Earnings Call: Q3 2021

Oct 21, 2021

Good morning, and welcome to this presentation of PGS Q3 Results. My name is Bart Stenberg, responsible for Investor Relations and Corporate Communications in PGS. Before we start, I would like to give some practical information. This presentation is being webcasted and the audience on the webcast are invited to ask questions after management's concluding remarks. I would also like to draw your attention to the cautionary statement showing on the screen, so please study that carefully. The agenda for the presentation is that Rune Olar Pedersen, President and CEO, will take you through Q3 takeaways, Financial summary and some comments on the order book. Then Gottfred Langset, EVP and CFO, will take you through the financial review of the Q3 numbers. Then Rune Olar Pedersen will be back to give you an operational update and market outlook, an overview of the guidance and then a summary and Q and A. So with that, it's my pleasure to give the word to you, Rune Olav. Thank you, Borr. And good morning, everyone. Our Q3 2021 results were impacted by a trend We have seen for some time, namely with further contract market improvement and weaker MultiClient segment, this time represented by weaker late sales in particular. We had high contract allocation and improving rates, which we will come back to in the Q3. On the MultiClient side, we had attractive MultiClient acquisition programs This time, particularly in Canada. And we saw on the late sales side, as I said, muted interest with continued low spending. We do expect seasonal late sale increase in the Q4. We had strong cash flow in the quarter, helped by a working capital development, which is now getting closer to a normal level, which is good to see. We also see an improving contract and MultiClient order book year over year, And we are approximately 50% up from the Q3 last year and sequentially from the Q2 this year, only slightly down. In the quarter, we also saw our first significant sale from our library to a Carbon Capture and Storage player only, which is good to see that this part of our business is starting to generate revenues. We continue to expect higher 2021 segment revenues than what we reported in 2020. On the financial summaries, I will be fairly brief as normal. I can comment that we had Decent cash flow from operations this time and it is good to see that it's improving over the last quarters. Our segment EBITDA was obviously impacted by the fact that we allocated most of our capacity to contract in the quarter And the EBIT impacted by the fact that we had fairly significant amortizations and low late sales. Gottfred Langset will come back to these numbers in his review. On the order book, It currently or at the end of the Q3 stands at SEK241,000,000 and SEK51,000,000 of that is related to MultiClient. And as you can see, we've had a steady increase of the order book from the Q2 2020 and up to last quarter and only Slightly down now in the Q3 as we are booking up the winter season and it's a normal trend for us to see. On the vessel booking, we have booked 13 vessel months in the 4th quarter, 7 vessel months in the Q1 2022 and six vessel months in the Q2 of 2022. We have 2 vessels with unsold capacity in the 4th quarter. And we are in detailed discussions for programs starting in Q4 for both these vessels. But it is clear that we will incur some idle time in the Q4. I can also mention that the 6 vessel months in the Q2 of 2022, in fact, does not really represent the strong Demand for acquisition services we see over the summer of 2022, which I will come back to. And with that, I will give the word to you, Gottfred, for to go through the financials. Thank you. Thank you. I will be short on the key financial figures, Segment revenues and other operating income, SEK 131,700,000. This is an 11% sorry, 13% increase from Q3 last year. Some will remember that Q3 last year It was impacted by receipt of government grants, NOK 23,000,000. So adjusting for that, Call it operating revenues increased by approximately 40% between the quarters. EBITDA, dollars 55,600,000 EBIT negative, dollars 40,000,000 We had very high amortization relative to MultiClient revenues or sales, which impacted the Q3 2021 EBIT. I'm going to move to revenues For the Q3 operational highlights, we had contract revenues in the quarter of NOK 66,000,000 59 percent active time for contract and a 40% approximately sequential increase of revenue per vessel day. If you look at the graph, you will see that we used less of our capacity for contract and at the same time delivered higher revenues. If I move to MultiClient revenues, SEK 60, sorry. I apologies, I lost my thought flow a little bit. Let me recapture. Total segment MultiClient revenues of NOK 60,000,000. Prefunding was NOK 35 €300,000 that is a prefunding level of 101% in the quarter. Revenues by region. North