BW Offshore Limited (BWO) Earnings Call Transcript & Summary

Good morning, and welcome to BW Offshore's Second Quarter 2026 Presentation. I'm Marco Beenen, CEO, and I'm joined by Stale Andreassen, our CFO. Thank you for joining this conference call today, and we will take you through the operational highlights, the financials and our strategic priorities and then leave time for questions at the end. And you can use the Q&A function in this webcast for that. And please note our disclaimer. And then I move on to the highlights. We have delivered a solid EBITDA of USD 63 million this quarter. BW Opal is in stable production and generates revenues currently at approximately 85% of the nameplate capacity. But due to debottlenecking issues, which we discovered as we ramped up production, practical completion has been moved to the second quarter of 2027. And that shift in timing leads to an adjustment to our full year EBITDA guidance to a range of USD 250 million to USD 280 million and this shift has also triggered a noncash impairment in this quarter, and Stale will come back to that in more detail. There is no impact on our commitment to our quarterly cash dividend under our covenants, which equates to USD 11 million or $0.063 per share. And lastly, the strategic review continues with interested parties, but the time line is naturally impacted by the revised practical completion date for BW Opal. I will now start with an operational update and dive a bit deeper in the progress with Opal. As mentioned, since restarting production in May, the unit has continued to deliver stable gas production and revenue generation. We successfully replaced all compressor dry gas seals and completed extensive cleaning of the heat exchanger trains. And in June -- sorry, in July, we also completed the first condensate cargo, roughly 300,000 barrels, which was an important milestone for the project and, of course, also for the client partnership. Commissioning was largely completed in August, but as production increased, some technical issues were identified and that prevented the ramp-up to 100% production rates and need to be resolved before practical completion. These issues primarily relate to an underperforming CO2 removal system where the membranes need to be replaced. And furthermore, the lean methanol tanks needs to be cleaned because we discovered residual sink trace contamination. And we need to inspect and repair weldings in the steam system. I want to emphasize that while these issues are frustrating, they are stand-alone vender and subcontractor-related quality issues rather than a fundamental design issue. The unit produces at high rates, and we're working closely together with our client, Santos, to optimize production while we address these issues effectively. Given the delivery times of these membranes, we expect most of the repairs to be carried out in the first quarter of '27, and that moves the start of the 15-year contract period, which is marked by practical completion to the second quarter of '27. For the remaining of 2026, we continue to produce gas under the volume-based revenue scheme, and that largely offsets a further USD 65 million of CapEx that we have to spend on completion, which mostly fall in 2027. And this USD 65 million is before any recovery under the warranty programs. Turning to safety and fleet performance. Safety remains our highest priority, and we continue to focus on maintaining a strong safety record. There was one new high potential incident in the quarter, and there are no injuries with a high potential incident, but we treat it as a leading indicator for something potentially serious and always follow up with a thorough investigation and lessons learned. The lost time incident trend is satisfying and trending down. The contracted fleet performed very well with another quarter of 100% commercial uptime. That excludes BW Opal since we're still in the commissioning phase and the formal contract term hasn't started yet, as I just explained. At the end of the second quarter, our backlog stood at USD 2.2 billion, of which 97% is firm. And the only real change in the quarter is the timing of contract cash flow from BW Opal. The commercial uptime of Opal was approximately 75% in the quarter after the restart on the 3rd of May. BW Adolo continued to deliver stable production above 26,000 barrels a day and Catcher delivered close to 20,000 barrels per day, largely in line with previous quarter. And then for Pioneer, we continue to provide the O&M service under a 5-year contract for Murphy Oil, and they confirmed now drilling in the Chinook field in the second half of this year, which should result in a production increase for the remainder of the contract, and that benefits our managed fee structure. Then an update on the Bay du Nord project with Equinor currently in the FEED phase. This project with Equinor continues to progress according to plan. Since signing the FEED contract with Equinor in April, both commercial and technical work streams have advanced well, and we expect the FEED to continue throughout 2026. We have already achieved an important milestone with the issuance of the first major equipment purchase of the gas turbine generators, and this was fully -- is fully reimbursed by our clients. We have also opened an office in St. Johns, and that's located in Newfoundland and Labrador to strengthen our relationship with the local supplier base ahead of pre-operations and subsequent operations and maintenance services. Equinor's acquisition of BP's interest in the Bay du Nord project in July increases its ownership to 100% and it further confirms their commitment to the project. We continue to expect a final investment decision and contract award early 2027. And with that, I'll hand over to Stale, who will take you through the financials.

