BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Welcome, everyone. My name is Marco Beenen, CEO, and I will host this conference call together with our CFO, Stale Andreassen. And in this call, we will present BW Offshore's first quarter 2023 results. Please note our disclaimer. And then I move on with highlights. I'm pleased to report good progress on Barossa, now 67% complete by end of April. We have divested BW Opportunity for USD 125 million, and we continue our return to shareholders with a combination of cash and dividend in-kind in BW Energy shares. That's roughly 50-50 and equivalent to about USD 45 million on an annual basis. The EBITDA in the first quarter came in at $79 million, operating cash flow $128 million, and that includes $78 million of the prepayments of the Barossa day rate. Moving on with an update on operations, starting with Barossa. As I just mentioned in the highlights, the Barossa project is progressing well, with 67% complete and on track for first oil in the first half of 2025 as planned. We're extremely pleased with the excellent safety performance on this project accomplished by all parties involved with 14.1 million manhours without a lost time injury event. The assembly of the mega blocks in the floating dock is nearing completion and we are preparing for a float out in June, and the first major equipment packages are arriving in Dyna-Mac in Singapore for integration in the modules. You can see from the pictures that we are now deep in the construction phase in all areas, the hull in South Korea, topside modules in Singapore and the turret and mooring system in Indonesia. As you know, the project is being executed in difficult circumstances. We're dealing with inflation and global supply chain disruption. But we remain on track and maintain our guidance on schedule and project economics. Then on our fleet and HSE performance, the safety statistics are trending down for recordable incidents, which is good. In addition, we report on the high potential incidents, which we treat as leading indicators, and we follow them up in the highest level of our internal investigation process to ensure we take this incident as learning moments to prevent potential future incidents. And this quarter, we had 2 of those type of incidents. The fleet commercial availability expressed in weighted average fleet uptime was slightly down, and that was due to logistical challenges in Nigeria, which impacted Sendje Berge. Overall, still a solid commercial uptime. Our strong cash flow is underpinned by our core fleet which, in addition to [indiscernible] Barossa consists of BW Adolo in Gabon, BW Catcher in the U.K. and BW Pioneer in the Gulf of Mexico. The backlog of these 4 units now stands at USD 5.8 billion, and that is 84% of our total backlog of USD 7 billion. The total backlog includes the most profitable options that we have in these contracts. BW Adolo will now increase its productions above the average of 7,000 barrels per day achieved in the first quarter. And this is due to achievement of the first oil from Hibiscus and Ruche field in April. And now the second well is in progress. I will come back to this in the BW Energy section of this presentation. BW Catcher had a strong quarter with 100% commercial uptime and an average production of just below 38,000 barrels per day. And BW Pioneer also delivered a strong quarter and we're looking forward to the results of the drilling activities in the Chinook field, which have started recently. Then an update on units that we had in lay-up. We sold both BW Opportunity and BW Athena for a total net proceeds of USD 130 million, and we reduced, with that, also our OpEx going forward. In case of BW Opportunity, this was part of a redeployment project, which consists of an EPCI and an O&M service contract, which we're currently negotiating, while the FEED phase has already started. Then on the non-core fleet, we are on track with the divestment of this portfolio, and we're aiming for conclusion before the end of this year. This will then cover the units in Nigeria and Ivory Coast. Petróleo Nautipa is progressing decommissioning, cleaning and then demobilization and then followed by recycling in the second half of this year. And for FPSO Polvo, we have already agreed to sales transaction with BW Energy so that the unit can be redeployed on the Maromba field in Brazil. We have now agreed with the BW Energy to delay the payment milestones in accordance with the adjusted time lines of the Maromba project. And with that, I'm handing over to Stale to run you through the financials.

