Fjord Defence Group ASA (DFENS) Earnings Call Transcript & Summary

Good morning, welcome to Carbon Transition's First Quarter 2022 Earnings Release. My name is Nils Haugestad, I'm the company's interim CEO and CFO. During the quarter, we reported multiclient late sales of $1.4 million. We had a decrease in the fair value of investments of $1.3 million. We are writing up the Utsira multiclient survey, which is resulting in a gain of $5.6 million. We divested the seismic node business, and that's resulting in a gain of $0.7 million, which leads to an operating profit of $4.1 million or a net profit of $4.4 million. At this point, we have fully repaid all financial indebtedness. We have also rightsized the company's cost structure and are now down to a highly efficient small team targeting the multiclient library and also focusing on the company's investment business. The net asset value is now NOK 1.86 per share. We have a highly valuable legacy business. We spoke briefly about the ocean bottom node operation, which we divested to Magseis Fairfield this quarter that had a book value of $2.9 million at the end of the quarter. This is a system which has an industry-leading node deployment speed and it's also node-agnostic. So we believe that this is a highly attractive asset that will fit very well in with Magseis Fairfield. The sale was done with an earnout structure. So we have an earnout cap of $12 million over the next 3 years. In addition to that, there is a floor. So in year 3, we have a floor of $1.5 million, subject to certain milestones. We have booked in the period, the net present value of expected earnings from this cash flow of $3 million. In addition, we received an upfront payment of $0.5 million. On the multiclient library side, we have $33.9 million as the Q1 book value. We expect that the late sales here will generate significant revenues and cash flow going forward. With respect to the Utsira survey, this is a survey which we have a cost to us of about $82.3 million initially. We took 2 significant write-downs in 2019 and 2020 of $35.1 million and $18.0 million, respectively. Also, following the processing, we had an amortization schedule where we amortized about 37.5% of the remaining book value by the end of year 2021. In light of what we're seeing in the oil and gas space at this point and also where we are with regards to the COVID pandemic, we believe that the value of this survey is significantly higher than was in the books. And as a result of that, it's being written up by the $5.6 million in quarter 1. There are no additional cash costs with regards to the surveys in the library. And the 2 services are in there are jointly owned with TGS on the one hand and with Schlumberger on the other hand. On the multiclient portfolio, we have 2 surveys. We have the Utsira survey in the Norwegian North Sea with a book value of $23.4 million. This is a survey that was backed by y AkerBP and Equinor and is jointly owned with TGS. We have the survey in the Gulf of Suez, which has a book value of $10.6 million which was backed by Neptune Energy and is jointly owned with Schlumberger. Both of these surveys are serviced, which we believe will target the sweet spot of our oil companies will be using money, which is really increased oil recovery and also on near-field exploration. With regards to the Utsira survey, we had 3 late sales in Q4 of last year, amounting to $5.5 million. And this year, in Q1, we had 1 late sale of $1.4 million. This is a survey that is located in -- to the west of Utsira high in the Norwegian North Sea, is about 2,000 square kilometers of acreage. It was acquired in 2018, 2019, together with TGS, as mentioned earlier. The Utsira area that holds a number of very important fields. As you'll see on the map on the right, you have Edvard Grieg, Ivar Aasen, Balder, Gina Krog, Gudrun and Johan Sverdrup. And in addition to that, of course, there are a number of undeveloped discoveries and also prospects in the area. So we believe that this is a survey that will carry significant value going forward. In addition to that, this is a survey that had extremely high sampling density. And in terms of the amount of data here, there is something in the order of 2 petabytes of data. So this is a survey which we believe is going to be analyzed in multiple different ways over time to make sure we optimize what is of value in this acreage. With regards to the Gulf of Suez, we have finished the data processing there and are waiting for the final report. As a result, we will also start amortizing this survey in quarter 2 of this year. The Gulf of Suez is an area that has had significant production since the 1980s, and it's a prolific petroleum basin. The challenge with the area has been the geology and the salt bodies that caused us a problem with seismic imaging. So the survey that we did in 2020, together with Neptune Energy and Schlumberger covers about 300 square kilometers. And this was a hybrid, both ocean bottom nodes as well as short 3D streamers to focus on near-surface imaging. This is also an area that is expecting