Magnora ASA

OSE:MGN

Earnings Call Transcript

[Erik Sneve, Chief Executive Officer]

Welcome to Magnora's first quarterly webcast for the Q2 2021 numbers. And with me today, I have Torstein Sanness, our Executive Chairman, and I am Erik Sneve, the CEO of Magnora. We have a portfolio approach of developing solar and wind projects and asset-light models supported by our strong legacy royalty revenues. We have a highly experienced team with people from DNV, Statkraft, Norsk Hydro and Lundin Energy. Our ambition over the next 4 years is to develop a pipe of 5 gigawatts of solar and wind projects. We will finance these projects by our strong cash flow from our legacy FPSO contracts. Today, we have 8,300 shareholders, up from 3,800 shareholders Q2 2020. On the right-hand side, you see our portfolio of 6 companies across Scotland, Sweden, Norway and South Africa. We're growing an asset-light wind and solar project portfolio with low capital requirements. We spend a lot of time on deal flow. We have a substantial deal flow coming in on a weekly basis from former partners, customers, lenders, financial advisers, lawyers, et cetera. We focus on this stage before they go into construction phase. That's where the return potential is the highest. We prefer to do this in joint venture with strong teams or industrial companies. We're then maturing these project portfolios into projects with permits from local and central governments. Prior to ready-to-build, we invite in buyers of these projects, institutional investors, infrastructure investors or pension funds. This business is supported by our legacy FPSO assets. So we have a focus on shareholder value, portfolio development and capital discipline. Since we launched the strategy, The Future is Electric, in March -- February 2020, we have tripled the share price from approximately NOK 5 to well over NOK 16. We've made 6 investments and we're currently into several new investment opportunities. A key event in the quarter was increasing our ownership in Evolar AB based on milestone beat and excellent execution. On the right side, you see the first 2 samples of a full-sized Perovskite solar cell manufactured by the Evolar team in Uppsala University in Sweden. They have shown proof of concept. And in the background, you see their unique machines. And those are machines where they have a unique design. And this is the design they will sell to solar cell manufacturers and glass manufacturers that want to participate in the Perovskite revolution. Proof-of-concept is established. The Evolar team has done this many times over before and they have established 10 factories in Germany and China over the last decade. The team is led by Professor Lars Stolt, who has worked with solar cells for the last 40 years.

[Torstein Sanness, Executive Chairman]

Then we're into the offshore wind. And I think it's fair to say that Magnora has already put into play their first application in the ScotWind for 2 areas. We did that in July. And the Scottish authorities think that they will develop up to 10 gigawatts. So we feel that there is space here for everybody. I think it's fair to say that we have a very good partner in this. It's TechnipFMC. And I think it's fair to say that, that is a company that has a huge experience in the EPCI, meaning engineering, procurement, construction and installation with 17,000 employees. And maybe the important thing is that 3,000 of these are in Scotland or in Norway, meaning that you bring something to the table in respect to putting something back into the local communities. And also, I would say that it's a well-known company in respect to being a EPCI contractor. And I have personally used them for the last 20 years, especially in the P&C and high of what they do. And they have been in the wind business for -- being a supplier for a long time. And with Magnora, with the necessary competent people that Erik talked about, that has done this in the U.K. in floating wind several times. I think it's -- we're fit to be very competitive. And of course, this is a good start-up for what we're going to do in the Norwegian sector as well coming later this year. And there is ongoing discussions with more potential partners in this. Here, you could see that the 4 other companies that were involved in, the Helios and the Magnora South Africa, the Kustvind and Vindr. And you can also see there that it's a portfolio model where you can increase your working interest as you go along and take the risk out of the different projects. And if you add up the capacity in respect to gigawatts, on the right side, it's a substantial amount. And this is where it's very comfortable to E&P. Yes, organic growth where you put the thing together and you have a return potential on PV of 10 to 20x. And, of course, in wind from 10 to 30x. So it's typical, if you are in there from the start, you put this thing together, you do that because you have the right competence and you have the right people to do it. And you have a success ratio of over 50% or more. Because it's after all easier in the North Sea and the rest of the Scotland to find wind then to find commercial hydrocarbons. That is on the NCS, roughly 23%. And of course, here, you can get up to 50% if you do it right and you're based on sound unit economics, you have a local acceptance because you have quite a few people working with you in the different yards, et cetera, et cetera. And you have a keen interest into the assessments of the environmental issues. Also, as we said that the cost of CO2 has gone up substantially over the last couple of years, and it will continue to do so because everybody has been told by the UN reports as well as the EEC that your CO2 footprint is going to go down, meaning that, yes, you need to get more green electricity. And you can see there that from August 1, 2020 to August '21, it's quite a change in respect to the number of euros per million watt hours. And you can also see that Statnett's projection for the future is going up, but I would say that, that might actually be fairly conservative. And also, this increase in -- and of course, electricity is just a commodity like oil and gas, and so who wants it. And of course, if it's a huge demand, the prices usually go up and that will benefit the company like Magnora that put all these portfolios together and will divest before you go into the building phase of them.

