BW Offshore Ltd

OSE:BWO

Earnings Call Transcript

[Operator]

Welcome to the BW Offshore Annual Reports 2021. [Operator Instructions]

I'll now hand the floor to Marco Beenen, CEO.

[Marco Beenen, executive]

Good morning and afternoon. Welcome to the presentation of our fourth quarter 2021 of BW Offshore. It's my pleasure to host this conference call together with Stale Andreassen, our CFO, who will present the financial results, and I will start with a general update first.

Please note our disclaimer, and then I go to Slide 3. Highlights in the fourth quarter are the Barossa project is progressing well and on schedule. We're very pleased with the success of BW Ideol as one of the winners of the ScotWind leasing round, obtaining an option agreement for a site of close to 1 gigawatt of floating wind power. We're progressing with making divestments in the noncore fleets with the sale of Joko Tole to a local Indonesian operator as well as the recycling of Cidade de São Vicente, which is currently laid up in Oman.

For the year, we delivered a solid financial operational result with full year EBITDA of USD 401 million and an operating cash flow of USD 510 million. As announced earlier this month, we have made an impairment of USD 86 million for units which were in lay-up or approaching end of contract and without opportunities for extensions or redeployments. This frees up liquidity, and that has a marginal impact on our operational cash flow. And it's, therefore, the right thing to do at this stage, but I'll come back to that further down this presentation.

Operational update. I'll start with the Barossa project. The project is on schedule with close to about 20% of progress as planned. Engineering is maturing well, and most of the procurement and subcontracts are now locked in. Fabrication of hull and mooring is on schedule, and we've started early fabrication of the topsides end of last year, 4 months earlier than planned.

On the supply chain side, it's more challenging. We're dealing with the market of inflation, and that puts pressure on our cost. But this is being absorbed by budgeted contingencies, and this now flattens out as we are at about 90% of our total procurement packages that have been placed. So overall, both our client, Santos, and we, as management of the company, are very pleased with how the project is progressing so far.

Moving on to the fleet performance. We are pleased with the downward trend of the total recordable incidents, including the LTIs. We did, however, have 5 recorded high-potential incidents in the quarter, which is too much. And we're very focused on high-potential incidents because those are leading indicators. It's incident without consequences, but that could have consequences. So we're focusing on that, and we're implementing the lessons learned from the investigations of those incidents. The commercial uptime in the fourth quarter has been affected by shutdowns of Sendje Berge and Espoir. However, the financial impact is limited as the 3 core operating units delivered very good uptime.

Including Barossa, 90% of our backlog will now be delivered by the 4 core FPSOs that you see on this slide. The total backlog, including probable options, amounts to USD 7.7 billion, of which 85% is firm. So Catcher in the U.K. delivered a high commercial uptime in this quarter with production around 47,500 barrels per day. Adolo in Gabon has increased production now after the 2 new production wells of the Phase 2 Tortue developments were hooked up end of last year. This was delayed due to COVID, but we're very pleased that we now produce from 6 wells on the Tortue field. And then Pioneer in the Gulf of Mexico continued to deliver high uptime, and this results in stable cash flow for both us and our client, Murphy Oil. So together, this provides a solid and predictable long-term cash flow.

For the remaining fleet, we're looking at opportunities to rationalize the portfolio by divesting units which are close to the end of contract or in lay-up, but in case there's no visibility of an attractive new contract. And this creates actually the opportunity to streamline and simplify the organization, free up liquidity. And there's not really a significant impact on our operational cash flow. In turn, this helps us to accelerate the investment in offshore energy infrastructure with large FPSOs on long-term contracts with long predictable revenue, similar revenue streams.

So more specifically but already mentioned in the highlights, the divestment of Joko Tole, including the offshore and local onshore organization; recycling of Cidade de São Vicente, and this will be executed in accordance by -- in accordance with the BWO recycling policy as well as the Hong Kong Convention. It will be closely supervised by ourselves and a third-party supervisor in the yard to make sure that there's full compliance with these processes. The ownership of YKN in Mexico will be transferred to the to our client, Pemex, and this is in accordance with the contract. We have to find a clear training program and a mobilization plan for Pemex personnel. And we're also supporting them to implement their management system to ensure a smooth and safe transition in July this year.

