Mhwirth AS (AKAST) Earnings Call Transcript & Summary

Good afternoon, and welcome to this Akastor webcast presentation regarding the combination of MHWirth and Baker Hughes Subsea Drilling Systems, or SDS, for short. My name is Øyvind Paaske. I'm the CFO of Akastor, and I'm here together with Karl Erik Kjelstad, Akastor's CEO. We are also very happy to have with us Mr. Pete Miller, the current Chairman of the Board of MHWirth and Chairman to be of the new combined company with us on the line to present. Eirik Bergsvik CEO of MHWirth, is also with us on the call and available to answer potential questions later on. First, Karl Erik will give you an introduction and present the transaction before Pete will provide further details on the new combined company. We will then open for questions from the audience through the webcast solution. You can send in questions as we present. Karl, please, the word is yours.

Good afternoon to everyone, and thanks for listening in to this investor call to present a transaction that we believe is a major step for investment in MHWirth. First, let me put the combination of MHWirth and Baker Hughes Subsea Drilling Systems into context for Akastor. Akastor was established 7 years ago as a listed investment company with a focus on the oil service space. Initially, we had 13 companies that all came from market solutions. Our strategy is to maximize the value of our existing portfolio. This means that we will likely not do any new platform investments, but we might do add-on transactions to increase scale and position our portfolio companies for successful exits. Since Akastor was established, we have conducted 15 transactions, which several have been divestments that have generated a total transaction value of $630 million to Akastor. Our portfolio today consists of investment in 8 companies, where our investment in MHWirth is the largest one. By the end of the fourth quarter last year, MHWirth constituted about 60% of our total net capital employed. Since Akastor was established in 2014, we have taken MHWirth through a strategic transformation. First, following the collapse of the oil price in 2014 that resulted in a massive transformation for the oil service sector at large, we focused strongly on preparing MHWirth for this new reality. Through this period, MHWirth divested noncore business, reduced its cost base by more than 50% and transformed its business from being very dependent on the new building market to a service business that is more recurring in nature and today forms a majority of the company's revenue base. Further, in 2014, we launched an investment and development program for digital solutions that have been remarkably successful and today forms a key part of MHWirth product offering. Then in 2019, after a long period of restructuring of the business, we launched a new buy-and-build strategy for MHWirth, aiming to enable an IPO at the right point in time. To deliver on this buy-and-build strategy, we were pleased that we succeeded in recruiting a new MHWirth management team with Pete Miller as the Chairman; and Eirik Bergsvik as CEO. Since then, MHWirth has grown its onshore presence. In addition, increased its non-oil-related business by, for example, MHWirth product offering to the mining industry. That, in fact, in 2020, was 70% of MHWirth's single equipment sale. 2020, and so far, in 2021, has, of course, been very much affected by the global pandemic that has driven drilling activity to record lows. Against this backdrop, MHWirth has managed to deliver positive cash flow by reducing its cost structure and meeting their customer needs, all while maintaining a safe working environment. We are pleased with the robustness of the MHWirth business has shown during these challenging times, driven by the [indiscernible] service business that has performed well despite the declining activity level. This combined with the upside potential that MHWirth has, when the new building market and product market at some point will improve, forms a solid value creation story for investment in MHWirth. So then let's continue with today's announced transaction, the combination of MHWirth with Baker Hughes Subsea Drilling Systems. As a drilling equipment provider, the missing link in MHWirth product portfolio has been the subsea pressure control system, so-called BOPs, blowout preventers. As you can see from this illustration, MHWirth delivers mainly all the drilling equipment on the top of the rig, so-called topside equipment, while Baker Hughes Subsea Drilling Systems delivers the subsea BOP. Both MHWirth and Baker Hughes delivers the riser system that connects the BOP to the topside. The entering barrier for subsea BOPs is massive due to the high safety and regulatory requirements needed. There are 3 suppliers worldwide capable of delivering subsea BOPs and one of them is Baker Hughes. We have, in decades, tried to fill this missing link in MHWirth's product portfolio. And in fact, in 2007, at that time, GE oil and gas acquired what today is Baker Hughes Subsea Drilling System, we contended in the process, but we did not succeed. However, we have always had an exceptional close cooperation with the Baker Hughes Subsea Drilling team, and there have been several projects where MHWirth has delivered the topside, and Baker Hughes has delivered a subsea drilling package, for example, on the recent White Rose project. We are therefore today very pleased with that we finally can announce this transaction. This transaction is a major step for MHWirth, and a new company will be a leading global drilling equipment provider with integrated delivery capabilities, financial strength and potential to address a full range of customers' needs. We also strongly believe that the combined entity will have a solid foundation for future growth, including increased capabilities to participate in the oil and gas industries transition towards more energy-efficient solutions as well as deploying and developing new technologies and service solutions that enhance drilling efficiency. As you can see from this slide, based on our historical pro forma financial numbers, the new company have had a combined revenue of between $700 million and $850 million with a strong double-digit EBITDA margin in the last 3 years despite a challenging market. Before I give the word to Pete, I will give you an introduction to the key features of the combined company, let me take you through a summary of the transaction. The combination will take place by establishment of a new jointly 50/50 owned company. We at Akastor, we will contribute our shares in MHWirth to the new company against 50% of the shares and receive a consideration of $120 million based on the new company, which $100 million is paid in cash at closing of the transaction. The cash proceeds to Akastor will be used to pay down existing debt. Further, Baker Hughes will contribute its Subsea Drilling Systems division against 50% of the shares in the new company and a consideration of $200 million paid by the new company and which of $120 million is payable at closing of the transaction. The payments to Akastor and Baker Hughes at closing finance by committed bank facility provided by DNB, [ SAB ] and Nordea. In addition, the new company at closing will have $80 million bank finance working capital facility that also is committed. Governance and exit provisions are regulated through shareholder agreement customary for 50-50 owned joint ventures. The new company will have dual operations headquarters in Kristiansand, Norway and Houston in Texas, U.S. As mentioned by Øyvind, Pete Miller will be Chairman of the Board. And in addition, we will have 2 board members of the new company elected by Baker Hughes and 2 members elected by Akastor. This transaction also have implications for the financing of our Akastor's existing corporate credit facility that has been based on the upstream cash flow from MHWirth to Akastor. The transaction does trigger a refinancing of Akastor. And in order to address this, a committed credit line facility of NOK 1,250 million are in place and will be used for refinancing Akastor?s existing debt and provide financial flexibility for Akastor going forward. Final closing of the transaction is subject to competition filings and approvals, and that is expected to take place within the next 4 to 6 months from today. This transaction fully delivers on our strategy to maximize the value of our existing portfolio by transaction that increased scale and position our portfolio companies for a successful exit. The transaction is value attractive and is fundamentally increasing what I will call the IPO ability of our investment in MHWirth. I would like to use this opportunity to say thank you to everybody that has been involved to make this transaction happen. The strategic rationale for the transaction has been strongly shared by all stakeholders, but the process has been somewhat challenging time-wise, particularly due to the practical challenges of the COVID-19 global pandemic. Thanks to the MHWirth organization that through the positive development of MHWirth last year has strengthened MHWirth as an attractive joint venture partner that is well positioned for the future. And last but not least, a special thanks to our banks that have been instrumental to make this transaction happen. So then, Pete, the word is yours.

