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

Welcome to Odfjell Technology's Q4 presentation. My name is Gert Haugland. I'm the SVP for Finance and Investor Relations in Odfjell Technology. I'm joined by our CEO, Simen Lieungh; and our CFO, Jone Torstensen. You will find the presentation on our website, and please take notice of the disclaimer on Page 2. We will start with Simen presenting the key highlights and talk about the market outlook, backlog and the contract status. Jone will thereafter go through the financial figures before we conclude with a Q&A session. You can submit your questions through the webcast portal or by using the dial-in numbers. I'll now hand it over to Simen for the first part.

Thank you, Gert. Good morning, everybody. Thank you for calling in. My voice is a little rusty today, so excuse me for that, but I'll manage. I'll start with the key highlights and the key financials. We have in the quarter revenue of NOK 1.45 billion. EBITDA, NOK 191 million EBITDA, all these numbers will be more detailed presented by Jone a little later. We have a stable and good order backlog of NOK 13.3 billion. We have a strong balance sheet. We have available liquidity of NOK 1.1 billion with a very comfortable leverage ratio. And we have also this quarter decided to pay dividend of NOK 60 million, which is NOK 1.52 per share. Go to the market outlook. I think we have, for a while, said that the last part of '24 and into '25 is a little more slow in the market. But however, we see a significant step-up in the second half of '25. I will come back to why we see that and how we're going to -- how we'll reach that and stand behind that statement. We -- still the Norway is a good market, it has been for quite a while with the Norwegian oil and gas business supporting Europe and other areas for -- with the gas and with the hydrocarbons in this very unstable situation in the world. The forward in the Norwegian market is strong. It's going to be quite a lot of drilling activity, quite a lot of well construction activities and also coming more P&A, Plug and Abandonment activities. That goes also within the U.K. sector. So Norway is a good market to be in. It's the biggest offshore market in the world, and we have a very good position there. So that's a very strong and stable market. We see also U.K. as a good market, more kind of operations over there. We see growth within -- we are engaging a lot of tenders regarding Plug and Abandonment and also well services and drilling operations. What I think is maybe the areas we are focusing more at now is the Americas. We have recently established our office up in -- down in at Houston in Texas. We have -- I was there a couple of weeks ago when we have met and we are now in engagement with local companies to establish local partnership for the Gulf of Mexico. We also are very actively in tendering activities down in South America, especially within Brazil. Our major clients back there, down there is really main service provider like typical Baker and Halliburton and Schlumberger SLB. So we position ourselves for growth in those areas. And even though the deepwater market has a slowdown now currently in maybe '25 and maybe into '26, clearly, there's a ramp-up of activities, both in South America and West Africa. We expect that coming late '25 or into '26. We are close to both of those markets, both within our sister company, Odfjell Drilling. So we have a quite good overview of what's going to happen with the drilling activity, and we, kind of, tag along on that information and knowledge. We also have a significant raise in tender activities in the Middle East. I can highlight Kuwait, Qatar and Saudi Arabia. We also expect in the future, we are in a very, I would say, nice position in Turkmenistan at the Caspian Sea, where we provide the services to Dragon Oil. And we also expect not to find the future extension of the contract we already have there, which is a very important contribution to our services within well services. What's quite interesting is that we also see more activity in the Asia Pacific. We have already established ourselves with the Shell contract in Brunei with the workover project down there, but we also see more activity in Brunei coming with major clients, and we also see Indonesia and Australia actually as an interesting country for servicing our wellbore clean-up tools, our whipstock tools and more than that. Also, we see plug abandonment activity ramping up more in those areas. So by being present in the area with both tools, people and contracts, we feel that we are quite well positioned for the rise in activity coming, I guess, late '25 into '26. So these are the reasons for us to say that, that slow start of '25, late '24 into '25, which is quite commonly frequently commented upon by all our competitors and peers. So that's not a surprise. But we -- but our position is that we see that our services will be -- we expect a rise in the activity level late second half of '25. So just an overview on the backlog. We have a stable and good backlog. So we feed more activity into the backlog. So it's kind of a stabilized NOK 13 billion, NOK 13.5 billion. Of course, quite a lot of this are based on operations, long-term contracts, but it's quite good to see that also well services are picking up more activity. And what is also good is that we have been able to renegotiate the extensions on existing contracts in the North Sea with better terms and conditions. So this also will improve our margins in those areas where we have seen in the mix of the services we are providing, we have seen that some areas has dropped margins, but we have also been able to kind of pick up on the execution of the options to pick up better terms and renegotiate some of them to improve our margins. I'm quite pleased to say that we have -- next, please, -- we have -- I'm delighted to say that we have -- we have entered a cooperation -- a strategic cooperation agreement with a company called Reelwell. We have been asked frequently why we -- our agreement with NOV has been terminated. We still do -- we still run well wide pipe drilling on several of our rigs. But NOV has decided to do all by themselves