BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Okay. Welcome, and good morning, everyone. We are presenting today our Third Quarter 2022 Update from BW Offshore. I'm here with Stale Andreassen, our CFO. After a couple of conference calls in the previous quarters, we choose for a bit more personal setup today in live presentation and a webcast for those who cannot participate here. Please note the disclaimer. And then I'll start with the highlights. I'm very pleased that I can announce an extension of the limited notice to proceed because this means that we're actually progressing towards the contract award of the Shell’'s Gato do Mato project, and we'll elaborate more later in this update. Also Barossa, still on track, 50% complete. We're making good progress. And this quarter, we will also continue with a dividend -- cash dividend and dividend in kind, totaling to USD 11 million. Operational update, starting straight with Barossa project is progressing well. We're on track, 50% complete now by end of October. We deliver excellent safety performance, 6.4 million man hours without incidents or lost time injuries. We're now in the middle of the heavy construction phase, both upsides in Singapore and the whole in Korea. And 80% of the equipment packages have now been delivered to the whole yard. Like everyone else, we're in -- we're maneuvering in a challenging supply chain market. And therefore, it's very important that we stay close to our subcontractors and suppliers. We're doing this together with our clients to make sure that we identify any disruptions or other issues that our vendors may have that we can act promptly and adequately. And that's key in maintaining the schedule in the kind of landscape that we operate in these days. And that has been so far very successful. We are impacted by the inflation and also the supply chain challenges and some design growth. We guided previously, we have good project buffers, first of all, contingency, but also our margins in the project. We're using these buffers. We're now halfway in the project. We're still drawing from the contingencies, but we can also see that towards the end of the contract, the EPC margins will be impacted somewhat. But overall, it's a project with very sound economics. And in that sense, we are still very satisfied with the project so far. Moving on to the fleet. Good fleet performance, both safety and uptime, despite 1 LTI, with somebody who hurts his back with some physical work, but nothing serious, fortunately. And the statistics are trending stable. Uptime was good. We were above 99% this quarter. And this is a weighted average of the units by revenue contribution. That means that the units of the core fleet that are in operation, the 3 units in Gabon, Gulf of Mexico and Catcher in the U.K. have delivered well. They are the main contributors to this uptime number. And together with Barossa, this part of our business, which we call the core FPSOs, define 99% of our backlog. And this backlog stands now at USD 7.3 billion, of which 84% is firm. On Adolo, we have stable production around 10,000 barrels per day. We're waiting for the ramp-up that we expect later in the quarter as BW Energy has also guided on later in next quarter -- first quarter next year. We're preparing the FPSO for the tie-in of the Hibiscus/Ruche development, again, targeted for end of first quarter next year. Catcher, lower production than normal. This was due to a planned maintenance campaign that took place in August, but otherwise, very good uptime as usual. And also Pioneer, stable production, good uptime. And we noted that our client is planning drilling activities in the Chinook fields, which we consider positive. The remaining fleet, what we call the noncore fleet, is now reduced to 3 units in operations and 2 units that we prepare for divestment and recycling. The divestment units are the units in West Africa for both Nigeria and Ivory Coast. And we are either divesting to our clients or to a local operator, and these discussions are ongoing. And I expect and hope that this will conclude in the course of next year, probably mid next year. Well, with that, I'm handing over to Stale.

