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

Good morning and welcome to Carbon Transition's Second Quarter 2022 Earnings Call. My name is Nils Haugestad, and I'm the company's interim CEO and CFO. Turning to the quarterly highlights. We had one multiclient late sale for USD 1.8 million in the quarter. The fair value of the multiclient library is $33.2 million. The fair value of our investments is $12.5 million, and that is relative to $9.9 million that was the initial investment. In the period, we took a noncash write-down of $4.5 million on the investment portfolio. $1.4 million of that reduction is a result of the significant strengthening in the U.S. dollar. The remaining portion is a result of the share price of CO2 Capsol, which went from NOK 16.59 at the end of the first quarter to NOK 9.18 at the end of the second quarter. Cash earnings for the period is $1.2 million, which is $1.8 million in revenues less $0.5 million in operating costs in the quarter. We have no financial indebtedness at the time. We have bank deposits of $2.7 million. And if we include the trade receivables which were collected in quarter 3, we're at $4.9 million. We also have marketable securities. And if we add that to it, we have a liquidity number of $8.3 million. The cost-cut efforts that we've been discussing for some time is largely completed at this point. The net asset value of the company is NOK 1.94 per share. And we believe that with this, we have a robust financial position, which enables us both to look at additional investments and to consider share repurchases or dividends if we believe that, that is more attractive to our shareholders. Turning to the business overview. We have a high-value legacy business. This is the company's largest asset area, of course, and we'll come back a bit to this. In this area, we have 2 asset groups. We have the multiclient library. In quarter 2, that had a book value of $33.2 million. And out of this, we're expecting to generate significant revenues and cash flows over time. The largest asset is the Utsira survey in Norway. A couple of observations we want to point out with regards to that, this is a survey that initially cost $82.3 million. We've taken some very significant write-downs of it, $35.1 million and $18.0 million in 2019 and 2020, respectively. We did the first reversal of impairments, $5.6 million in the first quarter of this year. With regards to the overall library, we don't expect any significant additional cash cost to generate cash flow out of this library. And the 2 surveys that are in the library are jointly owned with TGS on the one hand and the Schlumberger on the other hand. Number two, we have the ocean bottom node operations. This is an asset that was sold to Magseis Fairfield in quarter 1 of this year. It's a system that has an industry-leading no-deployment speed that is particularly suited for shallow water surveys. It's also node-agnostic, which makes it very flexible. The earn-out structure here is a payment system that has a cap of $12 million to Carbon Transition over a 3-year period. It also has a floor payment of $1.5 million subject to certain milestones. We have booked the expected present value of this earn-out at $3 million in the books at the moment. And we also received $0.5 million in an upfront payment from Magseis Fairfield in March of this year. Turning to the seismic markets. We believe that the overall conditions are improving in this market. The high oil and gas prices are likely to contribute to increased seismic multiclient data demand. There has been a historic underdevelopment in the oil and gas segment, and we believe that this will result in significant catch-up spending. The higher E&P company cash flows have been supporting the recent capital expenditure increase that we've been witnessing. In addition to that, we're seeing an increase in M&A activity among E&P companies in the North Sea, which is a benefit to our Utsira survey. We're seeing both new entrants into this but also changes in license operators or partner configurations. So overall, we believe this is a positive for this asset. The oil and gas demand has been outpacing supply. And in addition to that, energy security is becoming a global concern, and we believe that this will also play into the energy sector as a positive. And the potential increase in seismic survey activity will also be a benefit to the earn-out agreement with Magseis Fairfield. Looking at the multiclient surveys. The first asset is the Utsira survey. It has now an estimated fair value of $22.7 million. This is a near-field survey located to the west of Utsira high in the Norwegian North Sea. And this is a survey that was backed by AkerBP and Equinor and that we did together with TGS, and it's owned 50-50 with TGS. It is a very large survey, about 2,000 square kilometers in a highly prospective acreage, and it's a very high-definition 3D ocean bottom node data. As you'll see in the map on the right, this is a survey area that includes a number of important fields and also some undeveloped discoveries as well as prospects. The survey has very high sample density, and so we believe that this gives an imaging of the subsea surface that is very attractive and will allow us to have a view of the area that is very different from the available data earlier. In regards to the second half of this year, we're certainly seeing improved sales leads, and that's a positive sign. We do believe that the oil companies are moving relatively slowly, and so we think it's prudent to expect some lag effect here before we start seeing activity. But we do expect to see sales from the Utsira survey in the second half of this year. The second survey in the library is the survey we have in the Gulf of Suez that has an estimated fair value of $10.6 million. And this is a survey that has been under processing. The processing is being completed. And with that, the marketing phase of the survey is commencing. This will take some time. So we don't expect to see sales from this survey in 2022. So no sales here most likely until 2023. This is also a very prolific petroleum basin that has been active for a long time. The challenge here has been the complex geology and the salt bodies that have made it very difficult to get a good view of the sub-salt areas. So the survey that was done here was done with backing by Neptune Energy and with Schlumberger. It's about 300 square kilometers. And this is a hybrid configuration. It's both ocean bottom nodes together with short 3D streamers for near-surface imaging. It's an area that has a number of drilling campaigns planned. And also, we've seen some recent