and has entered a frame agreement with Aker BP. I said back then, there are other opportunities in the market, and this is clearly one of them. This is not just a wire pipe, it's also a power pipe. We know Reelwell from the history. They started actually to develop this technology back in days, some 20 years ago. And now it's proven -- now it's running in onshore U.S. And we have -- sorry, I just moved on -- sorry for that. We have entered this agreement with that company. And this is the only wide drill pipe to leverage digital real-time telemetry, wellbore power and better reliability downhole, which is actually resulting in a much better well and more efficient well construction and also we can reduce impact on climate by reducing needs for downhole batteries and also less emissions. So in that aspect, this product actually kick off all the right elements. Our strategic cooperation so far has been that we have won the first contract with Vår Energi with longed power pipe. And there are several other options as we speak, where we can easily -- I say, if clients think of what they want, we can also increase these numbers with more than one string. This is replacing really the observed uncertainty in the so-called high-margin product line we have. This is the same and even better. So with the exclusive agreement we have in Norway for the time being that all power pipe strings shall be delivered by Odfjell Technology. For the next 5 years, plus 5 plus 5, 1-year options in the future. And Norway is going to be the market where this is going to be tested fully offshore. It's going to be typical Equinor, where clearly Vår Energi also Aker BP, even though they have a frame agreement with NOV, we will see that if this product works, they will be very difficult for anyone else to replace it overnight. So it's a long-term development and all these technologies are protected by IPs. And we also have got quite significant interest from major clients back in the Gulf of Mexico, in Brazil and all over the world. So we clearly see that a slow start could be a great future on this. We very much believe in what we see here. And with the formal agreement with Reelwell and the close cooperation we have established, we will be the one, that together with them provide this new product into the market. And we see this clearly as a game changer for downhole operations. Power pipe means that you can power tools without having batteries downhole. You can do much more efficient and much quicker well construction activities. You can do more accurate horizontal drilling and typical major service providers like Halliburton, like Baker and SLBs are enthusiastic about this tool that actually give them the right, in a way, connection between topside drilling and their own tools downhole, meaning bottom hole assemblies can be made much more efficient and shorter and less vulnerable. So there's a lot of upsides here. And we look forward to engage with Vår on the first ring offshore. And by the excellent references we have got from the U.S. by one of the players that use this today is neighbors of onshore drilling. We clearly see that their experience from onshore drilling is fantastic. They're going to order more, and we're going to bring this into the offshore era and offshore market will be done by Odfjell Technology. So this is -- you heard me quite enthusiastic about it. It's a breakthrough and it's a game changer regarding product and technology. We have also decided to keep up our dividend policy. We have a strong balance sheet. We are kicking off all the elements on the incurrence tests, while we have decided to continue to pay NOK 60 million in dividend in Q4. Frequently, I'm asked what about the future? If we deliver on what we have in our strategy, this number is at least not going to be lower. I also said last time about our -- when we saw back in first half last year that the market will be more slow in '25, late '24, '25, we initiated what we call performance and improvement program, which is actually in our legacy. This is how we operate. This is how we work, and we established that program in March, April last year. This is to improve financial performance. This is to improve margins. This is to improve competitive edge. We have a very structured and systematic approach to the whole thing. We have done it before. We have been through crisis before. This is absolutely not a crisis, but we use the same systematic and the same models. So what's going to happen here is that, we will reduce organization where that fits in. We have already identified areas where we're going to make it more efficient. We are not reducing the organization, because of lower market. No, we are replacing work processes with more digital solutions, meaning that we can actually free up capacity to be more efficient and do more. I expect that the results from this program will be significant regarding bottom line effect. I will not say any number, but it's -- the potential is a very high number. So when that happens, I will share more. But we expect that the contribution to the second half will be partly done by this program in this year, especially late Q3 and Q4 and into '26. I think, this is a way to adjust and sharpen up the organization and our tools and deliveries, investments and where we focus to be -- to deliver on what we actually are saying here. When I'm saying that we're going to step up significant second half, this is part of it. On top of what we see coming from tender markets and activity in the markets. Remember, we are operating in our 35 countries. Some of the countries we see a slowdown, but most of them we see a ramp-up. As I mentioned, Middle East is coming up more, Asia Pacific with the countries I mentioned, and of course, also Americas with Gulf of Mexico and South America. So these areas are of interest and the program we talk about here is paramount to the [indiscernible] and we have high attention from the organization and is implemented in all business areas where that has been affected. And I see a lot of energy and enthusiasm to make this happen. Okay. With this, I think Jone, you can take over on the digging down into the more detailed financials. Thank you.

