BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Good morning and welcome everyone. My name is Marco Beenen, CEO, and I'm pleased to present to you our first quarter 2024 results of BW Offshore in this conference call, and I'm doing that together with our CFO, Stale Andreassen. And at the end of this presentation, we will be happy to address any questions you may have. And for that, you can use the Q&A module already during this call. Please note our disclaimer. Starting with the highlights. The BW Opal FPSO for the Barossa project remains on track. We continue with our quarterly cash dividend of USD 11 million. And we maintain our full year 2024 EBITDA outlook. And that's underpinned by first quarter EBITDA of USD 86 million, operating cash flow of USD 91 million and a net profit of USD 37 million. Then operational update. First of all, our FPSO of BW Opal for the Barossa project in Australia for our client, Santos continues to progress in accordance with schedule. And as such, we're on track to deliver first gas in the first half of next year. We are in the middle of the integration phase in Seatrium with 13 out of 16 modules lifted and already on board, and the remaining 3 lifts will take place before the end of this month. We're also progressing offshore with all mooring lines installed and now being hooked up to the lower part of the mooring buoy. Our top priority is to deliver per schedule, and we are derisking as we go, and this is the key driver to achieve the long-term project economics. Then our HSE performance and the fleet uptime, yes, our safety statistics are trending at satisfactory levels, as you can see, and this includes both our fleet and the project activities. With the project activities, we have a large amount of man hours being liquidated in the yards, and that is also an underlying reason for the trending down of the statistics. We're focusing very much on the high potential incidents, the HPIs and all of these will be followed by Level 3 investigations to extract the learnings. And this quarter, we have 2 recorded HPIs, which were linked to drop objects in the yard. And again, nobody got hurt, but it could have been worse and in particular, in the labor intensive phase we are currently in. So we're taking the learnings from that and working with our subcontractors to avoid recurring. Then our fleet commercial uptime was actually 100%. So excellent uptime for this quarter and that underpins also the strong cash flows of this quarter. So then our contract and backlog, you see an overview of that on this slide. And so in addition to BW Opal, we have 3 FPSOs in operation, and those deliver these -- the cash flows. First of all, BW Adolo in Gabon, stable productions, but the volumes and therefore, also our production tariff is still impacted by issues with the electrical submerged pumps which our client BW Energy is working hard to solve these. So we do expect that these production levels will increase in the future. Then Catcher, we're actually exceeding 100% commercial uptime and while we're on a rolling 12-month notice period, the expectation is that we will have at least 3 more years of production ahead of us, potentially more. And that is also because our client, Harbour, is looking at possible future tie-ins and will now embark on a 4D seismic program this year. And then BW Pioneer for our client, Murphy, in the Gulf of Mexico delivering stable production and the discussions with Murphy about the new contracts are progressing well, and we are converting. So the whole portfolio is expected to deliver strong cash flow till at least 2028. And with that, over to Stale for the financial update.

