Magnora ASA

OSE:MGN

Earnings Call Transcript

[Erik Sneve, executive]

Good morning, and welcome to Magnora's first quarter presentation in 2022. It's been an eventful start of the year, and I'm proud to share the highlights with you this morning. But first, a short intro into our background.

What many of you know is that we used to be oil and gas technology company, and we sold the technological assets to Sembcorp in 2018. So along that, we brought 20 years of experience from project development and management in the oil and gas industry together with Torstein Sanness, our Executive Chairman, who founded what's Lundin Energy today, that's been sold to Aker BP. It continues to be a driving force in energy project development. We have successfully managed to expand our team, with very capable people from the renewable industry, which we worked with before, and we are highly skilled with the ability to get things done. Together, we developed projects with a high focus on capital discipline to maintain a low LCOE in all our projects, flip slide please.

Entering 2022, we have a handful of development companies plus a few early-stage collaborations, which can become companies quickly. They're all under umbrella and supported by our balance sheet.

Next slide, please. In short, we're investing in companies and projects to be part of the development of the renewable energy solution that will deliver clean energy to industries and consumers in EU, the Norway, U.K. and South Africa. We aim to be an international developer of renewable energy with 5 gigawatt capacity before 2025. Today, we have established 2.7 gigawatt net. So we're well on our way to reach those goals. But we acknowledge that there is significant work lies ahead of us to realize those projects.

Next slide, please. We continuously monitor new projects with an ambition to invest in early stage, cooperate with strong partners, derisk the mature projects all the way through farm-down sales and phase. At the ready-to-build phase, we seek to optimize the ownership of the assets to suitable owners for long-term ownership and operations. As an example of this, Helios last week sold 2 turnkey solar projects, with a combined 69-megawatt at ready-to-build phase or soon ready-to-build phase to the German institutional investor, Commerz Real, owned 100% by the Commerce Bank of Germany.

Next slide, please. Helios is only one of our portfolio companies. After succeeding in the Scotland licensing round, Magnora Offshore Wind is progressing towards applications for areas in Norway and the U.K. The Kustvind development is now working on the finalization of impact assessments and application. In Magnora South Africa, we have placed the right people and competencies in the market with large opportunities where some 20 to 30 gigawatts of renewable energies is expected to be developed within the next decade. Our current portfolio in South Africa is now 1.7 gigawatts after the African Green Ventures transactions earlier this year.

Helios has truly showed proof of concept with a sale of 45-megawatt in 2021 to OX2, a leading European independent developer, and just recently to Commerz Real, which I mentioned on the last slide. We expect more to come in 2022 and approximately 600 megawatts in 2023. With current pricing of projects within the solar space, this will mean significant profit for Helios and Magnora shareholders in terms of dividend potential next year. There are also other opportunities to realize that value.

Evolar has matured its technology to a point where there is now potential for commercial testing and scale up. The company has agreement with 3 up from 2 companies last quarter. Evolar has matured its technology to the point -- sorry, we have high hopes for the year to come for Evolar. our Perovskite is the most disruptive technology for the solar industry in decades. We've seen a lot of major companies announced, over the last 6 months, that they're doing research getting into the perovskite space. Adding to this, we're in early stages in our cooperation with Troms Kraft and Prime Capital for the development of a green maritime fuel hub in the Tromso area, green ammonia. And we are continuously looking for other attractive opportunities. Today, we will focus on the selection of these companies and their recent developments.

Next slide, please. Magnora Offshore Wind has matured as an offshore wind developer in record time. Just about a year ago, the company was founded as a collaboration with TechnipFMC, and now holds 80% of the shares in the company. The team have 3 things on the agenda: one, continuing the development of 500-megawatt offshore wind capacity in the N3 field in Scotland after a successful application in the ScotWind leasing round, which we won in January. Two, Maturing the Celtic Sea opportunities with a local partner Hiraeth Energy after signing heads of terms. And three, preparing for the upcoming region licensing round, as well as other international rounds. The company has a global ambition and is preparing for industrial and financial cooperation in several geographic areas, and we're in discussion with several banks and investors around the world.

Next slide, please. Kustvind is our shallow water bottom-fixed wind project with a total capacity of 500 megawatts, which is the same size as the capacity awarded by Magnora Offshore Wind in the Scotland leasing rounds. The project has the potential for 2 terawatt hours of production. In that area, that would be equivalent to powering 100,000 homes or 720,000 electrical cars. In the strong pricing area, SC3, which is part of NordPool.

