SeaBird Exploration Plc (SBX) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to this fourth quarter conference call for SeaBird Exploration. I am Stale Rodahl, Chairman of this company, and I'm here with Finn Atle Hamre, our CEO; and Sveinung Alvestad, our CFO. Before I leave it over to them, I will make some initial remarks with the fourth quarter demerger of Green Minerals, the deep restructuring and cost-cutting process we worked upon 3 years ago have been finalized. We are excited to bring a lean, efficient and high-quality seismic operation back to the market in its pure form through SeaBird Exploration. The market headwind that we have faced the last many years has also turned to a tailwind. Ocean Bottom Seismic is a market in structural growth with demand up about 60% over the last 5 years. Active supply has dropped around 50% over the same period. Usually, such a dramatic mismatch between supply and demand will drive rates quickly upwards. While rates certainly are up almost doubling for OBN source, there has been a certain inertia that we believe are due to overall project economics that take some time to work themselves through. The market is, in our opinion, tighter now than at the last peak in 2014, but rates have yet not passed previous peaks of $80,000 a day. We believe rates need to move substantially higher as seismic vessel and equipment economics are far from where they need to be to give an adequate return on the substantial investments made into the equipment in this industry. So while the number of vessels and, importantly, also the number of players have been reduced dramatically, we have been strong advocates for further consolidation for some time. And also, we have the capacity to do more, both in terms of equipment and organization. In an industry marked by privately owned smaller players, often family-owned with fledgling ownership and commitment to the seismic business, we believe a publicly owned, professionally run company with a clear mission statement like SeaBird Exploration offers the best platform to consolidate from. We hope, and we believe, that our clients, over time, will think similarly around these important issues. Admittedly, while being a public company has many advantages, it may also put some constraints on you depending on how popular your equity is in the marketplace at any time. Understandably, just coming out of an acre-long downturn, our industry may not rank high in the popularity contest at the moment. Delivering strong operational performance and, ditto, cash flow to our owners is, in our opinion, the best way to have those valuation constraints on our strategic opportunities had removed, thereby accelerating some of the processes we are involved in. We hope that the results and outlook that Finn Atle and Sveinung will now present will shed some light on SeaBird in that perspective. Finally, as cash flow continues to improve, our priority is to pay down debt, and we look set to have come forward in this regard already in the first half of this year. With this, I hand it over to Finn Atle.

Thank you, Stale. SeaBird Exploration. SeaBird Exploration provides marine seismic acquisition, with a current fleet of 2 100% owned vessels. The Eagle Explorer is currently equipped to perform both 2D streamer acquisition and source services. Currently, the vessel is performing actually streamer work. The Fulmar Explorer is equipped for seismic source services and currently engaged in projects in the Gulf of Mexico. In addition, we have seismic equipment to rig chartered vessels, which, again, enables SeaBird to relatively quickly increase its fleet by up to 2 additional vessels with limited CapEx. Following dissolveness of Green Energy Group, SeaBird is now trading under the ticker SBX. Further, the Green Minerals shares held by SeaBird were distributed as dividend to SeaBird shareholders in early '23. Consequently, SeaBird Exploration is again a pure-play seismic acquisition company. Next, please. Key events in the fourth quarter. Fourth quarter '22 was a busy quarter with vessel mobilizations, project initiations and dry-docking of the Fulmar Explorer. Eagle Explorer commenced the 2D streamer project in India and has had good steady production since started. Early '23, a client awarded SeaBird with an extended work scope equivalent to about 20% of the original scope. We expect completion of the total scope in May this year. Fulmar Explorer had to be dry-docked due to a developing vibration in one of the main propellers. The timing of the dry-docking was increased by the client between 2 prospect areas and was completed within planned time. Plus, thereafter, started the second prospect area for the client and is performing very well. Then I would like to hand it over to our CFO, Sveinung Alvestad, to comment on the next slide, please.