America, the main contributor to prefunding revenues, while most of our late sales was From Europe Library. Moving then to Vessel utilization, we had 68% active vessel type in the quarter based on 6 vessels. For the next quarter, Q4, we will have an overweight of contract work. We will have some vessel relocations in the quarter, and we will have standby type relating to unsold capacity. I then move to cost. We are substantially down from the pre COVID levels of cost, and cost remains a key priority and develops in line with plan. We have a year on year cost increase compared to Q3 last year. That is primarily due to more operated vessel capacity, higher project costs, That includes node and source vessel operations. And in addition, we're impacted by higher fuel prices and an appreciation of or strengthening of Norwegian krona and some other currencies against the U. S. Dollar. We now expect the full year cash costs to be in the range of €400,000,000 to €420,000,000 Then balance sheet. We had cash and cash equivalents At quarter end of NOK 193,000,000 and cash and cash equivalents, just To clarify that, it does not include restricted cash. It's only the unrestricted cash. The SEK 193,000,000 is an increase of SEK 36 0.3% from the start of the year. Net interest bearing debt, including our lease liabilities, is reduced by €50,100,000 year to date, standing now at 1,046,000 Book value of the library, SEK 489,500,000 based on IFRS and slightly lower than that based on our segment reporting. If I then move to cash flow. We have returned to generating positive cash flows in what I would describe as Still very challenging market. The Q3 net cash flow was 37,600,000 We have broken that cash flow down in the graph at the top here. And as You can see this is the net cash flow. So it is after interest payments of just north of $20,000,000 and also payment of lease liabilities and interest. The lower graph shows our net cash flow similarly per quarter so far in 2021, Positive trend or development, note that in this illustration, we have Excluded the SEK 19,300,000 of 1 off net payments that we made in connection with the debt rescheduling earlier in the year. So the aggregate of these three quarters or year to date, we had €55,600,000 of net cash flow. Working capital, as already pointed to by Rune, We're seeing a reduction since our DSO or days of sales Outstanding for accounts receivables and accrued revenues are moving closer to our long term Average, we still have some receivables left with extended credit terms. Thus, we expect the DSO to come down further. Last point on this Slide is just to clarify. It has been said earlier and stated in our quarterly reports, but interest payments on our export credit financing Then my last slide. This slide is on the 2022 debt maturities. As shown in the graph on this slide, with the cash position we have at end 3rd quarter, we need only an additional SEK 17,000,000 of net cash flow for the next 12 months to meet the September 2022 term loan maturity. As Explained already on the previous slide on cash flow, in the Q3 alone this year, we had SEK 37,600,000,000 and year to date, We have generated net cash flow of SEK 55,600,000. On that backdrop and with this Cash flow generation in 3 quarters of 2021, generating more than SEK 17,000,000 In the coming 4 quarters does not appear very challenging. Adding to that, We are in a recovering improving market, and we do expect higher revenues now in 2021 compared to 2020. So it is clear that we expect to generate sufficient cash flow to repay the 2022 maturities and be in position to refinance then the later maturities. I will stop there and then give the podium back to you, Rune Olav. Thank you, Gottfred. Well, fleet activity in October Or as we speak now. Ramform Hyperion now demobilizing in the North Sea. And she will then go to yard and do classing before heading south. Ramform Vanguard still operating on a large survey in the Black Sea, where she will continue to operate through the year and into the Q1. Bramform Atlas currently standby in Las Palmas, waiting for new assignments. Ramform Titan in Barbados starting to mobilize Today or tomorrow, I believe, Ramform Tethys close by in Suriname on a project a large project there. We have then lastly Ramform Sovereign, which is operating in Asia Pacific region and has started on a large multi client survey. Contract market continues to improve and you can see that from the healthy Leading activity we are seeing. This is the active tenders and the active leads. The dark blue is the dollar value of all the tenders we currently have in house. The light blue is that dark blue line plus The dollar value of all risk weighted leads. And as you can see, they are now approaching or above pre COVID levels. We are seeing a significant volume of leads and tenders for 2022 summer season, as Mentioned when I spoke