Lately, there has been growing positive interest for hydrogen development in the area as well, which adds to the relevance of the project. And recent environmental impact assessment studies have identified no red flags for the project from an environmental perspective. That's quite important. There is no secret that these kinds of projects take time, but we see great prospects for the Kustvind project and expect to submit our final application by year-end.

Next slide, please. A lot has happened in South Africa this year, and we're happy to have integrated a team of 6 local renewable specialists through the acquisitions of 92% of African Green Ventures into Magnora. Peter Nygren works actively with the African Green Ventures team, and he was there for a couple of weeks in last quarter. Short term, we're very proud of our current development portfolio in South Africa, and long term, we see a large and growing renewable opportunity in the region, with strong backing by the local government.

Our 1.7 gigawatt portfolio, we are expecting some 50 to 250 megawatts, reaching ready-to-build or for the sales phase already this year. We commenced wind measurement activities last year, and we've put an application to Eskom for grid connection for several projects. We're actively screening for additional projects, and with our committed team on the ground, we believe we have an advantage when chasing attractive opportunities.

Next slide, please. Helios continues to expand its project portfolio and has now signed landowner agreements in Lithuania and Latvia to start feasibility studies for development of large-scale solar PV plants. We observed a great interest in the projects developed by Helios. And last week, they sold 69-megawatt to Commerz Real, which I mentioned previously. These projects represent the largest utility-scale parks to date in Sweden and adds to the successful sale last year of 45 megawatts.

Helios have now another 200-megawatt in current sales process. Over 30 companies ask for information around the projects we sold to Commerz. And that process was shortlisted in December last year. We had 11 companies submitting nonbinding bids for those projects. We believe there will be higher interest today due to the Ukraine situation and in energy security in Europe.

Solar PV is the fastest-growing renewable segment in the world for the time being. And it's the only real solution short term to increase supply in EU since onshore wind is meeting increasing resistance, not only in Norway, but in several European countries. Offshore wind takes a long time, as you know already.

Next slide, please. Some highlights of Commerz Real. I mentioned it's owned by the Commerzbank. They have EUR 36 billion under management. They have 50 solar parks in operations and over 30 onshore and offshore wind farms in Europe, and other places in the world. We're extremely proud that they chose the Helios projects [ merchant risk ] in the Nordic area. We expect only great things from Helios in the future, and we're proud to own 40% of the company.

Next slide, please. Solar power is the fastest-growing and cheapest renewable energy source in the world today. Imagine making the conventional technology 25% more efficient at the lower cost. That is exactly what the Evolar's perovskite technology is doing. By adding a thin-film layer of perovskite to conventional solar PV panels, the unit can utilize more of the solar spectrum and demand less acreage for the same power output.

It's not only also in Magnora that are quite confident that perovskite technology will play a significant role in the renewable shift, but also, several large industry players supports this opinion now.

Evolar's business model is to commercialize its unique turnkey solutions for integration into existing solar panel production lines or new power production lines. Our confidence in the technology team and commercial projects has led us to further increase our ownership to 63.5% in the company by exercising the last 3 options subsequent to the quarter. We're continuing to explore options for taking the company public and are also in discussions with leading Swedish and international investors regarding Evolar.

Next slide, please. Combined with its continued development of technology, it's fair to say that the business is developing according to plan. In fact, a little ahead. Evolar's quick clear advantage is it is years ahead of competition since it has the technological process platform in Uppsala, 2,500 square meters prototype plant. Most competitors don't have access to that and have more of a chemical approach to the perovskite industry.

In 2022, the company has reached all its business and technological milestones. It has mature discussions with several new Tier 1 players and recently, submitted an EU application for a EUR 15 million funding for a pilot production line in Uppsala. A decision by the EU is taken -- will be taken later this year. One month ago, EU went out and said that they will do what it takes to bring solar manufacturing back to EU again. We think this fits really well for Evolar's plans.

The company is growing and with the current 27 full-time equivalents, it has the technical and commercial power to take the company to the next level and be a good speaking partner for Tier 1 players in the solar industry.