Thank you very much, Karl Erik. And if you'd go ahead and move the slides forward a couple there. I'm very excited about this combination. These are essentially 2 world-class companies coming together. And I think the timing is right for it. I think the keys to this as you take a look as I go through this presentation, I'll repeat some of this a few different times just because it is so important. But I think the global footprint that this gives both companies the installed base is extremely important, the cutting-edge technology that both companies bring to the table and then finally and probably most important, are the tremendous employees that these companies have. I think when you combine this, you can see that the strategic rationale is really pretty much of a no-brainer. I think the things that we can bring together in this company really make us a very powerful combination within this industry. If you could move one slide ahead, please. If you take a look at this, the combined businesses really transcend across every part of the oilfield. Not only are we talking about floaters but we're talking about jack-ups, the onshore capabilities that we have. And I think something that will really be important later is going to be the non-oil and the renewable capabilities that we're able to bring to bear. I think as we look at the non-oil and renewables right now, we're already doing things in the mining industry, we're mining for lithium and copper and things like that are so very important in the energy transition. And we're doing some engineering work on things like floating windmills as an example. But more importantly, that installed base is there for us, and we bring together 2 tremendous service operations that are going to be able to take advantage of that. As you look at what's gone on over in the oilfield over the last couple of years, it's really been, as Karl Erik said, quite the depression. And we're going to see that move out. As you see, the strengthening of Brent Crude, you see the strengthening of West Texas, those things are going to provide opportunity, and those rigs are going to need the TLC that we're going to be able to bring to bear with this combination. So I think when you look at that, there won't be a part of the oilfield that we can't touch. And additionally, there's going to be many opportunities for new business when you look at especially the manufacturing capabilities of each organization. If you could move ahead with the slide, please. I think this one is very important for us right here. Because as we take a look at what we're doing in the future, the ESG is very, very important across the board. I think in Norway, ESG has played an important role all along. And as you take a look at what's going on in the United States today, ESG has been coming to the front of almost everything that every corporation is doing. And when you look at the things that we've already done, when we have hybrid power, we have regen power, we have a very much of a reduced footprint and the automation that we're able to bring to bear on these rigs is exceedingly important. We're able to take a rig like this and make it so much more carbon sensitive and really reduce that carbon footprint. And I think that's going to be important as we look to the future. There's going to be a lot of retrofitting that needs to be done. There are going to be things that have to be done on these rigs in order to hit the carbon requirements that are going to be out there, whether it's the EU, whether it's Southeast Asia, whether it's United States. And so bringing these 2 companies together gives us the world-class capability to be able to handle any sort of ESG requirements that the industry is going to be putting on us, that governments put on us. So that we could drill safer, we can drill at a much more economic and efficient fashion, and we can drill with much reduced emissions. Next slide, please. I think this is also exceedingly important. The digitization that we're able to bring to bear. I think when we're talking about open ecosystems where we can take all types of manufactured equipment and be able to combine those under one system, I think, a very important element and everybody that's involved in the business today understands this and that's cybersecurity. As. We take a look at what can we do to make our systems not only digital but be able to then make sure they're secure, so you just can't get any hacking done in that. And I think that's going to be extremely important. AI, we want to make sure that we have artificial intelligence where we have machine learning, so we can take that and make it very robust. And then obviously, safety. We want to make sure we're combining all those 6. So when you look at the capabilities at MHWirth and the Baker SDS companies, we become a much more professional, big, outstanding company when it comes to the digitization. And every rig out there today is going to have to be able to handle this. And we're going to be able to go out and say, okay, we can take care of a lot of your problems with this, and we're doing that now. As a matter of fact, we're actually hiring people even in these depressed times to be able to handle this as we push to the future. And I think all contractors, all rigs, all operators are going to need this. And by this combination, we make this much stronger and puts us in a much better position to be the answer that you need when it comes to this digitization. Can I have the next slide, please? And then obviously, you take a look at the equipment profile that we have now. And when you bring the 2 companies together, they both -- they fill holes that both companies had. When you look at the things that the MH side brings, when you look at the offshore, when you look at the top drives, the iron roughnecks, derricks, mud pumps, control systems and then you look at the SDS side, which are the BOPs, the risers and the control systems, and then when you look at the services that we both have, and I think this one, I'll hit hard many times. It's the aftermarket. We are able to really support all those rigs that are out there today that are running. And we'll get into that a little bit in a moment. But the aftermarket is very important, and both organizations have tremendous service capabilities. And those service capabilities have proven their worth over the last few years as both companies have remained very, very viable, very EBITDA profit. Simply, a lot of that has been