Okay. Good morning, everyone. I'll take you through the finance slides. I think I can start with saying that on an overall basis, we are pretty pleased with the result of the third quarter. As you can see, top line is declining somewhat, which is natural as we are now completed the handover for YKN, the lease that was with Pemex for a number of years. That's now been completed and the unit has been handed over. And we have completed a transaction where BW Joko Tole has now been sold to a local operator in Indonesia. On the EBITDA side, we got Sendje Berge back in operation in Q3. So the contribution from that unit has boosted our EBITDA vis-à-vis the second quarter, although we had somewhat less contribution from Catcher as the unit was on a planned shutdown during most of August. We are alluding to what Marco was saying on the units Abo, Sendje Berge and Espoir. We are in a process where we are divesting these units. As we're now seeing that we probably won't be able to consume remaining inventory during the period where we are to all these units, we have decided to write off remaining inventory on these units. That totals about $12 million on the Q3 numbers. So when you look at the underlying EBITDA, excluding impairment, we're looking at approximately $92 million for the quarter, which is an underlying result, we are quite pleased with. Income statement. Not so much to elaborate on you, as you see, depreciation is relatively stable quarter-on-quarter. Interest expense is also stable quarter-on-quarter. We're hedged on floating rate interests. So we don't see interest expenses fluctuating much even though the market is quite volatile. We could book a gain on financial instruments, which is driven by positive mark-to-market effects on this interest rate swaps that we have. And we booked a gain on other financial instruments, which is $2.1 million coming from revaluation of Norwegian kroner-denominated bond loan. BW Energy reported their results yesterday. They reported a net profit of approximately $34 million for quarter 3 and with our 26% ownership in the company, we could book a share of profit from that holding of $7.2 million in Q3. So when you take into account tax expenses, we could deliver a net profit for the period of $29.6 million in Q3. On the cash flow side, as you can see, operating cash flow in total was $192 million for the quarter. So meaning when you exclude the prepayments from Santos, the remaining underlying fleet was delivering $103 million in the quarter. This is -- this was above our expectations initially for the quarter. But -- and I want to also add that this was boosted additionally as we got settled all overdues, all outstanding related to the YKN contract as the unit was handed over for -- from -- to Pemex. We invested $218 million in the quarter. Most of it is related to Barossa as it says on the slide. The remaining $18 million is ongoing upgrade works for Adolo as we're now kind of finalizing the work we need to do for the tie-in for Ruche Phase I for BW Energy. And we had some capitalized costs related to the feed activities ongoing for the Gato do Mato project opportunity that Marco is going to come back to later on. Remaining items on the cash flow is quite self-explanatory. We continue to put equity into the joint venture, which will be the future owner of the Barossa FPSO. And we funded in the $170 million from the JV to the project company for the ongoing activities. So when you exclude any consolidated cash related to BW Ideol, which we consolidate. We had a cash position of $267 million in Q3, almost in line with how we started the quarter. Looking at financing for Barossa in isolation. It's very much business as usual. We continue to draw pro rata on the project debt facility as well as equity. We funded in $90 million from the -- or withdrew $90 million on the project debt facilities -- facility in Q3 and $22 million on a 100% basis in new equity into the JV. The Santos as a client, they paid in $89 million into the project. And when you look at the overall payments from Santos as opposed to the total number of an estimated $1 billion over the project period, they had paid 44-ish percent of the prepayments, which doesn't fully align with the number that Marco presented, but that is because the cut-off here is per end of September as opposed to what he was referring to, which is more assets picture where we are 50% complete. But all in all, it is -- we're well funded on the project and the financing or the funding activity goes as normal. On the balance sheet. Again, the trend is the same has been for previous quarter. We continue to reduce net debt. We continue to reduce our leverage ratio, all kind of naturalized as we're amortizing on our debt while our cash position stays flat. The equity ratio dropped just a little bit in the quarter, and this is as expected as due to these prepayments we have for the Barossa project, you're building up a liability on the balance sheet that you will start amortizing when the unit goes into operation in 2025. So we do expect to see some slow draw on the equity ratio towards 2025. But overall, when you look at our covenants, we are pretty comfortable with where we are. On the consolidated debt situation, nothing really new. It's a very slow moving graph. I think many have seen this for many quarters. And I will continue to say, as I've mentioned in previous presentations that we will start addressing the corporate facility and the Catcher facility as well as our 2 bonds during the course of mid-2023. As Marco mentioned earlier, we do have very good progress now on Gato do Mato. As part of that, we have kicked off the financing effort on that project. And that will be the main focus for us until the course of end of this year. And when that is closed out, we will go back to start addressing our corporate facility and the Catcher facility, as I mentioned. So to sum it up, we are focused on divestments on the noncore fleet. The focus is to try and free up as much liquidity we can from these units, which are seen as noncore in our long-term strategy. And I think we are on track on this as we are aiming to close this out by mid next year. We have a very, very good, I would say, liquidity situation at almost $500 million in available liquidity. We are 100% hedged on floating rate debt. So we also have very good visibility on kind of our financing costs going forward. And I would say this all transpires in us having now the ability, and we have an enabler where we're able to move ahead with what we consider to be the next big large infrastructure FPSO project for BW Offshore in Gato do Mato. And I think we put ourselves in a good position where we are able to financially, and I know Marco will mention this organization as well, capable of lifting such another large-scale project. On the dividends, there's not much more to add to what Marco said in the beginning. We continue to pay cash dividend and dividend in kind through BW Energy share sale level as before. And when you calculate this towards -- just to highlight towards today's share price, it does imply annual dividend return of approximately 9% on overall. Yes. And then we'll go to Marco for some updates on the strategy.

