Prosafe SE

Good morning, everyone here in Oslo, and those following us on the Internet. Welcome to Prosafe's Q1 2018 presentation and market update.

My name is Stig Christiansen. Our CEO, Jesper Kragh Andresen, is with me, but his voice is, unfortunately, not working perfectly this morning.

I will do the presentation, but he will support when we come to the Q&A session. So I'll do my best, and he will provide guidance via sign language.

Disclaimer, you have always--you've read that before, so let's dive into it. The good thing is that, for every day that passes, we are, hopefully, one day closer to the upturn.

The upturn will come, but as most of you have probably experienced, this, clearly in my time, the longest downturn in my 22 years in the industry. We think it will continue to take time before the market comes back, but the key point is it will come back.

And we need to make sure we do everything right in the period to make sure that the company is well-rigged for when the upturn comes. In the quarter, we continued to have good operating performance.

That's our license to operate. It's key.

Utilization is low, 33%, reflecting, of course, where the market is. Same quarter last year, we had 40% utilization, so this is kind of a low point, perhaps.

Operating revenues of $82.8 million in the quarter, good cash flow, though, $51.3 million in the quarter. Importantly, in this market, we were awarded the contract for the Safe Caledonia, five months.

I wish it was maintenance and modification. It's not.

It's hookup. But still, every contract is important, but what we need is, of course, for the maintenance market to come back.

Another important thing that you are aware of but that we want to repeat is, of course, the Westcon case. And I'll come back to that in the presentation, but certainly the ruling from the first instance was clearly and strongly, I would say, in Prosafe's favor.

Importantly as well, we have established presence in Mexico. We learned the hard way back in 2016 that we had possibly been driving a little bit too much in the back seat when it comes to Mexico operations.

That is no longer the case. We want to be on the ground in all key markets, speak to clients direct, and make sure we are well-positioned.

And of course, we continued to focus on the runway, control CapEx, and trim the cost side of the company. On the financial results, as alluded to, operating revenues in the quarter of $82.8 million compared to $75.7 million in the same quarter last year.

Now, we have told the market, and bear in mind that we have now implemented, or are following, IFRS-15 income recognition. The effect of IFRS-15 in Prosafe in Q1 to the revenues and, thus, to the EBITDA is $8.7 million.

That gives us the EBITDA of $49.2 million compared to $32.8 million in the same quarter last year. Now, revenues, even adjusting for the IFRS effect of $8.7 million on revenue, we're happy with that revenue level given the low utilization, and it's, of course, supported by the contribution from the very important Mariner contract that we're currently doing for Statoil in the U.K.

Moving below EBITDA, depreciation, $27.3 million in the quarter, down from $35.4 million last year, and you know why. We did major impairments last year, so depreciation comes down as a consequence of that.

In addition, though, as we have explained to the market, we have also made a reclassification of SPS costs, i.e. Special Periodic costs, to follow industry practice and to purify the CPDs on the vessels in operations, which means that, basically, the operating expenses in this quarter are reduced by $2 million, and the appreciation is increased by $2 million.

So it does not affect operating profit, but it impacts EBITDA. And the numbers in the previous periods are adjusted accordingly.

Interest expenses, slightly up. We are hedged, as you know, but we're not completely hedged, so the interest level has come up.

That impacts this somewhat. When it comes to other financial items, a big positive, $17.5 million in the quarter, and that's, of course, due to, again, the interest rate developments and the positive impacts from the interest swaps in the company.

And that gives us a profit before tax of $19.1 million in the quarter compared to minus $17.5 million in the same quarter last year, and then that profit of $15.9 million in the quarter compared to minus $19.1 in the same quarter last year. On the balance sheet, not very much to say, total assets close to $2 billion.

Cash position is good at the moment, and cash flow was good in the quarter, as you saw. Other than that, I want to mention that we have also explained the equity is somewhat down compared to year-end.

And again, that goes back to IFRS-15 and those effects, which were adjusted against the equity in the opening balance for 2018, and then added to interest-free liabilities as deferred income. And it's that income that we are now booking again on a quarterly basis, going forward, the $8.7 million in Q1.

Book equity, about 25%. This is, of course, something that is critical for a company like Prosafe in these times.

We are doing whatever we can to effectively protect the cash position and the runway. Of course, one of the key focus areas from the market is when does the market recovery come, both in terms of the month, but then day rights as opposed to how long will the runway last.

We are doing whatever we can internally in the company to protect this, and it's good to know that we have been able to trim everything down so that cash break-even EBITDA level is now currently between $90 million and $100 million. Moving on to operations, business and operations, Westcon, we are, of course, very pleased with the ruling from the first instance in the Stavanger City court.

