Gulf International Services Q.P.S.C. (GISS) Earnings Call Transcript & Summary

Good day, and welcome to the Gulf International Services Company Q3 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bobby Sarkar. Please go ahead, sir.

Thanks, Claire. Hello. Good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Gulf International Services Third Quarter and 9 Months 2021 Results Conference Call. So on this call from QP's Privatized Companies Affairs Group, we have Mohammed Al-Sulaiti, who is the Manager of Privatized Companies Affairs; we have Sami Mathlouthi, who is the Assistant Manager in Financial Operations; and we have Riaz Khan, who is the Head of IR and Communications. So we will conduct this conference first with management reviewing the company's results followed by a quick Q&A. I would like to turn the call over now to Riaz. Riaz, Please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Hope you're all doing great and staying safe. Before we go into the business and performance updates of GIS, I would like to mention that this call is purely for the investors of GIS, and no media representatives should be participating in this call. Moreover, please note that this call is subject to GIS disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call on 29th of October, GIS released its results for the 9 months period ended September 30, 2021. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights of GIS. We have structured our call as follows: at first, I will provide you with a quick insight on GIS ownership and structure, it's competitive strengths, overall governance and BOD structure by covering Slides 5 till 8 and Slides 29 and 30. Secondly, Sami will brief you on GIS key operational and financial performance metrics. Later, I will provide you with insights on segmental performance. And finally, we will open the floor for the Q&A session. To start with, as detailed on Slide #6 of the IR deck, the ownership structure of GIS comprises of Qatar Energy with 10% stake being the parent shareholder, whereas GRSIA with 22.2% stake in the largest shareholder. As detailed on Slide #5, Qatar Energy provides most of the head office functions through a service level agreement. The operations of GIA subsidiaries are independently managed by their respective Board of Directors, along with the senior management team. The Board structure is detailed on Slide 7 of the IR presentation. In terms of competitive advantages, as detailed on Slide #8, all of the GIS group companies are strategically placed, having significant market share in their respective business sectors within Qatar. For example, drilling business is the only Qatari onshore drilling service provider and have more than 50% market share in offshore drilling services in Qatar. Similarly, the aviation business of GIS is a sole provider of helicopter services in Qatar's Oil and Gas Service sector and being one of the largest operator in the MENA region. In terms of insurance business, it is one of the leading medical insurance providers in Qatar. This is supported by an experienced leadership having expertise in relevant business segments. In terms of governance structure of GIS, you may refer to Slides 29 and 30 of the IR deck, which covers various aspects of GIS' code of corporate governance in detail. I will now hand over to Sami.

Thank you, Riaz. Good afternoon, and thank you all for joining us. During the first 9 months of 2021, oil and gas industry showed positive signs of recovery, with consolidated macroeconomic driver on the back of effective vaccination campaigns, leading to ease our societal restrictions in major markets, linking to high net economic activity. However, the post-pandemic recovery within the group remains uneven but aviation and the insurance segments reported improved set of results, while drilling segment remained under pressure until first half of the year. Whereas the latest strategic realization was under drilling segment resulted in an improved set of results for the segment during Q3 2021. In terms of group financial performance, as detailed on Slide 12, the group's total revenue for the first 9 months of 2021 declined by 1% compared to the same period of last year, to reach QAR 2.2 billion, revenue growth from insurance and aviation segments were entirely offset by a negative growth in revenue from both drilling and catering segments. For the 9 months period ended, the group averaged an EBITDA of QAR 417 million, with a decline of 14% versus the same period last year. The group reported a net profit for the first 9 months of 2021, amounting to QAR 41 million as compared to a net profit of QAR 49 million for the same period last year. When analyzing the profitability in more details as reflected on Slide 14, one of the main contributors towards the decline in the bottom line profitability was the overall decline in revenue, which contributed by QAR 20 million negatively towards the current period bottom line earnings versus same period last year. Direct costs at the group level increased by 3% versus the first 9 months as of last year and contributed negatively by QAR 65 million to the current year's net earnings versus last year. The increase in direct cost was mainly due to increase in activity within drilling and aviation segments, coupled with increased claims within the insurance segment, partially offset by direct cost reduction noted in catering segment. On the other hand, finance costs contributed positively to the bottom line earnings and decreased by 27%. On the back of declining interest rates, general and administrative expenses also declined by 1% on account of continuous optimization drive. Moreover, the performance of group's investment portfolio was positively impacted due to recovery in the capital markets, and recovery amounting to QAR 38 million was noted on account of unrealized gains on revaluation of investment securities, when comparing the current period investment portfolio performance with the same period last year. Moving on quarter-on-quarter analysis, revenue for Q3 2021 was increased by 12% compared to Q2 2021, which is mainly on account of growth in revenue from aviation, insurance and drilling segments, which is partially offset by decline in revenue from catering. Net profit for quarter 3 2021 amounted to QAR 42 million was an increase of 783% compared to quarter 2 2021. This was mainly linked to the recovery in losses within drilling segment, coupled with continued momentum from aviation -- and aviation segment. On an overall basis, our base case strategy will continue to focus on market development, focusing on building market share, reducing operating costs and continuing to improve utilization of assets. I will now hand over to Riaz to cover the segmental performance.