a number of drilling campaigns in the coming years. And also importantly, this is an area where ENI in 2019 did a discovery of 200 million barrels of oil equivalent. And very recently, in the first quarter of this year, Dragon Oil did discovery in North Ramadan of about 100 million barrels of oil equivalent, which is just Northeast of our survey area. So what's the strategy going forward? Well, we're a listed investment company at this point. We believe we're a unique vehicle to take part in this ongoing energy transition shift. We're focusing on multiple sectors. We believe there are going to be a number of areas that are going to provide for interesting investment opportunities. We have an opportunistic approach, but there are some common denominators in what we're looking for. We're looking for companies with unique improvement technologies, scalable business models. We want areas that are high barriers to entry and that has a global or significant geographic scope potential. We may invest more broadly in the energy transition space, but I think it's important to note here that we're going to maintain a very high threshold for new investments. In addition to that, now that we have also repaid all the financial indebtedness of the company, we're looking to get net cash in from the legacy business. We will be considering potential share buybacks and also dividends as appropriate. On the value proposition, where are we going to be focusing. We're not really going to be focusing on the seed side and the venture side. Our focus will be on pre-IPOs. We've been looking at situation. Usually, the last round of financing before the companies are looking to go public, normally NOK 100 million to NOK 200 million kind of funding rounds where we can be a sizable investment. We can be an active involved partner in helping to position the company. We have, of course, a listed entity, which a number of these companies find attractive, a way to also make the market aware of who these investment companies are and their position in the market. And we have a very strong shareholder base that we think will be attractive. Our shareholder base and also our general reach in the market makes us believe we have a very strong access to deal flow and a strong network to leverage. And of course, as we mentioned before, we'll use the legacy business to contribute to funding investments going forward. In terms of investments done to date, we've done 3 investments. We did Arbaflame as the first investment in July of last year. We made an investment into Power by Britishvolt in August of last year. And then in October of last year, we made an investment into Co2 Capsol. And then, of course, we'll be looking going forward to investments beyond that. Arbaflame, our first investment. This is a company we're very excited about. It's a producer of green coal-replacement fuel and also biochemicals. They completed the construction of their first plant after about 10 years of technology development. It's a patented technology that produces black pellets, which is a substitute for coal. They also will produce biochemicals. [indiscernible] what is the current target, but there are a number of additional chemicals that will be coming out as a part of this production process. The black pellets are very attractive and much more so than the earlier versions that the industry had seen, the white pellets we've seen in the past. The primary reason here is that the black pellets that the company has a patent on don't absorb water so that they are easily transportable and stored without being damaged by water or transportation. In addition to that, they can be utilized more or less directly into the coal-fired power plants without any significant additional CapEx and given where coal prices are now and also where the ETS price is, the Arbaflame product is actually a cheaper product than coal. So not only does it reduce CO2 with some 90%, but it's also a product that is less expensive than the coal alternative. We invested $3.4 million into Arbaflame, which gives us currently about a 4.1% fully diluted ownership. And the fair value of the investment at the end of this quarter is set at $3.8 million. Right now, the core focus of the company is the ramp-up of the facility in Kongsvinger. They're making very good progress there. They've been doing all the right things in terms of hiring in the right engineering team to optimize this facility. And we're expecting to get a first shipment out of Norway to the Netherlands in June, which should be about 3,500 tonnes then for testing at the facility in the Netherlands. We expect that they will be a meaningful production here at the beginning of kind of the second half of this year. And by the end of 2022, early 2023, we would expect that they will be at full capacity. This is a 70,000 tonne facility. They're also working actively on ArbaTwo, both in terms of geographic location, but also in terms of ensuring that the setup for building this facility is all in place. And lastly, in terms of the balance sheet, they did an equity private placement of NOK 75 million to shore up the balance sheet, and that was done at NOK 8.50 a share. The second investment is Britishvolt. This is a company we also feel very strongly about. It has done an excellent job. It's a developer and future manufacturer of lithium-ion cell batteries for the electric vehicle market. It is a U.K.