Thank you, Finn Atle. First and foremost, with Green Minerals now being distributed, I want to highlight that Green Minerals has been recognized as discontinued operation held for distribution in the financial statements, meaning that all tables and graphs in the material released today is reflecting the seismic operation only. So for Q4, this was a turning point for us financially speaking as well. Revenue of $8.9 million was up from $8.4 million the prior year quarter. EBITDA of $2.3 million was a substantial improvement for the prior year quarter of negative $2.5 million, but still held back by some project-related start-up costs and the Fulmar dry-docking. Cash flow from operations was $1.3 million, where working capital build in India contributed negatively. Net interest-bearing debt as of year-end was $15.4 million, broadly flat from the start of the year. For the full year 2022, revenue was $20.2 million, broadly flat year-over-year. EBITDA for the year was $1.5 million, up from a loss of $4.2 million from the prior year. And now given to the strong operation and good visibility year-to-date, we are happy to give you some more flavor of what we expect going forward. The SG&A is expected to remain at today's level, with quarterly fluctuations aggregating to approximately $4 million for the year 2023. We see an EBITDA for Q1 in the range of $4 million to $5 million. And we expect the combination release of working capital and increased profitability to result in improving cash flow in the coming quarters and consequently strengthening our financial position. With that, back to you, Finn Atle.

Thank you. Contract coverage and backlog, ongoing. We are having now ongoing operations on our backlog on both the Fulmar and Eagle, as can be seen from the above. We expect Eagle to complete production in India towards the mid and end of May, including the extended work scope awarded. The extended work scope will run a better overall project economics as initial start-up and OBN costs are already accounted for. The Fulmar Explorer was out of operations for about 2 weeks during her dry-docking in November. Outlook. Delivering on our backlog, coupled with interesting leads for both 2D and source work is the priority. We are entertaining discussions for flexible charters, which we're timing to leads we are working on. Also, encouraging to see the geographic footprint of the opportunities stretching all continents. Next one, please. Utilization. Quarter 4 utilization was affected by dry-docking of the Fulmar and start-up timing of the Eagle. As you can see, to date, '23, the utilization has, for all practical purposes, being at 100%, and we expect that to be going for the next quarter as well. Next one, please. Market development. In short, market trends and indicators are strong throughout. The slide clearly indicates the impact COVID had on the OBN market from '19 into 2020, and recovery and further development since. If you couple this with the fleet reductions, partly permanent reductions, it further indicates a tight market going forward. The market increase in '22 and '23 is, of course, a combination of volume and price increase. However, as more and more OBN baseline service are done, we believe volume of projects in this market will increase in the years to come. Next, please. Market trends. Further, regarding market trends, we, over here, were presented with our usual slide and with leads received. Worth pointing out is the continued strong leads list into first quarter this year, following on from the last quarter. Again, we see a clear trend that leads have a longer duration overall. The mix between 2D and source leads seems to be more or less the same as before. Next one, please. We have, since last quarter, updated the list of available source vessels with about 5 vessels of total current and potential source vessels. We see these vessels can be potential source vessels. Some of these vessels are also capable of 3D streamer work. And as such, in a strong towed streamer market, can return to towed streamer work. So just to give you a flavor of availability of vessels that can swing between streamer work and source vessels included in the list. Note that this overview does not include Russian nor Chinese operators. And only 2 vessels of Shearwater fleet has been added as dedicated source vessels, although we don't normally compete with the vessels from Shearwater as these are dedicated to work for Shearwater. Of course, Shearwater is competing with our clients and in the OBN space in general. As such, these vessels are part of the market mix, we believe. Volume of OBN project is increasing and more and more baseline services are done, which will strengthen the market forward. It is interesting to couple the previous 2 slides I've shown with the available source fleet development since '18 and '19. Next one, please. This slide should be known to our usual audience, but let's spend some time to give reflection on where we are and where we see the market developing in the next year. When we introduced this slide about a year ago, there were some [indiscernible] and comments that our rate expectations for 2022 were too high. Now, with '22 in the rearview mirror, you see that both our contracts on 2D and OBN source segment are within the range provided, although on a 100% utilization basis. That said, our utilization has not been 100%. But nevertheless, this illustrates that the market is ballpark what we indicated a year ago. And as indicated in the previous slides, it is still improving. Now looking into a crystal ball for [ coming ] here. As we have touched upon in the presentation today, there are increasing number of requests for prices, and our clients are increasingly asking for longer contract duration. This, to us, is a clear sign that the pricing power is increasingly tilting towards the operators. And given the lower availability of vessels, we are seeing a willingness to discuss higher rates. More concrete -- we expect to see high-end OBN source vessels to be fixed at rates at maybe above -- indicated levels above, yielding an annual EBITDA in the range of $14 million to $18 million per vessel on a 100% utilization basis. In order to illustrate the EBITDA potential for SeaBird, this would mean that we could generate USD 25 million to USD 35 million on a 100% utilization basis after SG&A with our 2 owned vessels, or USD 45 million to USD 55 million if we charter 2 additional vessels and equip these with our equipment. And then I would like to hand it over to Sveinung to run through the fourth quarter and financials.