Diving a bit deeper in the noncore fleet unit by unit. I discussed YKN, but also, Petróleo Nautipa in Gabon will disappear from the fleet during this year. On Espoir, we're discussing a short-term contract extension. And the units in Nigeria are both on the contract till the end of this year. We're keeping Polvo and BW Opportunity as promising redeployment candidates, while we are preparing recycling for BW Athena and Umuroa. So as you can see, these units form economically only a small part of our portfolio, covering only 2% of our revenue backlog.

With that, I hand over to Stale to provide you with more details about the financials of the company.

[Ståle Andreassen, executive]

Thank you, Marco.

Operating revenues came in at $203 million in Q4, and we delivered an EBITDA of $102 million. Underlying financial performance has again been steady this quarter with high uptime on the core units and Espoir back in operation from October, while Sendje Berge continued to be shut down for tank inspections, although this has limited impact on financials.

The Norwegian War Risks Insurance, DNK, which BW Offshore is a member of, decided to make a distribution to members during Q4. BW Offshore received net $7.5 million from DNK. This, together with the release of certain provisions by year-end, has resulted in a positive EBITDA impact of approximately $12 million for Q4, leaving us with a run rate EBITDA of approximately $90 million.

Going to the overall income statement. EBIT for the fourth quarter was negative $50.9 million after a net impairment of USD 86.3 million on the FPSO fleet. Impairment charges were recognized on the units Athena, Espoir, Sendje Berge, Joko Tole, Petróleo Nautipa and Umuroa. We also reversed a previous impairment of approximately $4 million related to the sale of Cidade de São Vicente in the fourth quarter. The impairment reflects our reduced expectation of longer-term extensions on the current contracts for the units that are still in operation as well as limited potential for future redeployment of these same units despite that we see higher energy prices.

On the financials, you can see that we recorded a positive mark-to-market effect on our financial instruments of $5.9 million in Q4, which is adjustments to our interest rate swaps, as we see long-term interest rates are going up and our hedging instruments are increasing in value.

During October, we sold 20 million shares in BW Energy at NOK 28 per share, which was significantly above our cost price, resulting in a gain from that transaction of $14.9 million. In addition to this, BW Energy had 2 liftings in the quarter, which increased the net result quarter-on-quarter, and gave a total contribution to BW Offshore of $23.7 million, as you can see the share of profit from equity-accounted investments.

Underlying taxes from operations were affected by 2 one-offs. The first is a write-down on deferred tax asset of $11.8 million related to the sale of Joko Tole that's been announced. The second one is coming -- is a positive effect as we have finalized our assessment of tax loss in Australia that can be utilized as a result of the Barossa contract, which has resulted in an additional $9.3 million in deferred tax assets recognized in the quarter, which will bring additional tax saving on future cash flow from that contract. In total, we delivered a net loss for the period of $46.1 million.

Cash flow from operation was $148 million for the quarter and in line with our expectations. This includes $82 million from the underlying fleet in addition to $66 million received in prepayment of the Barossa FPSO day rate. For project activities, we spent $168 million in the quarter, of which $151 million is invested in Barossa in the quarter. And as I mentioned before, we have sold 20 million shares in BW Energy in October, which was sold for a total cash consideration or contribution just below $66 million.

The joint venture structure for Barossa was completed during the quarter. And our partners injected their pro rata investments in the joint venture that will be the future owner of the Barossa FPSO when completed. As this is a joint venture, BW Offshore will then, going forward, no longer consolidate. And the consequence for the cash flow is that the cash balance in the joint venture, which was $29 million at the time, as you can see here, will not be consolidated and has, as a result, been shown as a cash flow reduction for the group in Q4. As we continue to progress on the project, BW Offshore injected our pro rata kind of additional equity that was called on -- for funding of the project, and we injected $8 million into the sale JV.

