SeaBird Exploration Plc (SBX) Earnings Call Transcript & Summary

Good morning everyone and welcome to this first quarter conference call for SeaBird Exploration. My name is Stale åle Rodahl, I'm the Executive Chairman of the company. And I'm here with our CEO, Finn Atle Hamre; and CFO, Sveinung Alvestad. Before I hand it over, just some initial remarks. With good productivity and strong operating metrics, we're concluding a strong quarter for SeaBird exploration. I'm pleased to see that the company is delivering its best quarterly result in many, many years. Cash flow has turned positive, as we have guided. And as cash conversion improves, this is expected to improve further in the coming quarters. We are operating in a tight market with multiple leads across multiple regions. We are pleased to have won significant extension work and a new OBN contract in the first few months of the year. And we are in discussions for long-term opportunities for the Fulmar after completion of the current contract this summer. An interesting development to note is that the supply side in our segments of this industry is continuing to shrink, which Finn Atle will get back to. This may be a little surprising as the profitability in our industry now beats the alternatives by a wide margin. While this, of course, is positive for the market balance overall and earnings potential for the remaining vessels, the flip side of this is possibilities to add third-party tonnage. SeaBird Exploration is blessed with both the organization and the equipment to increase the profitability for these vessel owners. We have been a strong advocate for further consolidation and continue to monitor the market for opportunities to add profitable growth. Lastly, I'd like to commend the entire SeaBird team for the terrific spirit and effort put in over the last few months with solid results to show. Let's keep up to good work. And with that, I hand it over to Finn Atle, please.

Thank you, Stale. First, a few words on SeaBird and the brief overview for new listeners to our quarterly reports. SeaBird Exploration provides marine seismic acquisition with a current fleet of 2 100% owned vessels. The Eagle Explorer is currently equipped to perform 2D streamer acquisition and source services. Currently, the vessel is performing a 2D streamer work in India. Fulmar Explorer is equipped for seismic source services and currently engaged in a project in the Gulf of Mexico. In addition, we have seismic equipment to recharter vessels which, again, enables SeaBird to relatively quickly increase its fleet by up to 2 additional investments with limited CapEx. Green Minerals shares previously held with SeaBird were distributed as dividend to SeaBird shareholders in early this year. SeaBird Exploration is now a pure-play seismic acquisition company. Here is the first quarter of this year. We have both vessels in production throughout the quarter. Eagle Explorer in 2D streamer project in India with good, steady production. We expect completion of the total scope under the current contract in the beginning of June. Fulmar Explorer has been working on asserting client prospect area for the entire period. Then I would like to hand it over to our CFO, Sveinung for financial highlights.

Thank you, Finn Atle. So first and foremost, as Finn Atle said, Green Minerals has now been distributed. All of the tables and the graph in the material released today is reflecting the seismic operation only. So Q1 revenues was USD 9.9 million. This is up from $8.9 million sequentially and up from $5.2 million in the prior year quarter. EBITDA was $4.4 million, and this was a substantial improvement from both sequentially and year-over-year, $2.3 million and $0.6 million, respectively. Net profit of $6.9 million was positively impacted by a $5 million noncash gain related to the Green Minerals distribution. Hence, the underlying net profit was $2.0 million. Cash flow from operation was $2.7 million, while net cash flow was $1.6 million. Net interest-bearing debt as of end of the quarter was $12.5 million, down from $15.4 million sequentially. For the full year, we reiterate our guidance of SG&A of approximately $4 million with quarterly fluctuation. Furthermore, we expect the strong financial performance to continue, resulting in strengthening of the balance sheet and normalization of working capital in the coming quarter. With that, back to you, Finn Atle.