Thank you, Marco, and good morning, everyone. As usual, I'll do a bit of a deep dive on the financial section. Now we start with the EBITDA performance. EBITDA was $63 million in the second quarter, which is up compared to quarter 1 and in line with expectation. And it's really a result of BW Opal delivering up to 97%, 98% of nominated gas volumes during the quarter following the restart of production back in May. The new charter rates on BW Catcher are somewhat lower following the contract extension back in February. 2026 EBITDA guidance is revised to a range of $250 million to $280 million from the earlier range, which we gave, which was $310 million to $340 million and is largely due to the adjusted completion schedule for BW Opal shifting the contract start into 2027. About $50 million of the revision is related to BW Opal and about $10 million is related to higher tender activity. I would like to note that for the revision on Opal, about $40 million out of the $50 million is pure prepayments to be amortized. So when you calculate this, the net cash impact is very limited and around $10 million. Importantly, the long-term earnings capacity and contract backlog for the unit is unchanged. During this period until practical completion estimated second quarter next year, we are generating incremental revenues. BW Opal post practical completion will deliver an annual EBITDA estimated between $265 million to $275 million per year under the 15-year firm contract. Operating revenues and EBITDA increased in quarter 2 as BW Opal resumed production. This is also reflected in higher tax expenses, while depreciation and recognition of interest expense will only commence at practical completion. EBIT and the reported net loss reflects the impairment of $125 million on BW Opal recognized in the second quarter financials, and that is despite we only identifying this and concluding this during the course of August. The impairment is triggered due to additional costs, as mentioned earlier, as well as additional borrowing costs to be capitalized during the extended time line until practical completion. I want to highlight no further impairment charges are expected from the delayed completion, and this impairment is also reversal under IFRS should we be able to improve on the completion timing or the cost picture. This is a noncash event. There's no effect on liquidity or debt service as a result of the impairment. But when you adjust for the impairment, the underlying net profit was stable and comparable to Q1 at $23 million. Operating cash flow remained stable quarter-on-quarter. Investments were $38 million in the second quarter, of which about $30 million was related to BW Opal and the remaining largely related to funding of BW Elara as we are now progressing construction of our first floating desalination plant. In May, we decided to make a short-term placement of $25 million into a fixed income liquidity fund to achieve higher return or higher return on surplus cash. Under IFRS, it's required that this placement is recorded as an investment, although we, for practical purposes, look at this as available cash as we can liquidate this position at any point in time. So overall, we did reduce our cash position in this quarter when you consider this and other more regular movements to just below $280 million. And then I include the $25 million we have in the liquidity fund, which also implies that we continue to have a very comfortable cash position. Leverage remains 0 as we are in a consolidated net cash position as presented. We continue to present net debt and leverage, excluding BW Opal, the project debt until practical completion. Once this is achieved, as we have said before, we will move to a presentation where we include both the debt and the related EBITDA as part of our leverage. The impairment naturally reduces the equity ratio now standing at 28.3% by end of Q2, which sits comfortably above the 25% minimum in our loan facilities, which also means we are well within our financial covenants overall. Available liquidity continues to be solid, stood at $511 million, and that includes just over $200 million on our revolving credit facility, which is completely undrawn. We still have limited consolidated debt that's hedged at a comfortable 4.9% all in. Remaining committed investments totals approximately $140 million. Around $120 million is remaining net cash investment to complete BW Opal, and that includes the incremental $65 million estimated for the extended work period. The balance of the committed total, approximately $20 million is the remainder of our 50% share for the first BW Elara desalination unit. In numbers, our share is $30 million of the total estimated cost of building this unit estimated at $60 million. And I just want to emphasize again that BW Opal will be producing and generating revenue during the pre-contract start-up period that largely will offset the cash flow impact of the incremental CapEx without eating into the backlog. Our commitment to shareholder returns stay unchanged. We continue with the dividend policy of quarterly distributions based on paying a minimum of $0.25 per share, which for this quarter, again, reflects a dividend payment of $11.3 million. As the impairment have an impact on what we can distribute for the year, it naturally reduces the 2026 net profit and a top-up in the Q4, as earlier indicated, should not be expected for 2026. However, looking beyond '26, the framework remains unchanged and distribution capacity reset again from next year. Also looking forward, I am pleased to mention that we have started the market selling for the Bay du Nord FPSO financing, where we have seen significant interest from a number of banks. I believe this is really reflecting the robustness of the project itself as well as a strong indication that BW Offshore is a credible operator in the space and that we have a solid financial position. With that, I'm going to hand it back to Marco, who takes us through an update on strategy and the market.

