Yes. Thank you, Stale. So just summarizing the quarter and looking ahead. COVID-19 is still there and it's still very much in the forefront of how we need to and will manage our operations, keeping everyone safe and making sure that the availability of our production stays [ in effective. ] We continue to deliver stable EBITDA, and also, we continue to work on keeping good financial flexibility. BW Ideol is now listed as a platform for offshore floating wind growth and will position -- and is positioning itself strongly for the first floating wind tenders that are upcoming this year. Full focus will be on the Barossa project. We have explained a lot about that transformational project for the company. And in the meantime, we are still in a window where there are accretive FPSO prospects which we will very carefully evaluate. And we also expect to see good opportunities in the energy condition for BW Ideol and BW Offshore together. With that, I would like to open up for questions.

[Operator Instructions] And our first question comes from the line of Frederik Lunde of Carnegie.

I was wondering if you could give an update on [ auto ] energy. I believe you're one of 3 bidders for offshore vessel there. And if you could indicate which vessel you will look to use. And also, how keen are you on taking on this project, given that you now secure a lot of activity through Barossa?

Yes, I can answer that question. I don't want to go into specific, specific prospects. But all I can say is we're evaluating each prospect carefully. And if we would take on new projects, they have to be really interesting, really worth doing and the equivalent to criteria applied to Barossa and if not then, we will not do that. So, I guess that's a more generic answer, but probably still answers your question.

And also, just touching on Barossa. Could you indicate a bit on the funding cost? I understand that the terms on bank funding are quite favorable for you.

Stale, you might take that if you can.

We can't be specific, as you know. But I think you will see that the bank debt is reflecting competitive market terms when that is secured. I think it's overall driven by just the assurance that you have in this project. On the counterparty side, fully investment-grade offtake and long-term gas development, existing LNG terminal. That drives the cost of funding down to, at least what we think will be shown to be quite competitive funding cost over. So, and I can also add that the interest from the banking market has been quite significant to partake in this project.

But broadly speaking, it will in line with previous facilities around 250 basis points or so? Is that a fair assumption?

Yes. I think that's a fair assumption. To use the same, if that's for modeling purposes, you're pretty that -- you will be pretty close.

Super. And final question from me, if I may. BW Energy, the stake you have there, it's now making it a very big part of your market cap. And I guess you're not really getting much, it's not really property within evaluation. So, could you make any indication on how you see that going forward? How important is it operationally to have that ownership stake? And if you were to do some changes there, would it be through dividend kind or a block trade or no? Is there any sort of particular set list that would make you change your ownership?

I can start. Stale, you may want to add. So I think in general, there are 3 real value triggers for BW Offshore by BW Energy and one is, of course, the redeployment opportunities in the joint strategy, for which the percentage of ownership is not, I would say, it's not irrelevant, but there is no real particular number that we have to have. So, we can be quite flexible there from that perspective. Also, today, the ownership of the group. Secondly, we see BW Energy as a growth company, and we expect the company to grow, which will reflect in share price development over time as well as the dividend potential. And those are also interesting all triggers for BW Offshore, but we can be quite flexible, of course, in terms of how we treat that ownership. And if it would make sense to reduce that to support other investments that we may want to do as BW Offshore, yes, then there are other options, as you just mentioned. But I think it's too early to be specific. We will -- but yes, we will consider all those options if the time will come.

[Operator Instructions] Our next question comes from the line of [indiscernible].

Some kind of materials costs, including steel, have been going up lately and the yards obviously seem to have gotten more busy with mixed ship orders. What exposure do you have to increase in price of materials and kind of increasing prices from the yards? And kind of what's the time -- how much more is that were you sort of locking in the next few months versus to what extent will you have residual exposure to inflation over the few years that the FPSO is built for Barossa?

Yes, very, very relevant question in view of increasing commodities. Where that impacts would be obviously the Barossa project, not so much in the ongoing operations in the fleet. But for the Barossa, you could see in the presentation we have now locked in all our major -- almost all our major subcontracts, including the hull, which has the majority of the steel, but also the topside fabrication contract and the turret [indiscernible] system. So, the subcontract where fuel prices have most impact are now all signed. And basically, we're in the phase where we're locking very rapidly now also project NPLs. So, from that perspective, we're not full anymore for changes in steel price.

Okay. And was there any material difference between the prices you locked in those contracts and what you're seeing in your bid?

Yes, there was some price adjustment in the hull contract. Yes, so you could see that the steel prices increased from end of last year, when we fund the [indiscernible], we were to the current contract signing, which was -- which was in May. So yes, there was some impact. But on the overall project value, it's not significant.

[Operator Instructions]

We have an online question, which we can take, if you're waiting for more questions from on phone.

Yes. There doesn't seem to be any further questions on the phone at this time.

Okay. So, we have a question from [indiscernible]. And I think this one is for you, Marco. How do you see the possibilities with options for Espoir Ivoirien? So, will the extent in Q1 affect the possibility of having that contract extended?

Yes. So, we have a long-term -- very long-term relationship and good relationship with our client CNR and [indiscernible], we have worked very closely and very consistently together to recover from this accident, including a safe restart of our operations. We're preparing a shutdown later in the year to go back in the tank where the accident occurred. So, from that perspective, there's no change in the dynamics between our client and ourselves. And for that matter also, not in the willingness to extend another contract as far -- and do another extension of the contract, as far as I can judge. The field itself still has about 10 years of field life roughly, as far as we can see, even though the production levels have actually declined. It will take some investments from our client as well to get to these 10 years. So, the extension of the contract for Espoir, will also be linked to a broader decision for CNR to actually invest or make some investments in the field to keep the production growing. The current option period expires in 2022. And typically, what you see is that these agreements, even though we're already starting to discuss it, but the final agreement will take place closer to the expiration date of the current option period.

There's no more questions from sort of online.

[Operator Instructions] There seems no further questions on the phones at this time.

Okay. Well, then I think that concludes this call. I want to thank everyone for interest in BW Offshore and participation in this call. Have a good rest of the day. Thank you.