-based company. This is a market that is seeing very substantial growth, as would all expect, given what's happening in terms of electric vehicles. And also, it's a market that the British Government has been very clear on -- their focus on and their support for. Britishvolt is initially constructing a facility in Northumberland in Blyth, which will have about 3,500 or so jobs there. It's a cost of something in the order of GBP 4 billion to construct. The facility was initially targeting approximately 36 gigawatt hours per year of production. And that number, I think, is now up along something like 44, 45 gigawatts. So a very substantial facility for the U.K. market, and that's where they'll be targeting. It is for the larger European markets. We invested $1.7 million initially in this and received shares and also equal number of options with the same strike price. We came in at GBP 12.68 per share, and the fair value of the investment at the end of this quarter is estimated at $6.2 million. When we came into this investment, was in the Series B round and we came in with some very significant other players, among them being Glencore, Cathexis Venture and NG Bailey. In this most recent period, the U.K. government has announced an in-principle grant of a significant amount. In addition to that, we've also gotten funding for GBP 1.7 billion for the Northumberland Gigaplant. And this is through Aberdeen and Tritax. In addition to that, the company signed collaboration agreements with Lotus and Aston Martin. And also, they've signed a joint venture agreement with Glencore to develop a world-leading battery recycling facility in the U.K. that would take something in the order of 10,000 tonnes per year. Lastly and absolutely not least, we're now out with a Series C fundraising, and the pricing here is at GBP 1.925 billion pre-money. And that's a share price of GBP 30.08 per share. CO2 Capsol is a patented carbon capture solution. This was a third investment. Their focus is on hot potassium carbonate technology which is a process, which avoids the use of mean based solutions, which has HSE challenges with it. This is a technology that has been developed by the company and its predecessor for some 20 years. It's a patented technology. And it offers also an estimated cost advantage of about 40% compared to the alternative processes. We invested $4.7 million into the company, which gives us a fully diluted ownership of about 6.2%, and the fair value at the end of the quarter was $6.9 million. CO2 Capsol was the technology that was selected for the Stockholm Exergi carbon capture facility. This is a substantial facility that's going to be built right in the central of Stockholm, expected to be up and running by 2025. It's 800,000 tonnes per year of CO2 capture, which would be the largest waste to energy carbon capture set up in all of Europe. It's also very important to note that Stockholm Exergi's facility was the only of its kind to receive a financial grant from the EU Innovation Fund, and it received EUR 180 million. The company has also announced collaboration agreements with Petrofac and with WOIMA and Hitachi. And with regards to WOIMA, CO2 entered into a collaboration with the construction of a next-generation synthetic methane plant with Westenergy in Finland. This is an exciting opportunity to look at additional ways to use the carbon capture technology. Here, you're using the carbon that's being captured into the production process of synthetic methane. In addition to that, the company leased its first -- or signed a contract lease on its first CapsolGo, which is a concept we're very excited about. It's a test system to be able to utilize the technology and get experience with it. Öresundskraf is leasing CapsolGo system, which will be delivered in Q3 of 2022. The facility in question would be releasing 210,000 tonnes of CO2. So this is also a very significant facility. And we believe getting in with these CapsolGo solutions in front of the clients to get familiarized with the technology and how it operates is a great way to expand your presence into the market. So this was another great win for the company. If you look at the 3 investments and how do they stack up compared to what we have been talking about our targets and what we're looking for, they all have a unique improvement technology. They're scalable business models. There are high barriers to entry in here. There is a global potential for the technologies and they're all in a pre-IPO type of funding when we came into them. Looking at the income statement for the period, we had revenues of $1.4 million. The change in fair value of investments that we talked about is a reduction of $1.3 million, other gains and losses of $0.7 million. So this is