BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Good morning, and good afternoon, everyone. Welcome to BW Offshore's Third Quarter 2024 update. My name is Marco Beenen, CEO, and I'm here together with our CFO, Stale Andreassen, to give you the update. I will give you a general update, and then Stale will cover the financials. Then first, please note our disclaimer, and then I'll move on to the highlights. First of all, we are pleased with the progress on Barossa, the Barossa FPSO, which we named BW Opal, that project is now 90% complete. Based on solid results, we continue to pay the third quarter cash dividend of $11 million, consistent with previous quarters. And also, we have been able to raise our guidance of 2024 EBITDA to the range of USD 315 million to USD 320 million. Starting with BW Opal for the Barossa project in Australia, first gas planned for second quarter next year, in line with our previous guidance. Our focus has been on maintaining the schedule. And during the integration and commissioning phase, we faced a tense market in Singapore and others put further pressure on the costs as well as settlements that we have to make with our key subcontractors, mainly the yards and also settlements that are still pending with the client. Therefore, we need to guide on a USD 100 million to USD 150 million additional investment for the EPC phase of the project until the time it's completed next year. The project is now 90% complete with all construction finalized, integration, 95% complete and pre-commissioning and commissioning well underway. Important milestones in the commissioning scope have already been achieved. First of all, the gas turbine generators have all been fired up and worked well. [indiscernible] have gone live, and we have recently served the first meal for all our employees, subcontractors and clients in the project. And also most part of the league testing program has now been completed. Then moving on to the next slide, fleet and safety performance. We're happy with the safety statistics trending down. We had 1 LTI recorded somebody with a broken arm, a subcontractor in the yard, but we had 0 high potential incidents recorded, and that is the -- what we find the most important metric that we're tracking as that is a leading indicator. Commercial uptime is consistently high, and that is despite the planned shutdown that we had on our Catcher unit this quarter. The good commercial uptime of the core assets deliver strong cash flows, and this is underpinned by the backlog of our core FPSO fleet. I mentioned BW Opal coming on stream in the first quarter of next year. But then we have the 3 units in Gabon, U.K. and Gulf of Mexico, respectively. BW Ideol is -- will benefit from increased production tariffs, and that is $3 per barrel above the 20,000 barrel per day range, and that is linked to the increased production that BW Energy is achieving, handing to nameplate capacity. I mentioned the planned maintenance shutdown from Catcher that was in 21 days successful shut down, but that, of course, explains the lower production in the quarter. Catcher is on a 12-month running extension, meaning this project -- this contract gets extended every day with a year. But our view on total duration of the contract is that it will continue at least until the end of '28, and we'll base that on our view on the oil price and the decline of the production in the field. And then on Pioneer, also these units continue to deliver stable operations, while the field production is slowly declining. We have ongoing contract discussions with our clients, and they are converging, but neither party has so far obtained Board approval for that contract yet. So that's still work in progress. And then I'm handing over to Stale to give an update on finance.

Thank you for that, Marco. I will take you through the financial figures for Q3. And as said by Marco as well, we are pleased with the commercial performance in the third quarter despite the planned shutdown on Catcher. The EBITDA came in at $83 million, boosted by an additional $10 million from the Sakarya project as we closed out the remaining work on that project opportunity. I want to say we do not expect further contributions from Sakarya going forward. For 2024, we expect continued steady performance from the fleet for the remaining quarter, and we are now confident enough to revise our guidance upwards targeting an EBITDA of $315 million to $320 million. Moving to the income statement. You will see depreciations remained stable at $45.6 million in the quarter. Net interest expenses reduced to $4.3 million due to the fact that we have no draw on the corporate facility combined with good interest income from our cash balance. This quarter, we saw a negative mark-to-market adjustment on hedges. This is primarily due to lower U.S. dollar interest rates impacting our financial instruments. A $4 million loss on other financial items reflect stronger Norwegian kroner against U.S. dollar, affecting Norwegian kroner-denominated bond valuations. A $5.7 million loss from equity-accounted investments resulted from what was a one-off and noncash $7 million accounting adjustment we had to make due to the fact that we had to change how we account for interest rate swaps related to the Barossa project. So with that, we delivered a net profit for Q3 of $13 million. Cash flow from operations was steady at $86 million in the quarter 3, excluding the prepayment from Santos, the underlying operational cash flow was also good at $61 million, showing a modest improvement quarter-on-quarter. Investment cash flow was in this quarter directed towards Barossa. We continue to fund the project. We called $26 million net from the Barossa joint venture partners, which is also a little bit of a reduction quarter-on-quarter. Net debt reduced by $15 million in the quarter, mainly linked to scheduled repayments of the Catcher loan facility, and we also paid out $11 million in dividends during Q3, which means that our cash position remains steady since beginning of quarter 3. As the Barossa project is a joint venture and not consolidated, these slides provide the overview of the product funding progress on the project. In the third quarter, we drew another $50 million on the project debt facility, leaving $140 million available to draw towards completion of the project. We required only $4 million in new equity, while Santos contributed $25 million as per the contract, and as illustrated on the previous slide. With that, the total funding towards the project stood at $2.184 billion. And the project CapEx was a little bit lower, but increased to $2.161 billion by end of Q3. Our fleet continues to deliver steady cash flow, and that has allowed us to strengthen our consolidated net cash position even further, and it stood at $38 million at the end of Q3. The equity ratio remains almost steady. It stood at 29.6%, which is a slight dip from the 30.4% we had in Q2. Our balance sheet remains strong. We have an unused corporate facility, which is ready to support future project opportunities and growth. So we ended the quarter with an available liquidity above $700 million, only slightly reduced from quarter 2. The reduction quarter-on-quarter is primarily due to the fact that we have scheduled semi-annual reductions on the corporate facility, which reduces by $34 million every 6 months. In November, i.e., after the quarter, we repaid the remaining $157 million on the convertible bond that was issued in 2019, which means that the blue bar you're seeing there in 2024 on the right side of the slide will be gone at next quarter. We continue to pay a dividend of $0.0625 per share amounting to $11.3 million, which will be distributed to shareholders in November. And this marks the 19th consecutive quarter of dividend payments since we reintroduced dividends in 2020. And I also want to remind everyone about our goal of distributing 50% of annual net profits as dividends. With announced increase in net investment for BW Opal, as Marco mentioned, we do need to allocate additional funds to support the project's completion, ensuring we remain on track. However, we remain well positioned financially. We have a strong cash flow from our fleet. We have ample liquidity that allows us to comfortably meet our liabilities. This financial flexibility enables us to pursue growth opportunities, I would say, both organic and strategic, while we maintain our commitment to paying an attractive dividend. Back to you, Marco.

