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

Good morning, and welcome to Carbon Transition's Q4 2022 Earnings Presentation. My name is Nils Haugestad, and I'm the company's interim CEO and CFO. For the quarter, we reported fair value of the multi-client library of USD 37.5 million. This includes a second write-up of the Utsira survey of USD 7.0 million. We did a USD 5.6 million write-up earlier in the year, as you may recall. So the total write-ups of the survey for the year is USD 12.6 million. We also announced the reprocessing of the Utsira survey, which is backed by major operators in the area. We had USD 2.5 million in late sales from Utsira, that's net to carbon transition. And that also has significant additional future revenues, which is based on agreed trigger events. Subsequent to the quarter, we also reported USD 0.5 million of Utsira late sales. We had a noncash USD 4.3 million write-down of the investment portfolio. This is primarily a result of the Britishvolt investment. We invested USD 1.7 million or NOK 15.2 million in this company. Cash earnings for the period was USD 1.9 million, and available liquid funds was USD 11.2 million. Net asset value was NOK 2.00 per share. We have a revised strategy centered around an attractive multi-client library. We have a state-of-the-art multi-client library, which is targeting near-field exploration and production optimization. We have 2 surveys in the library. We have the Utsira survey in Norway, which was processed in 2020, and reprocessing now started for 2023 and 2024. We have the Gulf of Suez survey in Egypt, which was processed in 2022. So both very current vintages and state-of-the-art. We have an asset sale agreement with Magseis Fairfield for the sale of the node deployment equipment. Here, we have an earn-out with a cap at USD 12 million and a floor at USD 1.5 million. We certainly see improved market conditions and believe that, that promises well for getting the equipment utilized. We have a very low-cost operation, and we intend to stay very focused on managing our cost strategy. With this, we have a revised corporate strategy where we will look at generating revenues from the seismic assets, and we may invest in listed companies and companies expected to be listed in the near term. However, we will review risk and return criteria and also ensure that all approvals are being taken at the Board level. With this new strategy, we also believe it's prudent to change the name of the company, and we expect that this will be put out at the AGM coming up now. With regards to the seismic market, the current oil and gas prices are highly supportive of our multi-client business, both in Norway and in Egypt. The reopening of China and the restriction on Russian exports creates a supportive backdrop for the oil and gas prices in 2023. In addition to that, the increased focus on energy security is also driving industry investment. Major oil companies have announced increased spending in 2023 relative to recent years. And in the Middle East, we're currently seeing record investments. As a consequence of this, we recently experienced shorter sales cycle. We've achieved higher prices of seismic data sold and a stronger pipeline going into 2023. With regards to the Utsira OBN survey that now has an estimated value of USD 28.2 million, which includes the USD 7 million write-up we just announced. It has a historical cost of USD 82 million. It's a state-of-the-art survey with processing completed in Q3 2020. The survey is located to the west of the Utsira high in the Norwegian North Sea, and it covers approximately 2,000 square kilometers of highly prospective acreage with high-definition 3D seismic ocean bottom data. Q4 2022 late sales to an existing client of USD 2.5 million with any future milestones based on success criteria or uplifts. There has been a minor gas discovery in PL867B by AkerBP and several new wells to follow in the area during 2023. With regards to the reprocessing, we announced in December that Axxis together with CGG is reprocessing the Utsira survey, a project that's being funded by major operators in the area. The reprocessing has demonstrated significant improvements in subsurface imaging. The preliminary results were shown at the NCS Exploration Strategy Conference in Stavanger in November of last year and highlights the substantial improvements in the image quality. The reprocess data will improve sales of the Utsira data as well as add an additional product for sale to existing clients. It's important to note that the clients are required to purchase the underlying data before they can acquire the reprocessed product. The reprocessing project will generate quarterly cash flows during the project execution phase, and then late sales thereafter. With regards to the Gulf of Suez, this has an estimated fair value of USD 9.3 million. The processing was completed in Q3 of 2022. And this is a state-of-the-art node and streamer data set for subsalt analysis. The inaugural late sale was USD 1.6 million in Q3 2022. There are currently 2 wells scheduled to be completed in the first part of 2023 that will be drilled based on this library data. Schlumberger is actively marketing the data to Egyptian clients. And the Egyptian market is experiencing major benefits from high oil and gas prices and the government is supportive of investments in the sector. Looking at the net asset value. The legacy business is clearly the largest asset on the balance sheet. The multi-client library of 37.5% and the financial asset, which is the node deployment equipment earnout of USD 3 million. So together, USD 40.5 million or NOK 1.70 per share. Investments are USD 6.8 million or NOK 0.29 per share. Net current liabilities is a positive USD 0.3 million or positive NOK 0.01 per share, which takes us to a NOK 2.00 per share net asset value. On the income statement side, we had USD 2.5 million in revenues. We have a change in fair value of investments, negative USD 4.3 million, and this is then the noncash write-down of the investment portfolio, primarily a result of the Britishvolt investment, where we invested NOK 15.2 million or USD 1.7 million. We have SG&A for the period of USD 0.6 million, and that includes approximately USD 150,000 of nonrecurring items. We have amortization of the multi-client library of USD 1.4 million, which is USD 0.7 million for Utsira and USD 0.7 million for the Gulf of Suez survey. We have a write-up of the multi-client assets of USD 7.0 million, which takes us to an operating profit of positive USD 3.2 million. Net financial income was USD 0.3 million. And then we have a tax reversal, which leads to a tax income of USD 1.4 million. This is related to a reversal of tax accruals that have been on the books for the estimated tax expense in Egypt. That takes us to a profit for the period of USD 4.8 million. On the balance sheet, we have multi-client library of USD 37.5 million. We have investments of USD 6.8 million, financial assets of USD 3 million, which is then the no deployment equipment earnout. Other current assets of USD 3.2 million, which is an accrual for the late sale done in Q4. Cash and cash equivalents of USD 2.2 million, which leads to total assets of USD 52.7 million. Equity of USD 47.7 million, taxes payable of USD 2.3 billion, which is related to Egypt, and then other current liabilities of USD 2.8 million, which has USD 2.1 million also related to taxes in Egypt. So total taxes in Egypt have then been reduced to USD 4.4 million, down from USD 6.1 million in the previous period. Equity ratio 90.3%, net asset value per share NOK 2.0, and available liquid funds USD 11.2 million. On the cash flow side, we have profit before tax of USD 3.5 million. We have changes in fair value for investments. This is then the noncash write-down of the investment portfolio. So add back USD 4.3 million. We have amortization write-ups of negative USD 5.6 million, which is an add back of USD 1.4 million of amortization, and then the reversal of the write-up of the multi-client asset of USD 7 million. Other working capital changes of negative USD 1.5 million takes us to cash from operating activities of positive USD 0.6 million. We have no cash from investing activities and no cash from financial activities. So that takes us to a net cash for the period of USD 0.6 million and cash at the end of the period of USD 2.2 million. With regards to the outlook, we expect oil and gas prices to remain at historically high levels for the foreseeable future. Improved profitability in the energy sector is expected to result in increased capital investment by oil majors and independents. Historical underinvestment in the exploration and development is driving the need for investment. For 2023, capital investment by oil companies is significantly increased. We expect multi-client library to benefit from this market dynamic. Market volatility is expected to remain high, and this poses a risk for the investment portfolio. So we believe it's prudent to take a cautious approach on making additional investments. We will continue to evaluate new investment opportunities in line with our broader strategic focus, but risk profile and investment decisions will be evaluated by the Board. Thank you very much for listening in. Please call if you have any questions. Thank you.