Thank you, Sami. I will start with the drilling segment where you may refer to Slides 16 to 18. The segment reported a revenue of QAR 716 million for the 9-month period ended 30 September 2021, down by 1% compared to the same period last year. The reduction in revenue was primarily driven by rig suspension within the onshore fleet and lowered rig day rates effective since July 2020 until the mid of this year. However, the rig day rates applicable to the offshore fleet improved during Q3 of 2021 as the new rates were applied to the offshore fleet and took effect starting from July '21. Moreover, 2 of the suspended rigs commenced operations during Q3 of 2021. The segment reported a net loss of QAR 159 million compared to a net loss of QAR 120 million for the same period of last year. This increase in losses was primarily attributed to negative growth in revenue. However, this negative growth was partially offset by lower finance costs. Moving on to the aviation segment as detailed on Slide 19 till 21. Here, the segment reported a total revenue of QAR 528 million for the 9-month period ended 30th of September 2021, up by 8% compared to the same period of last year. This increase was mainly attributed to higher flying hours recorded within both domestic and international operations, coupled with growth in revenue noted across all businesses within the segment. The segment's net profit reached QAR 175 million, representing a growth of 13% compared to the first 9 months of 2020, mainly on account of revenue growth. Moving on to the insurance segment, as detailed on slides 22 until 24, revenue within the segment increased by 1% for the 9 months period of 2021 versus last year to reach QAR 745 million. Growth in premiums from general insurance line of business were entirely offset against a decline in premiums from medical line of business. Segment's net profit for 9 months of 2021 increased by 44% compared to the same period last year. The strong growth in bottom line profitability was mainly supported by strong recovery of the investment portfolio on the back of rebound capital markets. Finally, moving on to the catering segment as discussed on slides 25 till 27, the segment reported a revenue of QAR 258 million, with a decline of 19% compared to the first 9 months of 2020. This was mainly due to ongoing COVID-19 related restrictions which resulted in lower number of meals being served across majority of its catering locations. And in addition, a loss of some contracts within both manpower and catering businesses adversely affected the overall growth. The segment reported a net loss of QAR 19 million for the first 9-month period of 2021 compared to a net loss of QAR 4 million for the same period of last year, mainly due to lower margins and declining revenues. Now I think we can open the floor for the Q&A session.

[Operator Instructions] And our first question today comes from [ Nor Sheriff from Arcom Capital ].

Actually, I'm new to the company, so I will have to ask some basic questions if you don't mind. I will take it one by one, if that works. So my -- actually, on the drilling segment, we've seen in Qatar, there is this strong expansion plan for LNG. Should this have an impact on the company or should we see higher exposure to the drilling fleet or expansion in the fleet because of such plan?

Yes. At the moment, it's basically starting from last year. We created this joint venture between us and Seadrill, and this will -- including 5 jack-up rigs. So those rigs are allocated to the NFE projects. So we are studying the -- all the option. So -- but at this stage, there is no potential development of the sector -- for the segment. But based on the requirement from the customers, we'll study all the opportunities and then we can enter.

Yes. Maybe just to add to that, while we received 5 awards related to the North Field expansion and in future, I'd say bids or tenders, GDI will, for sure, try to locate the necessary assets in order to be able to play part of those enhanced rig, let's say, numbers within the offshore market of tremor.