Words on contract coverage. Q1, we continued production in our current contracts for both Fulmar and Eagle. We expect Eagle to complete production in India beginning of June. And as announced, we have follow-on work directly following that for another 2 months' worth of work for Eagle. Outlook. Delivering on the backlog coupled with interesting leads for both 2D and source work. And we are undertaking discussions for flexible charters, which will be tied into leads we are working on. Utilization, very quickly on that one. We are really happy to see the utilization on the good steady production during the quarter. To date this year, we have, for all practical purposes, have 100% utilization on our fleet. A few words quickly on our 2 vessels. The Eagle Explorer currently in production on the 2D contract in India. Good production throughout the quarter. Project is projected to complete in early June as per earlier guidance. A few days were delayed due to the weather and various operational small adjustments, but still within the projection for the projects. We recently announced a 60-day source contract, which will commence in direct continuation after the completion in India. Eagle Explorer is due for her third class renewal this year with dry docking. We are currently planning for this to be done during the fall of this year. Next. Fulmar Explorer. Currently, production on a 12-month source contract in the U.S. Gulf of Mexico. Project is projected to complete in June, July. We are in discussions with clients for various opportunities after the current contracts. Next. We've had some questions on our flex capacity and what that really means. So this slide is to illustrate and try to explain how we couple by chartering available vessels for the market, we coupled this with organization know-how and sourcing of equipment, which we already have in stock to increase our fleet and the scale of our company. We seek opportunities to match available losses with market opportunities and tie these together back to back. However, first priority would always be to secure backlog and continued employment of our owned fleet. Market development. In short market trends and indicators are strong. This graph we've presented earlier, and we see the fall in the market with the introduction of COVID and then a slow recovery over the years following and even more rapid recovery into this year and what we see in our crystal balls looking into the future. And particular focus on the ILX OBN source market for us. The more the baseline service is done, we believe the volume of work going forward in the next years to come will even strengthen. Market trends. Further regarding market trends represented by leads received by SeaBird. Worth pointing out continued strong leads into first quarter following the last quarter. Again, we see a clear trend that leads have a longer duration. The mix between 2D and source seems to be more or less the same as before. However, we see a tendency of more 2D work emerging in various oil and gas areas around -- in both Africa, South America and Asia, which is interesting to see. The source fleet. We have, since last quarter, renewed 3 vessels from the list of total current as potential source vessels as these vessels will transfer to different market segments outside seismic. Some of the available vessels are also capable of 3D streamer work and as such in a strong total streamer market, these can return to total streamer work. Of the available vessels, some of these are old age and as such, not likely to reenter the market. An illustration of the earnings potential to SeaBird. The illustration of earnings potential and historical numbers are not reflections of actuals. These are illustrations. What we would like to illustrate here is the potential earnings, coupled with the market trends we are seeing in the current market. In an ideal scenario, we could generate up to USD 24 million to USD 32 million on a 95% utilization basis with our 2 owned vessels or even $33 million to $45 million, if we charter additional vessels on a flash arrangement. And with that, I will pass it on to Sveinung for the financials.

Thank you, Finn Atle. So now to revenues. Revenues was $9.9 million in the quarter, as I previously said. This reflects the strong utilization as Finn Atle has already discussed with both vessels in operation. So after a challenging year with declining revenues in the first few quarters, Q4 really marked the inflection point for SeaBird. And we saw that the Q1 results continued this trend. Revenues for the last 12 months have now increased to $25.1 million in Q1, and we expect to see this trend continuing in the next quarters as well. More importantly, the profitability has continued to increase as well. Q1 EBITDA was $4.4 million, up sequentially from $2.3 million and up from $0.6 million the prior year quarter. This leaves us with an EBITDA margin of 44% compared to 26% in Q4 2022. The rolling 12 months EBITDA increased to $5.3 million, up substantially from the prior quarter and year-over-year, but still not in a level we are satisfied with. However, with the contracts in hand and our market outlook laid out by Finn Atle, we expect this to improve in the coming quarter as well. SG&A was $1 million in the quarter, in line with our full year guidance of approximately $4 million. Now for the cash flow. As you can see, we started the quarter with about USD 900,000 in cash. During the quarter, results of noncore equipment, which generated proceeds just south of $200,000. Operating cash flow for the quarter, when excluding working capital, was $3.9 million. The working capital position increased slightly during the quarter, resulting in a [ $1.2 million ] outflow, which we expect will normalize over the coming quarter. Furthermore, we repaid USD 740,000 in debt and paid $466,000 in interest. All of this leaves us with a net cash flow during the quarter of $1.6 million and a cash balance of $2.5 million. Net interest-bearing debt was $12.5 million in Q1. This is down from $15.4 million in Q4. And please note that we are in advanced dialogue with our main lender about refinancing our bank facility, and we remain confident that the refinancing will be concluded well ahead of the maturity in June. With that, I leave the word to Stale for closing remarks.