Thank you, Simen. I will give an update on the financials, starting with the group financials. Results current quarter versus same quarter previous year. There was a revenue growth of NOK 108 million with higher activity for Operations and Well Services. EBITDA dropped with NOK 32 million, driven by a shift in product line mix in Well Services, impacts of not renewed CCS contract in Well Services and reduced bonus achievements in operation. Cash generated from operation in Q4 '24 is NOK 262 million and available liquidity is NOK 1.1 billion. The results current quarter versus previous quarter, revenue growth of NOK 116 million and EBITDA reduction of NOK 10 million. The year-end EBITDA figure of NOK 825 million includes one-offs of approximately NOK 25 million, covering legal costs related to HMRC tax case in U.K., other personnel-related costs, et cetera. Some words about the dispute with HMRC relating to OT U.K. North Sea drilling operation. The dispute concerns whether OT U.K. is liable for secondary class national insurance contribution for drilling crews operating in the North Sea based on its classification as the host employer. The ruling received in early January was in HMRC favor. Legal advisers as First and King Council have recommend appealing to upper Court. Both OTL and its legal adviser maintained the view that OT U.K. has a good case, and we expect that the appeal will be in our favor. Let's have a look on the business area, starting with Well Services. Results current quarter versus same quarter previous year. Revenue has increased slightly, driven by higher revenue in Middle East, increased activity on wellbore cleaning in Africa and Norway and great activity in Europe. EBITDA decreased to NOK 31 million due to changes in product mix globally. The EBITDA margin in the quarter is 29%, the EBITDA margin in 2024 is 33%. Excluding pass-through revenue of NOK 211 million, the adjusted EBITDA margin for 2024 is 36.4%. Next. Operations results current quarter versus same quarter previous year. Revenue increased with NOK 103 million, mainly driven by high activity level in U.K. and Norway. EBITDA decreased with NOK 8 million due to lower bonus achievement and costs related to contract closing handover on Heidrun and Brage. For the current quarter versus previous quarter, we increased the revenue with NOK 80 million due to change in product -- contract portfolio. EBITDA decreased with NOK 12 million, impacted by contract close handover of Heidrun and Brage. Next business is Projects & Engineering. Results current quarter versus same quarter previous year. Revenue decreased with NOK 9 million, mainly driven by project postponements. EBITDA decreased of NOK 5 million due to lower utilization. Results current quarter versus previous quarter, revenue down with NOK 6 million and EBITDA up with NOK 6 million due to higher utilization. To the cash balance sheet, balance sheet is robust with high financial flexibility. The equity ratio is now 33% versus 29% at end '23. Available liquidity is about NOK 1.1 billion. The working capital in Q4 has improved NOK 81 million compared to Q3 '24. We have spent NOK 365 million in CapEx in 2024. Well Services part of that is NOK 315 million, mainly driven by high replacement of equipment and contract wins. We have increased the dividend payments during '24 from NOK 35 million in Q1, up to NOK 60 million in Q3 and Q4. The RCF of USD 50 million is still unused undrawn. Finally, the last 12 months development for OTL. OTL has demonstrated consistent revenue growth since its establishment, while EBITDA has declined slightly over the last two quarters and an improvement is expected in 2025. To sum up, OTL remains focused on its strategic direction, strong cash flow and improved working capital in Q4. Order backlog remains robust, ensuring significant revenue visibility. OTL secured a strategic cooperation agreement with Reelwell and led the first contract with Vår Energi. And finally, the performance and improvement program is on track, aiming to deliver higher margin in 2025.