Yes. Thank you, Stale. I'll continue with an update on the market. Our view on the market has not really changed. There is a strong demand with about 60 projects identified in the market between now and 2030. And this is supported by the expectation of a robust oil price for the remaining of the decade. But awards have been lagging, and that's mainly because cost levels of these projects went up due to complexity, inflation and also interest rates. And particularly, the latter has made the lease and operate model less attractive. And we see a gradual shift towards EPCI and O&M. We're well positioned to continue or to follow that trend. We like lease and operate, but we also -- we're also very much comfortable with EPCI plus O&M contracts. So we're ramping up our tender efforts, and we focus on 6 targets in this market, of which we think we will land 1 or 2 in the next 12 to 36 months. And I think the project nearest to an FID could be the project for Repsol in the Gulf of Mexico. In that market where the pace of project awards have been falling behind in past years, and that actually makes the market only stronger as these projects don't go away although some of them will. But generally, this is more a delay than a cancellation. So we'll continue to face the strong market, but a selective market. And we are well positioned in that market. We're maintaining a disciplined approach, though. As I said, the preference is long-term cash flows with O&M, but we're not limited to only the lease and operate market. But we will not take residual value risk in lease and operate contracts. We're looking for solid counterparts and we're working and co-investing with partners as the scale of the projects is significant. So in that market, we have a favorable position. First of all, as we demonstrate to BW Opal for the Barossa project. We can deliver these Premier League FPSO projects. We're demonstrating our confidence in building gas FPSOs, but also the rapid framework hull design then delivers an approach where we're less dependent on early lock-in of dry dock slots. So that gives us flexibility where we can build in a tight supply chain market. We have demonstrated our ability to put together hybrid financing solutions as we showed on Barossa with a true hybrid of almost 50% prepayments. But there are many alternatives to this as well. And again, the market allows a good risk/reward balance for future projects. On to the floating wind market, our subsidiary BW Ideol is progressing well, both on their current product portfolio, but also on new business development initiatives. First of all, the Buchan Offshore Wind project, which is a 1 gigawatt project offshore Scotland, is progressing towards consent application mid next year and then final consent is expected in '26. Also, the demonstrator or the pre-commercial project in Southern France, the Eolmed, which is a 3x10-megawatt project, is progressing. And first 2 floaters for this project are now assembled and also the blades and the turbines have arrived on site. In the same area, we're awaiting the outcome of the A06 tender, where BW Ideol tendered in consortium with EDF and Maple Power. And then we're progressing on the back of the positions that we have in these markets, we're progressing the development of fabrication lines, one in Ardersier, which is in the U.K. where we have exclusive access to the port there for floating wind and also in this market where we built Eolmed and also where A06 and A09 would materialize to unlock the supply chain constraints that currently exists for floating wind. Furthermore, we're also looking at other projects in Europe and Asia, and in particular, Japan and Taiwan. And we're continuing to have investor dialogues to join us as BW Offshore for this private company. Then we go into the final slide, which is the outlook. Again, the focus is, of course, on the Barossa project starting up BW Opal in the second quarter of next year. We also continue to look at value that we take from contract extensions, Catcher beyond 2028. And as I also explained the discussion we have on Pioneer, and then focusing on new, what we call, infrastructure like FPSO projects, like Barossa in a very strong FPSO market. And then BW Ideol, as I explained, we've continued to support the development of that company as a private company now and look for further capitalization by new industrial shareholders and the strong cash flows from the FPSO fleet support the continuation of our attractive shareholder return program. That concludes this Q3 trading update, but we're happy to take any questions if you would have.