Thank you, Sveinung. Yes. So strategy, I guess it's a mix of a strategy update and the summary. But strong operational performance has been something that we have been repeating now for quite a few quarters. So we have now many contracts behind us. I would say, in contrast to previous times, we have many contracts behind us with really good, consistent, strong operational performance, and this continues in the first quarter. This is really the backbone of everything that we do to have this in place. And I'm very pleased to see this continuing. Secondly, to win attractive contracts, I guess I would emphasize the middle work in that attractive and to secure additional backlog. And we've done so year-to-date. Particularly pleased with substantial extension of an existing contract, we believe, due to very good performance and also new OBN work. Finalize a new debt facility. Of course, it's a key point, a key focus point for the company. And Sveinung has commented on that. We expect this to be in place well before the bullet expires in -- or matures in June. We are actively monitoring value-accretive opportunities for growth, as Finn Atle has talked about. And I guess there, it's an interesting situation and with a number of players leaving the industry than reducing the opportunity set for the company. But that, again, improves -- helps improve the market conditions in the industry, so SeaBird benefiting from that. Still, there are opportunities left to be worked on, which we are doing that. But it's a really interesting development, we think, with a sharply reduced supply side. And no outlook actually as far as we can see for that to turn the other way. Strong financial performance is expected to continue to improve the company's balance sheet and we also, as Sveinung touched upon, expect to see significant further improvement in the cash conversion in the company. We have a focus on free cash flow. That means that we will limit CapEx. It will be limited to SPS and some equipment restocking. And there are no plans for any major CapEx outlays when we talk about growth opportunities. These are capital-light as such. That means the company is swiftly entering into a position where we are able to return capital, pay down bank debt, of course, is a focus for us and also to return capital to shareholders, either through dividends or share buybacks. We believe that we win this. And as those of you who followed us for the last 2 or 3 years now, we have been working hard to create a sound platform for strong profitability and also an attractive platform for consolidation. And we believe that we have that in place. And I am very pleased to see this showing up in our numbers, and believe that we are well on route to delivering on this, and then we'll see what the future brings in terms of opportunities on further consolidation. So I think I'll leave it with that and hand it back over to you, Sveinung, for Q&A.

[Operator Instructions] So the first question, I think I hand that to you, Finn Atle. Our rates for OBN and 2D is still improving. What are the current rates for source?

Yes. I would like to say that the rates are improving. I think clients are realizing that we -- competition is there and the market is tight. Supply is tight. So yes, we are secured now and what we've announced earlier this week is in -- on improved rates. What the actual rates are, I don't want to give you absolute values at this stage. But it's currently within the range we've previously guided.

Thank you. And with the tighter market often comes cost inflation. What are you seeing here? And how do you manage it? Are you able to compensate that in your contracts?

In the current contracts, we don't have a mechanism to compensate for that. But obviously, that is an element we use in discussions for future contracts. We live in the same world as everybody else, where inflation and price increase is happening on what we have to secure on services as well, both in terms of equipment and service. And of course, also in salary levels. We have, in our organization, both the crew and office employees. We have not had any salary adjustments for so many years. And obviously, we need to compensate for that. We need to be competitive. But I think that's reflected more than what we see in increased costs in increased rates. But that evens out and improves as we've guided.

Yes. Thank you. And I guess this is a question for both of you. I can see who is grabbing the word first. But can you update us on the competitive landscape and how many competing in your niche and also a direct -- the same are you currently engaged in talks with other companies about M&A? Not too easy to answer the last one, I guess, but...

Well, when it comes to players in the source market, it's very restricted. I think it's 3 or 4, maybe 5 players delivering sort of sources there as their key deliverable. What we sort of differentiate, of course, is to be able to do 2D work as well where we see there are very few players really interested in that space, which gives us a good opportunity in this kind of niche, particularly because Western players are limited in what they can do in the international market these days and also Chinese player is limited in certain regions where there is high activity these days. When it comes to consolidation and structural discussions, I'll leave it for Stale to maybe comment on that.