Thank you. So revenue for the quarter was $8.9 million, reflecting the strong utilization in the quarter. As we have talked about already, the Eagle mobilized during October and started production early November and has produced solely since then. Fulmar has been on a contract the whole quarter, with the exception of the dry-docking in November. So after a challenging year with declining revenues, Q4 marked an inflection point for us, and 2022 revenues ended up at around $20 million. And based on our contract backlog and strong tendering activity, we believe rolling 12 months revenue will increase in the coming quarters. Next slide, please. Although we had an operational strong quarter, we are not satisfied with the profitability. The EBITDA of $2.3 million was negatively impacted by start-up costs on the Eagle and dry-docking costs and off-hire on the Fulmar. However, as discussed by Finn Atle previously, the operation is progressing well in 2023, with utilization close to 100% so far this year. This gives us the confidence to provide a guidance of Q1 EBITDA in the range of $4 million to $5 million. Next slide. Now to the cash flow. As you can see from the chart, SeaBird started the quarter with a cash balance of $1.1 million. During the quarter, we sold some noncore equipment, which generated proceeds just south of USD 500,000. Operating cash flow for the quarter, when excluding working capital, was $3.1 million. The working capital build during the quarter mainly relates to start-up of the operation in India, a development we expect to reverse during the coming quarters. Furthermore, we repaid $740,000 of debt and paid $435,000 in interest. All of this leaves us with a net cash flow for the quarter at negative $230,000 and a cash balance of $855,000. Next one. And now to the net interest-bearing debt. The net debt was $15.4 million as of end 2022. This is relatively flat from the start of the year. The gross debt was $16.3 million at year-end, where $15.7 million is the bank facility with SpareBank 1 SMN, with maturity in June 2023. Lastly, I want to highlight that with both our vessels in full production and a substantial working capital position, we expect cash release in the coming quarters. With that, I leave the word to Finn Atle for closing remarks.

Summary. Since the announcement of the restructuring from 2 years ago, our strategic review announced earlier this year, we have refinanced, reduced headcount and, at the same time, strengthened our operational performance, a way of better teamwork and cross-department cooperation. We've reduced our overall SG&A. We recycled 3 vessels, sold 1 vessel out and successfully introduced the Fulmar Explorer to clients, now with several prospect areas already completed. We secured 23 months of vessel backlog, which we are now delivering on with reference to our EBITDA guidance. With that, and on behalf of the hard-working, dedicated and loyal SeaBird team, I would like to thank you for your attention and support. Thank you.

Thank you. So then to the Q&A. As many of you already have noticed, you can post questions in the team's viewer. Now we'll try to summarize them here and distribute them to our team here today. So first, there is a lot of questions regarding the flexible charter strategy and expectations we have. So maybe the first question for you, Finn Atle. Maybe you can give us a quick overview of what exactly flex capacity is and what we have the capacity to do. How does it work? Or what capabilities do you have to make use of such capacity?