[Erik Sneve, Chief Executive Officer]

Thank you, Torstein. So key financials for the quarter. Revenues were slightly up due to less off-loading of natural reasons in the quarter. Slightly higher operating costs as we develop the applications for ScotWind in our subsidiary, Magnora Offshore Wind, and also started wind measurement activities in South Africa for our SPV there. We have NOK 120 million at the end of the quarter and adjusted EBITDA of NOK 2.9 million, down from NOK 1.2 million in Q1 2021. So net operating cash flow was negative NOK 5.7 million. So our run rate now is around NOK 6 million, NOK 7 million per quarter for the staff and fixed costs. So we have good operating leverage and quite efficient organization. We're really proud of the organization we have today, and they're extremely efficient, and happy to have all people on board.So the projected license revenue and royalty income from our FPSO business, just to go over that. In 2022, we expect to receive USD 16 million from the Penguins contract, so that will be split in 3 payments, $8 million at sail away from the yard and $4 million at first production and then an additional $4 million after approximately 3 months of production. The Western Isles FPSO that could -- revenues could be increased in the future by new drilling and tie-ins from nearby fields or redeployment opportunities. So we have a pretty solid cash flow coming in. And all this cash flow is supporting our underlying business today. So a little bit about our financial strategy and capital priorities. We use our existing balance sheet towards activities towards 2025. We have strong cash flow from our FPSO contracts. And we will have organic cash flow from realization of our current projects or farm downs. Any spare cash will be returned to our shareholders if we can't find any new, highly accretive investment opportunities. If we IPO Evolar Magnora's shareholders will be preferred in dividend distribution of those [ logs ]. Magnora has returned NOK 517 million to the shareholders over the last 3 years. And we consider ourselves to be shareholder-friendly.So our key value drivers. So the first thing is the portfolio size. This is the Torstein Sanness' model to have a large portfolio. And we have done that and show that we've been able to find 6 highly interesting investments. We will continue increasing our portfolio. Then we have strict criteria for our project selection. And if you see on the right side, the quality of our project and the price we can realize depends naturally on energy yield, the wind and sun conditions, the scale of the projects, the ability to connect to the grid nearby, access to good roads and attractive land lease agreements and also the supply chain at the time the project will be realized. So we aim to have above 50% hit ratio based on the fact that the people we have on the organization have worked with energy projects for the last 15 to 50 years. So we are trying to avoid mistakes we have done before or the industry has done before. So our ambition is to grow our portfolio of 5 gigawatts by 2025. On the left side, you see the cost of developing a solar PV project or wind projects, basically between NOK 50,000 to NOK 100,000 per megawatt on which territory we're in. In some territories, it's higher and some, it's lower. But this is the average figure. So the plan is to monetize these projects prior to construction to institutional investors or pension funds or energy companies. If we're able to develop a portfolio of 5 gigawatt good projects and realize 50% of those projects at the prices we've shown in the previous mails -- previous slides, this will cost approximately NOK 300 million to NOK 400 million. The profit from those projects could be this could be approximately NOK 3 billion to NOK 4 billion, if we sold them at NOK 1.5 million per megawatt. So this is a very profitable business. It doesn't come without risk. As I mentioned in the last slide, the criteria for these projects, but this is a very interesting business. It takes 12 months to develop a good solar PV project, and it takes several years to develop a wind project. So it takes time and it takes patience and you need good people who can find the right projects. From 2020, since we launched The Future is Electric strategy, we have made 6 investments. We did 3 last year, and we have done 3 this year. So we're currently exploring new projects in new territories, and this is supported by the strong cash flow from our legacy FPSO asset business. We're also considering third-party asset management opportunities based on interest from institutional investors or infrastructure investors. We have a dynamic ownership strategy, and we're considering continuously potential IPO of Evolar, farm down in specific projects or potential project divestments. Helios have come far in that process. We also are in discussions with potential equity partners in Magnora Offshore Wind and Magnora South Africa. The future is bright and there will be invested NOK 1,000 billion in the Nordic sector -- north pole sector over the next decade. This is a highly interesting market to be in, and we have an excellent team that can execute in this landscape. In the quarter, we've made 4 new recruitments and you can see those recruitments in the appendix of this presentation. We're very proud to have them on board. And we're looking forward to meet you in our next quarterly presentation. We will end off this presentation today with a Q&A session. We have a detailed overview of our portfolio and the team in the back of the slide pack. Please look into that before or as we go through the Q&A session.So we are open for questions.