because of that aftermarket. And then finally, the rig intelligence and digital solutions that both companies bring to bear in this combination. So you can see this forms quite a compelling portfolio of products that are really going to be important as we take a look at what these companies, our customers are going to need to the future. Next slide, please. And you look, I mentioned the service element and you look at the installed base that we have. Here, we're showing it numerically. You look at the rigs, the fixed platforms. And these are floaters. We've got jack-ups out there. We've got land rigs that have a lot of the product that we have on them that we're going to be able to take care of. And I think the joint service capabilities that these 2 companies bring together really makes us, again, a very compelling combination. We have outstanding service men. We have people that even during these COVID ravage times, we've been able to send our people where they needed to be. And we've been able to look to on this service revenue with different business models. And that's going to be very important. How can we create a business model that really is -- it answers the needs of our customers rather than just say, call out a servicemen, what can we do to do things with predictive maintenance, what can we do with artificial intelligence, how can we upgrade the capabilities that we have on service to be able to take care of our customers much better. And I think that's going to be a key. We bring the ideas together from each one of these companies, and we really conform a new business model that's going to be able to take care of our customers as we push forward. Next slide, please. You can see on this also is a tremendous worldwide footprint. There's arguments about which one of these markets might be strong or might be weak. But at some point in time, every one of these markets is probably hitting on all 8 cylinders. And so by having this tremendous global footprint, we're able to take advantage of what we can do in a particular area, we can shift people around. If the Middle East is going strong and the North Sea is going strong and maybe the Gulf of Mexico not so much, we're able with this global footprint to really make it higher highs and higher lows. The business is always going to be cyclical. We understand that. But if we can hit the higher highs and the higher lows and be able to mitigate those cycles, then it puts us in a lot better position as a company and puts us in a much stronger financial way to be able to take care of our customers, but also to be able to return investment to our shareholders. So this is exceedingly important to us to have this footprint as we can then, as I say, mitigate the cycles and be able to get those higher highs and higher lows. Next slide, please. You can see we will get synergies out of this. If you go -- if you look at that previous slide again, you look at where there's a lot of overlap. We're going to be able to take care of that overlap. We're going to be able to combine operations. We're going to be able to save money in that regard. When I look at synergies, I look at both the hard synergies, and I think we have a lot of those here. And you can see that we're talking right now annualized run rate cost synergies of $10 million to $11 million over the next 3 years. That's hard, but there's going to be a lot of soft synergies, too. And those soft synergies could be just as compelling. They're hard to monetize today. I can't sit there and say, well, we're going to create $30 million or $40 million of soft synergies, but I will be able to say in about 2 years, I'm going to have you look back and say, okay, these are the soft synergies that we're able to bring together. But I think on the hard basis, you can see that bringing these 2 companies together really does create a lot of value. And I think it's going to be value that we're going to be able to return to our investors and be able to say, okay, look at the progress we've made on doing this, and we've really created quite a strong company. Next slide, please. So I want to kind of summarize right here. This is an extremely compelling combination. We're going to be able to do different things with the installed base, I think we're going to be able to get to a critical size to be able to IPO this. We're going to be establishing partnerships throughout the industry. We're going to get those synergies, and we're going to be able to really push our sales and get those soft synergies because of the integrated solutions. As I look at the industry today, it's going through a tremendous transition. When I look at a lot of the customer base, will be the large offshore drillers, and you're seeing the combinations that have already occurred there. Those companies are making -- they're taking a lot of rigs out of operation. But the rigs that are staying in operation are the top operating rigs, are the ones that have the best equipment, they're the ones that have the newest equipment, and they're the ones that have the highest technology equipment. We're going to be able to provide even more of that to them. I think as the future goes, I've always said this when I was drilling, the best rig always wins, the most technical rig always wins. And that's going to remain the same. But I think you're going to see some different business models as well. And with those business models, we're going to be able to take this combined company, and we're going to -- we can help redefine how we can supply our customers, how we could do things with equipment, how we could take care of them really with a blank sheet of paper and create different methodologies. Already in the SDS system, they have the power by the hour for BOPs. We're doing a lot today in MHWirth with the -- what can we do to be able to have service people on board all the time to be able to take care of the needs of our customers. So you'll see a lot more of that. So in summary here, I can tell you, we're excited about this. We have some great employees. We have a company that we're putting together here that I think is going to create value, a lot of value for our shareholders and our investors. And I think this is really going to be a compelling combination that's going to help this industry, that's going to help the energy transition, and that's going to provide value for all of our customers and all of our stakeholders. So having said that, Karl Erik, I'll turn it back over to you.

