BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Welcome to the BW Offshore Q2 2021 Presentation. [Operator Instructions] Today, I am pleased to present Marco Beenen, CEO; and Ståle Andreassen, CFO. Please begin your meeting.

Good morning, good afternoon. Welcome, everyone, to the BW Offshore's Second Quarter 2021 Update. My name is Marco Beenen, and I will cover the general part of this update; and Ståle Andreassen, our CFO, will run you through the financials. Unfortunately, once more, rather impersonal format with this conference call, but I'm hopeful that next quarter, we can return to the format of live attendance and at a selected venue and live streaming for those that can't attend. With that, moving on to the next slide. Please take note of our disclaimer when you process the information of this presentation. And then Slide 3, highlights. We are pleased with the overall progress on Barossa. Our major contracts and packages have been locked in. And equally important, the financing of the Barossa FPSO is now very near to completion. Financial results were solid. Second quarter EBITDA came in at USD 91 million, a bit below previous quarter, and that's explained by some positive one-offs in the previous quarter and negative one-offs in this quarter, but Ståle will come back to that. Operating cash flow was USD 134 million, which includes $56 million of lease prepayments for the Barossa FPSO. And then cash dividend continues at same levels as previous quarters. Over to the operational update, Slide 5, HSE performance. HSE performance was good. Our statistics are trending down, and we had 0 recorded LTIs and high-potential incidents in the second quarter. Commercial uptime is trending back up, and we're now close to our usual 99% average uptime, as we normally have. Then zooming in to some of the units on Slide 6. First of all, Polvo, she comes off contract. We've started decommissioning, and we're preparing for demobilization later in the year. She's a suitable candidate to develop the Maromba field also because she came off the Polvo field which has similar oil characteristics. Then, Espoir. To reinstate the cargo tank which was involved with the accident, we are currently carrying out a planned 60-day shutdown, and this will impact the third quarter results somewhat. Fourth quarter will be a normal quarter again, and we're also discussing contract extension scenarios with our client, CNR. Then, Sendje Berge. She has a planned shutdown next month to carry out a tank inspection campaign which will last about 2 months, and that brings us more or less to the end of the current contract, which expires early November. In the meantime, we're evaluating the best options for her, either a contract extension or a potential divestment. And then, Vicente in Brazil. We're moving her out of Brazil, as layup there was too expensive. And we changed that to a cold layup in Oman, so she's currently in transit to Oman. And then finally, Umuroa. And after we managed to agree with the New Zealand government last year that they would pay for the decommissioning and disconnection of the unit in New Zealand, she has now arrived in Indonesia for cold layup. This demobilization project was concluded without accidents and within budget and schedule and to the satisfaction of the authorities of New Zealand. Next slide, Slide 7. It's important to be reminded that of the current operating fleet, 3 units deliver about 85% of the cash flow, which are, in the first place, Catcher operating on the Catcher field for Harbour Energy and delivering above 100% commercial uptime; secondly, Adolo, producing on the Dussafu license in Gabon for BW Energy; and Pioneer, for which we extended the contract with Murphy Oil till 2025 and 5 more years after that. If we add the new backlog of the Barossa FPSO for Santos, we're building out our portfolio with a solid backlog for the future amounting to a gross number of USD 8.1 billion, of which USD 6.8 billion is fixed, which is about 84%. Then diving into Barossa, the project execution, Slide 8. The project has been off with a good start, with several milestones already completed within schedule like model test and first steel cut for the turret system, and also, steel cutting for the hull will already follow next month. The increasing commodity pricing puts cost -- put pressure on our costs. But we have sufficient contingency to absorb this with, and we're also mitigating this by accelerating the lock-in of our major contracts and packages like the hull fabrication contract, the turret system, the topside fabrication, the integration yard slot and the power generation packages. So while we're still early in the project with already 66% of all procurement scope committed, we will be less vulnerable to the dynamics in the market going forward. Moving on to the fleet contract view. This is the usual slide. It shows what I already explained. You see the first 4 units there, Barossa to Catcher, that's actually now 95% together of our backlog. Nautipa comes off and Yúum K'ak' Náab as well during the course of next year. Joko Tole, Espoir and Abo are all units that are on fields with still a longer-term production ahead of them. Sendje Berge, I already discussed as well as Polvo. Moving on then to COVID, Slide 10. Despite the progress in the vaccination programs in some parts of the world, COVID-19 is still very much a threat to the health of our people and to the operation of our assets. Therefore, we still have our quarantine protocols in place and enforced. And the cost of these have now been reduced to about USD 5 million per quarter. But this is still a lot of money. However, the pie chart on the left shows the success of these protocols. As you can see, we only had one infected case on one unit offshore in the second quarter, and all the other cases are called during the pre-mobilization. So it shows the effectiveness, but it doesn't come without efforts and expenses. The majority of our offices around the world were now seeing an increase of occupancy. And in Singapore, we have been able to ramp up the Barossa project team as per plan. With that, I'm handing over to Ståle for the financials.