Yes, and this is mainly for natural gas production, right.

Yes. North Field expansion is natural gas, but offshore drilling is not only natural gas in Qatar, it's both oil and...

Yes. Clear. And regarding this new joint venture of the 5 jackup rigs, where are we now? Or should we -- when should we expect this to go forward?

It has already started since last year. So 5 jackup rigs, so 2 have started in 2020, and the remaining rigs has been deployed during the Q2 2021. So basically, all the 5 rigs are in operation, and we are not expecting any additional rig at the moment. So those are the 5 rigs that are contracted.

Yes. Clear. And regarding the average day rates for GDI, and I've seen from the previous transcripts that it's linked to the oil prices. So where are we in Q3 and where is the cap regarding this formula?

Well, the indexation formula has started beginning of Q3 2021. So before the COVID -- so basically after the COVID so on July 2020, so some rigs has been suspended and then the indexation formula came in place, that will start beginning of July 2021. So this formula is based on the oil price with a minimum oil price of USD40. And then it takes into consideration a floor and ceiling for the daily rates. So the average floor was around 56,000 per day. And then the maximum at the moment, so it's around 74.

Yes. And where are we in Q4? In Q3, sorry.

In Q3, we are already reaching the ceiling. Based on the existing oil prices, I think it will remain at the ceiling level.

Yes. Clear. Okay. Can you give us guidance regarding the backlog of the operating rate? Is that available?

Yes. Basically on offshore most of the rigs are contracted, except -- I think most of the rigs are contracted for the onshore rigs. So only 2 rigs are not contracted at the moment, and all the remaining rigs are under contract. So the average contract is around 2 to 3 years at the moment and then so extension will start basically before the expiry date.

Yes. And regarding the 2 onshore idle rigs, is there any plans to get them back to operations? Or should we just assume that for now, it will be idle?

Not exactly. So basically, we are in continuous discussion with potential customers, basically to operate those 2 rigs and maybe one of them will be operating in Q4 and the other one will be -- still under discussion. And basically, on the existing oil prices, we expect to have those rigs operation.

Yes. Clear. Okay. And regarding the aviation segment. So can you give us your outlook regarding the number of planned hours? And what do you expect also in terms of the day rates or the formula there?

Yes. The active flying hours basically in the helicopter, so it has increased compared to last year by around 28%. So for the same period of last year for the 9-month period, so we are seeing 28% increase in flying hours from 7,800 hours to 10,000 hours. The same trend in terms of increase, as we have seen as well from quarter 2 2021 to quarter 3 2021 by an increase of around 12% between the 2 quarters. So we believe that this will -- the trend will continue based on the existing contracts that we have, which are a little bit different from the type of contracts you are having in terms of drilling, where the contracts are based on fixed rate and variable rate, which is based on the flying hours. So as higher flying hours we are doing, so basically, the revenue generation will increase. But at the same time, while we are securing a minimum level of revenue, so those fixed items.

Yes. And the values and rates goes upwards the higher flying hours or it goes down with the flying hours...

So there is -- the contract is based on fixed rates and that fixed revenue that we generate from the contract and then the variable component is depending on the flying hours that we are doing.

Yes. Clear. And regarding the outlook for the flying hours in 2022, is there a capacity for these 55 aircraft currently operating? Can you give us just a sense about what should we expect in 2022?

Well, at the moment, so we cannot give like a firm expectation of what will happen in 2022, especially with the issues relating to COVID. But the existing fleet is able to generate enough revenue for the business. So basically -- and we are planning as per the budget to increase the number of aircraft once we -- if you are able to gain more contracts. So with the existing oil prices and because we are a little bit linked to the oil industry as well, we have the existing oil prices. And if the economic situation and the economic environment will remain stable as what we have seen in beginning of Q3 2021, so I think there is nothing to let us not believe that maybe 2022 will be similar to what we are doing in Q3 2021, or maybe better.

Yes. Clear. And one last question, again, on the drilling, with the joint venture with Seadrill, what kind of contribution do you expect in terms of profitability in 2022 for the joint venture?