the gain from the sale of the seismic node business. We have cost of sales of $0.3 million and SG&A of $0.9 million, so together, $1.2 million. And I think this is a number important to focus a bit on. In this, there is approximately $0.5 million that is related to the legacy businesses being divested. So about $0.7 million that would be related to the ongoing operations. So if you look at the core charges that then relate to the legacy businesses being divested, there is a $100,000 related to rental of node equipment. We had employee costs of about $0.2 million and advisory fees of $0.1 million, all related to the legacy business. Going forward, you would expect the combined number there to look much more in line with something on the order of $700,000 than the $1.2 million looking at here. Below that, reverse impairment of multi-client. So this is the write-up of the Utsira survey by $5.6 million. And then we have depreciation of $0.6 million, which takes us to the operating profit of $4.1 million. We have income tax income of $0.3 million, taking us to a net income for the period of $4.4 million. The income tax gain here is a reversal of taxes for the project the company had in India. The other thing we should highlight is on the depreciation side where we had been working on a 4-year amortization period for Utsira. And as we mentioned before, we've taken a very conservative approach on amortizing these assets, in particular, given how the oil market looked and also the COVID pandemic. So we're changing the amortization periods going forward now from 4 years to 10 years on Utsira survey. And that will reduce the amortization to approximately $700,000 a quarter going forward. We'll need to remind you that we will start amortization of the Gulf of Suez survey also in Q2. So that will be in addition to the amortization on the Utsira survey. Looking at the balance sheet. We have the multi-client library of $34 million. The investment position of $17 million and then financial assets, which is the net present value of the earn-out with Magseis Fairfield is put there at $3 million. Other current assets is primarily receivables related to the multi-client late sale and then cash and cash equivalents of $3.4 million, which takes us to $58 million of total assets. We have equity of $51.1 million, which gives us an equity ratio of 88.2%. We have taxes payable of $2.4 million. And these we have to see in connection with the other current liabilities of $4.1 million. In the $4.1 million, there is also $3.7 million related to taxes. So the total tax liability that we have on the books is at $6.1 million. And this is related to the work in Egypt, and that's an ongoing discussion that we are trying to resolve. The net asset value then per share at the end of the quarter is NOK 1.86. Taking a look at the investment portfolio. We invested $9.9 million. That's $3.4 million into Arbaflame, $1.8 million into Britishvolt and then $4.7 million into CO2 Capsol. At the end of quarter 1, the carrying value of those investments is $17 million. Arbaflame $3.8 million and that's based on the equity private placement that just completed. Britishvolt at $6.2 million, which is based on the Series C financing, which is done at GBP 30.08 per share. And then CO2 Capsol at $6.9 million, which is based on market trading prices. With regards to outlook, we are expecting to see material cash flow from the legacy oil service business. We believe we have a very attractive multi-client library, which is targeting some prolific oilfields in both Norway and in Egypt. It's also important to note that these assets do not require any significant further investments to generate cash. So this is generally cash -- net cash inflow to the company. In addition to that, after the sale of the seismic node business to Magseis Fairfield, we have an earnout potential of up to $12 million over the next 3 years. On the investment side, there is a clear international focus on further reduction of carbon emissions, and that's going to lead to the development of new energy technologies and we intend to spend significant time on focusing on that. We're seeing a very good flow of investment opportunities. And of course, the current market turmoil is making it difficult for a number of these companies to get access to capital. That being said, we intend to have a very high threshold for what we're investing in. We're seeing that it takes longer than you expect, and it's more difficult to gain acceptance than you expected. And you also find alternative technologies developing over time. So we need to have a very sober and cautious view on what we're investing into. We think it's important to emphasize again that following this latest debt repayment, the company is now debt free. And lastly, we are here to improve the value for shareholders. And as we get cash in from the legacy business, we will be considering stock buybacks and/or dividends as appropriate. With that, we thank you for participating this morning, and we look forward to speaking again at the next quarter end. Thank you so much.