BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Hello, and welcome to the BW Offshore Quarter 4 2022 Presentation. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Mr. Marco Beenen, the CEO, to begin today's conference. Thank you.

Thank you, and good morning, everyone. Welcome to our fourth quarter 2022 update and our full year results presentation. Together with Stale Andreassen, our CFO, I will run you through our presentation, and then we will conclude with the Q&A at the end. Please note our disclaimer. And then I continue with the highlights. Full year results came in with a solid USD 346 million EBITDA and an operational cash flow of USD 650 million, of which about half came from the lease prepayments for the Barossa FPSO. For the quarter, EBITDA was USD 105 million, and that includes a one-off from the Gato do Mato limited notice to proceed, which was terminated. The Barossa project continues to progress well and is by now about 60% complete. We continue to pay our dividend this quarter through a mix of cash dividend and dividend in kind with BW Energy shares like we did in the previous quarters. On an annual basis, this equates to USD 45 million, and that means we have returned capital to shareholders at a 9% dividend yield. Then continue with an operational update. First of all, the Barossa project. The FPSO will now be named BW Opal, and I'm very pleased with the safety performance where we have now passed 10 million man hours without any LTI, any lost time incident. You can also see on the pictures that now the construction is really taking shape, both for the hull, topsides, as well as the turret. And this means engineering is nearing completion, and we're heading towards the phase where we can actually assembly the mega blocks. Despite the inflation, supply chain disruptions and design adjustments, the forecast of the project economics remain sound, and they haven't changed since previous quarter. So I'm proud of this team, which keeps the project on track for delivery in the first half of 2025. I'll move on to fleet and HSE performance. I'm pleased with the trending down of our safety statistics, which now includes both the BW Offshore employees and also the man hours of our contractors. We take the 3 HPIs that we recorded in the quarter, high-potential incidents. We take them as opportunities to learn and improve. We are considering these HPIs as leading safety performance indicators. And therefore, we treat them very seriously. On the uptime, the fleet average commercial uptime was above 99%, and that is where it should be without any planned shutdowns. Then I move to the backlog. 99% of the backlog is now from our core 4 FPSOs. We already talked about Barossa. Adolo is producing slightly below 10,000 barrels per day, but this will change by the end of this quarter when we expect first oil from the Hibiscus/Ruche development, and we will also boost production from the Tortue field with a second gas lift compressor. The increased production will trigger additional income for the FPSO to a production tariff. Then Catcher in the U.K. delivered a strong quarter with 100% commercial uptime and the same applies for BW Pioneer in the Gulf of Mexico, so nothing specific to report there really. So in total, with those 4 units, we are now having a backlog that stands at USD 7.1 billion, of which 84% is firm. The rest of the fleet is in progress of recycling or divestments and with the aim to conclude this divestment program in 2023. The exception is BW Opportunity, which is in Yard in Singapore. And for that unit, we're progressing redeployment opportunities. I will elaborate a bit more about that after the financial section, but we'll hand over to Stale first.