Yes. Thank you, Stale. And in this section, I'd like to give you an update on our strategic priorities for delivering growth in our portfolio. The FPSO market continues to provide attractive opportunities, and we see more than 70 potential FPSO awards over the next 5 years, and that is supported by an increasing energy demand, energy security consideration and continued offshore investments. It supports to remain disciplined and selective about the opportunities we pursue with a focus on strong counterparties, robust returns and appropriate allocation of risk, which includes effective partnership models. There has been a clear shift in the market from the conventional lease and operate contracts towards EPCI and O&M or hybrid models. That's like the ones we developed for BW Opal and Bay du Nord, that's all aimed at reducing project financing costs. We are agnostic to these contract models. We can deliver all of these as we have experienced with all of them. We're well positioned for both the large newbuild FPSO market segment, but also the smaller redeployment projects. We can leverage the experience and lessons learned from BW Opal, one of the largest gas FPSOs in the world. And we also have access to a high-quality FPSO for redeployment with the acquisition of BW Hurra earlier this year. And we also now have control on the availability of Catcher to the firm contract extension without options and Catcher is a very attractive redeployment candidate from 2030. We have a strong focus on winning new projects with a clear growth ambition of one project every other year. So that means executing 2 projects in parallel, but in a phased manner. Between now and 2030, of the mentioned 70 prospects, we identified 12 targets which we expect to meet our selection criteria, and we aim to win 2 or 3 of those. However, as mentioned, we maintain a disciplined approach, and that is also reflected in the latest bidding round for the Albacora tender and also tenders in past years. We weren't the lowest bidder in the Albacora tender, but I believe our bid reflected the right balance between commercial discipline and also value creation. The process established a strong partnership with Saipem, and that strengthens our position for future opportunities in Brazil, which we consider a key market with a strong pipeline of new FPSO projects. The 12-month focus is on the Americas. where we are working actively on selected projects, which is led by Bay du Nord, which I already talked about, in addition to Buzios 12 in Brazil and also KAN and Zama project in Mexico. These Mexico projects with our client, Harbour Energy are well suited for redeployment of BW Hurra and later also for new deployment of BW Catcher. We see opportunities to leverage our FPSO expertise to develop low-carbon energy solutions and create future growth opportunities in adjacent business segments. Here also, we take a disciplined approach with selective allocation of capital until these markets mature, and we focus on creating the same shareholder value as in our core FPSO business. Worth mentioning is the progress of BW Ideol, our floating offshore wind company, where we hold 68% ownership. BW Ideol signed an exclusive partnership agreement with NGE, and that's France Port's largest construction group for the Fos3F floating foundation fabrication line in the south of France. This partnership is a key step forward in delivering the strategy of unlocking the floater EPCI -- EPC supply chain in France. The aim is to replicate that also in U.K. later. We also continue to progress our floating desalination joint venture with BW Group, leveraging BW Water's technology. And the first barge has been acquired and is undergoing conversion into a floating desalination unit, targeting project completion and the first contract in the first half of 2027. Other segments close to our core FPSO business and natural for us to consider are FLNG and gas to power as that would expand our offshore energy production portfolio. And that brings me to the summary and a busy outlook with clear priorities. Summing up, our key priorities are continued stable production on BW Opal and deliver practical completion in the second quarter of 2027, completing the FEED on Bay du Nord by the end of this year and signing 1 new FPSO project within the next 12 months. And then also bringing our first floating desalination unit to the market in 2027 and continued value creation for shareholders through an attractive shareholder return program. And with that, that concludes this presentation, but we're happy to take your questions via the Q&A function.