Yes. So well, we mentioned Gato do Mato a couple of times, and that is indeed the exciting news. We're really progressing now towards a contract. We're targeting early February. And that's why the limited notice to proceed has been extended. Of course, contract award is subject to Shell’ taking FID and us completing our financing package in that time frame. In the meantime, we have agreed basically all the terms of this project in a REIT form. It also includes inflation risk of certain items where we think that we cannot take those risks and that would result in a contingencies in the project. So Shell is taking those. We also have progressed our -- or firmed up our project execution plan, and that includes the security of yacht capacity, which is very important in this market. And as Stale mentioned, we kicked off the financing and which is a significant debt facility for this kind of project. We obtained very good interest, very encouraging interest from the potential lenders. So that process is running well -- as well. I do think this is the most attractive FPSO project currently in the market. It's with -- our counterparty is Shell, as operator, Shell’ Brasil, and then a strong partner as Total alongside. It's an 18-year firm lease and operate contract. So similar Barossa and consistent with our strategy, it means we're achieving our returns during the fixed term and the 7-year options that are also there is pure upside. We don't include that in our commercial models and return estimates and it allows us to finance the equity with partners. So we will have equity partners as co-owners in our asset company, same as Barossa. So we're following the similar model and this asset company will purchase the FPSO from an EPC entity. And that's where it's different than Barossa because in that EPC entity, we have a joint venture with our partner Saipem for the EPCI undertaking. And that's a 50-50% joint venture. The timing is also excellent. We have in our strategy, we focus on being selective, taking the projects. This is definitely such a project. And we want to target a new project every other 2 years because that's, that times well with our project execution machine. And so this project comes very nicely at the tapering down of the engineering and procurement efforts of Barossa, and we can roll over this project organization into the next project very much as planned. So we're very pleased with all these elements of the next large investment and growing our portfolio with new type of FPSO projects. The market is still very good. The windows for new projects remains open. On 1 hand, also because there is only actually 4 FPSO operators seriously playing in this market at the moment, but there are really also a lot of projects identified for coming -- or taking FID between now and 2030. And what you see here on the map is that where the -- most of these projects are exactly in the areas where we already have operations ongoing. However, we just now we focus obviously now on Gato do Mato but the next target is for that matter, then the redeployment of BW Opportunity. We -- that unit now has completed upgrades and repair and refurbishment for the, let's say, the generic part of the facility. So we're really ready to take on a new project for this unit. That will then be a redeployment project. It's a versatile unit. It can be both oil and gas development, but we focus on gas because it has a very nice size of gas processing plant. Then I continue. The difference with redeployment projects is they have a very different nature, capital allocation-wise, and the amount of capital to invest in such units compared to large new build projects like Gato do Mato and Barossa is very different. And also the lead time from investment to cash flow is much shorter. So this is actually a very nice project to bring on stream after Gato do Mato and in the next 1 or 2 years. We're also progressing our initiatives to decarbonize oil and gas facilities to floating wind. And we're well positioned through a joint venture that we put in place between BW Ideol, our floating wind subsidiary and BW Offshore. And we leverage really the FPSO competencies with floating wind competencies. We now expanded that collaboration with Fram Green Technology and the Grieg Group to focus on the Norwegian continental shelf as a first area to