BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to the second quarter results of BW Offshore. My name is Marco Beenen, CEO; and I will present today together with our CFO, Stale Andreassen. And please note our disclaimer and then we're moving on to highlights. First of all, the Barossa project continues to progress by plan. And based on this quarter results and previous quarter results, we have the confidence to adjust the EBITDA guidance up to USD 305 million to USD 315 million, and we maintained our quarterly cash dividend of USD 11 million. Moving on to the operational update. I mentioned the BW Opal FPSO for the Barossa project, we're now 86% complete. Pleased with the progress. As you can see on the pictures, all the topside modules have now successfully been lifted onboard. So it really looks like it completed FPSO. But obviously, there's still a lot of integration and pre-commissioning commissioning, work to do while we are in the Seatrium yard in Singapore. Integration is now 75% complete, and the pre-commissioning and commissioning activities are ramping up. We're focused on maintaining the schedule and mitigating the project risk and delivering this unit safely to the field on the Barossa field in Australia. In accordance with the guidance on the schedule, we also are confident that the long-term project economics remain intact. So in short, we're on track to be ready for first gas in half of next year. Then to the fleet and HSE performance. We're happy with the right trending of the high potential incidents, trending downwards like we like to see it because this is the kind of leading indicator of safety performance. On the lagging indicators, we had afforded an LTI with a subcontractor in Indonesia, not without severe consequences, but we followed up with the Level 3 investigation and implement and lessons learned together with this subcontractor. Like last quarter, we have had a strong commercial uptime, and that underpins the good financial results of this quarter. Then moving to the fleet backlog overview, you see here the 3 operating assets. And with those 3 units, we deliver strong and predictable cash flow, which together with BW Opal gives us a firm contract backlog of USD 5.4 billion. BW Adolo production is a bit lower this quarter. That was due to a planned shutdown. BW Catcher delivered 100% commercial uptime. But next quarter, there will be -- and this will be a bit lower due to planned maintenance. Currently, we are on a 12-month rolling extension in the contract. And based on the current performance of the field and a few on the oil price, we expect that we'll remain on contract through to 2028. BW Pioneer delivers consistently stable production. And while we are converging on outstanding topics of the contract extension, we have not been able to conclude yet for a new contract after March 2025. But again, I think we're really converging and the number of outstanding issues is steadily reducing. With that, I hand over to Stale to run us through the financials.