It was a clear win on all accounts, and I think the verdict basically said that the yard had been clearly negligent, which then had direct impacts on every discipline and every work scope in that project. And at the moment, if we add legal, of course, and interest, we're talking about just over NOK400 million that we are owed by the yard.

Now, the yard has, of course--or they have appealed, but rest assured, we will appeal, and we have every intention of pursuing this case in order to not only protect our position but try to improve our position based on the verdict from the first instance. We are diligently preparing that case as we speak, and then the question is how long will it take.

We have guided, I think, the market at this will take us into 2019 before we might see the end of it, but we are going to protect our case. Fleet renewal, key strategy in Prosafe is fleet renewal.

We have the largest fleet in the world, still, but some of the assets are becoming seasoned, as you know. We have talked consistently about this for the last couple of years.

We keep controlling the three new builds in China, and we have every intention of doing what we can to make sure we get control over those vessels. We think it's absolutely critical that Prosafe can take out further assets in a controlled manner, going forward, thereby increase the quality of the fleet, reduce the average age, and add number of units that has the life ahead of them rather than behind them.

And in this strategy, striking a deal with COSCO is key. From day one, we talked about three elements.

It's about financing terms, it's about delivery flexibility, and it's about price. We have also said that price is the more difficult discussions with Chinese yards, but we will continue to push hard towards what is currently the deadline, 20th of May, to find a commercially attractive and workable solution for those three vessels to support Prosafe's strategy of being the leading player in the offshore accommodation space also in the future.

I talked to the Caledonia contract already. I think all I want to add now is that, even though I wish it was an MMO contract, every contract is important.

EBITDA contribution is very good, around about $50,000 a day. And of course, for us, it's an important contract.

And I think, when I talk about the seasoned fleet, Safe Caledonia is a seasoned lady, but she is probably one of the assets that, despite the age, will be in the fleet for the foreseeable future. She is a favorite among many, specifically in the U.K., and she's doing consistently a very good job, and we expect that to continue on this particular job, west of Shetland.

The contract chart, you have seen this before already. We have the Notos operating for a long period down in Brazil, which is important.

Mariner contract in the U.K. for Statoil going on as we speak.

[ The ] question is, what happens to the options. Well, let's see.

We hope there might be some, at least. We are currently mobilizing the Zephyrus for the Johan Sverdrup.

She is in transit as we speak, and she will commence contract shortly, very important contract for us. And then, of course, we have the Safe Scandinavia, which is fantastic on track but, unfortunately, is now coming off contract in the summer.

And then, we have the Caledonia contract that will commence soon, as I just alluded to. On that basis, utilization should go somewhat up in the second quarter.

What do we do about the Safe Scandinavia, going forward? Well, we still hope that Scandinavia being the type of unique, one-of-a-kind type vessel that she is, that there might be opportunities again for her to come back to Oseberg at some point in the future.

But of course, that's entirely up to Statoil. That's our hope.

It's their call. There are not many, a few other fields in the North Sea that could take a TSV like this, and we are, of course, vigorously pursuing that.

But at the same time, we are working with other service companies to try to set up some form of an alliance so that we can perhaps use that asset for P&A or decom support in addition to possible TSV opportunities. Right now, it's a bit of a challenge, given the contract coming to an end and the substantial EBITDA that goes away with it, but the vessel is, as I said, unique.

It's one-of-a-kind, and we will do whatever we can to get that rig back [at] in work, although we think it's going to take some time before that will happen. But Scandinavia will come back to work at some point in time.

When it comes to the outlook, this is pretty illustrative of what Prosafe is going through--well, not only us, the whole industry. This is showing the firm, so I've taken out the options, but this is showing a firm order backlog from Q1 '14 and up until Q1 2018.

It's pretty illustrative. At the end of Q1 '18, firm order backlog is $270 million, or $273 million, to be exact.

Clearly, when we look ahead, we've been told by some that we might--are we a little bit too pessimistic about the market. I'll come back to the market a little bit more.

We're just trying to illustrate what we currently see, and it takes time. In the early days, we talked about is this recession [ singulary ]?

Is it a [ doublary ]? Is it a bathtub, or what is it?

Well, it's clearly a bathtub, and a pretty big one, perhaps even a swimming pool. But we haven't lost faith.

It will come back. We do not see that there is a change of paradigm or such.

And hopefully one fine day, when the market has normalized both in the North Sea, Brazil, and Mexico and we have been able to continue to work a little bit on the sort of supply side and take out a few more vessels, and hopefully renew the fleet by the COSCO units, Prosafe will again be very strong and in a fantastic position to benefit from the opportunities that will arise from MMO, as well as hookup. It's just going to take a little bit of time.