Next slide, please. To sum it up, Magnora offshore Wind is chasing new opportunities with TechnipFMC and local partners while developing the ScotWind area. Kustvind is progressing, and we expect to submit the final application within the year. In South Africa, we hope to see several projects in the ready-to-build phase already to ready-to-sale phase in 2022. Helios is progressing fast and has another 200-plus megawatts in sales discussion. We have a strategic review of the company later this month, early June, because there is an area of opportunities for Helios and we've been approached by also companies that would like to invest directly into Helios as well as Evolar. And Evolar's commercial expansion is underway, with potential for paying customers and orders this year and next year. We think the prospects look extremely well. In addition to this, we are experiencing increased interest for investing directly in most of our portfolio companies, and we're also exploring solar for PV and energy storage opportunities in several European countries as we speak, with the opportunity to create the new Helios and other areas.

Next slide, please. One more, please. In the first quarter, we had revenues of NOK 3.4 million, mainly from the royalty income from Dana. We learned that Dana started the drilling campaign in late April. And we hope that the production in the Dana field will increase during the year. The increase in revenues for the quarter was due to slightly higher offloading volumes from the field.

We also provide some professional services to our portfolio companies, a gain of 400,000 according to IFRS rules. Our adjusted EBITDA came in at negative NOK 3.2 million, up from negative NOK 6.3 million in Q4. The deviation from our reporting EBITDA of NOK 14 million was development and M&A expense of NOK 9.8 million and a noncash option expense of NOK 1 million. We see operating expenses coming down 2.3% from the last quarter, and we continue to focus on maintaining a high capital and operational discipline.

Next slide, please. Our cash flow is supported by the agreement related to our legacy FPSO assets from design operations in the period 2013 to 2018. This includes the USD 0.50 for each barrel produced and offloaded from the Western Isles FPSO, and also, known as the Dana contract. And also, license income from the Shell's Penguins FPSO.

The first installment from the Penguins contract is incurring a sail-away from yard. This has been delayed according to media and is expected to happen next quarter Q3. After the sail-away, we expect to wait at least another 90 days before first production and at around 100 days before production of 4 million barrels at current production rates on the Penguins field today.

Next slide, please. With the cash flow supporting our development activities and the balance sheet with low leverage, we're in a position to invest and reinvest in new opportunities in our ongoing projects. We have a history of a shareholder-friendly company, prioritizing distribution and distribution capacity. However, currently, we're focusing our resources towards development of our portfolio companies and electric future. We're quite excited for the journey ahead and see that there is growing interest among larger energy companies for a platform company such as Magnora.

With that, we can start the Q&A.

[Erik Sneve, executive]

So let me see how many questions we got there.

Is there expectation for commercial sales of -- for Evolar in 2022? Question number one.

Question number two, regards to OX2 sale. Can you say anything about how many milestone payments there are? And if there is a timeline for these payments? Three, did not see Scotland clearly mentioning in the report presentation. If not mistaken, the application headline is today. Will Magnora Offshore Wind participate in these rounds?

So one, regarding timing of Evolar sales, we will see revenues from paying customers this year. If it's for a full production line or pilot line or for commercial activities testing, it's hard to say. But they have very good discussions with several clients for the time being.

Regard to the OX2 sale, can you say anything about milestone payments there? And if there's a timeline for these payments? So the OX2 sale and also, the Commerzbank sale, we both started those process before all permits were in place. So the final payments will be subject to, for instance, all permits in place, and then, we keep 25% left to commercial operation date, for instance. So that's typical scheme. But the various customer contracts are a little different. But mostly 10, if it's a pure auction, maybe, in the start. Then, you have -- with the Commerz, it's 75% at signing when all permits are in place, and then, 25% left for a commercial operation date.

The Scotland clearing round. It's only the registered applicants who lost, who can apply, but they need to ask for a permit with the existing license taker in that specific field. All the documentation is not available, but it's impossible to have a wind park adjacent to ours without approval or a commercial process with Magnora. So that answers to Synovia.

What are the progress in Evolar in the future? A question from Harry. And Evolar, the most important progress for its development is cell efficiency that, they can show in industrial process and that they have ability to produce samples for customers. I think we're all's those aspects, and they experience now in the Q1 that clients who have been asking competitors for offerings come back to Evolar because they don't get the right results for the offering.

And I think this is based on the fact that Evolar actually have a production plant in operations today. It's a pilot line, but it shows that you can do this in full-size samples, and that's very important for the customer. We have noticed several large players taking -- looking to perovskite last few quarters. First, solar for Tesco in Australia. Jinko, GCL, Oxford PV, several others, Equinor, who were interested in the area. So it's clear that this is the only way you can -- the only way the industry believes today, you can increase efficiency at the low cost.