Thank you. EBITDA for the quarter came in at a strong $77 million. This was driven by underlying good performance from the fleet, although slightly impacted by 21 days planned maintenance shutdown for Adolo. In addition, we had a sizable contribution to our earnings from the value-add engineering work we have done for the Sakarya project also in the second quarter, which added another $7 million to our EBITDA. Our client, Turkish Petroleum, has decided to progress this redeployment as a local content project in Turkey. And as a result, we will not see a role and be part of this project going forward, and we have agreed on remaining deliverables from our side to close out the project on our side or for our sake, which will be completed during the third quarter and that we expect will add another contribution of $10 million, which we expect to book into -- in quarter 3. So then when you look at the year as a whole, we expect steady contribution from the fleet from -- for the rest of the year. And when you then include expected contribution from the efforts we have performed on the Sakarya projects opportunity, it does allows us to increase the EBITDA outlooks for the year to a range of $305 million to $315 million for the year as a whole. The income statement shows very few surprises, I would say. Depreciations continue to be stable as we have now stabilized also the size of the fleet. Net interest expenses came in lower quarter-on-quarter at $4.8 million. This is driven by the fact that we have a lot of cash on hand, which generates interest income at the moment, but also the fact that we have no need to draw on our corporate facilities. So we only pay a commitment fee for that. And that offsets a lot of our interest expenses on the other loans we have. As you can see, we can post a gain on financial instruments, which is the typical mark-to-market movements you have on hedges, which in this quarter was largely offset by a $2.2 million loss being posted related to revaluation on our Norwegian kroner-denominated bond loan. And overall, as also Marco mentioned, we were able to post a profit of $29.2 million for the quarter, which is equivalent to $0.16 in earnings per share. Cash flow from operations, another quarter of good cash flow also when you remove the ongoing prepayments related to Barossa from Santos. We had underlying free cash flow from the fleet of $57 million. As you can see, majority of investments are related to Barossa as you would expect, with $111 million out of $130 million going to investing -- is invested into that unit. This quarter, we were able to close out the sale for Polvo. We received a full and final installment from BW Energy in quarter 2, which was approximately $28 million. Given the ownership of the FPSO is set up through a joint venture with 2 external partners, we do our funding through the JV. And this quarter, the JV funded $58 million towards completion of the FPSO, which when you add to the $50 million received from Santos more or less covers all the ongoing investments. We continue to pay installments on other loan facilities, $40 million was scheduled installments on the Catcher loan facility. So then when you take into account all the recurring items on the cash flow, it allowed us to increase our already solid, I would say, cash position, which was above $400 million when we started the quarter to $448 million by end of Q2. As we've said many times, the Barossa project is set up as a joint venture. All the funding is set up through these joint ventures as such, not consolidated on our balance sheet. We've produced these slides to give an overview of how the funding looks like and how that progresses. For the second quarter, we continue to draw on the debt facility set up for this project. We drew another $70 million, which resulted in overall draw on the facility of $960 million with another $190 million available, which we expect to draw as we complete the project. We did call for some new equity. So we added $8 million in new equity with the total equity injection for the projects stood at $230 million, which is another close to $30 million to go upon sort of expected equity contribution from completion of the project. And Santos continued to pay for scheduled installments. As I mentioned also on the previous slide, and as you can see, the client has, well, almost funded the equal amount to what we have drawn in debt on the project. So overall funding for the project was $2.1 billion. And we are kind of well funded with this for remaining cash needs to complete the product. When you look at cash flow and the balance sheet, you can see that during quarter 2, we went actually from a net debt position to a net cash position now of $29 million, which an improvement of close to $60 million, driven by good underlying cash flow from the fleet, which adds to our net cash position, equity ratio trending was more or less flat and stood at comfortable 30.4% by end of Q2. And despite the funding that we need to do for Barossa, despite the fact we continue to pay dividends quarterly, we still are able to increase our available liquidity. And we did -- we almost increased it by $50 million in quarter 2, and it stood at $728 million by end of the quarter. And this also includes the corporate facility, which is fully available at $268 million. We only have 1 major maturity that we need to manage. And this is the convertible bond, which matures in November 2024, so quite shortly. We have $157 million of sort of left under that convertible bond after we've been buying it back gradually over some time now. And the plan is, as also earlier communicated, that we will use available funds to retire that bond upon maturity in November. In terms of dividends, going forward, our ambitions is as we have said before, we will aim to pay out 50% of annual net profits as dividends. On a quarterly basis, we will continue with a flat dividend, which is equivalent to $0.06 per share, and then we will calibrate this depending on what results we can deliver for the full year and either potentially then top up our dividends during -- when we -- or when we present the Q4 results. So overall, I would say we're tracking well on our financial strategy. We have a good and strong balance sheet, we have liquidity that allow us to capture growth opportunities coming in the market, and we need that for -- to have that capital available. It gives us flexibility and agility. And we believe we are able to combine this with a sustainable and attractive dividend policy that generates solid direct returns for shareholders. With that, I'll give the word back to Marco.