Right. So of course, there is not too much we can elaborate on that. I think we've been very clear previously that we are strong advocates for further consolidation of the industry and also we have even announced some results of this as some of you might remember from last year, and we are continuing to work along those lines. So we'll just see where that ends. I just I think it's interesting to see that the number of players in the industry, as Finn Atle alluded to, is being reduced. It's constantly being reduced and not many left. And I think that is also understandable even if the market turns up, I think it's understandable to see that as also the requirements, the demands from our clients are increasing. So I think the, call it, more opportunistic players having a vessel or 2, trying to compete in the market, they find it harder to do so. And so I think that's a positive. It's a bit of a barrier of an entry, the bar there that has been raised somewhat, which is good for the industry, I think. As I alluded to, what is maybe a little bit more surprising is to see the number of vessels also being reduced at this juncture. Simply because of the strong profitability as you can understand from both the numbers that we are showing and our illustration of what the EBITDA potential is for these vessels. And that is a little bit surprising from the same players, although I think understandable from the fact that they won't participate anymore. We, though, have the potential to enhance the profitability of that capacity through our organization. So I think it's an interesting landscape, and we will do our best to capitalize on it going forward.

Very good. And a question for you again, Finn Atle. You mentioned that some vessels are leaving the industry to other segments. So I think can you give some information on what and which segments these are leaving to?

Wind industry and cable seems to be the main 2 segments where these vessels are leaving.

Yes. And also, there is a couple of questions on the clients regarding the U.K. line -- U.K. round we just had. So can you comment a bit on our position on the multiclient side, and do we expect MSA from that position?

No, honestly, it's been very quiet on the multiclient source for the 2, 3 prospects that we hold interest in. So we don't foresee or remain bit unguided or have any numbers related to multiclient serves in our forecasts.

Yes. And just to add there, the multiclient library is more or less written down to 0 in our books. So we don't have any -- any sale from that would be an option from our side. And then there is a question about the cycle we're in, and maybe I can address this to you, Stale. How long do you think the current up cycle will last?

Okay. Well, if I knew. But I think the way we look at it is that this up cycle has the potential to last longer than what we've seen in previous up cycles. The reason for that simply being the lack of movement on the supply side. So the lack of additional capacity coming in. That has always been an issue in previous up cycles. And typically then it takes maybe a couple of years before you really start to see this influx of new capacity into the industry. We're just not seeing that now. So with that sort of off the table, we need to look at the demand side. And barring any deep recessions, we just can't see -- from oil market fundamentals, we can't see any reason for any -- for oil prices much lower than where they are. So this really creates, I think, an unusual -- a bit unusual market compared to what we've seen in previous cycles. We have a very tight oil market. We have many, many years of underinvestment, and there is just no influx of new capacity in sight. So it will be exciting to see, but the outlook is really for a prolonged cycle from -- with -- on that basis.

Yes. And then I have a couple of ones back to the operational. Utilization, Finn Atle, seems to be the key generator of a strong and consistent EBITDA. And now with the Eagle changing contracts -- or contract and as you disclosed, it's a back-to-back contract, should we expect it to be back-to-back? Or will there be any gap at all in between the contracts?

Generally, that would be -- it would be very hard to move from one client to the other without any sort of period in between where we need to reconfigure and maybe do some organization or changes to the vessel. But for this particular contract, it is actually a back-to-back contract. We finish off in India and we go direct to another job. So that will be -- it will be maybe 3 days, 4 days of sort of movement. But again movement Is something clients are now willing to accept -- is something I need to pay for, whereas going back a few years, that was sort of something we needed more or less to keep them on a cost basis, whereas now we can model some profit in mobilization as well. So difficult to say that we every change of contract will have filled back-to-back. But I think prudently, we should sort of model there would be some gaps in between, which is, of course, also why longer-term contracts are of interest to us. Healthy contracts, long-term contracts and good rates, of course, gives us the opportunity to have more or less 100% utilization. It's all down to us to have good technical performance.