Thank you. Next slide. Thank you, Marco. Next side, please. So we're starting with the overview as we usually do. As you can see, operating revenues were almost in line with the first quarter at $208 million in Q2, while EBITDA came in at $91 million for the quarter, which is about 18% below a relatively strong quarter 1. The EBITDA for second quarter has been impacted by a number of items. We are incurring higher layup costs for CSV in Brazil than anticipated as we're not able to do cold layup. We have been focusing on bringing the unit out as soon as practical. And although this has -- although this has taken some time, we are now on our way to lay up in Oman. We have, as Marco mentioned, also brought Umuroa safely back to Indonesia for layup. And although the cost of decommissioning the unit was covered under the contract, the actual cost of transportation of the unit was not reimbursable and is another cost settlement impacting the result for the second quarter. And in general, we have seen that the activity level on the fleet has been relatively high, resulting in somewhat higher cost when you compare like-for-like quarter-on-quarter. As Marco also mentioned, we continue to have -- to manage COVID, where we incurred about $5 million this quarter on management. And as we look at it, we consider this will continue at similar levels for quite some time going forward. I also want to mention that with the BW Ideol now owned approximately 53% by BW Offshore, we have to consolidate their business as part of our results. And the EBITDA impact of Ideol of negative $2.2 million in second quarter has been consolidated into the result of the BW Offshore Group. So looking forward, I want to highlight that as the contract for Polvo is ending and with Espoir and Sendje Berge going into a period of shutdown where we have to do tank inspections, that we do expect to have some limited negative impact on results in quarter 3 as well. Next slide, please. On the income statement, I'll comment on some of the main items. As you can see, depreciation and amortization is going up a little bit from quarter 1 to $68 million. This is a result of including depreciation and amortization of assets and technology in BW Ideol as part of our accounts. We did sell Berge Helene for recycling in the second quarter, no impact on our income statement as the unit was sold for a price equal to net book value. When you look at the financials, net interest expenses were in line with previous quarter, while we had to record a mark-to-market loss on financial instruments of $9 million in quarter 2, predominantly linked to swap rates reducing quarter-on-quarter. And this was somewhat offset by a positive revaluation effect on our bond loans. Our investment holding in BW Energy continued to provide positive contribution to our results with $5.3 million to BW Offshore from an overall net result of $15.5 million in BW Energy in quarter 2. So with underlying taxes from operations in line with expectations at $6.4 million, we posted a net profit for the period of $5.9 million. Next slide, please. We started the quarter with a total cash position of $210 million, of which $60 million were consolidated cash from BW Ideol. Cash flow from operation was $134 million. This includes $56 million received in prepayments from Santos for the Barossa FPSO. As we stated before, the contract with Santos includes the prepayment of the FPSO day rate during construction of approximately $1 billion, and this will be presented as cash flow through operation as it is technically part payment of the future lease of the FPSO. We invested $41 million into projects. This is predominantly linked to Barossa, as CapEx on the existing fleet was limited in the second quarter. As I mentioned earlier, Berge Helene was sold for recycling in Q2 for, as previously communicated, net proceeds of $16 million. We continue to amortize on our debt, and we did schedule repayments on the Catcher facility and repayment under our corporate facility, reducing our debt by $88 million. The remaining items are, I would think, self-explanatory and, to a large extent, in line with previous quarters. So that taken into consideration, we ended the quarter with a net cash position of $148 million when excluding consolidated cash from BW Ideol of $55 million. Next slide, please. On the balance sheet, you can see that we continue to reduce our net debt, reducing it from $930 million in Q1 to $854 million by end of second quarter. In terms of ratios, you see the leverage ratio is trending flat, in line with previous quarters, while the equity ratio trended up just slightly and stood at 39.9% at the end of Q2. We have said this before, but I want to reiterate that it is important to prepare the balance sheet to be able to