Thank you, Marco. Before I begin, I would actually like to encourage everyone to take a look at our annual report, which is out today. It's a report we have spent a lot of time on, and it's a very good product for anyone who wants to get a better insight in what we do today, what is our financial situation and where we are going as a company. And you will find the report on our website. So starting with the overview, as usual. I'm quite pleased to state that we are able to finish 2022 with a quarter where we delivered good financial performance. As you can see, operating revenues came in at USD 211 million, and EBITDA was USD 105 million. For this quarter, both revenues and EBITDA has been positively impacted as we have now invoiced Shell for settlement of incurred costs related to the work we have done under the limited notice of proceed work arrangement for the Gato do Mato project that we were working on. And at the same time, we have expensed off all the costs for work that was carried out in quarter 4. So net off, as you can see, there was an impact of USD 13.6 million in the quarter. And as I will get back to -- on the next slide, you will see that we have also written-off our costs incurred in previous quarters related to this. So when removing the impact from settlement with Shell, we still delivered an EBITDA of USD 91.4 million in the quarter, which shows that underlying performance of key units have been good. And I would, in particular, highlight Catcher as we've been able to meet annual KPIs and we had good commercial uptime on the unit in the quarter. And that had an impact, as in quarter 3, we had a partial kind of planned shutdown for the unit. Going to the income statement, you will see that, as usual, depreciation are stable quarter-over-quarter. We have been capitalizing engineering cost since late 2021 related to Gato do Mato, as it was seen as an integrated part of the overall construction cost of the FPSO to be built. As the project has now been put on hold, we have expensed off all these costs that was earlier capitalized, and that is reflected now through an impairment of USD 15.8 million in the quarter. And I think if you take the net effect of the USD 13.6 million as was presented on the last slide and you deduct this additional USD 15.8 million, you will see that we have spent slightly more than we've been compensated for the project as a whole. Net interest expenses continue to be stable quarter-on-quarter as we are fully hedged on floating rate interest exposure. We have also hedged a significant part of our FX exposure to any currencies other than the U.S. dollar, which includes our NOK 900 million bond loan in Norwegian kroner. And over the course of the quarter, U.S. dollar has weakened significantly against currencies, particularly Singapore dollar, Norwegian kroner, and euros impacting us, and this has contributed to the majority of this USD 24.4 million gain on financial instruments reported in Q4. Other financial items were negative USD 3.9 million in the quarter, and that is largely due to revaluation of bond loan issued in Norwegian kroner. Share of loss from equity accounted investments were USD 2 million, and that is a reflection of our relative share of the result delivered by BW Energy in Q4. And when you take into account tax expenses, we delivered an overall profit of USD 41.3 million for quarter 4. On the cash flow side, you see cash flow from operation was USD 175 million, which means when you exclude prepayments from Santos for the Barossa charter, we delivered cash flow from operations at USD 87 million. So again, good cash contribution from predominantly coming off from our core units. We had net investments of USD 166 million in the quarter, of which USD 154 million is related to Barossa and remaining is, to a large extent, related to still ongoing upgrade works for FPSO Adolo related to the tie-in for Ruche Phase 1. We did not draw any further on the project facility for the Barossa side in the quarter. We injected USD 5 million more equity. And that is also why you see that our cash balance has reduced in quarter 4 as we've been trying to minimize working capital held for the project and utilizing that cash and that allowed us not to draw on the project loan facility in the quarter and to delay that into quarter 1, 2023. We did draw USD 33 million on the revolving credit facility we have, and that was to a large extent to manage liquidity as we have scheduled installments related