Earnings Call: Q1 2020

May 27, 2020

Summary

Q1 operational EBITDA reached NOK 804m, the strongest first quarter since 2015, but NOK 1.532bn of impairments and NOK 2.9bn in currency losses drove a loss above NOK 4bn and negative equity. COVID-19 and low oil prices clouded the outlook, with EBITDA expected to fall sharply.

Welcome to the first quarter presentation for DOF. Hilde Drønen, the CFO, and myself, Mons Aase are present. It's a bit of a mixed feeling in the first quarter. We have delivered the best operational first quarter since 2015 with an EBITDA of NOK 804 million, which is the third quarter in a row above NOK 800 million in operational EBITDA. Good fleet utilization, good performance in all segments, and we see tight markets through the quarter. Then in March, we as everybody else, were hit by the COVID-19 and the collapse in the oil price. After that, it's been extremely challenging to operate and to win contracts and so on. We see the quarter where we have taken huge impairments. We have big realized and unrealized losses on currency and the long-term financial solution that we have been discussing is now delayed, and we are in a phase where we have standstill agreements from secure lenders and bondholders. We also expect to be hit by a huge drop in earnings going forward for the remainder of 2020 and at the end of May. As we speak, we have 18 vessels in layups. We foresee a very tough second part of 2020. On the contract side, we have a few wins. In South America, we re-signed a 2-year bareboat with Technip for the Skandi Vitória. On the negative side, we have had termination of contracts for Skandi Captain, Skandi Texel that was terminated in April and redelivered in May, and the contract was originally supposed to end in June, so a month earlier. More problematic is that all tenders we have been discussing with Petrobras has been postponed. So where we were optimistic on rolling most of the Brazil fleet over on new contract, we now experience idle time layups and today it's very difficult for us to say if and we expect it will also on the tenders and when demand will not be. It's too early to say. In APAC, we have won a couple of months work for Singapore. We had a good first quarter in APAC, but April, May it's been very slow and mostly due to postponement of contracts that we already were awarded due to COVID-19. We also had two anchor handlers contracts terminated early, so they came back in March, April, a few months earlier than planned. In Atlantic, we are pleased with the Skandi Vega contract, 6 more months with Equinor. On the negative side, we have had the termination of two PSVs, the Skandi Captain and Skandi Texel. Not a big impact on the earnings for the group as the rates we had on this contract were low. The Skandi Caledonia were awarded a 4-well contract with Premier Oil, estimated around 400 days and supposed to start in June, July. Now postponed until September, October. Geir Gun was awarded a 6-month contract. We started GOC, a 5-year contract in Holland, very happy with that. Then on the negative side, Skandi Hav was terminated by the client and we are receiving a termination fee that partly compensate the loss of the contract. We have won some work for some anchor handlers, Skandi Skansen, Hera and Iceman, to install a fish farm in Norway in June. All in all, we have 69% coverage for quarter 2 and 51% coverage for quarter 3. This slide you have seen a lot of times before. It is not much new on that. We are around 3,400 employees spread around the globe. You also see the vessels are operating at the moment. Also a slide we have used before, it is showing that DOF is much more than a ship owner. It is also a subsea company and in quarter 1 we had 1.3 billion NOK turnover in the DOF Subsea. We have a backlog of 13.8 billion and around 1,200 employees in the Subsea group. Also a large fleet of ROVs, 71 ROVs, which is one of the largest ROV fleet in the world. Then Hilde will take you through the financials for quarter 1. Thank you. As normal, all the numbers are based on management reporting. Main highlights financially for first quarter is, as already mentioned by Mons, good operational performance. If we compare Q on Q, it was 804 million compared to 541 million last year. Below the EBITDA, it is impairment of 1.5 billion, which is reflecting a weaker market going forward. We have actually reevaluated all the value in use calculation during first quarter due to the sudden impacts in this year. It is split between vessels, so 1,447 million on the vessels and equipment and 85 million on the goodwill. High financial costs due to extreme volatility in the currency, especially a weak Norwegian krone and Brazilian reais to U.S. dollar. So our financial cost is impacted by close to 3 billion Norwegian krone due to this weakening of these currencies. This gives a loss of above 4 billion this quarter. The equity is now negative. Before we go into the numbers in detail, these dramatic impacts to the first quarter numbers was actually addressed in the Directors' Report for 2019. If we look at the financial highlights on the segments, we have achieved 94 utilization within the PSV segment, which is substantially better than last year. We have 75% utilization rate of the anchor handlers and 78 on the subsea segment, of which the project fleet represents a utilization rate of 73%. All utilization rates are actually better than same period last year. If we split into DOF and DOF Subsea, we still see that DOF Subsea represent the majority of the EBITDA, 61% compared to 67% last year. Then it is 39% for the rest of the activity and compared to 33 last year. That represent an EBITDA from DOF Subsea of 491 million this quarter. For the rest of the activity, DOF Supply, that is