BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for participating in this call with an update on BW Offshore's Second Quarter 2022. My name is Marco Beenen, and I'm here with CFO, Stale Andreassen, and we will run you through the presentation in this call. Please note our disclaimer on the next slide, and then I'm moving on to Slide 3 with the highlights. Barossa is progressing well despite a difficult supply chain landscape. We're now close to 40% complete. We continue our divesting program of the noncore units, and we maintain our dividend commitment with a combination of cash and BW Energy shares at USD 11 million in this quarter, which implies about 8% dividend yield. Our EBITDA came in at USD 76 million, which is about USD 10 million below last quarter, which is mainly due to a couple of one-off costs and provisions. But nevertheless, we had a solid operating cash flow of USD 136 million. Then moving on to the operational update. Starting with Barossa FPSO project on Slide 5. Yes, first of all, we closed the quarter with 4 million manhours without any LTIs or an injury, which is very satisfying. Overall, we have good progress even though the global supply chain situation is challenging with ongoing inflation increases and delivery disruptions due to the geopolitical situation. But we have mitigated most of that by locking in almost all procurement scope in monetary sense, while the remaining procurement activities are progressing well. To ensure timely deliveries, we are working very closely with our subcontractors, our suppliers and our clients together to proactively address any potential disruptions. With the completion of the whole engineering, including the detailed 3D model, we're further derisking the whole construction phase we are in right now. All in all, we're maintaining a robust project economic despite the challenging global economic situation we're in. Then next slide, Slide 6. Brief update on our fleet performance. HSE statistics are trending down, but we did record 2 HPIs, which we followed up with Level 3 investigations and lessons learned are being implemented through specific actions. The importance of HPIs is that while there are no consequences, it provides a very important opportunity to learn and improve. So we're taking them very seriously. Fleet uptime is stable around 95%, which is the way it efforts by revenue from the units that are in operation. Then next, Slide 7. 98% of our backlog is being delivered by our 3 core FPSOs in operation plus the Barossa project that is currently under construction, and this amounts to USD 7.4 billion backlog, of which 84% is firm. Our flagship Catcher continues to deliver 100% commercial uptime with a production of about 40,000 barrels per day. Adolo produces about 11,000 barrels per day, and we are looking forward to tie in the new production from the Hibiscus and Ruche development end of Q1 next year, which will increase the revenues to production tariff. And Pioneer in the Gulf of Mexico delivered stable production and the Chinook field drilling plan for 2023, can be considered as a positive for the future of Pioneer. Moving on to Slide 8. We're continuing to accelerate the transition of the fleet through divesting the noncore units, as I said in the highlights. And during this quarter, we completed the transaction of Joko Tole to a local Indonesian operator, and we also handed over the ownership and operation of the Yúum K’ak’ Náab FPSO to our client, Pemex. In quarter 3, the operations of Petróleo Nautipa was stopped followed by decommissioning, demobilization and then recycling. The remaining 3 units, which are presented on Slide 9, deliver only 2% of our backlog, and therefore, we are looking for divestments of these units as well. And we're preparing Athena for recycling in Europe. And our BD efforts are fully focused on the redeployment prospects that we see for BW Opportunity. The current market with high oil price, high steel price and tight supply chain makes a redeployment alternative quite attractive for smaller developments. So these prospects have certainly improved within the dynamics of the market. With that, I'm handing over to Stale for to run you through the financials.

