Odfjell Technology Ltd. (OTL) Earnings Call Transcript & Summary

Welcome to Odfjell Technology' Fourth Quarter Presentation. My name is Gert Haugland, I am the SVP for Finance and Investor Relations in Odfjell Technology. I am joined by CEO, Simen Lieungh; and our CFO, Jone Torstensen. You will find the presentation on our website, and I ask you to take notice of the disclaimer on Page 2. Simen will start off by going through the key highlights of the quarter, the market outlook and give a short strategy update before Jone will cover the financial figures. Thereafter, we will conclude with a Q&A session. You can submit your questions through webcast portal or by using the dial-in numbers. I now hand it over to Simen for the first part.

We got to go to Slide #4. Welcome, everybody, and thank you for calling in to our Q4 conference. If you start with the overall key financials on this slide, we have had a revenue in the quarter of NOK 1.1 billion with an EBITDA of NOK 197 million and with a quite stable order backlog about NOK 11 billion. This gives us a cash position of NOK 560 million. The gearing has gone down from Q2 in '22, down from 1.9x to 1.2x. The gearing KPI and which I think is quite more interesting is also that we have, I would say, somewhat conservative, we estimated the EBITDA in the order backlog compared to the debt to be approximately 2.2x. So that shows a quite strong stable financial background for our operations. If we go to the key highlights for the quarter, we can easily say that we can conclude that we have another strong quarter behind us. We certainly see a high level of activity in all business areas. The focus on operations and stable, safe operations has been successful. Again, I mentioned the order backlog, which is a very, very important element, it's stable. We actually see a much bigger and higher tender activity moving forward, and we are active in many of them. So we hope for even a higher order backlog in the future. We have also indicated earlier that we will do the dividend in '23. We are allowed to do that now based on the covenant we had in the bond we did last year. So we expect a dividend distribution, which Jone Torstensen, CFO, will comment upon somewhat later in the presentation. HSE is an important element for us. It is the license to operate. We have the 3 quarters, first quarter of the year were only just minor incidents, not many serious at all, but we certainly had a very, very serious incident in the fourth quarter, where we seriously injured one of our employees on the jackup on Ekofisk. That kind of incidents are tragic and of course, very, very important to do the investigation properly. We were, of course, investigated by the police. We have the PSA on board, and we have now concluded all the mitigation elements that has been implemented. And we have also arranged for an experienced transfer with all our competitors with the same type of equipment to avoid this to happen in the future. Our market is always an important element to talk about. And I think the whole oil and gas business area with services, billing operations, projects and so forth has certainly seen an upswing. And we see that driven by this energy demand for more stable energy supply, we certainly see that it has effect on the market. We see that a quite important KPI for Odfjell Technology is the active number of rigs operating globally. That KPI is certainly stronger and stronger. And we see more and more rigs in operation, which, of course, directly addresses our services. When services has done well. And I think we can, as I said, certainly see that we are able to combine operations between the business areas, we see a positive outlook. And one of the things we will work with in technology here is to utilize cross-business opportunities to do more integrated services to provide for clients solutions that is normally not really available. And so we see a better market, we see an upswing in the Middle East, especially Saudi is very, very active these days with a huge number of jackups being activated. We also see Europe coming stronger and also Southeast Asia, for example, with Malaysia and other countries in that area. Within operations, we see a stable market. We are, today, very active in many of the tenders that is in the market. We are combining drilling activities together with plug abandonment and slot recovery activities. And we also look at possible more operations on jack-ups. Within engineering, that's what we call our capability to activate more activities. It's a very important capability we have in the company. I think we have a high utilization, and we see that there are a lot of other activities coming. And we certainly see that with all the active rigs in place with a special period as upgrades and other things, we are in the market for increasing the number of employees in that part of the company. Regarding strategy, I will just give you a very short update. We indicated some months ago that we were in the process of defining the future for Odfjell Technology, which is really not just kind of a natural in a way. We have to do a thorough process to think through what kind of company this should be. So a short update here is that we see the market that we are through. Short term, we see a potential to grow the company to grow the business with both with organic growth and with M&A activities. And we see that the market is volatile these days. I mean, positively volatile, there are a lot of type of companies that could fit very well into our company, and we are today in the process of evaluating what kind of process we should do and how we should do it. And we will certainly come back to that when that's more specific. We will develop new product lines, as I indicated. We do it across business areas within the company as we are today. We are certainly focusing a lot on plug abandonment and slot recovery activities and also carefully now moving over to a new energy business. Plug abandonment has been on the plate for many, many years, has not really materialized. But we see now, especially in the U.K., that a lot more plug abandonment tenders are coming up, and we also expect that to switch also to the Norwegian market down the road. Of course, we have said, we are very focused on the cash flow to produce strong cash flow, which we have proven so far. Of course, we also will be a company that will potentially now in the future have a stable dividend capacity for shareholders. But I emphasize that we are long term also looking at different type of new business areas. And for example, we will certainly support the Oceanwind, which we see a great potential. We also will look at hydrogen production technologies. We are looking into geothermal type of businesses, and we also look at carbon caps type of technologies to be used on type of installations we operate and serve to take part of the greenhouse gas emissions. But I emphasize again that we don't foresee in the short term any yield from the new energy areas. So the main business regarding cash flow and operations will be based on oil and gas oil services in the more traditional way. That's where we do today, and that's where the short-term cash flow come. Long term, of course, we will support the energy shift. And down the road, there will be more return from that kind of business. So that is a short version of a company. So we have, in a way, concluded the direction type of targets for growth and type of targets for how we should develop the company further into other business areas. Going to business area reporting. You see within well services, we have a NOK 3.3 billion order backlog. We have a significant storage of equipment worth NOK 4.1 billion. We still have some capacity to grow the company based on the capacity we have within that equipment base. We have been successful to operate in more countries, like we mentioned here, Turkey and Hungary on casing running services. We use special tools there. So these margins on that kind of business is quite good. We have a focus to increase our presence in the markets we are. We operate in 22 countries as we speak. We also see that the investment level will be maybe somewhat more stable down the road, at least this year. And last year, we had a higher expected investment level because of special investment in moving equipment with wide pipe equipment and type of continuous circulation systems, where investments are actually quite good with a high yield. Operations means also drilling operations. This has a NOK 7.2 billion backlog. We operate on 16 installations as we speak, stable backlog, good clients. We are today look at more tenders. We are even invited to certain clients to see if we can provide more integrated smarter services. So yes, we expect also that part of the business to come even though that part of the business normally had lower margins. And based on better contracts these days with incentive schemes, we also hope for a better margin in that area. Within Project and Engineering, we have a backlog of more than NOK 500 million, a very high utilization, 92% of the people are in direct work where we are paid per hour and per project. As I said, high activity higher than we actually appreciate these days because we struggle to find enough capacity to do what we hope to do. So of course, we are in the market to work with other companies to establish alliances and also to employ significantly more people. And we do this and we add on capacity and competencies where we feel that we need to fill up, to be able to serve a very kind of both the traditional market we are working with also within the new energy areas. So that, in a way, concludes the highlights for the operations in the company and how we think about the future. So I hand the speech the next piece over to Jone Torstensen, CFO, to take the financial details. Thank you.

