Earnings Call: Q2 2019

Aug 20, 2019

Summary

Operational EBITDA rose to NOK 712m, with second-half improvement expected on stronger contract coverage. Weak IMR returns and unresolved refinancing remain key concerns.

The EBITDA in quarter 2 was $712 million. That is up quite a bit from quarter 1, and also better than same period last year. It is good to see it is moving in that direction. Average utilization of the fleet, 74%. It is still too low. The good is that we expect higher utilization in second half. We see we already have 75% or a bit more contract coverage for second half, so it means that utilization and hopefully also then the earnings will be higher in second half. North Sea PSV market has improved. It has been good. A bit down in the spot the last weeks, with some more idle time and especially in U.K. DOF today do not have any. We fixed what we had in the spot market on value contracts. We are not exposed in the spot right now. Still very high volatility in the anchor handling market. If you look at the average earnings for the boats in the spot so far this year, it is better than last year, but it is not far away from what you need. Presently, the market is good. Almost the first time this year, we see charterers fixing anchor handlers forward, so let us hope that last for a while. We need a couple of months with good earnings too, if this is going to be a decent year for anchor handlers. But a bit better than last year. On the IMR side, it is still the same. It is variable utilization and very tough market. We struggle, not only me, but all of us struggle to get the high enough utilization to give decent return on the IMR fleet. That is more or less globally. For boats without long-term contract, it is a big challenge to make decent earnings in the IMR segment now. Of course, what we try to do is to increase the number of term contract in that space as well. On the long-term contract, it has been good. I think we have had almost 100% utilization, between 98% and 100% utilization on the long-term fleet. Very happy with that. That delivers. Part of the reason why we say we are going to make more money in second half is that we have been on acceptance tests with our friends in Petrobras. After the end of quarter 2, the three RSVs, Skandi Olympia, Skandi Chieftain, and Skandi Commander went on hire to Petrobras on three-year contracts and looking forward to that. Our estimate is that they would deliver around $4.5 million US per year in EBITDA per vessel. Of course, that will help on the earnings going forward. As we said when we presented last time, we have had challenging times in the refinancing market. We have had a vessel with problems to roll over the balloon, and we have fixed that in the short term. We got an extension for a few months. But of course, there is no long-term solution in place, and as we speak, we are of course working on a long-term solution for the group. We see a few banks very unwilling to roll over balloons, and of course, that makes it very difficult. I have not more to say about the process and the solution and the outcome today, as we are in the middle of it and have not concluded on it yet, but working hard on it. This needs to be in place within the next few months. Can I get this thing up there out of the way? Those of you who went to school last. How do I get this out of the way? Quite a busy year, not busy year, but busy quarter on contracts. I do not mention all of them. We are very proud of Skandi Hav. It was the first vessel in the DOF fleet, built in 1993, and extended with Petrobras now for a year in May. At a good rate, it is making close to NOK 40 million in a year in EBITDA. It is something we are proud of, built in 1983. Skandi Rio awarded a new contract in Brazil, not with Petrobras this time, with Total. It is good and also a vessel like the Skandi Niterói out of layup again and working for our partner, Technip, on an EPCI contract they have with Equinor on the Peregrino fields. That started up in quarter three and will keep her busy for 140, 150 days, so close to half year. Hopefully, we will find more work after that, but it is good to see her out of layup again. We do not like that. In APAC, also very happy with the five-year contract with Esso in Australia. Starting now, we left the North Sea and commencing, I would say, in October. Actually, the first long-term contract in my career in DOF with Exxon globally. We have never had any success with Exxon or Esso, so it is very happy with that. Also, the earnings are a proof of that the PSV market is back. We are not far away from the numbers we had before the downturn in the market. It is a positive reference point also for the market. We got a contract in New Zealand for the Skandi Atlantic. We also sent a press release today. We have got a new contract for Skandi Atlantic and our sister vessel, Skandi Emerald, in New Zealand, which I am very happy with. The Skandi Atlantic, Skandi Emerald, and that fleet is medium-sized tankers and, of course, they have been one of the toughest classes to keep going. We see it is. Skandi Atlantic was taken out of layup earlier this year, and we see a shift in the market for those type of vessels as well, where we now have. I think we had two out of five boats working last year. Now we have four out of five boats. It is moving in the right direction. In the North Sea, on