Yes, sure. Well, first of all, the seismic companies, they have their seismic vessels and equipment and operational capabilities. However, from, historically, there are some vessel owners that are not seismic company. As such, they are only purely seismic vessel owners. These vessels, some of them have been laid out for quite some time, and some of them being on and off working. These vessels are available for bareboat charters, where we see ourselves as the charterer, taking them in on a bareboat, equipping them with -- coupling that with our seismic equipment and presenting it to clients. Obviously, taking on something on the bareboat is a commitment. And we are now working on tying this together with leads and discussions with clients so that we can go back-to-back, offering this to clients. Also, we would like to see a project of some duration to couple that because, of course, there's a cost involved in rigging and preparing these vessels for operations. But these discussions are indeed going on in the background. And we are confident that we can do this, of course, coupled with client expectations and then demand.

Thank you. And also, if I may add, what's very important for us is not to add on vessels on our own risk. We are very -- working very closely together with both vessel owners and clients in order to make a back-to-back arrangement so that SeaBird take limited downtime risk on the vessels we are looking to take on board. So maybe, Finn Atle, to you as well. There is a couple of questions of the capabilities of the vessel we have. And I know we have arranged a quick overview in the appendix of this presentation, but maybe you can take us through and just give us a quick overview of the 2 vessels we have and the equipment we have on storage.

Sure. Firstly, on the Eagle Explorer, she was originally designed and built as a 3D streamer vessel. We acquired the vessel back in 2018 and have operated since as a 2D and source vessel to the OBN market. Back in the days when she was built, the price was around about $120 million, which, I guess, will be even more now in -- if she weren't old enough to a newbuilding contract. Vessel is very capable in the market we are presenting it to and has proven very efficient in -- both in terms of fuel efficiency and project execution. The Fulmar Explorer we acquired back in 2019. It was previously engaged in the electromagnetic geoservices scope and designed for that purpose. We reconfigured the vessel, equipped with our source equipment. Also, some new equipment we purchased, semi-digital source controller, which is now the norm, more or less, in the OBN source market, and introduced that to the market last year and it's been performing very well. The clients are really happy with the performance, the fuel efficiency and the rest, the general capacity. Equipment pool. Taking off vessel equipment from some of the vessels that we've scrapped and seismic equipment that we've had in the company over the years is now being maintained, prepared and ready in our warehouse at CCB and Bergen, and it's more or less ready to be deployed on the vessel of choice. So that -- I think that sort of concludes your question, hopefully, Sveinung.

Yes. Thank you. And then we have some question -- a couple of questions I can answer. First of all, will the distribution of GEM have -- Green Minerals have impact in the SeaBird P&L? And the answer to this is, yes, it will in Q1 when we -- physical -- did the distribution. This will be a noncash, obviously. But I will, in the Q1 presentation, make that very clear what items that is including and, of course, in the relevant presentation, as I've highlighted. So I will come back to the magnitude and everything, but it's noncash and nonmaterial for the company. And then I had a question about we received a contract extension on the job we are doing in India. And the question is, how does this impact the $18 million EBITDA we guided for the contracts we started working on last fall? So first of all, there is a couple of plus and minuses which impacts the backlog we guided on. And as you have seen, we haven't updated the current backlog figure for this quarter, and that's not something we are going to do going forward. Instead, we have tried to give the market visibility through guiding what we expect for the Q1 quarter. But going back to the $18 million, I think it's important to note that we had a scheduled downtime on Fulmar relating to the dry-docking and repair, which Finn Atle touched upon earlier. This was, however, more than offset by the increased scope of 20% we received in India. So the net effect of the events, which has happened during the quarter, should be positive to our EBITDA -- original EBITDA backlog of $18 million. But more specific on what's remaining on that one, I think I'll keep that for the analysts. And then we have a couple of questions around consolidation. And I guess this is for you, Stale. It's -- there's a lot of questions on when do we expect M&A activity? Of course, that's very challenging to answer. But yes, let's leave it like when can we expect to hear more about consolidation in terms of how we can use our own listing as currency when we see that the valuation of our company is as low as it is and how we look upon that situation? So Stale, for you.