Okay. We just start with the first one, which is a clarification around the strategic review process. Is there still a strategic review process ongoing? Or should the press release sent out in December last year be disregarded? I would think, Marco, you can take this.

Yes. I mean the answer is simple. It's -- and I also mentioned it at the highlights. And the answer is, yes, it's ongoing with interested parties. But naturally, with the time line shift in practical completion of Opal, conclusion of such process is also moving. So yes, still ongoing.

Okay. And the next person has 2 questions in one. I'll take them. I'll read them both out and maybe we can split them. But the first one is the noncash impairment impacting the net result that is used as a base for calculating the dividend for the full year. And the second one being BP intends to pull out from the Bay du Nord project. How is this impacting the project? I can take the first one on -- around the impairment, how that impacts dividend. The way our covenants are structured, it allows us to pay out a minimum dividend of $0.25 per year regardless of net results. So in that sense, we can continue with the same dividend at the same level as we're announcing in Q2 also for Q3 and Q4 regardless of the impairment. But the impairment has an impact if you want to raise the dividend above the minimum level as we have done for the last couple of years. And so the answer is yes. And that's also why I said that we should not expect that we will be able to do a top-up of the dividend for the fourth quarter this year. But again, importantly, this resets from 2027, and we start fresh again. The second question, Marco, if you can take that. So BP tends to pull out from the Bay du Nord project, how is this impacting the project?

Yes. Well, it's a bit stronger than intention of BP. As I mentioned, Equinor has acquired the ownership from BP. So Equinor is now 100% owner of the field. That's 100% interest. And I think what it shows is the confidence of Equinor in the project and their commitment to meeting the time lines that they have laid out for this project. So from our perspective, as the selected contractor for the FPSO, this is positive because we are -- it gives confidence that we follow the time lines and we can move from FEED into contract award early next year.

Okay. Next one. [indiscernible] was a bit the way it was written, but I think the question is basically why is the BW Opal practical completion delayed? And what is the financial impact on BW Offshore? Maybe, Marco, you again could explain -- maybe you just summarize what was said earlier in the presentation. What are the reasoning behind us shifting the estimate for the date of reaching practical completion for the unit.

Yes. What I've tried to cover in the update on Opal is that the unit is producing and it's producing well and it's producing at high rates. And we work very closely with our client, Santos, to maximize these rates. Over the past weeks, when production increased, and that was -- the result of that was because Santos added a third well. production or gas supply to the FPSO increased. So we could also increase our production levels. And during that debottlenecking process, we discovered that we have a performance issue with the membranes of the CO2 removal system. And to solve that, our assessment currently is that we have to replace the membranes of the CO2 removal system. That's a large job and also requires delivery of these membranes. And these membranes have delivery times that bring us into the -- in the first quarter of next year. So naturally, to be able to do that -- to do that job, replace the membranes, we will move into the first quarter of 2027 to complete that. Then that will debottleneck the production, and we will reach 100%. And then after that, the practical completion will follow. Financial impact is mainly the USD 65 million that comes together with these activities as well as cleaning the lean methanol tank where we find traces of zinc. And we also are inspecting the wells in the steam system and expect some repairs there as well. The USD 65 million is additional CapEx. But as I said, we're producing. So it means like we're also receiving revenue. The revenue is directly linked to the level of production. So the USD 65 million increased CapEx during that period will largely be offset by additional revenue during that period before the contract term starts, which is the 15-year firm contract, and that is starting at practical completion.