the anchor handler on the PSV fleet of 313 million Norwegian krone. If we split on the two groups, it is 75% utilization for the DOF Subsea fleet and 85 for the DOF Supply fleet. All PSVs have been in operation this quarter, mainly in the North Sea and mainly on firm contract. I think it is only one vessels who partly have operated in the North Sea spot market. A stable utilization for the anchor handler fleet in Brazil. At the start of the quarter, especially from February, we saw a tightening in the markets in the North Sea. But towards the end of the quarter, the impact from COVID-19 started to impact the operation and reduced the utilization, especially in the North Sea from April and onwards. High utilization on the subsea vessels on firm contracts, and improved performance from the regions. As already mentioned by Mons, by end of May, we had 18 vessels in layups, and that is the highest number ever in the group. If you look at the P&L, you see that the EBITDA is NOK 804 million compared to NOK 541 million or NOK 496 million if we include the hedge accounting from previous year. All hedges were released by end of 2019, so there are no impacts in this quarter from hedge instruments. Depreciation more or less at the same level. Here you see the impact of the impairment of above NOK 1.5 billion compared to NOK 50 million. So that gives a negative EBIT of NOK 1 billion compared to a plus of NOK 133 million last year. It's fair to say that the FX effects are very weak Norwegian kroner, especially to US dollar, has had a positive impact on the EBITDA. However, the utilization of the fleet has actually been better within all segments compared to same quarter last year. The impairment is, as already stated, based on updated value in use calculation and fair market values. On the fair market values, we have experienced a significant drop based on unexpected weaker markets going forward. On the financials, we have experienced a loss in currency both on realized currencies and unrealized currency. That gives a total number of NOK 2.9 billion in this quarter only, of which NOK 528 million is realized. Part of that is release of FX and transaction and also payment or normal amortization. So, the movements within the currency has been extreme this quarter and at levels I could not imagine when we started the year. If you look at the segments, and here you see that the segment has achieved a better operational EBITDA than the same quarter last year, NOK 39 million on the PSV compared to minus NOK 6 million. It's fair to say that during first quarter last year, we had several vessels in preparing for new contracts and performing class dockings. On the anchor handler side, that is pure utilization. It's a better utilization compared to previous year, and some of it is FX effects. You see on subsea, the comparable numbers is NOK 534 million compared to NOK 376 million, which is also better performance. So in total, that gives NOK 804 million compared to NOK 496 million. But if you look at the EBIT, you see there is a minus in all segments, and here you see the split in impairments done on the various segments, of which the largest part is on the subsea assets. Since 2015, we have done impairments, especially on the PSV and anchor handler side, and less on the subsea assets due to a newer fleet. So that's the main reason why the highest impact is actually on the subsea assets. So that gives a minus of NOK 147 million on the PSVs, minus NOK 325 million on the anchor handlers, and NOK 564 million on the subsea assets. So the EBITDA margin is pretty good, but the EBIT margin is, of course, extremely weak due to impairments done in this quarter. This is the impact after the COVID-19 and a sharp drop in the oil prices, which has resulted in expected reduced activity going forward and reduced earnings. On the EBITDA, you see the split is the majority of EBITDA come from the subsea assets, slightly lower this quarter compared to quarter last year. If you look at the DOF Subsea group, DOF Subsea is reporting in two segments. It is the Subsea IMR projects, and it is the long-term chartering, of which the majority of the backlog is within the long-term chartering, mainly the PLSVs in Brazil. If we start on the IMR project, you see a total revenue, NOK 859 million and an EBITDA of NOK 141 million. This gives a margin of 16%, which is a better margin compared to same period last year. A backlog of NOK 3.3 billion. Here is the majority of the vessels, a total 18, of which one vessel is hired in from external party. Close to 1,200 employees working in this segment. If you go to long-term chartering, it is a revenue of NOK 470 million and an EBITDA of NOK 349 million, which gives a margin of 74%, which is not far from or more or less in line on the same quarter last year. Nine vessels are in operation and a backlog of NOK 10.5 billion. If we look at the historical performance, here you see where we had the EBITDA at the same level as this quarter was actually first quarter 2016, an EBITDA of NOK 801 million, and an EBITDA of around NOK 530 million to NOK 540 million from 2017 until 2019, and then NOK 804 million in 2020. Partly impacted by FX, a weak Norwegian krone versus US dollar, but also good utilization of the fleet, which gives a margin of 39% this quarter. If we go to non-current assets, that is mainly vessels of NOK 24 billion and represent, I think in this balance sheet, it is 64 vessels in total, plus our subsea equipment and ROVs. The main impact this quarter is the equity, which now is minus NOK 245 million, and that is due to it was actually a weak result in fourth quarter, but even weaker result for first quarter due to high impairments and high losses on currency, of which the main part is unrealized loss on