Yes. Thank you, Stale. Yes, we'll address the opportunities that we see. There's clearly a strong FPSO market with a historical high demand for FPSOs. As you can see here on this map, which is one of the presentations of the market. But at the same time, and that's a bit ironic, we see that the awards are lagging. The last 2, 3 years, only a limited number of FPSO contracts have been awarded compared to the expectations. And the reason is that, on one hand, the relatively high oil price and also concerns about the energy security pushes demand up, but at the same time, projects have become large and more complex and multiple years of inflation and high interest rates have increased the cost of the project itself and also the cost to finance these. And this has resulted in the delays of FIDs and recycling of tenders by our clients. And that's what you see in the graph in this slide. However, I do think that this is going to change towards the end of '25, '26, '27. And we have identified 6 attractive targets where BW Offshore has an edge. And half of these are gas FPSOs, where we can leverage our credibility and experience of the Barossa project for Australia, which we're currently completing, as you know. And we're also progressing with the fleet for Repsol for our Gulf of Mexico project and the other targets are in the Americas and Europe and Australia, and these are all jurisdictions where we have presence and where we have experience. Aim is to land 1 or 2 of these targets in the next 12 to 36 months. And with Barossa starting up in the end first half of next year, we have both the financial capacity and the organizational capacity to do so. And consequently, we are ramping up our tender efforts. The inflation and interest rates increases have also resulted in less appetite in the market for the conventional long-term lease and operate contract models. The trend is more towards EPCI and combined with our O&M models, operation and maintenance, and often with negotiable risk reward structures. And we are adjusting accordingly where we focus on delivering to our clients the unique FPSO contractor competence, which is the seamless delivery of engineering to building, operating and maintaining the facility of our client, while we're open about the contract structure. And this is to tailor to our client needs, while meeting our risk-reward appetite. Our aim is to lower the risk and consequently lower margins but with high probability of the -- and visit profit take-out. An example is our involvement in the Sakarya Phase 2 project in the Black Sea, and this was already mentioned by Stale. But this is a project where we assisted our clients with engineering and procurement services, till the phase where they decided to make a strategic change and make it a 100% local contact project, which had limited -- there was limited added value to give by us in that setup. And so while the project became a lot smaller than I visited earlier, we have still been able to deliver to our clients what they needed, and we were able to extract a healthy profit, and that contributes to -- contribute meaningfully to our 2024 results. So all in all, as Stale also said, we don't consider this as a bad outcome either for ourselves nor for our clients. And this service contract model can be replicated with other clients as well, from EPCI all the way into the O&M phase. So all in all, we take a positive view on the market in which we take a strong position for gas FPSOs. We also bring a long experience in all major oil and gas regions and our RapidFramework Hull strategy eliminates the constraints of dry dock capacity in the supply chain. And I think the delays in the contract awards in past years have only made the market stronger for the coming years. And we are ready to take the benefit of this market with disciplined investments and new financing models and/or derisk EPCI plus O&M contracts. Then moving on to floating wind. Our subsidiary, BW Ideol and together with its consortium partners BayWa and Elicio continue to be 1 of the front runners of the Scotland floating wind developments, as they progress the Buchan offshore wind project towards final consent. And this is expected in 2026. The EolMed consortium, which is led by Qair for French Mediterranean pilot floating wind project is also progressing with the 3x 10-megawatt development. And this project is based on the BW Ideol floater solution. So now all steel blocks are in production, and the wind turbine blades are being delivered, and the project is further progressing towards production in '26. Focus for further developments are in Europe and Asia. And in particular, France and Taiwan. Together with BW Ideol Management, we are engaged in investor dialogues for a capital increase in the private company. Then I come to the outlook and summary. Our focus is in the first place on our ongoing business, in particular, Barossa. We focus on the safe delivery and completion of the Barossa project with a start-up in the first half of next year, as explained. And also we're trying to unlock value to contract extensions for Catcher and Pioneer. But in parallel, we are looking for new business and we have increased our tender efforts on 6 targets with the aim to land 1 or 2 in the next 12 to 36 months. Then we continue our support to BW Ideol as a private company with the aim to increase capital with the new industrial shareholders, and we maintain an attractive shareholder return program, as we have consistently delivered during past years. That concludes this second quarter update, and we're happy to take any questions.