to the cash facility and the fact that we bought back 31 million in convertible bonds during Q4. And that when you take into account payment of interest, dividends and payments under the preferential arrangement with ICBC, we ended the quarter with USD 230 million in consolidated kind of cash position. The Barossa project has been progressing well during the quarter, as Marco has touched upon, also reflected in the financing, as it is a good measure for progress on the project. As I mentioned on the previous slide, we have not drawn on the debt facility for this project in the quarter. Normally, we will draw equity and debt pro rata based on forward-looking calculations of funding needed for the project. But in quarter 4, when factoring in prepayments from Santos, we had sufficient liquidity to push out any drawdown to the next quarter. The prepayments from Santos was based on the percentage measured completion of the project in the quarter and stood at approximately 53% of the total by end of the year, up from 44% by end of quarter 3. Looking at our overall financial position. As you can see, net debt increased slightly in the quarter now to USD 497 million. And although we have reduced overall consolidated debt levels, this is primarily driven by lower cash balance as we have been utilizing cash on hand for Barossa in the quarter. And despite this, we are still trending on a leverage ratio of 1.4x last 12 months EBITDA. So we have what we consider a comfortable leverage position. We have continued to be supported by steady strong cash flow from our core units. And if you turn to the equity ratio, you see slightly down now by just over 1% quarter-on-quarter, and this is in line with expectations as our balance sheet continues to increase as progress or construction on Barossa moves forward. And we do expect that this effect will continue until the project is completed, and then it will unwind and equity ratio will start trending upwards. Looking at the consolidated debt. We have 2 debt facilities and 2 bonds that need to be addressed over the next couple of years. As we're now entering 2023, we are now kicking off efforts on amending and extending the corporate facility and the BW Catcher facility, which both have maturity mid-2024 originally. We believe we have a very good starting point as the facilities are supported by our 3 core FPSOs, which we expect to be on lease to our clients for years to come, and that will provide good steady cash flow visibility and support our efforts on extending the maturities on these 2 facilities, as I mentioned. For the capital markets debt, our plan stays firm in the terms that we are expecting to reduce the overall debt quite significantly from today's level of around USD 335 million down to USD 150 million, USD 200 million as we address the maturities on those. So we continue to focus on divesting noncore assets in line with our strategy and that shall ultimately allow us to simplify the organization, free up liquidity and grow infrastructure FPSOs. In the medium term. Divestment dialogue for noncore FPSOs are ongoing with the aim to close out these dialogues and close transactions within first half of this year. Looking at the overall liquidity situation, it's very stable. We had a liquidity of USD 371 million at the end of Q4. This has allowed us to, in addition to regular debt installments, repurchase more of the convertible bond debt in Q4. We repurchased for approximately USD 31 million in the quarter. And when you look at 2022 as a whole, we did repurchase bonds for just over USD 60 million. And I might sound like a broken record, as I mentioned this before, but having 100% hedge coverage on debt thus gives us good protection against increased interest rates and give visibility on financing cost in what we still consider to be an inflationary environment. So summing up, delivering on the divestment program and managing liquidity through capital discipline is what we consider an enabler for delivering long-term value growth to our shareholders. We do have an ambition to take in on new infrastructure FPSO products, but we do believe that building on the capital structure model that we established for Barossa does enable us to take on new projects without overstretching the balance sheet and creating a good risk reward balance and creating long-term value for shareholders while we still deliver on our promise of paying steady dividends. With that, I'll give the word back to Marco.