Thank you, Simen. Starting with the financial performance on Page 14. Revenue in Q4 was NOK 1.1 billion, an increase of 14% from Q3 to Q4 and year-on-year increase of 37%. EBITDA in Q4 was NOK 197 million, an increase of 5% from Q3 to Q4 and year-on-year increase of 54%. In Q4, we have high activity engineering and consistent performance and activity in drilling operation and well services. For the full year, revenue growth of 42% from '21 to '22 and EBITDA growth of 74% from '21 to '22. Cash flow from operation generated NOK 296 million in Q4 and NOK 680 million for the full year. Cash position was NOK 560 million in Q4 compared to NOK 423 million in Q3. And as Simen said, leverage ratio is down to 1.2. If we look at the split of the revenue, 49% is operations, 35% is well services and 15% is engineering. And as you can see on the right, Norway is still the most important region with 65% of the revenue. Going to Page 15, business area reports, starting with well services. Revenue of NOK 374 million in Q4 '22 compared to NOK 267 million in Q4 '21, an increase of NOK 107 million. EBITDA of NOK 132 million in Q4 compared to NOK 76 million in Q4 '21, an increase of NOK 56 million. Stable revenue and EBITDA in Q4 compared to Q3. EBITDA margin percentage increased from 26% in 2021 to 36% in 2022. Going to operations. Revenue of NOK 569 million in Q4 '22 compared to NOK 449 million in Q4 '21, an increase of NOK 130 million. EBITDA of NOK 42 million in Q4 compared to NOK 47 million in Q4 '21, a reduction of NOK 5 million. Increased revenue in Q4 '22 compared to Q3 '22 due to start-up of Linus operation and a minor reduction of EBITDA due to reduced bonus incentive scheme achievements in Q4. Look for the year, EBITDA margin increased from 7% in '21 to 8% in 2022. Engineering, revenue of NOK 179 million in Q4 '22 million compared to NOK 101 million in Q4 '21, an increase of NOK 78 million, EBITDA of NOK 34 million in Q4 compared to 0 in Q4 '21, an increase of NOK 34 million. Increased revenue and EBITDA in Q4 compared to Q3 '22 due to increased activity and improved financial performance. And for the year, EBITDA margin increased from 6% in '21 to 12% in '22. Let's go to 16. I have a look on the historical performance and development in revenue and EBITDA. And you can see that we start with Q1 '19. OTL is, as we said, a asset-light business with a low-risk exposure in operation and in projects. We have delivered good financial performance over time, even during a period with low activity and low oil price and during COVID-19. And the main drivers for that is that we work very hard to secure a solid order backlog. We're delivering high class operation and project execution. We have a continuous alignment of cost space towards activity level. And we have always continuous improvement processes in operation, organization and all commercial aspects. We are very hands on in the business control. And finally, it's important to secure a satisfactory management capacity and capability. Summary, concluded the year with growth in revenue and margin, good cash situation. We expected dividend payment in 2023 to be NOK 100 million. As Simen said, positive market outlook, very strong contract portfolio and strategic process concluded and direction set. Then we are ready for Q&A.