One of the key reasons, looking specifically at the North Sea, is, of course, that the maintenance intensity has just come down significantly. And you have to take a view on whether it's just a consequence of the recession, or is it permanent.

Now, we believe the former. It's not permanent.

There is too much stuff out there, big stuff, that will live for a long, long time, driven by focus on enhanced oil recovery and everything else, and we cannot foresee how, thus, will not need support at some point in the future, as we have seen for the last--well, forever, actually, and through history. We've been following, of course, what happens in some of the other segments.

We're late cyclical. You all know that, so size makes moves first, and then you have exploration drilling.

We're seeing that the likes of [indiscernible] solutions are building order books. But when we look into the numbers, it seems--and that's good.

That's clearly good, but it seems to be order book that is built on the basis of engineering studies, concept development, visibility studies and that sort of stuff, and not really the large actual maintenance projects, as such. And that's what we need.

So it's a good start, and it has to continue and eventually materialize into real activity that hits us, whether that's large maintenance projects or tie-backs or hookups, or just modifications to be able to receive further production from their [ oilfields ]. So the macro picture is positive.

Breakeven levels on oilfield developments are coming down to the left. Oil price is behaving well, as we tend to say, and it keeps behaving well at a decent level.

And clearly, as everyone says, the oil companies are clearly cash-positive at much lower levels than the current oil price, even after [indiscernible]. And those who remember all the way back to 2013, when I think it really started, that was the key topic.

The oil industry was cash-negative. The financial community wanted their dividends back, and that was the start.

Now, we see the beginning of a situation where the oil companies perhaps increasingly must shift focus from cost and dividends only and combine that with protect the reserve bank and increase production. And that's exactly what we need.

And we see the CapEx budgets and the CapEx expectations from the oil companies coming up as a consequence of the same, which is important. And of course, to the right, although again more direct, interesting for [ seismics ] and exploration drilling, but also for us, going forward, the triple-R, the reserve replacement ratio, has come down.

And again, haven't we seen that in every down cycle? So if you combine this with no change of paradigm, paradigm in terms of how they eventually will take care of the big assets offshore, then it's a matter of time, but it will come back.

This is another interesting perspective, just to remind you. At the moment, this goes for Prosafe but also for our competitors.

Historically over the last 20, 25 years, the main bread-and-butter business for Prosafe has been maintenance and modifications, whereas today, that's pretty still. It's all about hookup.

We did the [ Evaroson ]. Someone else did the [indiscernible].

Now we're doing [ Mariner ]. Now we're doing to do Johan Svedrup, and we have a couple of others coming.

And when these big field developments are done, then maybe the next specific one we see is Johan Svedrup phase two, but that's out there. We're looking a few years out.

That means that we need the MMO market to come back, maintenance and modifications to come back, and then to be supplemented from time to time with hookup and other type of work. It's pretty interesting.

If you look at the pie chart at the bottom, so through the history, that was kind of turned upside-down. The majority was MMO but, right now, it's all hook-up.

Just a quick one. I've already alluded to this, but just to remind you, and again, North Sea-specific, but obviously there is--we're talking hundreds of installations out there in the North Sea across all sectors.

Looking at Norway specifically, we have seen for years the push to get more out of the existing reservoirs. The Ekofisk field is, of course, the golden example initially that I loved to cease production in 1990, and now I think we're talking, is it 2050 or 2070, I don't know, but this is a general trend, and that's what we need.

That requires more work. It requires life extensions, which means modifications and more drilling, which means tie-backs, et cetera.

This is the type of--it's a very difficult market to read, as you know. There is low visibility, and short visibility in the MMO market, even for us as an incumbent in the industry.

We need to start by looking at the big picture, and we cannot imagine that this is something that will continue and eventually lead to real demand for the type of assets that Prosafe controls in the North Sea and elsewhere. Irrespective, international markets will continue to become more important.

Now, as you know, we lived well on Mexico for many, many years until it collapsed. We are confident Mexico will come back, but it's just difficult to know exactly when.

But they will come back, and they will demand better equipment. They want the same type of DP units, state-of-the-art equipment that they want in the North Sea and in Brazil.

So, Mexico will come back, but it might take another couple of more years. Brazil, I think we have consistently said it's the market that will come back first, and we still believe that will come back first.

We expect Petrobras to come out with bids this year. And it is interesting, because only 10 years ago or so, they didn't really use these units in Brazil.

Then, they went to the different phases and used all types of equipment, and now they seem to be homing in again on semis as the main concept, very high standards. The challenge for us is that all our modern flagship vessels are busy.