Okay. Thank you, Stale. I continue with an overview of the market. On this slide, you see ample opportunities for new FPSO projects for the remaining of the decade. And while there are only 4 contractors actively pursuing these projects, so we're still in a window of an attractive supply and demand balance in the FPSO space. Previous quarter, we advised you that we were heading towards a new opportunity with Gato do Mato. We assume that by now we would have signed a contract with Shell for this project. And while not fully concluded, we were quite far progressed with putting the debt finance for this project together. And therefore, we were caught by surprise, as Shell suddenly decided that this was not the right time to proceed with the Gato do Mato project. And while this is obviously disappointing, the work done for the Gato do Mato project proved that we were ready for taking on these kind of projects with a quality stamp on our proposed execution plan and our financing plan, both by Shell and our lenders. Recycling of such projects happen in our business, and the project may come back in 12 to 24 months, as Shell advised. But for now, it simply means that we are moving on with targeting new prospects, in particular, with a focus on the redeployment of BW Opportunity. And we're progressing with various prospects for her and aim for a contract award within 2023. That's a clear target. In addition, we have identified a handful of potential FPSO infrastructure projects, which meets our investment criteria, which are a firm contract of 15 years or more, solid NRCs or investment-grade counterparties, and teaming up with strategic and/or co-investing partners in the project. We're making preparations to be able to submit a tender when these opportunities come to the market in this year and coming years. Then moving on to the floating wind market. This is a market that is now clearly emerging and taking shape. The floating offshore wind pipeline for the next 3 years tripled compared to 12 months ago to 33 gigawatt. And of that pipeline, BW Ideol has secured 1 gigawatt in 2022, which is currently being developed as part of Scotland. And 3 gigawatt projects are substantiated and being targeted through specific leading partnerships. For example, the EDF Maple Power partnership with BW Ideol is targeting the 3 French tenders that are currently ongoing. Together with BW Offshore, BW Ideol always engaged in multiple feasibility studies for floating wind to power solutions, targeting accelerated revenue generation through EPCI activities in the coming years. The focus of the company is on preserving and expanding the technology leadership, building on the day-to-day experience gained from the 2 full-scale floating wind turbines in the water in Japan and in France, and optimizing the product execution and strengthening the competencies to ensure project readiness. Project readiness for either FIDs for developments or for EPCI tenders by other developers. Disciplined operational management is being applied with full year operational revenue in 2022 of EUR 6.6 million and a net cash burn of EUR 3.4 million. Together, we are working on a long-term financing plan for closing targeted in the first half of 2023, and that includes a EUR 10 million convertible shareholder loan from BW Offshore. Moving on to BW Energy. BW Energy is progressing towards a step change in production, as mentioned, in connection to the BW Ideol FPSO update. First of all, to first oil from the Ruche/Hibiscus development and then followed by an increase in production from the Tortue field with a new gas lift compressor. In addition, BW Energy works on the closing of the Golfinho acquisition in Brazil, and this is expected to close this quarter as well. And we'll then immediately add, because this is existing production. The company is further looking at maturing the Kudu gas field with 3D seismic. And this is triggered by the nearby discoveries made by a couple of oil majors. And this may point at a whole new offshore oil and gas region. So exciting months ahead for BW Energy, and therefore, also for BW Offshore. Presenting this fourth quarter results justifies summary of last year as well, where we have shown disciplined delivery to our strategic priorities. And these priorities are, first, accelerate and maximize the value extraction from the legacy fleet. And we did that through divestment and ownership transfer of 5 units. And this allowed us to increase shareholder returns to USD 45 million over the year, which was partly done through dividend in kind with BW ECS as well. Secondly, we want to invest in new and better backlog through infrastructure-type FPSO projects. We're progressing the Barossa FPSO project in accordance with the schedule. And that is despite the difficult circumstances in the global supply chain. The Gato do Mato tender, the fact that we have been selected and have reached project kickoff revenues, which was built on this experience from Barossa and it confirmed our ability to develop a robust execution plan and the sourcing that is required to fund this kind of projects. We will also build on that for the next opportunities in the FPSO infrastructure arena. And then thirdly, we want to position and invest in adjacent business to capture the opportunities in the energy transition. And that has materialized to securing the 1 gigawatt offshore floating wind acreage in the Scotland leasing round. So we're pleased with the progress that we made in 2022, and this forms a very good basis to continue in 2023. And with that, I can conclude with an outlook. The Barossa FPSO project's safe and timely delivery remains our top priority. We will take the benefit of a healthy FPSO market with a window of attractive demand/supply balance, and we will pursue the next energy, infrastructure, FPSO projects, leveraging the proven capabilities in the Barossa project. We'll support BW Ideol in pursuing floating wind opportunities, in particular for the first EPCI tenders, which are due to come to the market, as well as floating wind power to platform opportunities. The fleet divestment program will be concluded in 2023, and we continue with a substantial shareholder return program. Thank you. And now we're open for questions from the operator.

[Operator Instructions] We currently have no questions coming through.

Yes. Thank you. But then I think we can take a couple of the questions that came in via the web. So I'll start with the first one, which came from [ George Idodo ] from Brooks Macdonald. And he is asking what proceeds are you expecting to raise from the 4 FPSOs for sale? I guess, Marco, could you take that.

Yes. Well, that's an ongoing process, so it's a bit difficult to be -- and not the property to be too exact, but we're expecting something between USD 50 million and USD 75 million.

Okay. We got another question from [indiscernible] from [indiscernible]. He's asking how much of the revenue backlog is related to BW Catcher options? I can take that one, how much it is. So the firm backlog is USD 6 billion. And what we call the probable backlog is USD 7.1 billion, and that includes some option. And in the USD 7.1 billion, USD 650 million is related to Catcher as a whole, roughly USD 650 million. That is all the questions I have on the web at the moment. So back to you.

[Operator Instructions] It appears there's no further question.

Okay. Then I think we conclude this conference call. Thanks, everyone, for your interest for this presentation and for BW Offshore and hope to talk to you next quarter. Thank you very much.