Thank you, Marco, and good morning, everyone. I want to start by saying I'm pretty pleased to report another robust quarter driven by strong commercial performance on the fleet, which delivered 100% uptime, as Marco has just showed you. The EBITDA of $86 million in the quarter was also positively impacted by a contribution from the early works we have been doing for the Sakarya project opportunity as we were able to book almost $9 million net EBITDA contribution related to this in the quarter. The contribution is coming from value-add engineering we are doing while we are progressing the contract negotiations. And Marco will touch upon this later on in the presentation as well. Then when you look at the year as a whole, I'm pretty confident to say that we don't expect any surprises related to the fleet, which we expect to continue to deliver stable earnings throughout the year, meaning we are confident in maintaining the full year 2024 EBITDA outlook of delivering between $290 million to $310 million. So going to the overall income statement. As you can see, depreciations hovering around $46 million in the quarter, and you should expect this to stay like this for the remaining quarters of the year. We had a small revaluation gain of just over $1 million related to the sale of Petroleo Nautipa as we sold the unit for about $1 million more than book at $9 million all in. Net interest expenses were relatively stable quarter-on-quarter, as expected, while we could book a gain on financial instruments of $3.1 million in Q1. Even though U.S. dollar has strengthened against Norwegian krone this quarter and everything else equal, we should have had a negative impact. This was offset by a $6 million net gain and cash in as we terminated one of the interest rate swaps we have in our portfolio. As of now, we are -- I would say we're overhedged, we have no draw on our corporate debt facilities, and we have been in a position where we are able to take benefit of closing some of the hedges we have had set at very favorable rates in the past and take some cash gains from this now. We posted a gain on other financial instruments of $6.4 million, which is the usual revaluation of our Norwegian krone-denominated bond loan. As indicated in Q4, we did expect that we'll have a small loss related to the sale of our BW Energy shares. And as you can see, we had to post an overall loss of $2.2 million on equity accounted investments related to the sale and the effect of our net share of BW Energy up until the time of closing of the sale of -- when we sold the shares. So overall, as Marco mentioned, net profit for the quarter, just shy of $37 million, which is just below Q4 and the result that I would say we are overall quite pleased with. Cash flow from operations was $91 million. So when excluding prepayment from Santos, we had cash flow from underlying operations at $58 million for the quarter. Cash flow was somewhat affected by timing of tax payments in Q1 as well as some timing-related payments of lease from clients, which shifted into Q2. Majority of investments were related to Barossa with $92 million out of $94 million. The $2 million that you can see related to sale of fixed assets were prepayments for the sale of Petroleo Nautipa, which was concluded in the second quarter. And then you can see the $176 million cash inflow related to the BW Energy shares that were sold back in January. For the Barossa project, we didn't need to make any draw on the debt facility in the quarter as we were relatively well funded. However, to plan for upcoming draw in Q2, we funded in $5 million in new equity for the joint venture, and the joint venture paid $10 million in -- to BW Offshore for ongoing construction cost on the project. Net debt reduction in the quarter was $100 million. As we received the cash for the sale of BW Energy shares, we could reduce the draw on our corporate facility to 0. Then we paid scheduled installments related to the Catcher facility and we purchased back convertible bonds for just under $36 million in Q1. Remaining cash transactions in the quarter should be relatively self-explanatory. And when you remove $10 million in consolidated cash from -- related to BW Ideol, we could end the quarter with a cash position at over $390 million. Taking a look at Barossa funding. As I mentioned earlier, we have not drawn anything further on the debt facility, which was stood at $890 million by end of Q1. We injected $10 million in new equity into the project, and Santos continued to pay based on progress milestones. Overall funding received was just shy of $2 billion per QM -- sorry, Q1. And I can confirm and say that we remain well funded for the remaining project as the project is now progressing through the integration commissioning phase in Singapore. I think this slide doesn't come as a surprise for those of you that follows us. We received $176 million in cash from selling shares in Q1, which means that as you can see here on this slide, we are almost net debt-free as of end of Q1 with only $28 million in net debt and a leverage ratio, which stood at 0.1x. When you look at the equity ratio, it trended upwards a little bit due to -- driven by positive results in the quarter and stood at a comfortable 31.1%. So very good headroom to any covenants and a very comfortable balance sheet position. So summing it up from my side, we have a very solid liquidity situation with over $680 million in liquidity as of end of the quarter, of which almost $400 million is cash and our corporate facility, which is fully available. All the planned refinancings are behind us. We will redeem the remaining convertible bond by November 2024. And I'm confident to say that we have sufficient liquidity to carry that out upon maturity of that bond. We have very good visibility on debt maturities and debt management with basically all our debt hedged and an all-in cost of debt of 4.9%. And as announced in Q4, we will be paying out $11.3 million or $0.06 per share based on Q1 results. And that would imply a dividend on an annual -- well, on an annualized basis of between 9% to 10%, I think, based on where the stock is trading today. We believe this is an attractive dividend proposition, also with room to potentially increase provided we are able to deliver a net result above $90 million for the year as a whole. So with that, back to you, Marco.

Yes. Thank you, Stale. Then I will now continue to give you some insights in our strategic priorities and starting with a market outlook. As you can see on this slide, and we've shown that in the quarters before a year as well, there is a strong demand for FPSOs as a production facility to develop new oil and gas fields. And this is supported by a continued high Brent price. However, we also see that the increased complexity of the facilities that are specified and the cost inflation and higher interest rates, these have made these projects more expensive and harder to finance. And consequently, contract awards are moving to the right. And the number of the actual awards has been much lower than planned if you look at the last 2 years. And I expect this to continue for a while. And that also sort of means that the project awards keep moving to the right and that also means for our project targets, that probably will take longer before we can sign up in the next contract award. Where we were targeting this year, I think this will move now into 2025. But in the meantime, for the Sakarya project, that's a project we have talked about earlier as well, we continue with paid early works agreements for our client, Turkish Petroleum, and we are progressing towards a meaningful EPC management contract for the conversion of BW Opportunity. And that's the unit we sold last year already to Turkish Petroleum. And hopefully, this can be concluded in the coming months or at least during 2024. In this market, we are well positioned. We bring experience from all major FPSO regions. We also have a proven Rapid Framework hull design, which is not limited to dry dock capacity and it's designed for meeting harsh environments and large topsides requirements. And we're also creative in finding new FPSO financing solutions as we have shown with Santos for the Barossa project. In this market, it is important to maintain a disciplined approach as we have shown in the last 5 years. Our preference is lease and operate or EPCI combined with accretive long-term R&M contracts with focus on a balanced risk reward with our clients. And we don't take residual value risk on our investments. So no return -- sorry, the return requirements will be met during the firm period of the lease. We're looking for solid NRC or investment-grade counterparties, and we bring partners in the EPC phase as well as in the asset-owning phase. Then I'm moving to floating wind. Our subsidiary, BW Ideol, continues to progress business development initiatives in its project portfolio. Last quarter, they have launched the standardized floating foundation design for mass production. And this design is optimized for varying metocean conditions across all key markets for floating wind. It's scalable and replicable with minimum harbor requirement because of its shallow draft design. And it is compatible with all current 15-megawatt wind turbine manufacturers and scalable for future 20-plus megawatt models. It allows for flexible manufacturing, and it's capable to produce one foundation per week in a manufacturing line. So these all provide tangible benefits for developers to focus on price, schedule and flexibility. And it is an important piece to unlock the supply chain for floating wind. Another piece is the manufacturing lines, the manufacturing lines of floating foundations and BW Ideol has the exclusive access in Ardersier and good news for Ardersier is that this development now is backed by GBP 100 million loan from the U.K. and Scottish government. And for this port development, we have the manufacturing line designs ready for a capacity of 50 floaters per year. In parallel with all this, we're progressing investor dialogues as a private company as we're looking for an industrial or a financial partner to confront the future of this company. Then I conclude with the outlook. It is more or less the same focus as I've communicated in previous quarters. Barossa also remains the most important undertaking we have at hand, and we're fully focused on the safe and timely execution of this project with first gas mid next year. We're also working with our clients, Harbour and Pioneer, to unlock future value of these assets through contract extensions. And as explained, in this market with strong demand, but still also a difficult market to progress towards FIDs, we remain selective to land the next FPSO project. And for BW Ideol, as just explained, now as a private company, we're looking for capitalization of this company with industrial shareholders, preferably, and we maintain an attractive shareholder return program, as Stale also explained. And with that, I think we can continue with the questions.