That's good. The drawback is how do we deal with the next bid from Petrobras in Brazil.

And we expect them to be long-term contracts, as well. That takes us back to COSCO, that I have already talked to.

Our own prospects in tendering keeps coming up, and some of you, of course, ask me the question, it looks good, keeps trending the right way, but when does it actually materialize into work, and that's a good question. Now, this is, of course, not the answer.

We are consistently applying our business intel, and it's good intel. But things keep slipping and being pushed to the right.

Some of them fall out, and some others come in. But it is important to note that, at the moment, we see 22 North Sea prospects with what we believe, or have a high probability of coming to tenders within the next three years.

So we think there might be tenders already in 2019. The issue is right now that, at the moment, most vessels will be available in '19, so the competition will be high, as well.

We might go through a situation where, as expected, demand will start to come up gradually, but the day rates will lag and take longer to come up. We need to start with activity, and then start looking for contribution.

But it's an important picture, and we believe it should be supported by the macro indicators. It's supported by the research we see from the various markets.

And I guess the conclusion is, yes, it has taken time. Yes, it will take time, but it will come back.

And for every day, we're one day closer to recovery one fine day. Supply side, I've alluded to as well, but the top graph is pretty illustrative.

The world fleet of [indiscernible] units is pretty well defined into two buckets, the seasoned units and the new units, including the ones not delivered. And of course, on the assumption that Prosafe can get a good deal with COSCO, we will end up controlling a large part of the modern new fleet.

And that's clearly the key strategic goal in Prosafe, as we speak. Interestingly as well, as you will see, at the moment, it's really the newer vessels, except the Caledonia, that are working.

And going forward, as we have talk to many times, at the moment, we might have 35, 34, something like that, semis in the world. We have consistently said that we foresee the fleet renewal strategy leading to a rebalancing, where global supply of such high-end assets might come down to 25, 26, 27 by 2020.

That needs to continue. We will scrap more, and other units will exit the market or never come back in.

And in that scenario, we will again, ideally, sit back with the largest fleet of modern, high-end units that can cover demand in all the key markets in the North Sea, Brazil, and Mexico. We expect this to continue, and the drawback is only that, even when the market comes back strong, clients will demand the new units, and the older units will remain idle.

Strategically at the moment, we are pursuing every opportunity, in addition to COSCO, to position Prosafe. That could involve pooling arrangements.

Management agreements we already have for the Safe Swift. We will be willing to consider that for the other assets if it makes sense.

But of course, point number one to the right, fleet enhancements, I've addressed in detail already. Consolidation is, of course, on the agenda.

And we have talked consistently about that for the last couple of years, and I think, as I've said before, you have to assume that consolidation is on everyone's agenda these days, but it doesn't mean that it's easy to make it happen. But we've said before, the landscape is likely to change in the foreseeable future, and we have every intention of playing an active role in an industry restructuring also in the future, as we have done historically.

To sum up, strategic focus in Prosafe as we speak, cost and efficiency measures to protect the runway. We continue to do that, to refine the organization, improve the organization.

The big cost cuts are done, but there is always more to do while improving the organization at the same time in such a way that we're able to take growth when it comes without adding costs against to protect the runway and the cash books. Fleet management, scrapping, and fleet renewal, COSCO obviously.

Financial planning to deliver on strategic goals. Right now we're in an okay position.

We have enough cash, and we have a runway. Question is, when will the market come back.

And given what we experienced abruptly at the start of 2016, rest assured, we are not sitting still. We need to act now to make sure that this company is positioned in the best way possible for the future.

And of course, consolidation I have already talked to. I think, in sum, good operating performance again in the quarter, good cash flow and cash flow position.

Very happy with the Caledonia contract. The Westcon case will be continued, but we're extremely happy with the verdict from the first instance, and we have every intention of improving that.

Established in Mexico, key, positive macro indicators. We foresee a gradual pickup in demand from next year, but as I said, we expect competition to be high, as well.

But you need to start somewhere, and then hopefully it will become stronger from '21, '22. And we aim to be proactive in the industry restructuring, going forward.

I think with that, we've been through the presentation and the key highlights, and I think we'll open the floor for any questions, including from the Web. Thank you.

Do we have any questions? There are none on the Web yet.

Any questions in the -- yes, good, and then I might have to draw on you, Jesper.

How [ does ] your competitive position in Mexico, given that your competitors there can provide a more broad base of services?

That's a good question. Do you want to respond to that first, Jesper?

That's true. It depends a bit.

You see different scopes from pay mix. Some have integrated solutions, including the maintenance work to be done.