Okay. Then we'll start with a couple of questions to kick off. I'll start with the first one. It's a fairly -- one, which is we're asked to disclose how much of the work on the Sakarya impacted the Q2 revenues. That I said, it's $19 million, was the revenue from that activity in Q2. Then we have a question relating to, you're increasing your forecast EBITDA range, but however, with $163 million in the first half, it implies midrange, $147 million for the second half, which seem soft, given the $10 million contribution you expect to also book in from Sakarya and soft, assuming in terms of underlying operations. So can you comment on this? Yes. I think, as Marco mentioned in his presentation, there are a few kind of moving pieces also in second half, all part of natural operations. Catcher will have a shutdown in Q3 for planned maintenance. We will wrap up the activities related to Sakarya. So we'll need to wait and see how we redeploy resources, which has been linked to that activity up until now, which means there might be an interim increase on the overhead. And we're still seeing a lag in production from BW Energy, impacting a little bit negative on the tariff contribution from Adolo. So we are a bit cautious on the second half awaiting some of these moving parts. I think that's the explanation for that one. I was thinking -- so the next 1 here. Maybe Marco this 1 for you. Could you elaborate on why you consider Catcher. Why are we confident now that Catcher would operate throughout 2028?

Yes, sure. I can do that. Well, basically, we are in the field from -- in 2017, we've seen the production evolving and how it compares with the original production profiles. So yes, basically, if you take a view on production decline expectations of oil price and also activities in the Catcher area, this is a larger oil and gas region than just a field we're producing from. And there's seismic activities going on. So if you combine all that, I think, it's hard to see that this would come to a cutoff point already before 2029. So on that basis, this is the kind of what we put in our projections.

No, nothing to add my side. Let me see. Next question, when can we expect an update on the Pioneer extension?

Yes. Guiding on time lines of negotiations. I think it's always hard and not even wise I think to do. I had hoped, and I think Murphy as well likely to be able to have an update before this market update. But, as always, the final bits and pieces of contracts can take longer. The fact is by March, both parties need to have a new agreement in place, and both parties want to have it in place. And it's kind of beyond the point of return if you could say so. So it's a matter of getting the agreements detailed out and signed. But I still expect that will happen -- well, in any case before March, but I really hope before the end of the...

Maybe a point, I was thinking in addition. I think we would have to communicate and think differently, if we didn't think this will continue because we get so close to end of the contract that we would need to start planning for decommissioning. If there was any thinking that it would move in a different direction. So I think our comfort or confidence in this -- being able to land this is very hard. And also from the client side, of course.

Yes, you're absolutely right. It's the fact that we're not preparing for decommissioning at all. There's no activities in that direction.

Now slightly different angle on the next one. But when do you expect the Buchan offshore wind project to reach ready to build? I presume FID. They refer to FID, and are you looking to further farm down the exposure or the remain risks for the project, not materializing as expected. Marco, are you probably closer to answer this one?

Yes. Well, so as part of the scope in development, the U.K. government have been a bit slow with confirming the grid connections and time lines have changed. The confirmation is now that there is no -- grid connection will be no later than 2033. It could be earlier, but it's no later than that, but that's still a bit far out. And of course, we'll only start building when all these things are firmed up. So if you -- yes, you could knock off 4 years from that, then you're -- around '29 could be a time that you start the construction activities.

It was kind of a follow-up on that. What are the main risks for the project not materializing as expected?

Yes, main risk are, if you can't agree on an acceptable CFD that gives the right returns. That's I think the main risk. I mean we're heading towards consenting and I don't think that will be controversial. A lot of work has been done. And so I think that's more following the process. After that, you get the CFD and that confirms the commerciality of the project. So we'll -- yes, that's too early to say because we don't know yet how the CFDs will look like. What you could see, those that follow it, that it has improved quite a bit. The CFD schemes in the past 12 months, the latest round because the U.K. is still very much committed to the offshore wind developments. So -- but yes, we'll have to see by the time we get to that point, what it will look like. And in terms of farming down, there's always -- we're definitely open for farming down, and it's a key part of the business model. We like the exposure to the developments to be early and be part of that value creation and also to unlock kind of an EPCI market for -- in the U.K. and combined with the strategic position we have in the Ardersier port, that kind of makes us an early mover for a very large EPCI market. So development strategy is part of that, but we would be okay to farm down at the right price during this process.