Yes. And that brings me into maybe the next question, which is about flexible charters. We have talked quite a lot about that both in previous quarters and during this presentation. But can you give us a bit more flavor on when we could expect a flex chatter entering -- or the next vessel entering our fleet and -- yes, talk a bit around that.

And as I tried to explain in my presentation, we are looking for these opportunities on a sort of an industrial approach where we want to do it back-to-back. We don't want to take an open-ended charter on a vessel and then try to market that afterwards. I think that would be very wrong to do and very risky. So I mean that's the crux of this, where you need to sort of tie a vessel down, present it to clients and sort of try to do these deals back-to-back. Obviously, if we were just going to a client and wanted to charter a vessel, I think we could have done that a long time ago. But it's much these things together. It's sort of a complicated and it makes it difficult for us to predict exactly when this can happen. But that said, we are actively working on these opportunities, and we have discussions going. But actually when that will materialize and if that will materialize is difficult to predict just now.

Can I just add there that just to what Finn Atle just said, I think -- as those who know us well, will realize from this is that we have a slightly different approach to flex capacity now than what we've had in the past, i.e., we are not willing to -- we don't think that we should be taking the kind of risk that we have been taking previously. We're not willing to take it. The industrial approach, the full -- call it, the full package with the contract and the vessel against it is really important for us. If we can do this and, in a meaningful way, increase the value of the company through such a setup, we will do it. But not with undue risk for our shareholders.

And then there is a couple of questions on what kind of debt levels we foresee with the current market outlook? And how we want to -- or how we should allocate capital -- surplus capital going forward? And especially there is some question about dividends and share buyback. So first, I think I can cover the debt part of it. I think it's not prudent of me to go out and like guide on what kind of debt level we see going forward in nominal terms. What I can say that we have a close and good cooperation with our main lender. We are in advanced dialogue with the bank package we have today. And we remain confident that we are in a position to have that refinanced before the final maturity in June this year. So I think I'll leave it at that. In terms of dividend and share buyback, that's really a question which we need to give to the Board. So I just -- I think I'll leave the word for you, Stale, to discuss that.

When it comes to dividend buybacks, yes, I can just open up by saying that we have said for some time that our priority was to reduce bank debt. And -- if you look at the numbers, you will see that we have reduced our bank debt with 42% over the last 12 months. So it's down from $22 million to somewhat over $12 million. So we have done what we had said that we will be doing, and we are pleased with that. And we think our bank also is pleased with that. And of course, that is key for us to continue to service this debt going forward. So -- and then when it comes to dividends and buybacks, it's all a balance. We talked about growth opportunities. I've said that this is not going to be capital-intensive initiatives if they come along. So we are very focused on generating free cash flow that will be available to our shareholders. And whether that will be dividends or buybacks or a balance of the 2 remains to be seen. We have an authorization for buybacks from our last AGM, and we will ask for another one in the upcoming AGM. And then it's -- we will take a decision in the Board when we think the time is right to initiate that.

Thank you. So with that, I think I have gone through most of the questions. I have one question for you, Finn Atle. In 2020, we did a job with the 3D vessel. Do you think it's possible to see SeaBird doing 3D work in the future as well? Or have we limited ourselves to 2D and OBN now?

First of all, we don't have streamer or recording equipment to do 3D work. So for us, to be able to do that, we will have to couple that with owners operators who can lease, co-cooperate with us on the project to do such projects. The [indiscernible] project was a special case for a project in India. And whether that can be repeated, I wouldn't say no, we can't, we can absolutely. But I don't see any opportunities just now where this is a possibility. But who knows.

Yes. Thank you. And with that, I think I'll hand the word back to you, Stale, for closing. I think we went through all of the questions. Thank you.

Right. Thank you very much. Well then, I don't really have much to add. I think we went through it all other than thanking everyone for participating on this call and for the interest that you're taking in the SeaBird Exploration and on behalf of the team, I'm sure that Finn Atle and Sveinung will join me in saying thank you and see you again next quarter.

Indeed. Thank you on behalf of everybody at SeaBird as CEO of the company.