on the booking numbers. And we are in the process of booking up Significant activity in or during the summer season of 2022. And part of that is driven by an effect that we see a significant increase in the 4 d activity in the North Sea season and else Where? We expect production seismic or 4 d activity to increase significantly in 2022 and approach or reach record levels. We are currently seeing more than 30 4 d streamer projects planned for 2022, identified and planned. Previous record This 24 surveys, which we experienced in 2012, which is quite some time back. These more than 30, we are seeing project planning well advanced for at least 26 of them, either being active tenders, being awarded or in close dialogue, I should say, with us on this. It is not unlikely that we will see further increase in 4 d activity in 2022 as we are only in October at this stage. So Very positive to see the number of 4Ds rise to such a level next year. As most of you know, we have a strong position in the 4 d market. And obviously, this trend is in line with What we are seeing in the market where spending on production seismic, increasing production from existing fields has a greater focus currently than more frontier explorations. And this is an evidence of that also coming through into our So a very positive for next year. We are also seeing recovering contract rates. So what you're seeing here are the rates we have achieved in Q1 2021, Q2 2021, Q3 2021 And also the rates we have already booked for the Q4 of 2021. These rates are adjusted for node operations, source vessels, so that they should be on an apples to apples basis. From Q1 2021 until Q3, what we realized in this quarter, there is an increase of approximately 55%, which obviously is a very healthy increase in rates. That has a positive spin because we achieved higher rates in the Q3. It also shows you how challenging the first part of this year was. We expect activity, as you understand, to increase coming into 2022, and we expect prices to recover further. On the supply side, we see historically low supply. We also see a seasonally capacity reduction going into the Q4 of 2021. And we expect To operate 6 vessels through 2022. We can Introduce the 7th vessel. We have the vessel is ready to go. We have streamers for it, but we will focus on profitability overcapacity. So for that to happen, we will need to see materially higher both activity level and rate level into 2022 than what we're currently experiencing. Changing gear a little bit, I mentioned in the first slide that we have seen our first significant data sale solely for the purpose of carbon capture and storage. This is a data sale, which is multimillion dollars, Less than 5, I should say, to give you an indication of the level we are talking about. It is very positive to see that this Part of this new business unit, the new energy is starting to generate real revenues for PGS. We expect to see more MultiClient data sales going forward. I can't promise that we'll see it every quarter. I mean, this is a slow start, But it is an area which we will expect to grow also from the MultiClient late sales perspective. The more interesting part of this story is the 4 d activity, which Carbon Capture and Storage will require. And we are seeing 3 baseline acquisition tenders, which are scheduled for 2022. They are in And therefore, the indications that I have given you. And we expect to do 1 or more of these. So we expect to have higher revenues from carbon capture and storage in 2022 than we have had in 2021. Now That is obviously positive, but the real story about carbon capture and storage is about the future. And what you see in the middle graph here is Some CO2 storage scenarios in 2,050 from various sources. The first one, the green one is from the Global CCS Institute. Then you have the yellowish or lighter green, which is the EEA Net 0,250 report. And all the blue ones are different scenarios by IPCC And they have a median where you see at approximately 15 gigatons there. So what we have done is we have taken these scenarios And we have tried to estimate what does that mean in terms of vessel activity seismic vessel activity. Get the graphs you see there with vessels on Okay. It appears that we've had some technical problems and that we lost the Internet for a minute. And I'm going to try to rewind a minute. Not really sure where that was, but I will start on the mid part of the graph here, where what I said is these are different scenarios For CO2 storage in 2,050. And you have the Global CCS Institute, the green one, and then you have the EEA Net 0,250 is the yellow or light green one, and all the blue ones are 2,050 scenarios from IPCC with a medium value of 50 gigaton of CO2 stored in 2,050. So potentially, this is a large market going forward. What we have tried to do moving to the right graph is to indicate what kind of