demonstrate that this is technically and economically viable. Another area I would, by the way, also be U.K. because it's the cost of CO2 emissions that really underpins the business case here. And these are areas where there's a lot of focus on CO2 emissions and put a price against those emissions. Therefore, it's naturally to look at opportunities there. And we have identified 2 or 3 of those opportunities that we will work on as we speak. And of course, when I talk about FPSO competence here, it's not just technical and operational, it's also our ability to offer those solutions to a lease and operate model in a similar way as we do for FPSOs or even in combination with FPSO investments. Then a bit more about BW Ideol itself. It's clear that the floating wind market is expanding rapidly. If you compare last year, this time, BW Ideol targeted a floating wind pipeline of 10 gigawatt by now, 1 gigawatt of that is actually under development. Another 3 gigawatt is substantiated with means for us that we have actually put partnerships in place and specifically target site or tenders. And the pipeline has increased from 10 to 30 gigawatts. So that's a factor 3. We are -- BW Ideol expanded their positioning with a partnership in Taiwan and also the project in South Brittany in France. It's progressing, and there is an award expected mid-2023. And we think in the partnership with EDF and Maple Power, BW Ideol is very well positioned. Globally, you see this growth of the wind market is materializing in a size of 185 gigawatt now. So that's double compared to the picture that we saw last year. All the sales is that we were -- floating wind is a very rapidly expanding market. And if you would translate it into, for instance, capacity of floaters that you would need by 2030, you would come to more than 3,000 floaters. It also underpins the reasons why we invested in exclusivity in the Port Ardersier in Scotland because that's a strategically very attractively located site where we could, together with BW Ideol capture the floater manufacturing market for the U.K. and even broader in Europe. BW Energy. It will be quite an exciting first quarter next year, and BW Energy is preparing for a ramp-up of production of at least a factor 2 and that consists of 3 components. The first 1 is the Tortue field itself from which they're producing today through our FPSO Adolo. If the new gas lift compressor is commissioned then the production will be taken from all 6 wells. In addition, we will then have the tie-in through the BW MaBoMo Jack-up and a subsea pipeline into FPSO Adolo and bring the Ruche/Hibiscus production online. And in addition, in Brazil, BW Energy expects the closing of the Golfinho transaction with Petronas -- Petrobras and Saipem. And that will then add the existing production of that field, which is currently 9,000 barrels per day as well. So it's a three -- on threefold, we see production increases starting from end of the quarter -- first quarter next year, which is exciting for our FPSO Adolo operations as well because we also have a production tariff there. And of course, as a 25% shareholder, we're also following this with a lot of interest. Namibia has shows interesting developments as well. You may have followed that there are nearby discoveries made by some oil majors. And therefore, BW Energy also embarked on a large 3D seismic campaign to further validate reserves of the field and the license they have with the Kudu field in Namibia. Production is still for this quarter is still around 10,000 barrels per day, resulting in EBITDA of $61.5 million, which was based on 1 lifting. So summarizing an outlook, I think the third quarter was a solid quarter. We're pleased with what we have achieved. We remain fully focused on the Barossa project, and we're progressing then to the Gato do Mato project towards a contract in February, and we're making -- or we're making sure our project readiness is 100%, and we have our finance in place by that time as well. We continue the divestments of the noncore FPSO fleet and we're seeing good opportunities for BW Opportunity FPSO as a redeployment project following after Gato do Mato. And then again, just mentioned, we look forward to the production ramp up next year by BW Energy. That concludes this update, we are very happy to take questions together with Stale.