Okay. And I think I will just jump a bit on the question list and then go back, but since there was a linked question, which is more directly, is there any prediction of when BW Ideol might become profitable, which I understand is given what you said is not a straightforward answer to give. I'm not sure you want to try and give some color?

But there's -- so when it will be profitable as a company, there's 3 revenue streams. One is kind of selling the technology and engineering and with license fees. And so for every floater that will be built by -- on the BW Ideol designers, a license fee as a percentage of the CapEx. So as soon as the first unit will be built regardless the Buchan development project or other development projects, there's revenues coming in from that. Until that time, there's revenues from engineering so that's 1 stream of revenue. And then there's a stream of revenue from sitting in EPCI consortia. And then there is the revenues from the -- and that's the further out from the development activities with calling the wind farms if we even get all the way to that point. So if you take those 3, that is also where time lines of profitability come in. We increase -- if we increase the engineering activities, the company could be cash neutral or positive in, I would say, nearer future years year-over-year, but it will be relatively small values, it will be engineering business profits. Then again, you could progress to EPCI level profits and potentially, if that would remain the strategy, basically selling the power, the PPA returns. So that's a bit how you need to look at the potential revenue streams and the time lines to profitability. But of course, as things in the floating wind business have shifted to the right time line mines, makes sense to focus a bit more on engineering work first because it starts with that.

Yes. So in short, different potential revenue streams with different potential time lines for them. Maybe in particular -- in addition to farm down as a way to capitalize on development.

Exactly. That's the forward revenue stream or you could say that's linked to the co-developer revenue stream, either you take your return from a PPA or for a farm-down or a combination, but that's further down the line.

Then shifting a bit gear on the question on back up again. So we have a question which we get on a regular basis is around, if we have any plans to launch a share buyback program. I think if we take a step back to what we've said, we have committed to do a dividend program. We pay quarterly dividends as I think most of you are aware of, where we have -- we are paying within what's the minimum covenant at the moment. And then we will take stock when we get to Q4 if results allow us to increase dividends. And that being said, we have an ongoing dialogue with our board on how to address this because it could be dividends, it could be share buybacks, and we have done this -- we have done this before. So what I think we can say is that we are -- it's always something that's in the back of our mind. We are discussing it and considering it. And we will -- yes, we will announce if we will do a share buyback program. And then I'm assuming there's some repeat on questions. Yes, I'll ask some more questions around the Pioneer, but I think you have answered because this may be more linked to -- if you can give some color on potential structure and terms on the Pioneer extension contract relative to the current. I think, I don't want to answer for you, Marco, but it is difficult at this point to try to go into details on this, unless you want to say something.

That's a bit premature. I think we better communicate everything at once. But all I can say, we have -- the commercial target was to come up with something close to equivalent of what we have now. But then yes, there's different commercial structures to get to kind of the equivalent answer. One thing we're trying to build in is also flexibility for our client and derisking future exposures for ourselves.

Exactly. But now you said it, I think we're also very focused on the risk side of this operating going forward moving towards reimbursable O&M, et cetera, to make sure you have more certainty on the net contribution, which is also important for us in the new contract.

Yes.

Then, yes, I think I said, but do you still expect the existing financing to be sufficient to complete Barossa. The question is, yes, as of now, we think we are funded such that we can complete the unit. That's how we look at it. Then are you bidding actively for new FPSO contracts? And what type of contract do you prefer, lease and operate or is EPCI plus O&M. You did, yes, partially in status, but maybe you want to elaborate a bit.