[Operator Instructions] Our first question comes from Lukas Daul from Arctic Securities.

So Simen, I had a question on how you see sort of '23 shaping up in terms of growth potential. Obviously, '22 was very high on the delta compared to '21. But how do you see '23 shaping up in terms of growth?

Lukas, I think as we have said, '23 is in a way, it's more activity. But I think regarding with the activity level, we see really upswing in '24. '23 is also good, not I would say, better than we have seen for the last year, so that shouldn't be too difficult to say because those years have not been good at all. But certainly, I think you will see a more significant step-up in '24 onwards. '23 is a more as we see a year where there's a lot of activity, a lot of tenders, but those tenders will be awarded during '23 but will be activated in '24 onwards. I don't guide anything. But what we see here is that we expect a better market. We do have capacity to take our share and hopefully more. And again, '23 to me is a starting point for improved cycle in general.

Okay. That's interesting. And in terms of the sort of inflation pressures in the value chain, how are you sort of experiencing that yourself access to qualified people, the equipment inflation, et cetera? And how is sort of the dialog with the end clients in terms of passing on those costs?

I think we do have in most of our contracts, we do have escalation clauses taking care of the index really. What we don't have full control of is, of course, the cost increase in the market in general, like type of equipment, access to people and so forth. I think there will be seriously going to be a fight in quotes in the market for the best heads, how we have positioned ourselves in that context is that we certainly feel that the response in the market for Odfjell Technology as a company is quite positive because we do have focus on the oil service side, but we also move more also to the new energy side. For example, our engagement within Oceanwind is widened for that company to launch. And a lot of our engineers work both on type of oil and gas projects and also support the development of the solutions within Oceanwind. We also see that, that really attracts people because you can do both. So, so far, I would not underestimate that it's going to be complex to get the capacity we want. We will do it by organic growth, and we will do it by alliances and maybe some M&A activity. But I can say that much. We will not take on projects where we cannot deliver. I know that there will always be a stretch for that target. But the balance is really to not to pull that element too far and say we need to be stable of delivery, and that's been a mantra in the company. So we take on projects and operations where we can deliver even though it might be stressful now and then, we do that because it will take just a very few quarters, when you fail, you will lose all your credibility and by that also lose your traction in the market. So I'm somewhat concerned about the cost increases. We will defend ourselves in the context by clauses. But clearly, there will be more difficult to get access to critical equipment and critical capacity regarding people.