the IMR side, subsea side, we won quite a few shorter contracts. You can say on the IMR fleet globally, we have decent visibility in quarter three. We believe August, September will be okay months and then, of course, there is a challenge as normal in quarter four. Quarter three looks okay at the moment. Then we also got three, five-year contracts with Conoco on the Skandi Nova and Skandi Marøy field, which we are happy with, and continue to build the backlog. This is not new, I guess. There are some movements on the boats and still around 3,500 employees and still 67 boats. I think the new on this map is we have three boats in Guyana, two PSVs and one subsea boat and working down there at least, I think, well into quarter four. It is an interesting place where we see Liza-2 going to happen after Liza-1. Then we are also waiting for Liza-3. We think it will be more to do in that area. Not much new on this slide. Then Hilde will do the financials. Thank you. As already said by Mons, the operational EBITDA of NOK 712 million, which is approximately NOK 200 million more than first quarter this year. An average utilization of 74%, 93% in PSV, which is much higher than previous quarter. That is mainly due to several vessel mobilizing for new contracts in first quarter. So we had zero PSVs in layup this quarter and high utilization and good performance. On the anchor handler segment, 69% utilization, which is slightly higher than previous quarter, mainly due to seasonality and also that one vessel was idle the entire quarter in first quarter. That vessel went on hire on a new contract in May in Brazil. We also see that utilization in the North Sea spot market has been better than last year. However, still high volatility. On the subsea segment, it is 67%. A generally high utilization, a good performance on the long-term chartering vessels. However, variable and low utilization in some regions, especially the Asia-Pacific and Atlantic region. As you see, still, if you split in the segment, our main portion of EBITDA comes from the subsea, and the rest from the anchor handler and PSVs mainly. DOF Supply and subsea. Here you see it in numbers. DOF Supply, that is the PSV and anchor handler fleet, an EBITDA of NOK 267 million this quarter, and NOK 445 million for the DOF Subsea fleet. If you take the overall utilization for these two groups, it is 72% in DOF Subsea and 75% in DOF Supply. By end of the quarter, we had five vessels in layup, three anchor handlers and two PLSVs, of which one is currently mobilizing for a new contract which start up late third quarter. If you look at the numbers, I will focus on the two columns here. This quarter, separately, it is NOK 712 million in EBITDA compared to NOK 594 million last year, and NOK 669 million compared to NOK 560 million if we include the hedge accounting. Already mentioned, good performance the PSV fleet, all vessels in operation. On the anchor handler side, it is improved, but still high volatility. On subsea, good performance on long-term chartering and variable from the regions. If you look at the impairment done this quarter, it is NOK 154 million, and mainly relates to the oldest part of our fleet. What we have experienced both last quarter and this quarter is that the broker valuation has stabilized. The impairment is actually done only on the oldest part of the fleet and where we see that there is a risk of low utilization on this part of the fleet, and it's actually mainly the old vessels in layup. Not much to say on financials. No big movements in the U.S. dollar. How we are funded, it's Norskan and DOF Subsea who has a dollar debt, and DOF Rederi is only Norwegian kroner. Cash-wise, we are actually hedged. That's something I've mentioned several times, that on Norskan, we have a balance risk due to the U.S. dollar, but cash-wise, we are actually perfectly hedged. If you look at the segment, and if you see on the operational EBITDA, if you see the PSVs is for 43 this quarter compared to last year, 31. On the anchor handler, 183 compared to 131. 443 compared to 398, and that gives a total of 669 to 560. You see in all segments, we are performing better than previous quarter. On subsea, it's mainly due to more vessels on firm contracts, the PLSVs. On anchor handler and PSVs, nothing more that we have achieved better performance. Here you see where we have done impairment. It's on the anchor handler side. It relates to a few very old vessels, and the same goes for subsea. Still the same trend, here you see the segment to represent the highest part of our EBITDA. If you look at the balance sheet, and here I'm comparing last quarter with this quarter, you see on the long-term asset side, nothing to report really. All new builds are delivered and the last new build was delivered in first quarter this year. On the operational side, we achieved an operation cash flow of 586 this quarter compared to 358 last year, same period. On investments, it was minus 237, and that's mainly due to conversion and main class renewals. No new build CapEx this quarter. On financing activity, it was minus 476. That is mainly normal amortization. Here you see the movements on the non-current interest-bearing debt. Normal amortization this quarter was 550 and is one bond loan that is moved from long-term to short-term. If you look at the current portion of long-term debt, that mainly includes a