Thank you, Marco. Moving to the finance section, starting with the overview as usual. You can see as operating revenues came in at $166 million and EBITDA at $79 million for the quarter. If you compare to quarter 4 of last year, you will see that those numbers were impacted by the one-off reimbursement for the work we had done on the Gato do Mato project. And as such, it's not representative for underlying business going forward. And as Marco mentioned, we had good performance on the units during the quarter, only affected by the shutdown on Sendje Berge, which have limited impact on the financial results overall. And when going forward now, we should see minor impact as marginal units are leaving the fleet through the divestment program, but that should be offset by better and higher tariff from Adolo as production is increasing in line with planned production increase from BW Energy and also somewhat offset by lower OpEx as units are leaving the fleet. Looking at the overall income statement. As you can see, depreciations are reducing slightly. Again, it's just a natural effect of units being fully amortized. We have fully amortized FPSO Abo in last quarter of '22. And as such, you see lower depreciation in this first quarter of '23. The sale of BW Opportunity resulted in a gain as we saw slightly above book value of $6.4 million recorded in quarter 1. And when you move on to financial instruments, you will see that we have a negative mark-to-market impact of $13.9 million in Q1 related to hedges we have put in place. This is mostly driven by strengthening of U.S. dollar against other currencies that we have hedged and also declining swap rates, which has had a negative mark-to-market impact quarter-on-quarter on interest rate hedges. Countering this somewhat is the fact that we are reevaluating our bond loan in -- which is denominated in Norwegian kroner to the same strengthening of U.S. dollar, which has a positive impact on our P&L of $10.3 million in quarter 1. Other items are more or less in line with expectations. Share of our investment in BW Energy was -- the impact was close to 0 this quarter. Tax expenses, similar to last quarter, and we ended the quarter with $17.8 million net profit in Q1. Taking a look at the cash flow. As you can see, cash flow from operation was $128 million in quarter 1. And when you exclude the prepayment related to the Barossa FPSO charter, we had cash flow of $50 million from existing operations. I have to say, that's somewhat lower than what you would expect. And this is driven by some delay on payments from clients, which is coming after quarter end and as such not been reflected in this cash flow statement. We had net investments of $196 million in the quarter, of which $159 million is related to Barossa. The remaining cash flow out in the quarter is, one, related to the final milestone payment to Keppel for the repair work we have done on BW Opportunity, which was all settled ahead of the sale, and some CapEx that we still are incurring on Adolo related to the tie-in for Ruche Phase 1. And I just want to mention that this CapEx also, although not so significant, but it does translate to a higher ongoing day rate, thus including an agreed return on the investment we are making on the unit. As Marco already said, we have sold BW Opportunity in the quarter, and we got $135 million in from the buyer. For Barossa, BW Offshore, for our 51% ownership, injected another $13 million into the joint venture, and the same joint venture paid another $100 million to the construction company as we're progressing as per plan for the project. Other debt was reduced by $66 million in the quarter as we continue with the scheduled installments on our facilities. And you now can note that interest expenses are reducing to about $5 million for the quarter as we have to take quite a bit of benefit from the positive cash settlement under our interest rate hedges, which are now significantly in the money. And so end of the quarter, we had $283 million in consolidated -- when excluding consolidated cash from BW Ideol. Taking a look at the funding for the Barossa project. As Marco has mentioned already, we are progressing well on the project. We continue to fund as planned. And in Q1, we did draw another $135 million on the project debt facility, which is now about 50% drawn in total. And as you can see, we called another $25 million in equity when you combine the equity injection from BW Offshore as well as our partners. And this implies that there's approximately $52 million more to be funded from BWO until end of the project. Prepayments from Santos is coming in as expected. They are being paid based on percentage measured completion of the project. And as of end of Q1, we had received $607 million from Santos, which shows their continued very strong commitment to completion of the FPSO. And I've said this before, but again, we are 100% funded for all costs related to this project. This quarter, the net debt reduced by also $130 million to $369 million by end of Q1. And the basically exceptional debt reduction in the quarter is largely driven by the sale of BW Opportunity that was closed in March. But I also think it shows to demonstrate that we continue to fund equity for Barossa as well as paying dividend without the need to increase on consolidated debt on our balance sheet. Equity ratio trended down slightly and stood at 32.4% by end of Q1. As you can see, we have 2 debt facilities and 2 bonds that need to be addressed over the next couple of years. I'm pleased to say that we have now launched the refinancing of the corporate facility and the facility for BW Catcher, which both have their original maturity mid-2024. We are targeting to extend the corporate facility with 5 years from closing and the Catcher facility with 3.5 years from closing. And we do have a target to close these refinancing efforts within end of second quarter. And we think that we are offering lenders an attractive refinancing opportunity backed by units, which have good cash flow visibilities, and in 2 facilities that are further supported by our corporate guarantee. And post closing of the refinancing, the next step will then be to start addressing the outstanding bond debt that we have in the market. And as I've said before, we indicated that we -- and -- as we've indicated before, sorry, we expect to reduce this debt significantly on a going-forward basis. Well, to sum it up, and I think Marco has said it to a large extent, we are progressing well on divestments on the non-core fleet, freeing up $130 million from the sale of BW Opportunity and BW Athena. The efforts on the remaining non-core units are -- in terms of divestments are continuing. Also including the sale of Polvo, which is now being moved to completion by first half of 2024. Looking at the liquidity situation, I would argue it's rock solid with the sale of Opportunity, and we now have over $520 million in available liquidity at the end of the quarter. And with the liquidity situation being where it is, we have continued to opportunistically repurchase the convertible bond as it's trading significantly under par. And as I mentioned on the previous slide, we are now well underway with the refinancing of both the corporate facility as well as the Catcher facility, which, all in all, will help improve our overall financial flexibility and our capacity when it comes to new project business that we are in the market for. And I think when you bring this to the projects and the outlook there, as Marco is saying, we are delivering well on Barossa. And we have good cash flow visibility with activities we're undertaking and that allows us to continue with what we would argue is a substantial dividend program at the same level as before and which is -- at current share price level implies a dividend yield of approximately 10% annually. So with that, I'll hand it back to Marco for the remaining part of the presentation.