During Q4, as you can see, we funded in total $178 million for the Barossa project, which is a combination of funds coming from equity drawdown on the Barossa project financing and prepayments from Santos. As we had surplus cash, in particular, following the sale of BW Energy, we repaid almost $100 million on the corporate facility. And together with scheduled installments on the Catcher facility, we reduced consolidated debt with $126 million in Q4, which when you take into account other smaller regular adjustments to our cash flow, we had $237 million in cash in BW Offshore, excluding any consolidated cash from BW Ideol.

The financing for Barossa project is a good measure for progress on the project, and we are fully funded for all the CapEx, profit margin and any interest incurred during the project period. And as you can see on the slide, the project has 3 funding streams that we use under construction. And the first 2 being equity and debt that we draw down pro rata based on forward-looking calculations of funding needed for the project. And as of year-end, we had drawn $210 million project facility as well as funded in total $40 million in equity. And the third stream is prepayments from Santos, which is based or paid from the client based on percentage measured to completion on the project as well as some defined milestones.

As you can see from this overview, we have received in total approximately 20% of total prepayments by year-end and is a good gauge for overall progress on the project. In total, we have made available $449 million in funding for the project by year-end, which is funding for CapEx, profit margin and interest, as I mentioned, plus a healthy working capital level position that we have for coming payments in Q1.

Our consolidated net debt position reduced from just over $800 million to just over $650 million in Q4. Good cash flow from operations combined with cash flow from sale of shares as well as healthy funding of the Barossa construction has allowed us to reduce net debt by almost 20% quarter-on-quarter. I do want to note that all the funding for Barossa is structured to a JV or a joint venture, so we do not consolidate the project debt, and it is, as such, not included in the overview that you see here. And consolidated leverage ratio was then, with all this, dropping from 2.1x to 1.6x per end of the year.

As you can see on the equity ratio, it dropped back. It dropped to 33.9% by year-end, predominantly driven by the impairments I covered a little bit earlier. But there's also some gradual reduction in the equity ratio as we get prepayments from Santos for the project, which is shown as debt until the FPSO is in operation and, as such, grows the balance sheet a little bit and reduces the equity relative to the balance sheet as we progress on the project. But all in all, still a very healthy and strong equity ratio.

This is a familiar slide. And as you can see from this overview, except from regular amortization on secured debt, we have no maturities before our high-yield bond. It's the Nordic high-yield bond, matures in December 2023.

The core units in the FPSO fleet continued to deliver substantial and steady cash flow. And it's expected that they will continue to do some for many years to come. And that, combined with the toolbox we have available and the outlook we have on liquidity, we are confident that we can address these maturities in due time.

We continue to focus on how to maximize the value we can extract from the noncore fleet versus optimizing our liquidity. We are accelerating divestments of noncore units where we do not see that the risk/reward is justifying keeping the units or continuing operations. The sale of Joko Tole is expected to close towards the end of the first quarter. And with this transaction and announced transaction on Cidade de São Vicente, we will free up approximately $63 million, which will increase further as we progress with recycling of Umuroa and BW Athena.

In total, as you can see, when you include liquidity being raised from the sale of BW Energy shares in Q4, we had a total liquidity position of almost $400 million. With 2021 being concluded, we have paid out $25 million in dividend, as we have promised. That alongside taking a sizeable investment to support our strategy in the energy transition through investing in BW Ideol as well as kicking off a large infrastructure project in Barossa.

As Marco will come back to later, we are on track with our strategic initiatives, and we have good visibility on the future liquidity. And we, therefore, continue to pay a quarterly dividend of $0.035 also for the first quarter in 2022.

And with that, I'll hand it over to Marco then.

[Marco Beenen, executive]

Yes. Thank you, Stale. I will now give you a further update on the development of our strategic investments.

Moving to Slide 19, starting with BW Ideol. We're very pleased that BW Ideol was amongst the winners of the ScotWind leasing round, securing an option agreement for about 1 gigawatt development of floating wind power. It's important to note, this was the very first commercial tender for floating wind developments with many credible players competing. And it was important and also very satisfying to get confirmed that proven technology with floaters in the water and a concrete local content development plan are differentiators in this emerging market.