bond loan. A bond loan, which is partly due in October this year and May next year. Amortization estimated approximately 2 billion NOK and balloons of 1.2 billion. Credit facilities and other interest costs mainly. On the equity side, no movements on the convertible loan. However, in third quarter, some parts of this loan has been converted to share, but that's third quarter. If we look at the historical performance, we see if we follow the EBITDA from 2016 until now, 712, and you see an improvement from last year to 2019. Of course, we hope that will continue. If you look at the net interest in bearing debt, it has gone up, and that is mainly due to one more vessels delivered this year. If you look at the key figures, some historical figures here as well, this is the revenue the last 12 months, and you see it's slightly up and also on the EBITDA, which is positive. But if you look at the backlog, it's slightly down compared to last year. However, I recognize that in first quarter, we reported a backlog of NOK 20 billion, and this quarter we are reporting the same number. We have actually built backlog this quarter as we did last quarter. If you look at the debt maturity profile, and if you take DOF excluding DOF Subsea first, you see here that there are some balloons that is moved until 2020. As already mentioned by Mons, we reported in first quarter a new situation that we have problems on regular rollover on balloons. Which again, is a new situation, and we have achieved a short-term solution. However, we are working on a long-term solution, and we believe that we will succeed on that. DOF has historically had a good relationship with our banks, and we still have, and we will continue to have that. A long-term refinance solution is in process. If you look at the same in DOF Subsea, no big changes here other than that one balloon is moved until later this year. If you see our counterparty exposure, you see that our main exposure is with ECAs. That is mainly export credit facilities like EC and BNDES, and regular bonds 36%, and then bonds 12%. Here you see the bank balance from 2018, which has slightly changed from previous quarter. Then you will take DOF Subsea, Mons. Yeah, a few slides on DOF Subsea. Not say much about that, but now we have stabilized on 27 boats and no new builds. On the employee side also, it is more or less stabilized. I also note that next year, DOF Subsea is 15 years anniversary from it started in 2005. I do not go through the history, but it has been an interesting journey, at least. On the numbers with DOF Subsea, we see revenues picking a bit up last 12 months. We also see that EBITDA is in the right direction and the backlog a bit weaker. That is also partly on currency. Hopefully, the trend on the two first graphs continues. As I said, we believe quarter three will be okay also for DOF Subsea with a decent visibility on the backlog. This is the segments and of course, we and most of our competitors struggling is on the margin, on the earnings, on the IMR side. We see the margin is 10%, so it is too low. Of course, that is where we have the main focus is to reduce the exposure on that and to increase the margin. We are working on that, and hopefully we are going to win a few contracts that will help us on that side. What happened was that quite a few of the vessels working on long-term contract, and through the downturn of course, they were redelivered and of course, so they were moved into the IMR side. We are working hard to increase the backlog on that fleet. Hopefully we will succeed on that, but they take time, of course. On the long term, it was a decent quarter with good utilization apart from Skandi Vitória and Skandi Niterói that has been in layup. Skandi Niterói is out working and will make money again from late quarter 3. That's how we split. We all see that the challenge here is on the Subsea IMR side. Then on the outlook, we believe second half to be better than first half. As we said, we have 75% full backlog for second half, and of course, that means that the utilization will be higher than first half. I think we can confirm that the activity is increasing in most regions, if not all. But of course, still oversupply of vessels and services. The activity is, I think we can state that if you go to APAC, we will see more drilling, but still slow on the IMR side, but more drilling. You also see that on the boat side that we win more contracts in APAC than we did a while back. In the North Sea, there is no doubt that the market is more busiest with first mover on the PSV side, but still not quite there on the anchor handling side and still too competitive on the IMR side, but higher activity. In Brazil we're working quite a few tender these days and we expect more. Also think that Brazil has started to move in a more positive direction. But it will take time before we see balance in all the markets. On the financial side, Hilde mentioned that, and we repeat that, the risk has increased on refinancing, and still we have a few balloons that is only fixed short-term, and that has to be sorted long-term. The board and us are working on a long-term solution and of course, as I said, it's too early to comment that in any detail. We are working on it, and hopefully, we can tell you more next time we meet in November on the quarter 3. That's where we are. Then we are open for questions.