Thank you, Pete. Then we are ready for Q&As. And Øyvind Paaske will facilitate that session. So Øyvind, please?

Yes. We are then open for receiving questions through the Webcast Solutions. [Operator Instructions] We can start with a question from [ Mr. Mark Bianci ] that has come in. He asks how much of your installed base is working, warm or cold stacked? I can take that one. As Pete pointed to, the total fleet of this combined entity is 146 units, of which 92 is floaters. That combined fleet constitutes around 40% of the total floater fleet. Of that, 53% of the units are currently active. That means 77 units. 18% of the units are cold stacked, hence 27 units. Of the active floaters, they have an average an 18 months of remaining contract time, which is relatively strong in today's market where the contract lengths are much shorter than back in the days. The total contract coverage for the floater fleet is around 73 years. Then he asks what is the order and revenue outlook for '21 versus 2020? I think it's fair to say that '20 was a challenging year with regards to COVID and decreasing oilfield activity. Of course, affecting the order backlog as per end of 2020, we does foresee that 2020 will be more challenging than -- 2021, sorry, will be more challenging in terms of project and product revenues. However, we remain cautiously optimistic that from the second half of '21, the markets will again improve, and service contribution will increase from the current levels through 2021. Then there's a question also from [ Mr. Bianci ] around the engineering capacity within floating wind and how we see the company participating in this market. Maybe Karl Erik, maybe you want to answer that.