Thank you, Marco. Operating revenues came in at USD 193 million in the second quarter, and we delivered an EBITDA of USD 76 million, as you can see. The financial performance on the core fleet, which is Adolo, Catcher and Pioneer, was solid in the quarter with good commercial uptime and a net contribution that was very similar to what we delivered the last quarter. Contribution from the remaining fleet has been impacted by higher cost due to relatively high maintenance activity in the quarter, in particular, on Sendje Berge, where in addition to preparing for start-up, we have purchased a significant amount of bunker fuel. The figures were also negatively impacted by certain valuation adjustments we have made on inventory and provisions made for severance related to those units that are now nearing end of contract term. So overall, we did end the quarter with an EBITDA, it was slightly below our $80 million EBITDA run rate. Going to the overall income statement. Depreciation reduced from $55 million to approximately $51 million in the second quarter. As we now have fully amortized equipment related to an earlier Abo, Espoir in the Q1, our depreciation has reduced further from Q2. As you can see, we reported a gain on sale of assets of $1.6 million in the quarter. This is an accounting technicality as we have reclassified Polvo from held-for-sale to a financial lease on our balance sheet following signing of the sale and purchase agreement with BW Energy. We have hedged all the floating rate exposure on our loan facilities, and we are well protected against increasing interest rates. We're also hedging a large portion of our foreign currency exposure on operations and projects as well as bond debt that we have in NOK. Focus for us is to have visibility on cash flow and not be significantly exposed to macro events outside our control. Net mark-to-market loss on financial instruments for the quarter were $1.9 million. And although we had positive mark-to-market adjustments on interest rate hedges this quarter, these were offset by negative mark-to-market adjustments on currency hedges. Other financial items were $10.2 million in the quarter, largely due to revaluation of bond loan denominated in NOK as the U.S. dollar has strengthened throughout the quarter. As previously guided by BW Energy, there were no lifting in the second quarter. And as revenue recognition is based on barrels lifted this has resulted in a net negative contribution to BW Offshore of $4.8 million, seen here as share of loss from equity accounted investments. So when you include taxes, we still delivered a net profit for the period of $12.3 million. Cash flow from operations were $136 million. This does include $70 million from the underlying fleet operation in addition to $66 million received from our clients Santos related to Barossa. The core fleet is contributing the bulk of the operating cash flow coming from the fleet and is expected that it will do so going forward also. We have, as you can see, net investments of $182 million in the quarter, of which $160 million was related to Barossa. The remaining cash flow out is, to a large extent, related to BW Ideol, as they have paid the option fee for their share in the ScotWind license award during Q2. And note, all of this is shown on our cash flow, it is being paid directly from Ideol, but due to our ownership, we consolidate all cash flow movements also for BW Ideol. This quarter, we also managed to finally close out the sales transaction for Joko Tole where the unit has been sold to an Indonesian consortium. The transaction supported us generating roughly $52 million in liquidity when including working capital related to that operation. As we continue to fund progress on the Barossa project, through our joint venture, with Itochu, Meiji and Macquarie, we injected another $50 million as equity. And at the same time, we funded in $109 million from this joint venture to the Barossa project. We did have surplus cash to a large extent, driven by the closing of the Joko Tole transaction. So we did reduce our debt beyond regular installments this quarter. $29 million was scheduled installment on the cash facility, and we used just under $22 million to purchase back nominally $25 million of convertible bond debt at a discount to par. And we also reduced draw on the corporate facility in the quarter with approximately $35 million. So as you can see, cash position net to BW Offshore was $237 million end of Q2. Our aim is to create full transparency on the status on funding for Barossa as the structure is only partially consolidated. And we also think it's good to show this overview as progress on funding is a good measure for how you have progress on the project overall. We continue to draw equity and debt pro rata based on forward-looking calculations of funding needed for the project. And during the second quarter, we drew down another $75 million on the debt facility, and we injected $30 million more equity. Prepayments from Santos continued throughout the quarter. As you can see from this overview, we have received approximately 35% of the total prepayments by end of the second quarter. And I just want to highlight, this doesn't fully reconcile with the project overview slide that Marco showed you earlier, but that is -- the reason for this is that this is a -- as a cutoff for Q2, while that slide is more of a snapshot as of the moment. With the closing of the Joko Tole transaction, we continue to reduce our consolidated net position, which stood at just under $530 million in Q2. And this is really a result of delivering on the promise of freeing up liquidity from divestments on the noncore part of our fleet. Combined with that, we still get steady cash flow from the core units. Equity ratio was almost unchanged at 35.2%. Here, I want to highlight again that although we do not consolidate the debt from the Barossa project, we are booking an increasing finance lease liability and a liability for prepaid charter rates, which is expected to reduce equity ratio as this liability goes up, now onwards until the FPSO starts operating. So at some point, we expect that the equity ratio will trend down somewhat with the building up of this liability. But overall, we continue to prepare and be ready to have the capacity to take on new projects as we have communicated earlier. Gross consolidated debt stood at just under $800 million by Q2. And although we have Barossa or the financing for Barossa structured in a joint venture, we have a transparent debt structure. Beyond current scheduled amortization on debt, the plan is that we will start addressing maturity on the corporate facility as well as the BW Catcher facility, sometime during the course of next year ahead of maturity mid-2024. We will basically aim to stretch these maturities in line with visibility on contracts on the existing fleet. For capital markets that we have, the plan is to reduce this quite significantly beyond 2024, supported by visibility we have on future cash flow. So to sum up the financial slides. We are delivering on divestments on noncore FPSOs. We still have some work to do, but we have been able to accelerate liquidity that we can extract from this unit. We have a solid liquidity by end of Q2 at almost $430 million. In Q3, we will add another $60 million to this as a standby letter of $60 million has been in place for the YKN contract for -- well, throughout the whole duration and that has now been released in Q3 as part of the FPSO Yúum K’ak’ Náab being transferred to Pemex. Having 100% hedge coverage on debt makes us well protected against increasing interest rates and give visibility on financing costs going forward. And all in all, this has allowed us to slowly start addressing some of the bond maturities that we have. And as I mentioned earlier, we did purchase back approximately $25 million of convertible bond debt, and this was done at approximately 30% discount to its nominal value. And lastly, our investment strategy is to balance growth with a stable return for our shareholders. Last quarter, we announced that we would increase our annual dividend. And we decided to add $20 million to our annual dividend for 2022 through dividending out BW Energy shares on top of the cash dividend. We do believe that the model of dividending out BW Energy shares in kind combined with a cash dividend provides shareholders with cash as well as flexibility to decide if they want to benefit from the future value creation of BW Energy. In Q3, we will pay out $6.3 million in cash dividend, and we will pay out $5 million through BW Energy shares in kind, which -- if you take it on an annual basis, it implies a dividend yield of approximately 8%. So with that, I will hand the word back to Marco.