The secured site, and I refer now to the map on the slide, NE8, is a very attractively located site, about 75 kilometers offshore, northeast of Fraserburgh with water depths of 75 to 110 meters, and it has a very favorable wind profile. The site will be developed with 60 Damping Pool floaters. This is the BW Ideol's patented floater technology. It's supporting wind turbines of 15- to 16-megawatt capacity.

On the map, you can also see the location of the Ardersier Port, of which BW Ideol has the exclusive right to develop a concrete floater manufacturing plant for floating wind projects. And this can serve both the Scottish developments and U.K. developments but also international developments. So our next steps now will contain further engagement with development stakeholders, starting environmental studies and start with the preparation of the consent applications.

On the next slide, Slide 20, I want to explain a bit more on the value creation model. As you can see, and this is typical for a floating wind farm development itself, there are 3 phases of value creation. First, the development phase. That's the phase we're in now, with deep value growth towards FID. And then followed by the execution phase, so the EPCI phase, building, installing and commissioning the floating farm and bringing it to its full value. And then followed by the operation phase with low risk and consequently, lower returns.

So during these 3 phases, there are natural windows of opportunity to optimize ownership through divestments, similar as you've seen with bottom-fixed offshore wind developments. Until the cash flow from operations is generated, BW Ideol will already generate various other cash flow streams like the engineering services that we'll provide to the Floating Energy Allyance that, with consortium, it's part of; and during execution phase, the technology royalties and EPCI margins.

In addition, the partnership with the Ardersier Port creates further opportunities. It's not only a differentiating solution for local concrete manufacturing of the floaters for its own development at the NE8 site, but it will also become the largest dedicated floating wind up for concrete floater manufacturing in the U.K. And that positions BW Ideol, supported by BW Offshore, in a unique position to deliver EPCI projects in the future to a 15-gigawatt market of floating wind offshore -- floating offshore wind in Scotland.

The development plan of the port consists furthermore of an oil and gas decommissioning facility, a green steel plant and a concrete production plant at the port, and that will utilize the [ dredge ] sent from the port. And this combined plan will make Europe's first fully circular energy transition facility. So it's exciting and it is strategically very important that BW Ideol has achieved this exclusivity for floating wind concrete manufacturing.

In parallel to this large-scale floating wind developments, the floating wind technology also enables new opportunities to power floating offshore oil and gas infrastructure, and that contributes towards low-carbon emission oil and gas developments. Because of that, we have had various oil companies that expressed interest in these solutions, as it will increase the gas that's available for sale and it will reduce the greenhouse gas emissions. And increased cost of these emissions further underpins the business case.

So we are responding to this interest in a joint venture of BW Offshore and BW Ideol and leveraging -- in a combination, leveraging the floating production and the floating wind competencies. And that doesn't limit to only technical and project management competencies, although very relevant, but it also includes the way such small skilled wind farms can be financed and leased to field operators in a similar way as we run the FPSO business. So this is a whole new opportunity created by floating wind solutions, which potentially develops faster than the large-scale floating wind farms.

I will give a short update, but please refer to their update last week for more details. First, production of the Tortue field has increased with 2 more wells now being hooked up to the FPSO Adolo. In the fourth quarter, 2 liftings have been carried out with 1.1 million barrels to BW Energy at a price of USD 79 per barrel. The development projects to bring the Hibiscus/Ruche field onstream is progressing well and is on track for first oil end of this year. And then we preserve our FPSO Polvo as a redeployment candidate for the Maromba development in Brazil.

Then summarizing the year 2021 on Slide 23. It has been a challenging year from COVID perspective and also inflation development in the supply chain market. But we are pleased how we have been able to deliver to our strategic priorities, first of all, growing our FPSO business. The Barossa project is progressing well, and we have established a new and robust project financing model. And we're also progressing potential new projects based on the same financial model.