Thank you, Stale. The last part of our presentation is an update on our strategic investments. The window of opportunity is definitely still open and even improved on the back of concerns about the energy security and relatively high oil prices. And this also supports contract extensions and redeployments, which are obviously relevant for our core fleet. But for new FPSO projects, this year, we may see 10 new awards in the market, and there are about 40 to 50 serious FPSO projects on the map between now and 2030. As BW Offshore, we are targeting the 4 to 5 most attractive of these, and we do see that lenders and investors are increasingly selective on which projects to support. In addition, we see several banks no longer supporting oil and gas developments, including lease FPSOs, so selecting the right project is absolutely key here. Our preference remains long-term lease contracts with lease prepayments similar as we have with the Barossa project, but we're also looking at EPCI plus long-term O&M opportunities. Key criteria for us is that we will not invest in projects which require residual value risk in the asset. Then in the floating wind segment, the assembly of the first EolMed floater based on BW Ideol's Damping Pool design has now started in Port-la-Nouvelle. Our subsidiary, BW Ideol has signed heads of terms with a local developer, Elawan, to co-develop floating wind projects in Spain and Portugal. And the BW Ideol Board has approved a partnership for the Celtic Sea Tender. And good progress have been made for the project development funding backed by France investment fund, ADEME. ADEME will invest USD 40 million (sic) [ EUR 40 million ] in BW Ideol's project portfolio. Together with Noria, BW Offshore provides a buffer of EUR 12 million to the shareholder loan. And last but not least, the Ardersier Port, where BW Ideol obtained exclusive rights to manufacture floating wind turbines, has now secured GBP 300 million to progress the development plans. Then moving on to BW Energy. BW Energy is on track for a step change in production during 2023. This started with the first oil from Hibiscus/Ruche and that added about 6,000 barrels per day, which is in line with the expectations. And it will continue to bring 5 more wells online during this year, targeting about 30,000 barrels per day when all these 6 wells are online. In addition, an additional gas lift compressor onboard FPSO Adolo will further support the production and start-up is now expected very soon. In Brazil, the planned transaction of the Golfinho field is now progressing towards closing. And then in Namibia, on the Kudu field, a 3D seismic campaign is progressing to further study the potential of the reservoir following the recent nearby discovery made by a couple of oil majors. And this may open a whole new oil and gas region. That brings me to the end of the presentation, a brief summary and outlook. As we explained, all focus is on the safe and timely execution of the Barossa project, which is going as planned. We will conclude the fleet divestment program in the second half of this year. We're actively but selectively progressing new infrastructure-type FPSO projects. And we continue to support BW Ideol in pursuing floating wind opportunities, both co-development as well as the first EPCI opportunities. And we continue to support BW Energy in the ambitious production ramp-up. We remain focused on shareholder returns while we grow the company both in the FPSO segment and the renewable energy segment. And that concludes this presentation, and we will then continue with the questions that we have received on the web.