I continue on Slide 19 with a look at the very positive FPSO market. There is a very healthy pipeline of about 25 to 35 FPSO projects in the planning in between now and 2025. Brazil and West Africa remain the largest markets, but we see also good opportunities in Australia, Southeast Asia and the Gulf of Mexico. And these are areas where we already have presence and experience. At the same time, there is a reduced available execution and financing capacity amongst the active FPSO contractors, as most of them already have signed up on quite a number of contracts. So that allows us to focus on the most solid projects, which meet our investment criteria and which attracts lenders and equity investors who have become increasingly selective on which projects to support. And that brings me to Slide 20 with an update on our progress on the Gato do Mato opportunity in Brazil. This is an opportunity which really meets all the selection criteria for an attractive lease and operate project. Firm lease and operate contract for 18 years, infrastructure like project transitioning to gas over time, world-class counterparties, led by Shell as the operator. EPCI risk sharing with joint venture partner, Saipem. And this is an attractive investment opportunity for equity partners. We're now about 3 months in the Limited Notice to Proceed period and the focus of our have been on advancing the engineering and firming up CapEx estimates. Continuous negotiations on final commercial terms and risk allocation in the current inflationary supply chain environment and to progressing financing. Further updates on Gato do Mato will come in, in due course. It's difficult to give exact timelines for closure. Then moving on to our progress in the floating wind segment, moving to Slide 21. I'm very pleased with the progress BW Ideol is making, converting the prospect pipeline into real floating wind projects. We have now 1 gigawatt of projects under development. And for another 3.4 gigawatt BW Ideol has entered into agreements with leading partners for specific sites and tenders. The latest of such partnership is the partnership with EDF Renewables & Maple Power to bid on 2 Mediterranean floating insights. And this is the same partnership that's currently tendering for the South Bittany sites. So we are very well positioned to win one of the first commercial skill floating wind developments in France, just like we did in Scotland. And that confirms the leading position that BW Ideol has in its floating wind segment. In the meantime, the 30-megawatt EolMed development is progressing with the EPCI phase. And this project consists of 3 10-megawatt floating wind turbines. And EolMed is close to the 2 Mediterranean sites that I just mentioned. And it will, therefore, provide very relevant experience for the standard for a commercial skill development in the same area. Other good news in France is that the Floatgen floating wind turbine in operations since 2018 -- will extend its operation until 2024 now. Then on Scotland and ScotWind, the 1 gigawatt begun development site NE8 is progressing well with the development studies. And in parallel, BW Ideol is progressing with the development of the Ardersier Port in Scotland with the plan to make this a hub for concrete floater manufacturing for the U.K. floating wind industry. Then next slide, a particular interesting niche for the combination of BW Ideol and BW Offshore is the transition into net-0 oil and gas developments using floating wind to provide power to the oil and gas industry. We have now 2 feasibility studies going on with 2 major oil companies to prove the technology and feasibility of integrating wind power into oil and gas facilities. Then moving on to BW Energy, Slide 23, who has presented their quarterly results last week. As a 27% shareholder in BW Energy, we are very excited about the step change in production that we expect for the end of quarter 1 next year. And this will be achieved in Gabon in the Dussafu license with production increase on the Tortue field with extra gas lift capacity, and then followed by the first oil of the Hibiscus/Ruche development. And when all wells are in production, this is expected to increase production with 30,000 barrels per day. But also in Brazil with the acquired Golfinho and Camarupim Clusters, which are expected to produce about 9,000 barrels per day. So exciting times ahead of us for BW Energy. Summing up, last slide. The Barossa project is our main delivery focus, and we are navigating around the challenges of disruptions and capacity constraints in the global supply chain system. Project is in good progress. we're continuing with the divestment program of the noncore FPSOs, improving our liquidity position and rationalizing our global organization. The energy crisis improves the market outlook for FPSOs with a significant pipeline of prospects between now and 2025. And in that environment, we're working hard to bring the Gato do Mato opportunity to a good conclusion, including financing. And we have also a full focus on the redeployment of BW Opportunity. In the floating wind segment, we are collaborating with BW Ideol to transform the prospect pipeline in floating wind to real projects, including wind power to oil and gas developments. And last, but not least, I confirm our commitment to stable direct return to shareholders similar as previous quarter. And with that, I conclude this quarterly update, and I open the floor for questions.