Okay. And then just finally, having sort of concluded your review, your strategic review. Do you have sort of a certain or a specific leverage target going forward, given sort of the cash flow conversion you are showing on a [Technical Difficulty] basis?

Yes, we do have an idea where that should be. And we will always be an asset-light company. We will focus to be able to pay regular dividend but at the same time, we do have, Jone might comment on that, too. We do have extra capacity within our debt arrangement to have to scale up and do certain type of capacity for M&A. But in general, we like to be asset-light. We like to have control of the debt. We like to have cash for dividend and investments. So I said, yes, thank you to all. But I think that the way we shape the company now will be the way you will see it in the future, hopefully, a stable good provider of cash and dividend.

We will now take our next question from Tommy Johannessen from SB 1 Markets.

Yes. Starting off with the Middle East, you thought that you see high growth there. And obviously, in 2023, you will see a very high demand growth for jack-ups, particularly in that region. So I'm just wondering what's the growth potential for you there? Can you grow further there organically or potentially also inorganically?

We can do both. Very much of the companies with technologies we have, over the years, invested, for example, of a wellbore cleanup capacity and technology was bought in the Middle East some time ago. You mentioned jack-ups. I think Saudi, as you know, is activating a lot more jack-ups within well services, we serve. We have already got a frame agreement with Saudi Aramco for 25, 30 jack-ups, that could be more. And we see that more jack-ups available, more type of activity rigs available, the more activity we will get because there are competition down there, certainly, but we have a strong presence in Dubai with both workshops and people, and we operate in the region with Central Asia and in the Middle East area. So we will certainly pick up more activity down there. And we are positioning ourselves for that type of operation ourselves. And we see actually a better access to capacity in that region today than it has compared to other regions. So I, again, will not give any number on the growth, but yes, we're going to go in that region.

Okay. And on engineering the EBITDA you reported there was particularly high compared to at least my estimates. Can you dig a bit into what's driving that in Q4 and also what you're expecting into 2023? You have Odfjell Drilling, one of your key clients having several FPS other players, too. So do you expect the engineering department to continue to deliver such high results going forward?

Yes, I think the reason we have improved the margin there is combined, as you know, we have organized now engineering under a separate business area with a new manager, new director Anne Siri Saevareid. She came from Seadrill and is very capable of building up that part of the company. So by organizing structuring, making a more systematic approach to these kind of contracts, we are also able to take more engineering contracts on a more lump-sum basis, not only man-hours, but also lump-sum basis, where you are kind of shaping up the scope of work, you price it and you get it and you deliver. But that you also can actually see a better margin instead of just having man-hours. So I think going forward, a combination of what I'm saying here, a combination of better alliances, a combination of increased man power in the company, yes, we see that as our capability to engage in more activity and also engage more in other type of renewable projects. Okay?

Okay. My last question is on the organic and M&A growth you're expecting in the short term in our traditional oil service segment. Is this mostly in the well service segment or also in engineering, I guess, drilling operation is hard to do much. But yes...

I don't foresee any, I think, any M&A activity within the drilling operations itself. I don't foresee that. That's more into bidding and operating more platforms that has normally been business transfer. If we take over a platform from a competition, you take over the crew and everything. So it's a type of business transfer. So by that, you grow, but not necessarily with M&A activity. So the most M&A activity will be within well services, to acquire products, acquire type of companies that can actually add on type of products, which can fit into our portfolio of products globally. We also see that within engineering, we are looking at companies where we could either go into close alliances or also to do M&A activity on. So there will be a combination, but most of the candidates we're looking at today is within well services. Okay?

We have a question from [ Ben Tank ], a Private Investor.

Congrats on the fourth quarter results. So just a quick question for me regarding the U.K. operation. So I've seen some operators noting that due to the new U.K. windfall tax, there might be a decrease in the exploration activities in the U.K. North Sea region. And I just wonder whether that would affect your future revenue in that particular area, given that I note that more than 20% of your revenue in 2022 that comes from the U.K. region. So breakthrough if you could just let us have your views on that...

I was actually quite noisy. I did not hear your question, to be honest. Could you just repeat your question, please?