demand or how many vessel years Will it require to address this market? So we made certain assumptions. First of all, it is clear that when you're During CO2 in a reservoir, you need to do 4 d monitoring to see that the overburden holds that is not leaking CO2. So that's in a way given and we're seeing that already next year as people are starting to do their baselines. Secondly, we are seeing that or we are assuming that approximately half All the CO2 will be stored offshore and half onshore. Onshore is not relevant for us. Thirdly, we assume that Approximately 5 megaton can be stored in every reservoir. And that it will take us approximately 3 weeks, So a short 4 d survey to shoot that reservoir, that is including mob and demob. And lastly, that you need to do a 4 year repeat every 3 year as you're inserting into the reservoir. And if you take these assumptions, these are the numbers that come out. And if you look at 2,030, you could see a Vessel year market of between 2% to 4%. In 2,050, you could see a market between 9 and yes, it goes through the scale, 9 and much higher than the current world fleet of seismic vessels. Obviously, there is large potential and that is the purpose of showing this. This is not exact science. This trying to assess what is the demand going to be in 2015, how we're going to address it is Obviously, only a scenario planning can be nothing else, but it shows the very large potential for New seismic surveys and acquisition in the area of CCS. Now it's also a pleasure today to be able to announce that we have entered into a strategic collaboration with MagSize Fairfield, the premium OBN player. Together, we will address The growing hybrid towed streamer and OBN market. We believe this is a fairly large untapped market. And those of you who follow us closely will know that we did a combined OBN and streamer job during the summer this year For Lundin, and the first indication from the is that the data is superb. We believe that together with MagSize, we can address and grow a market where It is necessary to improve the data quality above what we can deliver with streamers And do that in a cost efficient way, which is significantly cheaper than doing it only with nodes. So we believe there is a sweet spot and a large untapped market opportunity for a collaboration between ourselves and MagSize to address this market. The initiative has a global scope, but it will have the initial focus on the North See, this is a 1 year agreement with options to extend further. So we are enthusiastic about this, And it's going to be really exciting to see what we can deliver together with MagSize in this space. Guidance, we have put up a new slide here, so that you see both the year to date performance and Our 2021 guidance, I will focus on the guidance here. Our group cash costs, we now guide in the range of SEK 400,000,000 to SEK 4.20,000,000 down from approximately SEK 425,000,000 Our MultiClient cash investments, we guide at approximately SEK 100 and 25%, which is also a reduction. Our active three d vessel time allocated to MultiClient, we now guide Approximately 35%, down from approximately 45%. And as Goltra has indicated, we will only have 1 vessel doing MultiClient during the 4th Quarter, our CapEx are still guided at approximately $40,000,000 So in summary, What are we seeing? We're seeing further contract market improvement in the quarter and going forward. We're seeing a changing and challenging MultiClient market. While we do believe that sales is likely to improve going forward, And we absolutely expect a seasonal late sale increase in Q4 as we see almost every year. We're seeing increasing demand for new acquisition surveys with record high 4 d activity expected in 2022. We have a healthy order book and we do expect higher segment revenue in 2021 versus 2020. We expect to generate sufficient cash flow to repay 2022 debt maturities and be in a position to So with that, I leave the word back to you, Board, for Q and A. We have our first question from a private investor, I believe. It's he asked how has Q4 started regarding late sales expectations and then he also indicate that we expected some market improvement in the Okay. Well, I think I've touched on the market improvement Quite extensively through the presentation. With respect to Q4, late sales is obviously too early to indicate How that is going? But when we say we expect seasonal late sales increase in the Q4 like we normally see, It is based on both general market outlook, commodity pricing, but also on communication from our larger clients That is giving us the confidence to go out and say that we expect this to happen also this year. So it is both a general Assessment to the general market and based on concrete comments from several large clients. Very good. Next question is from Mick Pickup in Barclays. You see a big increase in 4 d. How do