[Operator Instructions] Our first question comes from Christopher Mollerlokken from SPB.

Yes. This is Christopher Mollerlokken from Sparebank 1 Markets. Costs in the second quarter were a bit higher than we had assumed, and you mentioned that there were one-offs in the quarter also related to the start-up of Sendje Berge. So could you give a bit more detail and also what you expect for third quarter? Will there be any more started costs also for the current quarter?

Yes. May I can start on this one. Yes, you are right, we have a relatively high operating costs in the quarter. As you can see, top line was more or less in line with the previous quarter. It is to a large extent, we have had quite a lot of cost, in particular related to Sendje Berge due to the repairs ahead of the start-up. And as I mentioned, we had spent quite a bit of money on buying bunker fuel ahead of project. So that's affected the quarter. And we've also done inventory write-down, and we've made provisions for severance related to units that are coming up contracts relatively shortly. So what I mentioned on the call is that a normal run rate should be in the range of [ $80 million ], and I think that's that should hold going forward. I just want to emphasize again, when you look at our fleet and also in terms of what Marco said that we're trying to wind up the noncore units, the majority of any cash flow and EBITDA contribution going forward is coming from Catcher, Pioneer and Adolo. So [indiscernible] what I'm saying is going to hold and it's not affected heavily by what is happening on the rest of the fleet, although we're going to see some fluctuations due to wind up cost going forward on the noncore fleet. I hope that kind of gives a bit more flavor.

And just a technical question. You mentioned that in the third quarter, you will get an additional $60 million of additional liquidity related to performance bonds being released on Yúum K’ak’ Náab, but just technically, has this previously been booked as a debt on your balance sheet? Or how should we -- just on the bookkeeping...

No, no, it has not. It's a standby letter of credit that's been placed for a year as a [indiscernible] under the contract we have with Pemex. And the only thing that's really happened now in Q3 when the contract ended was that this standby letter of credit has expired -- and that has feed up additional liquidity, so it's basically been a block of $60 million on our liquidity, thanks to our corporate facility for all these years. So in Q3, these $60 million are freeing up, and we have $60 million additional liquidity that we can use. But there has not been booked as a debt or anything. Was that clear?

Yes.

Okay. Yes.

Our next question comes from Haakon Amundsen from ABG.