Okay. Then I'll go to the web where we've received a few questions. I'll start with the first one from Christopher Mollerlokken from Sparebank 1 Markets. And there's actually 2 questions there. I'll do the first one first because it's simple, then I'll take the second one for you, Marco, but I can take the first one. The first one is on the CapEx excluding Barossa was higher than expected in the first quarter. What is it used for? And what's the guidance for CapEx excluding Barossa going forward? As I mentioned in my part of the presentation, the majority of the CapEx, excluding Barossa, was for the final milestone payment to Keppel, related to the repair project that's been going on for that unit. That was all cleared out before the unit was sold and was closer to $30 million now. But that's now done. And the rest was related to Adolo as we're doing some repairs related to the tie-in project there. Going forward, as kind of units are, well, all the units are being phased out. So we do no investments on them. Catcher and Adolo generally are reimbursable contracts. So we have very little in terms of planned CapEx for these units. What we have in the pipeline is to finalize the work we're doing related to this tie-in activities for Adolo, which should be in the magnitude of $5 million to $10 million in total in terms of CapEx, excluding the Barossa project, going forward. So very, very limited. And the second question is on -- if the Barossa FPSO is completed according to plan, but Santos is not able to start production due to delayed drilling program, would the contract terms still allow you to go for -- go on your contracted day rate? Or would it be fair to assume you would receive a standby rate until Santos is ready to start production? Marco, do you want to take that one?

Yes, I can answer that. I mean our contract is very clear on this. If we are ready to receive first gas but cannot proceed, then we will receive a standby rate. The difference between standby rate and contract rate is not very much. And then the good thing about the standby rate is, in fact, that the contract term is not starting. So this comes on top of the firm period of the contract. So in that sense, limited impact on our expected cash flows, whether we go on standby rate or contract rate.

Okay. And the next question is from -- is coming from upstream. In terms of the fleet, if your divestments are completed, how can you compete in the redeployment market, which evidently the oil and gas markets or oil and gas companies are turning to with enthusiasm? And maybe just to start from my side and then you continue, Marco, on this. But I think we have tried to be quite vocal on the fact that we are predominantly focused on newbuild projects. We're very particular about counterparties and the type of contracts we are entering into. We are not looking to take also residual value risk on the assets and looking more for the type of -- long-term infrastructure type projects. So it's a conscious decision to divest all the units as we don't actually see them as a viable redeployment candidates. Not that we're not looking at these opportunities if they are around. If you had the right unit that has a potential for us, but I don't think we see this as our -- this is not main part of our strategy. We will see if the right projects come around with the right fit on the right unit. But otherwise, I think we are more focused on the market where we do newbuilds. You want to add to that, Marco?

Yes. No, you said it correctly. But indeed, our strategy was to extract maximum value from our existing fleet and we do that through divestments and -- but also redeployments where redeployments make sense. And the units we divest, we didn't consider as very suitable for redeployments in the first place. So the fact that we complete these divestments is just -- is progress, is a good thing. And then in view of redeployment opportunities, there were basically 4 assets that we had, which is Polvo and then BW Opportunity and then we still have Pioneer and Catcher, and those were the assets in our portfolio that could potentially be redeployed. Polvo will be redeployed with BW Energy. BW Opportunity we sold, but we're also expecting to progress into a redeployment project for that unit. So in that sense, 2 out of those 4 are being redeployed. And then we have Catcher and Pioneer in due time. But first, we see -- we expect those units to get into contract extensions and then potentially, they could still benefit from a strong redeployment market. So one is not, I would say, contradicting the other.