Well, at the moment, so far, the joint venture is contributing negatively to the net income of the GDI in general, which is mainly due to -- basically to the delays, especially in the operation of 3 rigs, which was planned to start in Q1 2021, but we have them to start in Q2 2021 due to many factors, which are relating to COVID-19, where we have seen some delays in the deployment of those rigs. So starting from 20 -- from Q4 2021 and Q1 2022, I think you will see more positive contribution from the JV and where we will be able to make profits to the net income of GDI.

Yes. And in terms of contribution, do you have an estimate there?

Well, at the moment, well, we are as saying, we don't have exactly how much it will contribute in 2022, and we can provide that so -- in -- on the new cost.

Yes. Clear. And regarding the day rates at Seadrill, is it the same formula that you applied to the rest of the onshore and offshore of the GI?

It's not the same formula. It's not exactly the same customers. So those are different contracts that we have made on the beginning of the JV. And at the moment, they are not indexed to the oil price. So they are fixed day rates that we have agreed with our customers.

Yes. Is there a certain point that you are going to renegotiate? Or is it fixed until the contract comes to an end?

Well, those are contractual arrangements. So -- and the initial contract, they have been made for 2.5 and 3 years. So -- and all the parties, they will have the freedom to rediscuss those contracts at the expiry of the contract or during the contract. So if we see a huge increase in oil prices or -- so we might renegotiate those terms with our customer and either to keep the fixed day rates or maybe to negotiate index formula. But those are contractual agreements that can be discussed between the parties.

We do have further questions, gentlemen. Are you happy to take them?

Yes, please. Go ahead.

Our next question today comes from [ Nasus Albas from Agesh Capital ].

I just have one question regarding your GDI entity and leverage. I understand that the company was discussing with the banks regarding their outstanding debts for the past, let's say, a year or a little bit over a year. Do you have any update? Did you reach any agreement with them? Are you going to get a haircut on the debt? What are -- what should we expect the development for that to be?

Yes, the discussions were initiated, let's say, 1.5 years or 2 years ago. At the time when we were on the verge of restructuring the debt, then came the pandemic that delayed the whole process. Starting, I'd say, Q3 of this year, we have reengaged with the bank, so we are currently working closely with our financial adviser to put forward our restructuring plan with the local or the current plans. It's very early maybe at this stage to tell you what kind of conclusion we're going to reach, but we expect that towards the end of this year or early -- very early next year, it should be concluded and communicated to the shareholders.

Our next question comes from [ Mustafa Ameer ] from Al Rayan Investment.

Congratulations on a good set of results for the third quarter. This is analyst Zohaib Pervez from Al Rayan Investment. I have a question on -- I have actually 2 questions. My first question is regarding the drilling segment. So in the third quarter, you recorded a loss of QAR 26 million only. Now considering that your rates are capped nearly but most of your rigs are in already there. The Seadrill rigs are already there. Is this the best that we can expect or we can expect a breakeven going forward?

Well, we are -- at the moment, we're working on the -- hello? Hello?

Should I ask my second question also, yes?

Yes, you can. Go ahead. Go ahead with your second question as well.

Okay. Sir, my second question is on the opportunity that is there for the insurance segment regarding the mandatory insurance. So could you talk a little bit about what the opportunity is and how the insurance segment could benefit from this opportunity?

So for your first question regarding GDI segment, so basically, the QAR 26 million loss that we are making, it's true that at the offshore level, we reached the ceiling for most of the offshore rigs. But as stated in the beginning of this conference, so we have some rigs, which are not deployed yet. And those rigs if they will be deployed, so they will change a little bit the equation. We are yet to finalize the budget for the next year and based on the discussion that our commercial team will have was regarding those 2 rigs and regarding one of the budgets. So if the operating days will improve at all the onshore and offshore rigs, so I think the situation could improve. And as well, it's -- the discussion regarding the, as I said, regarding the JV rigs as well, that we will have with our customer, we might have different day rates during next year, and then this will improve. So there is a potential for improving, all depending on the market condition and the market environment relating to both oil prices and relating to the COVID situation that we will see in 2022. That's in terms of the net results for the Q3 2021 for the drilling. In terms of insurance, so at the moment, the insurance segment is basically organized to deal mainly with corporate accounts not directly with the retailer business. So at the moment, the business is playing to study this opportunity where all of the expatriate that will need to have access to health insurance. We are in medical insurance, correct but again, in a totally different segment. So this segment will require additional investment. And at the same time, to study the feasibility of this -- of moving towards this retailing segment. Basically, if we find out that this will bring additional money to the shareholders and additional returns to the shareholders, we will go ahead with this. But we are still in the study phase. And hopefully, by end of this year, we will have a better idea about the strategy and whether we would like to penetrate the specific segment or not.