Okay. Then we move on to the Q&A. We're getting some questions on the web here. So maybe I'll just start with some questions that comes from Christopher Mollerlokken from SpareBank 1 Markets, and he's asking how much did they already work on new opportunities impact first quarter revenues. And could you provide a bit more flavor regarding what you describe as new opportunities? Actually, I did need to -- on gross revenues, I actually need to check back what the gross revenue was on this. The net impact was somewhat below $9 million and they obviously have a margin on the work we're doing. So that's -- actually, I have to come back on what that number would be. Marco, do you want to move on to the one, the -- I guess, what you said about new opportunities?

Yes. So well, we said -- last quarter, we said we were targeting 4 opportunities. One of them is Sakarya which we're progressing. And as you -- as everyone noticed, that is paid work and more -- but it can take out some profit of that work already. Another one is the Repsol FEED in the Gulf of Mexico. It's a partly paid FEED. That's progressing as well, but it is a FEED. And that means like it's -- it's too early to say when that could turn into a contract and how that will exactly look. We're working with the client to find the best field development solution based on the redeployment FPSO. And then we have 2 more targets that I prefer not to disclose. But yes, my comment to the market was that there is a large demand. But because of the complexities with financing and cost, and I think also a lack of capacity with the contractors and yards, you see that the awards move to the right. So the difficulty is at the moment to predict timing of these new opportunities.

In the meantime, I was checking the number here on the gross revenue. So that's low 30s, $33 million, $34 million was the gross number, revenue related to this for Q1. And then there was another question from the same person. Is it fair to assume that early works on Sakarya Phase 2 also will impact Q2 earnings in BW Offshore? I think -- maybe I go on this one that we don't -- sorry, Marco.

No, go ahead.

Okay. Yes. No, we're not guiding on any future revenues regarding this project opportunity. If things continue, yes, there might be more revenues coming but as of now, we can't guide on how this will be as we progress towards a final contract, which is the key objective at this point in time is try and land this as soon as possible. Yes, we got the next question from Ola Eikanger from SEB. A couple of questions. Okay. One, how recurring is the EBITDA contribution from early works activities on new projects? Should we expect similar contributions for upcoming quarters? Well, I think I responded on that already. We can't guide on this at this point in time as we're focusing on closing a project management contract as soon as possible. And then we will come back on this. And second question, in your conversation with Harbour Energy regarding Catcher, do they voice concern about the possible tax extensions on the oil and gas industry should The Labour Party win the U.K. election?

Maybe I could comment. I think if you read the media, you see that Harbour is quite frustrated about this windfall tax and expresses their concern about that to the government. Whether that concern changes if The Labour Party wins the U.K. election, I don't know. You have to ask Harbour, but generally in the industry, there is an expectation that this windfall tax will continue in that case. So yes, that's an issue in the U.K. I don't think it impacts us much, but it is a topic for the oil and gas industry in the U.K., obviously.

But I think you said the key thing there is that in direct dialogue with us in terms of our contract extension, we don't necessarily see that this is something impacting the possibilities that Catcher will continue for a number of years, more on the field.

Exactly. And we also look at the rate of decline of the production. And yes, if we look at the whole picture, our analysis is that this contract will at least continue another 3 years, potentially more. And then everything else is dependent on the level of investment that Harbour will make for tie-ins and that obviously could be impacted by future tax regimes. But that's beyond that.

Okay. Next question, same person. How are the contract negotiations for a possible extension for the Pioneer FPSO progressing? When should we expect an announcement?