Question from Clarksons. Regarding the sale of the 2 solar PV projects in Helios totaling 69 megawatts. Can you give some color on the economics of the project sales?

I think I've given you some guidelines before. I think in general, we looked at these 2 opportunities as, on average, basically, a multiple of 20x the development cost. The development cost for Helios is basically their manpower, 15 people, and divide with what they generate. The grid connection fees and environmental work beyond their operational expenses are quite low in Sweden compared to some other markets, so we have pretty decent multiples.

The multiples are based on the -- being the proximity to the grid connection fee. Also, the land lease agreement and also, CapEx per client. And then, we help them source an EPC contract, and then we do construction management for them. So in total, you get -- they get the yield that they're satisfied with. There are probably 100 infrastructure funds in Europe chasing these kind of opportunities, and it's sort of an industry price. We're not able to disclose the price because that's -- we've signed an agreement on that, but these are pretty in line with what we see in the industry. And we think that so our PV multiples will be closer to onshore wind over the next year. And they've been pretty healthy from 1 through a couple of million in the region NOK per megawatt.

Next question is from Turner in Clarkson. As I mentioned, we are in discussions now with Helios to sell another beyond 200 megawatts in 2022 alone. And then, we have a goal of selling 600 megawatts in 2023. The cash will not be retained in Helios, but I think all shareholders there want dividend. And we've had some discussions around larger [ Funds ] asking if it would be interesting to sell out to make an IPP and stuff like that. But I think there are several growth opportunities, but they don't use that much cash. So extra cash can definitely be paid back.

In terms of FPSO payments expected later in 2022 and 2023, how do you expect to deploy the cash received? Will you continue to invest in new platforms or focus on building the current platforms? I think this depends a little bit on the timing of dividend potential from Helios and South Africa. We're also in discussions regarding other portfolio companies. So we've said that any spare cash would be repaid. We haven't articulated a clear cash and operational strategy, but I think we will try to pursue a few more smaller opportunities, like some Helios replicas in some other markets. And then, I think we're good to go to start harvesting in all the companies. So we can get back to that in Q3, I think, Turner.

Next question from Jorgen Lomberg. You previously had an ambition to divest [ 300-megawatt ] projects from Helios in 2022, which leaves around 86 megawatts remaining.

So I think I answered that question. We see strong interest, as I mentioned. We sent the teaser to over 70 companies for the 69-megawatt project. 35 -- above 30 companies returned those teasers and said they would sign an NDA to receive the information around them. So 35 companies looked into the project and above 10 submitted nonbinding bids. So I think it's very strong interest.

And we also noticed that [indiscernible] and all these other price makers, they predict, get more comfortable on the midterm price of gas, and that's sort of their benchmark price for renewable, I think, it is just in Europe now. And with 1,700 terawatt hours of Russian gas needs to be replaced, we see that both potential margins can increase. Some upsets with the potential for CapEx on the modules. But see that it's possible to sell above the indicated guidance earlier this year. So the Helios team together with Peter, are working very closely on all these opportunities. And they have a good discussion naturally with the Commerz and other companies that have been in dialogue with over the last year.

Next question. Reveal earnings from the sale in Helios so it is to be seen in Magnora revenues. As we reported today, it might -- it will be funneled down at 40% level when it's recognized in the books of Helios. So we -- as I mentioned last quarter, we'll change reporting most likely from Q2 this year, we're in the process with PWC regarding valuation of the portfolio. And then, we'll report uplifts and downlifts in the valuation of the whole portfolio instead of having the P&L from the portfolio companies funding in, but we haven't concluded yet. But Stefan, to answer your questions, you're right.

Can you be more specific in sail-away from the Penguins project? We don't know the exact reason. We -- It's very few people who know the exact timing in that line for any activities which show even in some [indiscernible]. So what we read is the same as what you read. We know that how the work that surrounded was finished years back. I think it's logistical issues and some planning, and maybe, some optimizing from Shell, I think they've been accurate before upstream and sail-aways in Q3.