Yes. Well, what I said just earlier in this call is that we are -- we see a very good strong market. We see that the awards have been lagging to expectations or to plan. And that means like the market only gets stronger because these projects are generally not canceled, but postponed. So I think you'll get even more of a crunch in the market. And we have increased our number of targets from 4 to -- I think last time I said 4, now I said 6 because we really do see attractive projects where we have an edge, whether that's building on the Barossa solution and experience or what we have to offer to our experience in specific oil and gas regions, I would say, heavy regulated areas, hard environments. So there is -- the market is large, and we are able to really select now 6 targets where we feel like we have a good position with the aim to land 1 or 2 in the next 12 to 36 months. So yes, we're actively bidding. We're ramping up our tendering efforts, and we think there is a great market. And as Stale explained, we also have the financial position for it, and that's for a reason. Otherwise, we would not have that liquidity. So we are ready to invest. And 12 months may sound for some of you like a long time, but that's actually relatively short. That's kind of like in our long-term business. That's kind of tomorrow. Normally, it takes 2 to 3 years to develop a project and then it takes another 4 years to build it. So 12 months is actually tomorrow. Now on the contract models, what we like about lease and operate is the -- are the long-term cash flows. But what is most important still for us is that we have the right risk profile of the undertaking. And so EPCI plus O&M with partial kind of service contract, partial lump sum undertaking where we can fully control the risk, all these things are on the table. Essence is, I think, that we -- as FPSO contractors, there's only a handful or less companies that really have that companies where you can give a solution to the client all the way from engineering, building, owning and operating and maintaining and operating. And that has a value, and it's quite a unique competence and that's what we want to sell in the right risk award model. And the market has been changing a bit due to the challenges I explained with inflation and interest rate increases. So I think we need to be agile and flexible to work together with our clients to the best solution. And that seems to shift a bit to EPCI and combined with the long-term O&M and with good operational incentives. And that's totally fine for us. That's still a model where we can allocate our confidence and provide what our clients need. So yes, no real preference really working with our clients to find the best solution for both.

Yes. So exactly as you said, so we are all flexible to different models, but it's all about high allocated risk under the different models and to agree with the clients. Maybe a point to make on this and operate is that, as you mentioned, the inflation, et cetera, that there's a appropriate -- and the lease operating model that there's appropriate risk sharing on. Maybe material or cost inflation in general and could also be related to risk on interest rates. Factors that typically will -- yes, it's quite risky as there is a time span between you start negotiating until you execute, which needs to be managed during this time span.

Yes. And it's something we don't control, right? I keep repeating, we have no problem to taking risk in areas where we can control the risk and where we use our confidence to control these risks, but our particularly with the lease and operate model, there are risk that we can't control, and obviously, those need to be allocated to our clients.

Then another question on Sakarya. You said there's limited scope for meeting your return requirements. Could you elaborate? Is the project losing attractiveness?

Yes. I think what I said, we were -- what we were negotiating with our client was an EPCI management contract building on already the early engineering and early procurement service contracts that we had in place for about a year. And while the project was also shifting to 100% local content contract in Turkey and certain risk where it kind of expected to be taken by us, and again, risk that I feel like we could not control, it didn't make sense anymore than the risk reward of a kind of management contract versus risk that we can't control doesn't work anymore. I mean, and service contract is kind of, you could say, low risk, low return contract, but then it has to be like that. And yes, the strategy of the project changed and our client had different evolved with different drivers during the process, which is, of course, at their discretion, but it changed the game incrementally. And to the point that I think didn't make that much sense anymore nor for them nor for us to try to then come to an EPC engagement all the way to the finish. And that's why we're kind of stopped it here. And basically provided the solution that the client can use to continue in their local setup and doing the project in Turkey.

I think as we have debated and stated, I think it's worth to mention, as we say, although -- as you say, we are flexible, we want to be creative solution oriented towards our clients, but at the same time, we need to be disciplined with regard to what risks we are taking. And in this case, it just didn't work out. We could not find a solution that would work for us and the client. And I think that's -- we really believe this will pay off in the end that we do what we do it. And I think we have a good relationship with Turkish Petroleum. As you said, they want to move in a different direction. We do our deliverables and that's it for now. That's the last question I have here. So I think we -- doesn't seem anything else is coming in right now, so you can probably wrap it up, Marco.

Yes. And I think this concludes our second quarter update, and thanks for your attention and participation in this call. And I wish everyone a good day and already a good weekend ahead of you. Thank you.