finds in this area: ENI in 2019; and most recently, in the first quarter of this year, Dragon Oil. Looking at the investment portfolio. We have seen increased price pressure in general in the market, and in particular, in light of the growing market uncertainty. So for this period, we did a noncash portfolio write-down of $4.5 million. And as mentioned upfront, the strengthening in the U.S. dollar represents $1.4 million of this write-down. CO2 Capsol went from NOK 16.59 to NOK 9.18 as mentioned, and that is the remainder portion of this write-down. I think it's important to mention that there's, of course, been significant volatility here. And subsequent to the quarter end, CO2 Capsol has been trading more in the range of $11 to $12 a share. And we also think it's worth to point out that both the increase that we've seen in the EU ETS pricing and most recently, the U.S. Inflation Reduction Act, are very supportive of the carbon capture and storage sector broadly speaking. We have not had any valuation changes in this quarter to Britishvolt or to Arbaflame in local currencies. However, both of them are adjusted because of the U.S. dollar. So if you look at the Arbaflame and Britishvolt Q2 numbers, they are both reduced by approximately $0.5 million, which is again a result of the U.S. dollar. So with that, you'll see on the left-hand side on the table, invested amount, $9.9 million; and the Q2 amount, $12.51 million; with then CO2 Capsol being written down $3.55 million, off of which approximately $0.5 million is foreign exchange; and then Britishvolt and Arbaflame, each approximately $0.5 million to take you down $4.5 million. And again, this is a noncash adjustment. Looking at the net asset value of the company. We have the legacy business, which is, as mentioned upfront, the largest part of the company. The net asset value there is USD 36.3 million. So if you look at it on a NOK per-share basis, NOK 1.50. The investment portion is $12.5 million or on a NOK per-share basis, NOK 0.52. So the legacy business represents approximately 75% of the net asset value and the multiclient library alone about 70%, with the investment portfolio representing approximately 25% of the net asset value. Then we have NOK 0.07 per share in net liabilities, which takes you down to a net asset value of NOK 1.94 per share or USD 47.1 million. Looking at the comprehensive income statement. You'll see a multiclient late sale of $1.8 million, the noncash reduction in investments of $4.5 million. We have a positive cost of sale in the period of $0.1 million, and this is mainly related to the reversal of some rental charges that is a result of the legacy business that's been divested. The SG&A for the period was $0.5 million. And as mentioned, we are largely finished with the cost cuts, but there are still things that are in process, and we hope to improve this number. We have the amortization of $0.7 million. And here, we now adjusted the amortization period of the Utsira survey from 4 years to 10 years. And we have not yet started the amortization of the Gulf of Suez, which will be starting now shortly. We have tax income of $0.1 million, which is a reversal in Egypt and in the U.K. And that takes us down to a negative $4 million or if you look at the cash earnings side, a positive $1.2 million, which again is the multiclient late sales minus cash expenses of approximately $0.5 million. Looking at the financial position. On the multiclient library, $33.2 million. And that's then Utsira at $22.7 million and the Gulf of Suez at $10.6 million. We have the investments at $12.5 million. Financial assets, which is the net present value of the node equipment earn-out, that's at $3.0 million. We have the trade receivables of $2.2 million, which as mentioned before includes VAT but has now also then been subsequently to quarter end been collected. Other current assets of $0.1 million and then cash and cash equivalents of $2.7 million. On the equity and liability side, we have equity of $47.1 million. Taxes payable of $2.3 million, and this is a tax liability under review in Egypt. Other current liabilities of $4.3 million. And here, $3.8 million of that $4.3 million also relates to that same tax discussion in Egypt. What's not on the books is a tax loss carryforward, which is estimated at approximately $60 million. Total assets for the period then, $53.8 million. It gives us an equity ratio of 87.5% and as mentioned, a net asset value per share of NOK 1.94. If you look again the net liquidity to the company, we have bank and the collected trade receivable plus marketable securities, which is the position in CO2 Capsol of $8.3 million. Looking at the cash flow. Cash from operations, negative $0.6 million. But again, important to mention here, of course, that the trade receivable of $2.2 million had not been collected at the end of quarter 2. That's collected subsequently in quarter 3. We had no investing activities, so that's 0. We had a small tax amount paid of $62,000, which takes us to a net change in cash of negative $0.7 million. In terms of the outlook, we believe the conflict in the Ukraine and the focus of energy security is going to keep an upward pressure on energy prices. The increased capital spending by oil companies should positively impact multiclient late sales and also overall seismic activity. We do want to point out that the oil companies have been slow to implement new production plant. So we think it's important and prudent to just expect a lag effect here and take a cautious approach. The market volatility is expected to remain high, and there is a possibility of financial recessions in a number of economies. And we believe this poses a risk, especially to growth companies. However, the energy transition theme remains strong, and we expect to continue to see new investment opportunities within this segment. But given the overall market outlook and the volatility in the market, we expect to take a cautious approach to new investments. The company is now debt-free, and we believe we have a robust financial position that allows us to look at new investments if attractive opportunities arise. The future late sales we're going to see are expected to increase cash balances, and thereby, investable capital. We will consider doing share repurchases and/or consider dividends if that's more attractive for our shareholders. And lastly and importantly, we have a new Board just selected, and we will commence a review of the strategy of the company. So there will be more to come on this front. That concludes the remarks this quarter. We look forward to speaking with you again shortly. Thank you for listening in.