In other situations, you see basic vessel suppliers we provide. In that prospect, I guess there are two options.

One is basically to offer the basic vessel supply, and the second is partnering. And I think we have both options obviously to make the scope by pay mix.

Magnus Olsvik, Kepler Cheuvreux. Just on competition, do you see any change in the competition from other type of units, like smaller units, monohulls and so on, now versus, let's say, four or five years ago?

No, not dramatically. In the southern part of the North Sea, there's more walk-to-work solutions.

But for these small [POB] jobs, 30, 40, 50 people, it's not the core of our activity. In the core segment and the major part of the demand, we don't see any significant change.

Any more questions? Still none from the web.

For how long can you survive in the current market if you foresee that it will keep slipping?

Well, ask the analysts. There are many of them in the room.

I think my only response to that is that we said in 2016 that what we were doing was to restructure the company and protect -- or create, rather, a financial runway to 2020, and that's what we have done. And since then, I think it's been improved by the cost and CapEx reductions that we have.

We're in a good position right now, but of course, for us, it's not a strategy to sit still and burn cash and wait for market recovery. We have to use that time wisely.

I think, instead of focusing too much on when -- on the assumption that demand remains low, when is the inflection point between a market recovery and the end of the runway, we are doing whatever we can in the meantime to avoid that surprise strategically and financially so that we can protect the company and build for the future. But the short answer is we created the runway to 2020.

That stands. I probably said too much, then, since there is a follow-up.

That's fine.

If you look at the fleet, as you talk about you see a lot of scrapping…

Not enough.

But if you see when the market comes back, how much of the fleet do you think will be scrapped?

Well, I didn't mention that detail, but it's on the slide. I think if you go back to the previous boiling hot days where you had good activity in Mexico, Brazil, and the North Sea, and maybe the odd job in Australia and the U.S., you probably had 15, 16 vessels working, and the fleet at the point in time was just over 20.

So what we are saying is that we will -- we had scrapped five units already. We have definitely taken responsibility there, as well.

[ Dunford Olson ] did one. We are indicating that another seven units or so will disappear from the market to take supply down towards 25 by 2020.

We haven't been too specific, but you all understand that, in that seven, some are ours. The question is, is it two or is it three.

We have definitely identified the next scrapping candidate, and it's just a matter of finding the right time to do it. The remaining four or five units needs to come from others.

And I don't think I want to mention names in the public, but we know which vessels are likely to be scrapped and-or never come back simply because, with the current market activity, some of them will struggle. It's expensive to keep them [ layup ], and the longer it takes before they are reactivated, it might become uneconomical to reactivate and do the class.

So I think our prediction will prove right, but we have to continue to take responsibility. And at least a couple of units will disappear also from Prosafe's fleet.

It's just a matter of time. Which means that, historically, in good times you saw maybe a global fleet utilization of around 80% or so.

There is always spare capacity, and there should be spare capacity, so that's what we're kind of looking for. Again, in a hot market, 25 units globally, you would see maybe 17, 18 units working.

But this is scenario-painting. This is not guiding or anything else.

I'm just thinking out loud.

Why is it so difficult to have consolidation when everybody sees the need for it?

Well, this takes me back to University, actually, because this is a very interesting topic. But to make a long story short, it's often very simple for everyone to see the industrial and strategic rationale for consolidation.

The difficulty becomes when you start talking about valuation. Fleets are different, relative valuation and other complexities.

So it's just the way it is. The strategy is easy.

The difficult part is to make this come together from the perspective of many owners, I guess. That's always the challenge.

[Indiscernible] investor. How long can you keep postponing the standstill agreement in China?

And are you experiencing any pressure there? Yes, it's been postponed several times, and we see the time getting closer and closer here.

That's a good question. It takes two to agree, and that's hard to guess in advance what will happen.

But I think overall, it's of course not an easy situation. The market has changed significantly since we ordered the vessels.

As you know, there are not many deals done in China, actually zero, more or less, to date. On the other hand, I think everybody understands that Prosafe is in a prime position to take these vessels, all three of them, into the market in a timely fashion as the market recovers.

And I think not to be underestimated is that we know the vessels. The [ Euros ] is fairly complete, and [ Nova and Vega ], the yard has work to do in that respect, and they are [ two ] extremely complex vessels, so there's a considerable project risk in just taking them.

So it's a question of timing, when does it become relevant, when [ does their job ] -- when is the situation [ possible ] in China to do something and how long can we postpone. I don't think it's a fixed answer in that respect.

Still no questions from the Web, so any final questions from you guys? No?

Okay. But then, we say thank you all for showing up and listening in, and have a nice day.

Thank you.