you see this as a signal of the industry getting back to work and inherent worries about decline rates? Yes, I think this is due mainly a little bit due to, call it, pent up demand, demand that we Should have seen being done in 2020, in particular, where the if you follow the normal regularity of 4Ds. But when you have a low oil price, people don't want to increase their production. So it's a little bit of a shift like that. But I think mainly it is a reflection of the fact that our clients currently are allocating a larger budget To increasing existing production than they are to Frontier Exploration. And with an oil price of €85,000,000 everyone is eager to make sure that they can get the most out of their reservoir. So So I think there is a combination going on here with oil price, allocation of budgets, which is now finally playing through into our markets. Then we also have another question. Can you talk about restricted cash and what is to be used for? And then he also wonders whether the 2022 ECF repayment of NOK 28,000,000 is included in restricted cash? No, in a way, restricted cash in our balance sheet is there are multiple elements. But as described in our earnings release, a Fairly large portion of that is for debt service for the ECF financing. These most of this will be held until the last maturity on each of the 4 tranches. But over the deferral period that we have now for a bit over 2 years, We will cover the interest payments from the Restricted earning one of the restricted accounts. The payment that restarts late installments late Q4 next year will not be paid by restricted cash. Very good. Then we have our next question from Andre Klotz in Jefferies. He asked 2 questions. What is the revenue or the EBITDA opportunity in the 4 d seismic business given the growth you expect there? Typically, we have somewhat higher Rates and revenues from our 4 d activities than what we do from 3 d activity. It has at least historically had something to do with our position in that market. It normally requires multi sensor streamer, Where we obviously have that on all our vessels, while competition has it on very few. A lot of these 4Ds Our shot with GeoStreamer in the baseline and repeats. And there is a preference to continue with the same technology. So typically, higher 4 gs activity indicate higher rates in general. And I guess, is what I can say about that as of today. And his second question goes to you, Gottfred. Where do you think you need to be bridge wise in early fiscal year 2023 to refinance the debt? No, I don't think I want to quantify that in a Leverage, we expect to improve quite significantly. We're now just below 3%. We expect In a way, a better market and better financial earnings numbers in 'twenty two. And As already commented in the presentation, we expect that our debt will reduce. So I can't quantify that. More important for us, we will likely then see an improving or reducing leverage Ratio, as important is in a way in my head, we'd be demonstrating that We have been able to generate the cash flow required to repay the 2022 maturities. And secondly, that we operate In a way where we generate cash flow and demonstrate debt servicing capacity, those are Things are critical for successful refinancing and for achieving our ambition, which is to refinance With a lower cost of debt as well when we go forward. Then we have a series of questions from John Olaisen in ABG. Your Q3 late sales was the lowest quarter Quarterly numbers seen in about 10 years. Hence, it does not take a lot to see us see it's not uptick in Q4 as you say you expect. Would it be possible to give some indication if you expect Q4 2021 late sales up relative to last year? I think I will be careful With that giving any indication, I mean, it is early. I agree. Q3 is very low and an uptick just an uptick wouldn't be enough for us to be satisfied. That is obviously clear. We believe we're going to have higher revenues. We believe the markets are somewhat better now than what they were last year. But where we will land versus last year is still I'm going to be hesitant to say that Because if I do, I'm also guiding on the full year revenues to quite a large extent. And the second question is about refinancing. You say that you expect to be in position to refinance. Could you elaborate, please? How much do you need to refinance in 2022 on top of the maturities? And do you expect And do you think you will be able to refinance without having to raise more equity? Yes. In a way, we I will partly answer that on the previous question, I think. But with repaying the maturities In 2022, from available cash and cash flow generation until then, that would reduce our Interest bearing debt by some approximately $150,000,000 And then How much we need to refinance is a bit down to the timing of the refinancing in a way, whether it's early Sort of in our