Our next question comes from Lee Beswick from QNB.

My question has been answered. Thank you.

And our final question today comes from Nitin Garg from SICO.

This is Nitin from SICO Asset Management. As per the last call, I mean, the last rig was deployed on -- in August '20 -- in May 2021. Have you deployed rig after that? It was in June. I mean, you have deployed 3 rigs in this 2020 and...

Yes, let me give you the date of when we started every rig. So we started -- the first rig was on 9th of May 2021, which is Al-Wajba. Second rig was on 31st of May, that's West Telesto, and the third rig is West Tucana on 23rd of June 2021. So those are the 3 remaining rigs out of the 5 that has been deployed in 2021. So no additional rigs. So we have 2 rigs started in 2020 and the remaining 3 rigs in Q2 2021.

So is there any rig left to be deployed for that?

No, no. In total that they are 5 rigs, 2 has been deployed in 2020 and 3 in 2021.

Okay. Okay. And I mean, that's a basic question. I mean, the rigs are used to -- for drilling when there is increase in capacity, like the gas expansion project. So that's understood, I mean, the Gulfdrill JV. What about the existing rigs? I mean, Qatar oil and gas production has been stable for many years. So what those rigs are doing? I mean I assume there could be some workover stuff, which the rigs are used. But if the production has been stable for many years, so where are those rigs involved, both onshore and offshore?

Well, those -- look, those rigs are on continuous contracts and with our customers. So once we do the contract, so basically, we agree the scope of work that will be made. So those are the scope of work, so we cannot basically declare in the market. So -- but it's based on the requirement of the customer. So some -- depending on the requirement of the customer, what the rig will do. So I don't know how -- what exactly -- what information you are looking at, Nitin.

Yes. Actually, the thing is, I mean, if we -- the rig job is to drill. I mean, when there is increasing production, you have to drill well, so the rig is involved. So when the drilling is over, the well is ready for production, the rig job is over. So my question is, I mean, your legacy business, which is -- I mean, without the new JV, the Qatar oil and gas production has been stable for many years. So I mean, when the production is stable, I mean, the rig job is less. So where are those rigs involved? What actually they are doing? That's my basic question, actually. I mean, I understand that new JV Gulfdrill, where you have to drill a lot of wells. The production capacity will increase from 77 million tons to 125 million tons. It's a long work. So for that the drilling is required. But the existing production has been flat for many years. So I mean I'm just trying to understand the scope of work, the rigs are doing there.

Yes. I think they're following up basically the development that the customers are making, and they will be deployed whenever the customer will have some programs for drilling. So we haven't seen during the last few years, any issue except that what we have seen during the COVID period where we had to suspend around 4 -- basically 4 rigs. Otherwise, so I think it's stable, and we are not seeing any issues in relation to the deployment of those rigs.

Okay. So currently, GDI 4 and 5 is out of operation, right? 4, 5 and 8 is out, right? 7 was deployed in August, if I remember, GDI7. 4, 5 and 8 is still out.

Well, currently, 5 and 7 are deployed. 4 is still out and 8 is still out. Those are the 2 rigs, which are not yet deployed. But as mentioned during our call today, so we are in discussion with the customers to deploy those 2 rigs, so maybe one of them will start in Q4 2021, and the remaining one will continue our discussion. So only 2 rigs are not operating at the moment.

And all offshore rigs are deployed, right?

All offshore rigs are deployed.

Gentlemen, we have no further questions at this time. I'll turn the call back over to you for any closing remarks. Thank you.

Thank you, Claire. This is Bobby again from QNBFS. If we have no further questions, we can end the call for today. I want to thank management for taking the time to answer our questions, and we will pick this up next quarter. Thank you so much.

Thank you, everyone.

Thank you all. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.