[Erik Sneve, Chief Executive Officer]

Yes. We have one question here from Jørgen Lande in Danske Bank. What's the main driver behind the CapEx figure in Q2?And the main reason for the increase, it's temporary and it relates to the application -- of the ScotWind license application with some subcontractors and some invoicing from our external advisers, who you find on the -- our web pages. So this is temporary. You'll see it slow off in Q3. And in Q4, it will be gone. And based on every application, we will have a slight increase, but we expect to be able to reuse a lot of the the blueprint we've developed for the ScotWind application round. We think it's probably the most difficult application in the wind industry currently. So it can be a lot of reusage from that application process.The next question is regarding the Dana contract, and I'll let Torstein answer that.

[Torstein Sanness, Executive Chairman]

Yes. And this is also a question from Jørgen Andreas Lande, and that's on the Dana contract. Is it fair to expect more normal "off-loadings" in the third and the fourth quarter? And would you say that second quarter production levels were below your expectations?"I think it's fair to say that, yes, it was below our expectations. There is no question about that. And of course, we're of the opinion that there is nothing wrong in about 20 million barrels left to be produced. But at times, there is no question that they have some problems with their production and the gas injection and also getting rid of the gas because you cannot flare it. So if you cannot -- I think the gas is going over some of the fields in the area. And when they're having their problems, that means that you cannot produce what you really should produce on with Dana. So I think we got some indication that, yes, they should be able to up the production. And also what we are hoping for, and they have gone ahead and hired a rig. And hopefully, they will be drilling and completing another well in there. We don't know exactly where, but that will definitely help the production in the future.

[Erik Sneve, Chief Executive Officer]

The next question is from Turner Holm in Clarksons, lead analyst there. With proof-of-concept now established for Evolar, can we expect -- when can we expect the first commercial agreements? I think the Evolar team is working really hard across the industry and have good discussions with both large and small suppliers of solar modules. And we anticipate within 3 to 9 months that they will land a key agreement that will show commercial proof-of-concept as well as technical proof-of-concept. Next question is from Jørgen Lande again. And he says that, where does your growth come from over the next 5 years to -- 4 years to the 2025? Is it coming from M&A or organic growth? I think most of our deals so far has been JV agreements, small M&A agreements where we partner up with a small company. So we define this as M&A as opposed to when we do organic growth like in Magnora Offshore Wind with the ScotWind application. We're working on a few rounds now where we also look at teams that are able to invest themselves in the deals. So we're going to look at small M&A opportunities, very similar to what we've done with Helios and Kustvind and Vindr.One last question from Magnus Solheim in Fearnley. And He asked about the commercial success ratio, 50%. I think for solar, we're going to look at much higher percentages like Helios, maybe up to 80%, 90%. And in wind, depending on the size of the portfolio, you'll be -- we have a target of 50% to 70%. But this depends if you start completing greenfield or if you have a more mature project. So in total, 50% is a little conservative. And I think this was the last question we received. We are always open for questions from our investors by e-mail or please set up a conference call or contact one of our analysts following the company. We appreciate the time you spent with us this morning and wish you a wonderful day. Thank you.