planning period, which by the way sort of sometime between mid-twenty 2 and early 23, we will obviously have capacity to From cash flow to repay, so further maturities in 2023 with cash flow, but In a way, the step up in maturity or amounts is designed so that in a way it lends itself to refinancing before most of the 2023 maturities. So we envisage refinancing Most of the then remaining debt, maybe all, probably all, We do not anticipate using equity as part of that refinancing. And this next question is about contract backlog and contract rates. I'm positively surprised about the contract backlog of about NOK 190,000,000 which is on par with the backlog as of Q2. However, you have not published or announced a single new contract during Q3. As I understand it, your policy is to publish all contracts about $10,000,000 to $50,000,000 in value. Does that mean that the order intake During Q3 has been a number of smaller contracts. Well, here there is that element. And the other element is the fact that we to be able to announce The contracts, we need approval also from our clients. And that approval sometimes, Unfortunately, comes later than and significantly later from time to time or not at all compared to when we Sign the contract and when it is put into the order book, so there is a lag effect. And there is also an element of Smaller contract or let's say existing contract becoming larger, so the incremental increases to it. Yes. So there are different effects here. I agree that this may appear a bit Odd, but this is the way our business works. So there may not always be A one to one match with the timing of when we announced stuff and when we put it into the order book because of these reasons, unfortunately. Then he also asked a question regarding margins or the EBIT range. Are contract rates now in positive EBIT range? We're not going to give a Concrete answer to that. But obviously, as you see, the increase is quite substantial. It is at least close or above. It is not significantly below. That's good. That is obviously clear. I think it's fair to say that, yes, we're in EBIT positive range in most of the contracts in the Q3. Then his last question, which you have touched upon already, Rune. How big was the CCS revenue booked in 2021? Yes. In 2021, in total, we had a small sale also in Yes. 1st quarter or 2nd quarter, but that was in the range of less than $1,000,000 And now we had a sale of less than $5,000,000 So we're approaching $5,000,000 of CCS Revenue so far this year with E sales. Very good. Then we have another question from an investor. How many additional receivables do you still expect to collect? We expect to collect all of our receivables, of course. But in a way, as we said in the presentation, we have some with extended payment terms left. We will generally have a limited amount of such most of the time, but have had for a period of time more than usual. That has now been built Down. We need we expect to collect that in a way part, which is over and above in a way our standard payment terms, collect that over the next 6 months, most of it early next Yes, pretty much. In a way, we I'm not sure whether it really answers the question, but we expected this all to Come down. I guess it's a question regarding the day sales outstanding and working capital related type of question. Typically, when we have extended payment terms, it is typically to get it into the next financial year. So you're getting from that deduct that when it comes into the Q1 or early in Q1, that's typically where these things tend to mature. Can you give a sense of vessel activity you expect to allocate to MagSafe's collaboration over the next 12 months? That's too early to indicate. We will have to see what we obviously hope to have a few Material surveys during the 1st year. I mean, we are embarking on fairly new grounds here. So in the beginning, we need to Work up some areas, bring it to our clients and then bring it to live surveys. So that will take a little bit of time before we see that as a material part of our business. Then we have a question from Kevin Bu in AlphaValue. On CCS projects, Are you going to sell dedicated data for CCS or is it the same as MultiClient data? Both. We are also making dedicated, I would call it, product based on our data, which is designed To be specifically for CCS players and addressing their problem and What they are looking for. But we're also selling general normal multi client data to CCS players. So there here we have a combination. What we've done so far is normal data without much. We haven't done a lot with it, But we are also doing making products addressing the CCS market. And we don't have any Further questions from the people on the webcast, so we can pause for a moment to allow people to type in any last minute questions. I think that concludes Q3 presentation. So thank you for watching