If there's anything from the audience, I guess we can take those here.

Christopher Mollerlokken from Sparebank 1 Markets. So 2 questions. One difficult, 1 easy. Starting with a difficult one. On Barossa, with drilling currently suspended, I guess there's a court hearing next week. If drilling remains suspended, is it more likely that you'll just conclude the FPSO and it's on field and it will start producing from less wells than originally planned? Or is it more fair to assume that if drilling is delayed, that you'll also be delayed in terms of delivering the FPSO? That's the first question. And the second 1 is just on the fourth quarter on Espoir. So CNR is having a 45-day shutdown now for maintenance on the FPSO. Is it then fair to assume half a quarter on that unit in Q4 for your part? Or are you fully compensated when the operator does that kind of shutdowns?

Yes. Maybe I'll start with the last 1 still because I think there, the shutdowns in used by the operator don't affect the day rate. So we're not seeing any change in revenues on as far as I know.

No, there should be no change to the contribution. Yes, as I think most know also the contribution is quite limited on the unit for the results overall.

Yes. No. So -- and then on Barossa, I think it's the former, meaning that if there would be delays in the drilling program, which would affect the FPSO or if that would affect the start-up of the field as planned, if that would happen, then we will go on -- we will still go on rate, basically. Our contract is independent from that. So that's the risk, that is on Santos, not on us. That's one. And that obviously gives us not only the comfort but also the obligation to deliver the project as planned and on target, which is what we're doing. But I want to emphasize that -- and that's following the guidance we get from Santos. Santos also really emphasized to us that we should really focus on the schedule, deliver per schedule because there is an at least 18 months buffer. So the FPSO is always on the critical path and drilling is not. So this issue that Santos has -- or actually, the regulator has not even Santos, the regulator has based on the permits or the license to drill. These things will be sorted out and the expectation is that this can be sorted out well within those 18 months. So in that sense, it will not impact the overall project. There was a court ruling or the appeal of the court ruling took place 2 days ago. And I think the expectation is that in January, we will hear more about that. So that's -- yes, that's a difficult to comment on what the outcome will be. But I do want to stress that Santos -- for Santos, the way they advise to us is you need to keep going, don't get distracted. This will be sorted. And the FPSO is always on the critical path, and that's what you need to do, and that's what we're doing. Any other questions in audience?

We have received some questions from our Q&A module. The first question comes from Erik Fosså in Carnegie. The wording on the Barossa project was slightly more negative this quarter. For example, the project is impacted by inflation and supply chain challenges. How should we interpret this? Is this from earlier challenges? Or yes, is it under control? Or has economics further deteriorated?

Yes. The project is very much under control. What you could say is we're now 50% complete. We're basically done with engineering and procurement. So it is a phase in a project where you're in a good position to look through the whole project to the end. So we've been a holistic analyst of everything we think can happen towards the end of the contract. And our conclusion is that although we're still drawing from contingencies and in our models, contingencies are there to be used. We can see that we will exceed that towards the end of the project based on what we see today and based on that holistic analysis. And that would mean we will also eat in somewhat of the EPC margins. And to that extent, you could say that picture is a bit more clear now than it was in previous quarter where there were more, I would say, moving parts than we have today because, again, today, we're in the construction phase, engineering procurement is kind of done. And this is always a piece where delays can occur. So that delays and cost increases can occur. So that picture is very clear. We now just have done the whole analysis towards the end. And I think overall, we're still -- you can still -- we still see this as a very sound commercial project. It's also important that everyone understands that, in any case, there was no impact on the lease returns. This is we're just talking about the project margin.

Maybe just to add sort of from a modeling perspective in terms of what you're saying because I think what we saw earlier in earlier stages, the range of outcomes are wider, earlier. I think what you're saying now with going into an execution phase, we see the range of outcomes are getting pretty narrow. So it gives us a pretty good view now on where we're heading. And I think that's why we're comfortable about what you're seeing.

Then there is a question from Haakon Amundsen in ABG. Two questions. Can you quantify the EBITDA effect of the Catcher maintenance in Q3? And then the second question on Barossa, to make sure I understand this correctly, while you will draw on the contingency and some EPC margin, you still expect to complete the project within the original total CapEx budget?

Okay. I can't remember exactly. It's a few millions, which is the impact on Catcher. It is not a significant impact from the shutdown. But I need to go back and look at what the exact impact was quarter-on-quarter. We can come back to Haakon directly on this.

And on Barossa, I think we just explained, but it doesn't impact the CapEx but from the asset company. We're only saying we're doing for contingencies and margin on a project level.

That concludes the Q&A from the web.

Okay. Thanks, everyone. Thanks for your interest, and have a good day.