In Evolar, could you provide more color on discussions with the Tier 1 players for commercial deployment of the company's tandems to ourselves? Well, I can't say too much Turner, but what I can say is that some of these companies have been around in the industry and had the initiatives with what some people might perceive as Evolar's competitors. And they have not been satisfied with the results from ups, I've learned. I think Evolar's strength is that they actually have the platform in place, and you've seen it yourself, Turner. They can do humidity testing in-house, they can do solar light testing, they can sample, and they can try different combinations of perovskite solutions. And they just have a very industrial approach to the perovskite opportunity. And I think any larger company that wants to invest in the platform need to see it work at some larger-scale prototype setting, as opposed to just some spin-coating mechanism inside a small laboratory with a glove box, those what you see in X Files. I mean, they don't have what it takes to sell technology process to a Tier 1 player.

So Evolar will definitely have serious competitors, but I think the lead times on the equipment they have is probably 2 to 3 years. And we're very proud that they have the full prototyped line in place in [ ups ] today.

I think I received one more question on e-mail. Yes. I think I answered that, that was from Jorgen, and it's correct. We probably booked them net 40% as it's recognized. So it will be 75% of the first sale in Q2, and then, 25% at commercial operation date, basically.

So I think I answered all the questions. I think what we initiated in 2020, with focusing on asset-light projects in renewable segment, it's well known for many now that it's working. OX2 does the same. They buy project from us or Helios and they sell it again. They take the construction risk and they can take -- fetch another 25%, 30%, 40% margin on top of that when they provide the EPC contract. We see that other competitors in Nordic are doing it. We see companies like Falck and Siemens [indiscernible] being acquired by larger industrial players.

It takes a lot of groundwork in local communities in municipalities communities in South Africa, in Scotland, in U.K. and Sweden to develop these projects. And I think we've shown now that Helios, less than a year after we invested in the company, we were able to sell one project to OX2. 14 months later, they are able to sell a project to Commerz Real. This market is for real. It's driven by downsizing of coal and nuclear and also, making Europe carbon neutral. And I think this situation with Russia is just crazy. It will take a lot more new supply, and the only supply we see short term is really, LNG and solar. And a lot of the LNG terminal is working at full capacity.

So short term, next 12 to 24 months, solar is in pole positioned and onshore wind is [ frowned upon ] in most countries in the Nordpool area, except from Finland because they have these big forests, and Norway and Sweden. But there is no grid to bring that electricity to the market, and you see huge price differences from the most northern areas to the southern areas.

In Europe, it's worse, and I think this CapEx drop 90% from 2010 to 2020 together with the dropping price of battery, make solar sort of a black swan, and we're in pole position with Helios and the other opportunities we're looking at now. We have revenues today from Shell and Dana, and we have good relations with the bank like we increased the credit facility to NOK 100 million, which is rare for a development company, but the banks are eager to chase this market, and we have a lot of infrastructure funds chasing projects, and we have larger energy companies that need to show that they invest less in fossil and more in renewables.

It's about the EU taxonomy. I think we have the portfolio of companies, products and technologies. We are also very pleased with the green ammonia project in Tromso; so we have applied for investment grants for that. So we're into hydrogen/green ammonia. Looking at battery. We have solar and the project development is very similar. You spend NOK 3 million to NOK 20 million, NOK 30 million typically on these projects and except from offshore wind and then you're able to sell the project rights at the ready-to-build stage. But it takes a good team.

So I'm very happy we have the team. We have today with Espen, [indiscernible], Torstein, Bard, and Gisle and all our advisers, who really know how to mature these projects and make an institutional investor interested in buying them.

And then, we have Evolar and it's a company we worked with several years from 2003 until we sold it in 2007 and started a factory in Germany in 2008. They're the leading company in thin film globally. You, of course, have the First Solar, but they have a different technology. But I mean, the Evolar team has worked 20 years with thin film and this cross-path opportunities, one thing that comes in -- once in a decade or a generation, it's basically a discovery of a new material that can do things that people didn't think about 10, 20 years ago.

So they have the -- they have worked in the industry for a long time now. They know what it takes to make an industrial scale product. They're in discussion with clients, they have good support from EU with funding potential, and they have a business model that really fits Magnora's capital strategy being asset-light, and we think good things will happen to Evolar over the next 12 months.

So I would like to thank everyone for the attention, and you're always welcome to send an e-mail if you're around [indiscernible] area. We might have time for coffee, if that's interested, and we are very happy for the support. And I wish all a good day and warmer weather from me. And thank you for this session.