In parallel, we have extracted maximum value from the existing FPSO fleet through good uptime on the core units, contract extensions and divestments, as we explained in this presentation. And we have also created a substantial and growing position in the floating renewable energy infrastructure segment through the creation of BW Ideol as a floating offshore wind champion and the success in the ScotWind leasing round, as I explained earlier.

Barossa's safe and timely delivery is the main focus of the company. The high energy prices support new investment and contract extensions for the 3 core units. We'll continue to look for divestment opportunities for the noncore units if there -- and those are the units which we can't economically extend on their field or as a redeployment. We're progressing with new FPSO projects potentials selectively and based on the same financial model as Barossa and also energy transition opportunities. And we continue to support BW Ideol in firming up their pipeline of projects to secure -- towards secured positions for floating wind developments.

I mean, that concludes this update, but we will be very happy to take any questions you may have. Thank you.

[Operator]

[Operator Instructions] And we just had one question coming from the phone so far. That's from the line of Christopher Mollerlokken of SB1 Markets.

[Christopher Mollerlokken, analyst]

Yes. This is Christopher Mollerlokken from SB1 Markets. You mentioned that on the Barossa project, you have had challenges with cost inflation, that you have been covered so far by contingencies. With the 10% remaining now in terms of securing procurement, do you still have available contingencies if costs turn out to be higher than you previously assumed? Or what's the status there?

[Marco Beenen, executive]

Yes. Christopher, I can answer that question. So yes, obviously, I mean, we all have seen what happens in the world and supply chain market with inflation. So that puts a project a bit in a cost pressure. At the same time, I want to emphasize that it is normal to take quite significant buffers into your project through contingencies, and so we have absorbed quite a bit of that, but in a way, as planned.

Naturally, in the first year, that's the time you really -- well, that's where you commit most of your cost, so as we did. We still have remaining contingencies. And it's also good to understand that the equity investing in the asset company is not related to the contingencies and the profit on the project. So basically, in total, we have buffers, both contingency and profit.

We expect a more flat period going forward as we have most of our cost committed. And then you have, towards the end of the project, a new phase when you have to put a unit in production where you could potentially be exposed to extra cost.

[Christopher Mollerlokken, analyst]

And in terms of the potential future projects for BWO, you have both a specific project for BW Energy Offshore Brazil, where one of your units have been highlighted as a candidate. And you also have a super major with a project in Brazil where you have been rumored to be most likely candidate to be chosen. Could you update us regarding the current tendering environment for FPSOs in general?

[Marco Beenen, executive]

Yes. I think there's still what we call a window of opportunity to secure good projects with good counterparties and attractive long-term leases. And competition is quite busy at the moment and in some cases, struggles with the delivery of the projects or just have a lot on their plate. So it still looks good. The FPSO market is increasing. The oil price is obviously high. So we're in a good period the coming 12 to 24 months to capture another active project, which we would then execute and finance in a similar way as Barossa.

[Operator]

[Operator Instructions] We just had one question from a caller from OCBC Bank.

[Unknown Analyst]

Marco, this is [ YK ] from OCBC Bank. Just a quick question on any impact on your operations from the recent events in Russia and Ukraine.

[Marco Beenen, executive]

[ YK ], well, fortunately, our business portfolio is quite shielded or, I would say, fully shielded from the situation in Russia and Ukraine. We don't have any operations going on. We don't have contracts with the Russian counterparties, and we don't have Russian or Ukrainian subcontractors. So to that extent, we're very, very much shielded.

Obviously, we all have to see what it does do to the global economic energy prices, which could also drive further inflation. So just like everyone else, we'll have to see what it really means from a more global economic perspective. But specifically, for our business portfolio, we are very much shielded.

[Operator]

[Operator Instructions] Okay. That seems to be the last question from the phone line. So I'll hand back to our speakers from any questions on the web.

[Ståle Andreassen, executive]

I've just checked this. There's no questions on the web.

[Marco Beenen, executive]

Okay. Well, if there's no questions on the web and no more questions on the phone, then I'll trust everything is clear. And I want to thank you for your interest, and wishing you a good day and a good week ahead. Thank you.