take on growth. And as we ramp up the activity on the Barossa project in the coming quarters, we shall expect to see that both net debt and leverage ratio will increase from current levels. Next slide, please. This is another familiar slide, and again, you see the installment schedule show that we have a manageable maturity profile on our existing debt, with the larger debt maturities only towards end of 2023 and into 2024. And although we are now starting to see the contribution from all the units are tapering as they get closer to end of contract, the key units on the FPSO fleet continue to deliver substantial cash flow, and we do expect that they will continue to do so for years to come. And this is what gives us comfort towards refinancing of debt maturities in due course. I also want to highlight that we have substantial asset values through the investment in BW Energy as well as the investment in BW Ideol, which is completely unleveraged as of today but which we could potentially leverage if we see fit in the future. From a cash management point of view, I also want to caution that with a large project like Barossa, which is relatively capital intensive and also will tie up some working capital, we will plan ahead and work on maturities in a structured way to ensure we have good visibility on liquidity at any time. Next slide, please. As Marco mentioned, we are now complete on the financing for Barossa now. We have continued to focus on this throughout the whole quarter, and I'm pleased to say that we are now complete on signing a $1.150 billion combined construction and post-delivery financing for the project. The loan will be a 14-year facility when including the construction period delivered through a syndicate of 9 international financing institutions. In parallel with this, we have been finalizing agreements with our partners for equity participation in the project. And although we do recognize this has been a large and relatively complicated effort with multiple stakeholders as everything has been worked in parallel and it has taken some time to complete this, we hope that we will be able to announce this now very shortly that it has been concluded upon. As we're always looking for ways to increase our funding toolbox, in the second quarter, we were contemplating to launch our inaugural green bond to finance the transition we have started on with our investment in BW Ideol. A great deal of work was done to prepare for this, including developing a green bond framework. Proceeds from a green bond is highly regulated and will have to be used towards investments in qualified renewable activities. However, as the terms that were offered were not satisfactory to BW Offshore, we did decide to hold the issue for the time being, but we might come back to the market at a future point in time with this. On the liquidity side, as I've mentioned, we have to be focused now going forward as Barossa is ramping up. We are making good progress on locking in large contract packages, and as we're doing so, the spend curve will pick up in the second half of this year. And as indicated last quarter, we estimate total CapEx in the range of $0.5 billion by end of the year. We continue to evaluate opportunity costs on holding units in layup, and although it's not a significant cost per unit for layup, they also tie up working capital, and we will be focused on making sure we rightsize the fleet going forward. The estimated CapEx for existing fleet continues to be in the range of $25 million for the full year of 2021. As shown on the slide here, overall liquidity was approximately $280 million by end of Q2 when you exclude consolidated cash from BW Ideol, and this includes $132 million in available liquidity from the corporate facility. So with the recent investment in BW Ideol and securing the contract for Barossa, we believe we are on track on the strategic initiatives that we have set out. Barossa is a project that has helped us develop a robust partnership model, which we believe is one of the cornerstones for future success in both the large-scale newbuild FPSO segment and the offshore floating wind segment. Barossa itself provides for long-term, stable cash flow as well as the ability to grow our dividends in the medium-term future, while BW Ideol provides for growth potential in a new and potential vast market longer term. We're also pleased to see that BW Energy is announcing multiple value triggers over the next couple of years, culminating in an intention to pay dividend when fully operational on Dussafu and Maromba. So with this, we continue to keep confident that we have good overview of our liquidity and that we can continue to pay a dividend as in previous quarter of USD 0.035. So with that, I'll hand it over to Marco again.