Yes. Thank you, Øyvind. So what we did in 2020 was that we restructured our engineering business into a new company called Frontica Engineering. That company, as Pete mentioned, are doing work within the FEED studies and someone for the renewable sector. And what they have is the knowledge from designing logistics and a good efficient layout of a deck. In addition, they also have the experience of MHWirth how to handle complex installations and operations at heavy seas. So that is in the way the core skills set we are bringing to the table when it comes to renewables.

Thank you, Karl Erik. Then we have another question. Maybe, Pete, you can take a shot at this. Do you expect to be active in M&A? And if so, which areas will we focus on? And how will M&A be financed? And how important is M&A for an IPO? So Pete, feel free to comment on that.

Sure. Thank you, Øyvind. M&A, I've always said, is opportunistic. You don't want to ever say, well, we're going to do 2 or 3 deals in a year because then what you're doing is you're kind of forcing your hand and you take a look at things or you might do something that makes no sense. With me, it's more opportunistic. When is the deal out there to be done? What will there be add-on deals? Is there another transformative deal? I can't say. But what I can say is there will be opportunities to do deals. And my experience has been, whenever there's an opportunity, if it's compelling opportunity, we'll get the financing, and we'll be able to get it done. But again, it's very opportunistic. I probably would like to do some more things on the digital side, probably see if there are some things on the carbon reduction side that makes some sense. But again, I would never put a target out there because that makes no sense. But we will be very active in taking a look at opportunities as they arise, and we'll be able to finance those appropriately.

Thank you very much, Pete. Then we have another question from Mr. [ Waman ]. How do you see the market for the combined company, product and services developing going forward, both in '21 and a longer-term perspective? I can take a shot at that. As I said, or first, we do not guide specifically on the outlook for the business. However, as mentioned, we do see that '21 starts with a relatively low order backlog in terms of projects and products, single equipment, especially for MHWirth side, but also for SDS, which will affect performance in '21. However, service is very strong at the moment, and we expect that to improve going forward. In the longer term, we, of course, do expect both the service segment to further improve as more rigs are active in the market and also then that new building market at some point in time might return. And as Pete already mentioned, we also do see great potential for the retrofit market. And technology development have kind of fueling a potential new building market as the current rigs are relatively old in the current market space. So I don't know if you want to comment any further on that.

I think that's fine.

And then we have one question from [ Mr. George O'Leary ]. Could you describe the JV's role in the energy transition and the long-term goals within that space? I don't know if you would like to comment on that, Karl Erik.

Yes. Thank you, Øyvind. I think we're working together with Baker Hughes setting the ESG strategy for the new company with clear targets for the company itself, and we revert to that. When it comes to our clients, we are providing already services and products that is reducing the carbon footprint. For instance, the newest rig where MHWirth provides equipment has a carbon footprint about 25% to 30% less than a rig that was delivered before the downturn. So we have a dual agenda. One is what can we, as a company do to reduce our carbon footprint? And secondly, or not at least important, what can we do to help of our customers to have a more carbon-efficient business?

Good. And then a second question from [ Mr. O'Leary ] that I'll pass on to you, Pete. If there's any geographic cross-selling opportunities that you believe will emerge from this combination? And if so, which geographies do you intend to push into? Maybe you can comment on that, Pete.

Sure. I think there will be a lot of cross-selling capability. And as you go back and you take a look at the slide that I had on the global footprint, effectively, we're basically covering most parts of the world already, one of the other companies, and we'll be able to expand if one company is in one particular area, for instance, the Middle East, with a little bit stronger capability, we'll be able to combine the companies in that facility and be able to take advantage of the selling opportunities there. So I wouldn't limit it to any one place. But as you look at the map, you can kind of see where the SDS from Baker has a strong hold, where the MH has a stronghold, and we'll be able to play off to the strengths of each one of those companies in those particular areas. So that part of it is really exciting. It does give us a much greater worldwide footprint to be able to take care of both the installed base and the new business opportunities.

Thank you, Pete. Then we've time for one last question, and I'll take that myself. It's regarding the cost synergies, which indiscernible] points to appear low as a percentage of revenue and asks if we can elaborate on that. I think just as Pete showed the high-level synergy from the initial phase of evaluating the cost synergies is estimated to around $10 million per year. That will be further investigated through the integration process, which will be kicked off between signing and closing, and we expect to have more details on that as we go forward. So we will revert to that down the road. So with that, I think we are through our presentation, and we would like to thank you all for your attention. Thank you very much to Pete and Erik, which were with us, and we'll wish you a very good day. And thank you for your attendance. Thank you.

Thanks, everybody.

Thank you.