Yes. Well, thanks. It's a good question. I guess that's one of the, sort of, double edges here in terms of being listed. So the obvious answer is, of course, to have cash. And -- but in an industry, having just come out of an 8-year downturn, of course, cash is not abundant yet. So without that, of course, we are in a position, as we said, where our equity is -- well, basically, limiting our maneuverability in terms of the opportunities we're seeing. And so what we do is to continue our work to consolidate the industry than with -- on other parameters than using the equity. And one thing is certain, that is that equity will not be used until the pricing of it is such that any transaction is value accretive to our shareholders. So I think I will just leave it like that. We will use other -- we are working on other parameters to bring us forward in our determined effort to continue to consolidate the industry.

Thank you, Stale. And I think I'll give you one more question here. So the question is, looking at your presentation, it looks as if you will generate a significant amount of cash going forward. And I guess, the question is referring to the illustrative annual EBITDA slide we have here. So do you have any thoughts of how we're going to use that cash and when we're going to see that coming?

Yes. I guess you touched upon it. The cash -- and you also commented on returning cash in your cash flow balance. So -- and what you pointed to there is that there will be a significant improvement in cash conversion, more or less, from now on, as we're seeing it. And that cash will be put to use the following way. Our main priority is to pay down bank debt. And as I said, we will have come far in that regard already in the first half. And thereafter, we have approval for a buyback program from the last AGM and returning cash to shareholders through buybacks and/or dividends is going to be a priority when we've come far enough down on the bank debt. Also, I think we should add that we are operating in a market that has turned very exciting now, and there are opportunities here. So we will, and we are, continuously viewing, and we're continuously working on opportunities that we think will support profitable growth for the company. And to the extent that we can do that -- and that also ties into, actually, the other question that you had for me in terms of the pricing of our equity. So to the extent that we see an opportunity to do value-accretive deal for our shareholders, we will act on that. So that should be mentioned as well.

Thank you. And then, Finn Atle, a direct question to you and translating here. It's about contracts. And we have 2 contracts, as you touched upon now, taking us to the end of May and end of June. So I just -- can you give us a bit more flavor of when we should expect new contracts. Of course, that's hard to answer, but give us a bit flavor of the discussion you are in with clients. And how do you see the opportunity for us to secure more backlog from the summer and the second half of this year? You are on mute still.

I think, first of all, you need to understand the dynamics of awarding contracts. First, the OBN companies need to be awarded projects from their clients, i.e., the oil companies. And thereafter, we enter into more firm discussions on charters going forward. The timing here between when we tender or give them price indications and when our clients are awarded projects and when project starts is normally quite tight from when award happens until project starts. And then with the knowledge of ours as being busy up until, say, middle part of this year, that timing is not sort of going together. But we are in discussions on -- extension discussions. Projects started more or less in continuation of the projects we were doing now on the Fulmar are building. When it comes to flexible charters, it's a bit more delicate and complex than just signing a contract for a 2- or 3-month typical OBN project. We have only taken on the -- a bareboat on it. And then the last 2 -- back-to-back on normally a 2- to 3-month project. That's going to be a business risk, and we've seen this before when we've done this. Because a bareboat charter, you need to understand the complexity and the risks of -- on taking on that commitment on such a short notice -- or sorry, contract. So we have to build relationships with clients first, together with a dedicated vessel in mind, and coupling that with discussions with the vessel owner. These discussions are ongoing. Difficult to say really when that will materialize. But indeed, we are working hard on these discussions. Yes, I think that's what I can say on that one, Sveinung.

Yes. Thank you for that. And also, I just want to remind the audience that we, just a couple of weeks ago, announced that we did indeed was awarded a 20% increase on the operation we have in India. So we are already expanding our contract coverage and backlog for the year. But of course, the second half is currently open, as the question alludes to, that we are working very hard to do something with. With that, I think, actually, we have more or less touched upon all of the questions on the call. Of course, flexible charter is and new contract is a very hot topic, but I think both you, Finn Atle and Stale, have touched upon it. So with that, I think I would take the opportunity to just say thank you, and have it back to Finn Atle for close, if you have anything to close with.

No, I think I don't have anything to add, Sveinung. My closing remarks still stands as previous. Thank you.

Okay. Thank you all. This then concludes the call for today. And as always, we, in the team and our Executive Chairman, is available for both meeting and follow-ups post quarterly results. So thank you for this, and goodbye.