Right. So I think it's more of a question on whether the U.K. windfall tax will lead to a decreased level of exploration activities in the U.K. North Sea region, and whether that will affect our revenue top line growth in that area?

Well, it will have no effect on us directly because those projects we are working with in the U.K. are quite stable. Even though there might be in the U.K. side, it's within the traditional drilling type of business, where you say that, yes, there are regulations that has changed. But again, with the shortage of energy and so forth, there are still quite high activity in the U.K. But in the U.K., we see a lot more activity on plug abandonment. which is also done combined with drilling. So many of the tenders today are combining drilling, slot recovery and plug abandonment activities. So we actually see a ramp-up of activity in the U.K., but with a different mix of services, as I said, including plug abandonment activities. So I think maybe 30%, 40% of the tenders we look at now is also about plug abandonment activity. So we don't see any shortfall there over the next few years really. Okay?

There are no further questions in the phone queue. I'd like to hand the call back over to Gert for any webcast questions. Over to you, Gert.

Yes, we have received a few questions. The first one is from Jorgen Andreas Lande, Danske Bank. I think it's kind of similar to maybe the first one. But he is asking to understand the 2023 growth profile. In '22, the top line grew 32%. How do you see '23 play develop on volume versus pricing and also the backlog execution. Simen, will you answer that?

Yes. We are moving into some sort of guiding here. I'm not guiding. But with the growth, we see that we expect, as I said, we expect growth. We expect to build backlog. We expect to kind of have increased numbers all over the place, but I will not kind of say too much about the profitability. The profitability level we have now is quite good. It will be wrong for me to say we expect even more profits in our margins, but we will work with the margins. We will work with providing a more stable and better operations so we can kind of be more efficient and get more out of what we're doing. That's obviously a fruit we will work to pick up. But in general, I think that we have seen the difference between the 3 business areas, and then the growth will primarily come within well services. That's a totally different type of business compared to drilling operations and to engineering. And you see that you show a chart where you see all the revenue coming from where. Historically, the margins within well services has been much higher than the other areas. And that's going to continue. If we are able to scale better and we grow the company better in that area, we will certainly see also growth on the EBITDA and revenue and backlog in that area, too. So without going into any numbers, we are focusing you will also see on the growth side on well services element. That is where we have the biggest potential. Remember, some years ago, if you go back to '12-'13, we had actually back then more than NOK 100 million EBITDA from well services. And it dropped due to the prices. And of course, we are working. We're probably not going to get back to that quickly, but we certainly see that the potential in that area is massive. If the drilling market picks up, both onshore, offshore, shallow water, deepwater, and so forth, we serve them all with the same type of equipment. So if we see the drilling market picking up, you will also see a direct impact on the well services market. That's the good answer to that.

Yes. Okay. And another question from Jorgen, within engineering, strong profitability in Q4, is this quarter representative for a new pricing level also for '23 or was Q4 also backed by higher than the rest of the '22 activity?

I think that the margin number in the Q4 was high because of certain elements in that quarter. We see a margin within engineering on the [indiscernible] side, which has normally been between 10%, 15%, maybe somewhat more. If you can combine with better with more type of combined type of projects where we do more lump sum. In general, shouldn't be too far to get those kind of margins, but it will depend on the mix of man-hours and projects you actually operate on. So I will not say anything about the number on the margins. But it's a nice level we are now, but I think it's going to fluctuate around those areas, by combining a bit smarter to how to establish and structure the engineering projects. That's the way to do it.

Yes. We have one last question from [ Grande Ericsson ] [indiscernible] Capital. He asked, can you talk about the relationship between higher revenue in operations year-on-year and yet you have lower EBITDA and sharply lower margin. I think Jone...

I can take that. If you look at the EBITDA on operation in Q4 last year was NOK 47 million, very high compared to the revenue. And the main reason for that is that was impacted by [indiscernible] estimation pension estimation, which means that we have paid in too much and get money back in Q4. So that's the reason. So it's a kind of a one-off, which is not normal for the operation.

I think that concludes it with the Q&A. Do we have any other questions?

There are no questions over the phone.

Okay. Then I would like to just thank everyone for joining the webcast. If you need further information, please contact me or go to our website. And please get in contact. Thank you.