I think, that concludes the presentation, and we will take a few questions, and we'll start with calling questions.

[Operator Instructions] There are no questions in queue. [Operator Instructions] There are no questions coming through. So I hand back over to you, Gert, to take questions from the webcast.

Okay. We have a few questions. The first has to do with HMRC and the timeline. Maybe you can answer that, Jone.

Yes. The first -- has been on the first quarter level now. There is two or in worst case, three additional levels, which can be appealed to. So if we go the whole, whole way, it could end up in 2027. And the point is there's no cash out before final decision.

Yes. Another question is on the CapEx in light of the higher CapEx in '24 than we initially guided or estimated. What can we say about the CapEx in '25 and '26?

Yes, I can start and maybe Simen can follow. As we said that -- we have said that it has been a lot of CapEx this year and explain why. What we said as a normalized cash for the year is approximately NOK 250 million. If we have additional external business opportunity with high margin, we will do that. And that example of that is Reelwell. So we expect NOK 250 million going forward for the next 2 years -- on the ordinary operation.

Okay. And we also have a normal question, which goes to buyback of shares instead of a dividend. And I think that's a discussion that has been going on for a while. And I think, it is something that will be considered. And for right now, we have focused on the dividend, but it is something that will be discussed in each Board meeting. And I think that's all we can say at this point. We have questions about the revenue in Q3 and Q4 or for Q3 and Q4 for Well Services, when it comes to pass-through. And I think, what we saw in Q4 in '24 is that the pass-through was very high. And the total figure for the year was NOK 211 million, but NOK 80 million to NOK 90 million of it ended up in Q4, which pulled down the margin significantly for Value Services. This is a typical part of the business where we have contracts, where we see the risk of high maintenance cost is handled through making the customer responsible for it. And we have agreements saying they will pay for the maintenance and repairs, and it fluctuates a little bit. We have not specified this before, but have brought it up this time. And I think, we can say that it was much higher in Q4 than it was both in Q3 and Q4 the year before. So I have a question on the start-up of the Brunei contract. I think, there's no big changes, but it will be early Q3. So I think, the estimate right now is still for July 2025. What's the main contributor to the anticipated margin improvement in 2025? I think, the focus is going to be on cost initiatives quite clearly. It's improving the efficiency in the organization. And of course, we're not basing it mainly on the revenue growth. It's about making us more cost effective, making sure we have the right headcount compared to the activity level, but mainly focusing on improving our processes. I think, we actually had some technical issues with Simen. And I think, we've been through the main questions, and we'll conclude the Q&A here. I thank you all for joining today's call. Please contact me if you have additional questions that were not answered today. And have a nice weekend.