Okay. Then we'll move to Q&A. And we have a couple of questions coming in via the web. So I'll start this off. The first question -- one, can you provide any color on the financial impact to BW Offshore from the additional $100 million to $150 million investment in BW Opal? Is the whole figure to be covered by BW Offshore directly or indirectly?

Yes. This is the impact to BWO. So this is the amount that's the exposure to BWO.

And then the second question here is, is the extra cost already identified as an identified cost? Or does it include a buffer to ensure that there is no more cost increase before the vessel is sent to Australia or, I assume, until the vessel is delivered on the field?

Yes. This is the result of a holistic approach. And as I said in the -- just now in the update that we have been working quite hard on settlements on -- with our subcontractors in Singapore and also with our clients. And it was difficult to settle them in a way we wanted giving the tense labor market in Singapore. And that's why we -- that's basically the basis for the guidance, but also the outstanding results of the discussions we have with our client, Santos, we included that in this number, but we haven't given up on these discussions. They will continue until the project is complete. So we're still working on recovering some of these.

Maybe just going to add in terms of the fact that it's -- we have given a range here, and it is clearly a buffer. We can see costs towards the midpoint of our guidance, but anything beyond here is, as we see it, a pure, pure buffer that's going to take us towards completion. So we do have some room in the estimates we have given now. We want to be transparent in the way where we don't want to guide on cost overruns on a regular basis. And we want to be cautious when we do that. We really thought it through to avoid coming with these kind of updates to the market more than we absolutely have to. The next question is related to BW Pioneer. And the question is whether we can quantify the likelihood of the vessel being employed. I guess, on contract from second quarter 2025 or 2025 as a whole. And I guess, as most people know, this contract, at least, the formal 5-year contract comes to an end in March 2025.

Yes, Sorry. Now unfortunately, we can't be fully conclusive yet. But as I said in previous quarters, this is an ongoing dialogue. And typically, these discussions take longer. They will always get concluded before the current contract really expires. And I'm very certain that the operation continues beyond that date in 2025. And I think we're very close to an agreement, but none of the companies have been able to obtain Board approval yet, so it's too early to communicate. And we have also been discussing various contract models and actually still do. So I think the -- aligned on the objective, but there's different ways to get there. But everything is done in kind of a view of another 5 years in operations in the field, and that's the common goal of both companies.

Okay. And then we have a slightly different question. Are you considering strategic inorganic initiatives? If yes, can you give a bit of color? I think that's for...

Well, we always look at consolidation efforts. I think that's what this is referred to. There are not that many FPSO players and not that many companies that would make a lot of -- where a combination would make strategic sense, but there are some. We have the financial means. So yes, we're looking at these things. But again, it needs to make sense strategically and also it needs to make sense price-wise. So yes, there's not that many opportunities out there, but we are looking at them.

Okay. And then we have a -- another question which is directed towards Barossa, again, or BW Opal. How will the allocation of the additional $100 million to $150 million CapEx be for BW Opal in terms of Q4 2024 versus first half of 2025? And what is the estimated total remaining CapEx for the unit net to BW Offshore. Well, the fact of the way that we have added $100 million to $150 million, this is cost that we will see is coming in the back end of the project. So this is cash outlay we expect to have to fund throughout the first half of 2025 towards completion of the unit. So we would allocate that in our cash flow plan for 2025. And then in terms of what is the remaining CapEx. We have -- there's 2 sources there. You have a CapEx that's funded by our JV. I was just trying to roughly get that number so that should be remaining a little bit more than $200 million on the unit. And then this new guided number would come on top of this. But the first -- the CapEx funded by the JV is only 51% carried by BW Offshore while the remaining $100 million to $150 million that we have guided on is 100% for our account. Hopefully, that is clear. Next question. I understand that BW is one of the 2 companies selected by Equinor to participate in a FEED conference for the Bay du Nord project offshore in Newfoundland. Can you confirm and shed some color on the contracting process?

Well, it's a bit of a, I would say, a bit premature. But what I can confirm is that we have been -- we're working already for more than 12 months constructively together with Equinor on this Bay du Nord FPSO project. And it is a project we like and where I think we have a lot of value to add. And based on experience that we have in harsh environment, operating FPSOs in a harsh environment and the whole solutions and mooring solutions we have for that. So yes, we are a company that is being considered by Equinor for the next phase, but it's -- we don't have a confirmation of that yet that we will actually participate in the FEED.

Okay. That seems to -- unless there's anything else. No, that seems to be it. Then that is the last question. So I guess nothing else is coming in, then it's for you to wrap it up.

Okay. Yes. If no further questions, then thanks for participating in this call and your interest in BW Offshore. And I do want to wish everyone a good rest of the day. Thank you very much.