currency. So that gives a negative equity of NOK 245 million. You can also see that the non-current debt and the current debt is significantly changed compared to first quarter 2019, and that is due to the reclassification of the majority of the secure debt and the bond debt by end of 2019. So that gives a non-current debt of NOK 9.8 billion compared to 20 first quarter last year and NOK 18 billion compared to first quarter of NOK 5.6 billion in 2019. So that is a major change, which I will show on the next slide, showing the balance sheet. Here you see the development from end of last year and first quarter 2019. As already mentioned, the vessel values, the book value of the assets, mainly vessels, are impacted by high impairments of more than 1.5 billion NOK and the goodwill is, as you can see, now written down from 295 last quarter last year from 85 by end of the year to zero by end of March this year. That's the main changes on the non-current assets. If you go to current assets, the cash and cash equivalents are, of course, very important. If we see the operating cash flow achieved this quarter is actually 440 million compared to 443 million same period last year. If we see on the investments, it was 86 million, and that represent mainly class dockings in the fleet compared to 902 million last year. Last year, we received our last new building, a PLSV in the DOFCON JV, was delivered in January 2019. If you go to the financing activity, we have a negative number, 127 million, versus a positive number of 520 million last year. But the main impact on the cash this quarter is from the FX, which is a realized loss of 336 million. That is release of several FX position in one of our subsidiaries. That gives cash from 1.7 million by end of the year to 1.6, of which 166 million is restricted cash. Then again, you see the equity has moved from 5.6 first quarter 2019 to 3.4 by end of the year to minus 245, impacted by impairments and in currency loss already mentioned. On the long-term liabilities of 9.6 billion this quarter, that represent the debt in the DOFCON JV and the debt to BNDES for the group. All secure debt and bond loans are classified as short-term due to that waiver periods are less than 12 months. So that's the number you see of 16.5 billion NOK. The group has, however, paid installments first quarter, and the number is 360 million approximately. That represents normal amortization in parts of the group and mainly related to DOFCON and BNDES debts. As you also can see is that the gross debt has actually increased even though we have repaid some debt this quarter, and that is due to FX which has increased the debt by 2.8 billion NOK. So that was the numbers. If we take some key financials, year to date, or if we take the last 12 months, we see that the revenue has increased, the EBITDA has increased, and even the backlog. On the backlog, that's basically due to a very strong USD because most of our firm backlog is in USD. The EBITDA and revenue already mentioned is also impacted by FX. However, it's also impacted by a good utilization of the fleet this quarter. So that was it on the numbers. Yeah, then we are on the last page, the outlook. I think it is more difficult than ever to comment on the outlook. Today, we are hit by the COVID-19, and we are also hit by the last oil price drop. The COVID-19 has delayed and postponed projects. Of course, we do expect that when restrictions are gradually lifted, some of these projects will come back and will be executed hopefully later in the year. What we are seeing is that April and May has had very low activity and also that is due to projects being postponed by COVID-19. However, there is no doubt that the low oil price will have a, let's say, long, of course, we don't know how long the COVID will last, but we know that as long as oil price are at these levels, we expect the activity level to stay low. When we now have delivered, I would say three quarters with the last second half last year and first quarter this year with EBITDA above 800, we are not able to give a precise guiding for the remainder of the year because the uncertainty is very high. What we do believe is that we will see a sharp reduction in the operation EBITDA for the last three quarters of the year. We have for the next 12 months, we have the backlog of contract coverage around 50%. That's visually on the presentation, we have 69% covers for second quarter. Of course, if the market continues as they are today, it will be very difficult to build new backlog for the group. As I said, we don't know how much is influenced by COVID and how much is influenced by low oil price. Of course, it is part of the reason why we are not able to give a new guidance on the EBITDA for the remainder year. As we have said, the global markets in all segments are very challenging and the tender activity is very low. The rates level are low, and of course, the utilization are very low. Of course, for the fleet that work in the project market or in spot market has been extremely low utilization after the COVID-19 hit the global market. We expect this to be challenging also for the remainder of the year. We cannot predict when we expect this to turn, and we just have to do our best day by day in this challenging market. On the financial side, as we have said, the board and management are working on a long-term solution, and are in discussion with both owners and secured lenders. Of course, the solution now probably need to be different than the solution discussed before the COVID-19 and before the last oil price drop. Thank you. That was the presentation. We will host a call and you are all invited to call in on that, and we will try to answer questions as good as we can. Thank you very much. Thank you.