Second one is also from upstream. In terms of potential new projects, can you provide some detail on the projects being pursued? Not sure what you want to?

Yes, it's not too much detail to provide or at least I don't think it's desirable to provide too much details. But what I can say is that we're definitely focused on Brazil and Americas in general. And then, of course, West Africa is also a market we know well, and there could be opportunities there as well.

I think what you are saying, what you also showed on the previous slide that the market is very active at the moment. And there's probably more in terms of limitations on capacity -- internal capacity, financial capacity, supply chain capacity that also, I would say, limit how many projects we can chase at the same time.

Yes, exactly. And that's why we're saying selectively. So the other light I can shine on what type of projects we pursue is, that's linked to our criteria. We want contracts with strong counterparties. We want contracts that are -- that can be financed, obviously. And we will not take residual value in our investments.

Next question is from Nick Linnane from Sefton Place. He's asking what is approximate increase in BWO revenue you get from 1,000 barrels a day higher production in Gabon? And does this only kick in above a certain production level or does it kick in from current production level? I think details on the contract, but yes, there is a tariff there. And it's $1.5 up to 20,000 barrels and $3 above. That's how the tariff works in terms of how it affects our revenue stream with higher tariff. The next question is from [indiscernible] from Arctic. Despite a very good sales price of 125 -- it's not euros, but $125 million for BW Opportunity, you recorded a gain of only USD 6 million. Does that mean the book value was USD 119 million or is the accounting affected by the dealer negotiating with regards to redeployment? Well, the book value was close to $120 million when the unit was sold, I think. We have done quite extensive repairs over a number of years on this unit. I can't remember exactly the number on top of my head, but it's above $80 million, which has been invested in this unit, replacing the [indiscernible] section of this and new accommodation on this unit. So the -- I would say part of this unit is completely -- which is somewhat also reflecting in the price that the client has paid for this unit. And it was the reason why they saw it as a good opportunity for what they are -- where they are going to redeploy this asset. So there's no -- nothing else to the accounting that -- the book value was very close to the price that we achieved through this sale. But that being said, and has been said also in our updates is that we are now pursuing to do kind of an EPCI services contract for this unit, where we will do the necessary upgrades to enable this unit to go on the field for the client and also combining this with a transitional type of O&M contract where we will operate the unit for a period of time after activation. Next question is from ABG from Haakon Amundsen. It sounds like we can expect the quarterly EBITDA run rate to remain roughly around the underlying level from this quarter in the near term. What is -- is that correct? And can you provide some more color on the prospects for extensions on Catcher and Pioneer? Is refinancing of Catcher facility linked to an extension? Well, on the first one, I think going forward, given that -- as also said, the [ marginal ] units are leaving the fleet. In the short run, I think we expect the quarterly EBITDA run rate to drop somewhat. But we expect this to be counted to a large extent by increased tariff being generated by Adolo as production ramp up. But there might be a bit of a gap there until kind of this equalizes. So if you ask me kind of today, I expect the next quarter to be, yes, some million lower than what we have reported today due to this kind of change that's ongoing. And it's also hard to be 100% specific on this because of these divestment programs that we're working on. It's difficult to give you kind of the exact timing of when units leave the fleet, when agreements are being closed, and that's affecting our short-term kind of internal forecasting a little bit in terms of being accurate. But -- so somewhat -- yes, to repeat myself, some drop I expect in the near term and then for this to be counted as these units are leaving the fleet and production is kind of being increased on Adolo countering this again and should bring EBITDA up to very similar levels as today. And on the second question, on the prospect for extensions on Catcher and Pioneer, maybe -- sorry, Marco, you would want to elaborate on this, how you see it?

Yes. On both of them, we're seeing quite high probability of extensions being exercised, probably somewhere between 3 and 5 years. And then in any case, on Catcher, we see also beyond the extension, we see also very good opportunities for redeployment. As mentioned, the market is -- that -- it is a good market currently for redeployments and Catcher is one of the most versatile FPSOs in the space. So yes, beyond extensions, we also see opportunities for redeployments. But we have a few more years on the contract and at least a few more years extensions and then we will look at that.