Yes. Okay. Thank you, Ståle. In the next slides, I would like to give you an update on our strategy in adjacent segments, and firstly, the floating wind segment. Next slide, please. We're very pleased with how this market develops. The response to the recent ScotWind tender is a testimony that the floating wind industry is maturing rapidly and that there will be a significant growth to expect in that segment. And therefore, it's important to be an early mover with proven technology. It means having full-scale floating wind turbines in the water and gaining experience on a daily basis. And we're doing that through our controlling ownership of 53% in BW Ideol. We're combining BW Offshore's global footprint and project track record with BW Ideol's proven technology and product developer positions together with our partners. We're also teaming up to develop wind power service business to EPCI or lease of floating substations and power to platform solutions based on BW Ideol's technology. And in parallel, we have a partnership with a leading U.S. renewable energy and utility company, Invenergy, which was established to submit bids for the ScotWind tender. Next slide, diving in a bit more on BW Ideol itself. They presented their quarter -- or second quarter results last week showing that they're progressing well with building their project pipeline. And worth mentioning is the EolMed project in the South of France. It's a 30-megawatt pilot project based on 3x 10-megawatt of floating wind turbines; and also, in France, the partnership with a leading French utility for the Brittany tender. Furthermore, a collaboration has been established with Hitachi ABB to deliver industry-first, scalable floating substations. And that's a competitive solution for both floating as well as bottom-fixed wind farms, and that's in reference to this, what we call, wind power service business that we're trying to develop with BW Ideol together. In July, a joint development agreement was signed with ENEOS Corporation for a commercial scale floating wind farm in Japan, and it further strengthens the already quite strong position BW Ideol has in Japan. In U.K., together with the joint venture partners, bids were submitted for the ScotWind tender. And then design and engineering service agreement has been signed for Taiwan, and this not only creates a strong position in that market but also generates some immediate revenues for the company. Finally, this month, heads of terms for a partnership was signed for a floating wind development in Italy. Then moving on to BW Energy. Our 35% ownership in BW Energy, which has a current market cap of USD 680 million, represents a significant value for BW shore. So that's Slide 21. It keeps us exposed also to the upsides in oil price as well as to the dividend potential, as Ståle also mentioned, once the Hibiscus project and the Maromba development are in production. At the moment, the Tortue field in Gabon produces about 10,500 barrels per day, and in Q4, this will increase when 2 more wells will come in production. Then the Hibiscus/Ruche project is on track for first oil in the last quarter of next year. And the Maromba development is on track for FID in first quarter of next year. We materialized our strategic fit with BW Energy to an increased production tariff when we are in production -- when the production on the Tortue field increases, as I said, by end of this year with those 2 new wells that come in production. And that will give additional peak production of about 8,000 barrels per day. Already mentioned that Polvo is considered the suitable FPSO to be redeployed at the Maromba field development, and there is also potential for additional redeployments like BW opportunity for new field developments. Then to Slide 22, basically now summing up looking -- and looking forward. First of all, we're fully focused on a safe delivery of the Barossa FPSO within budget and schedule. This is the most important activity we have in the company, and it is encouraging that we went off with a great start and have been able to lock in the majority of our commitments. We will take a holistic view on how to maximize the value of the handful of units which are approaching the end of contract in the coming 1 to 2 years as well as those that are already in layup. And this spans from either extending contracts, if it makes sense; but also looking at divestments, which means selling to either our clients or local operators if those opportunities arise; or redeployments, preferably with BW Energy. And then for those units where none of these options are likely, we will proceed with recycling, and the aim is really to target a lower average operating cost, minimal layup cost and capture some divestment opportunities if they arise. The Hibiscus/Ruche project from BW Energy is on track for first oil in the last quarter of next year. And we continue to expand the project pipeline of floating wind developments together with BW Ideol and partners with a target of 1.5 gigawatt in operation by 2030. And lastly, we continue to evaluate new floating energy infrastructure projects, both FPSO projects as well as energy transition opportunities. And that ends this update, but we are very happy to take any questions. And with that, over to the operator.

[Operator Instructions] We currently have one question in the queue. That's from the line of Haakon Amundsen of ABG.

Yes. Yes, two questions from me, if I can. Firstly, Marco, I think you mentioned that about 2/3 of the procurement scope on Barossa had been placed through contracts already. Can you give some color on the remaining amount, how that is impacted by the inflation rate and how it would impact your contingencies, if in any way? Can you give some color on that, please?

Yes. Thank you, and good question. So there is a remaining procurement scope, but the sensitivity to commodity pricing is a lot less as it was in the earlier part of the scope. So obviously, the steel price has increased significantly, so we had to mitigate that and make sure we had our slots and have access to these materials. It's not just pricing. It's also making sure your schedule stays robust by locking in the slots for these commodities. So I would say the rest is -- the potential sensitivities are a lot less. There are some dynamics in the exotic material market, so we're looking at that. But again, it's of a very different magnitude than what we have been seeing in the first half year.

All right. That's clear. And Ståle, is it possible to quantify a little bit the special items you mentioned with respect to layup of the Vicente and transit of Umuroa in the quarter?