Prosafe SE

Good morning, and welcome to the Prosafe Second Quarter '18 Results and Market Update Presentation. While you're reading the disclaimer, it's -- I know it's less than -- it's about 2 weeks ago we were here last time.

I can see that almost it's the same turnout, which is positive, so hopefully we have some interesting things to share. During the last presentation, 2 weeks ago, we focused, of course, a lot on COSCO and the amended terms with the banks.

We will give an update on that. But I think we will focus a bit more on the market update and the result for the second quarter.

So let's go quickly through the highlights before Stig will take us through the financials. As you all know, we reached an agreement with COSCO and with our lenders that transforms Prosafe.

I will give an update to that, and we can see that has been very positively received in the market as we expected. The utilization in the second quarter stands at 45.8%.

It's a good improvement compared to last year. But as you would recall, the utilization in the first quarter was only 33%, so it's about 12%, 13% improvement in that respect.

EBITDA comes in around $57 million as a result of our improved utilization and cost control. And as Stig will come back to, we even have had a bit of mobilization cost in that quarter as both the Zephyrus and the Caledonia have mobilized in that quarter to their new jobs.

Cash flows from operations, $43.5 million. And as you know, we have had 2 attractive extensions or new contract awards: the Safe Scandinavia to Ula, which is a modification project; and the Safe Concordia re-entering Brazil in its own niche on a maintenance project.

And lastly, I think we see the optionality in our existing contracts play out as the Caledonia has been extended to its maximum 21st November at Clair Ridge, and Equinor has called 2 options now, two 1-month options at the Boreas at Mariner. So I think, all in all, it's been a very eventful few months from Prosafe in the very positive sense of that word.

And we have good reason to think that now we have the fleet in place, the financing is amended. And we see some very interesting developments in the market, especially relating to the MMO, which I'll come back to, which I think is good reason to think that this will continue.

Stig, will you take us through the financial results?

Yes. Thank you, Jesper, and good morning, everyone.

Let's start with the income statement. You've all seen it this morning, obviously.

So as Jesper alluded to, revenues are up in the quarter, USD 100.3 million of revenue in the quarter compared to USD 61.7 million in the same quarter last year, driven by high utilization, but also driven by better day rates or higher average day rates. Of course, the revenues are also impacted by the IFRS adjustments that we have talked about before.

You are aware of that. So in the quarter, we have $8.7 million included in the numbers.

But the main reason is higher utilization and higher day rates. On the operating expenses side, coming up a little bit as well related to the increased activity, of course, which is positive.

What I would like to add is that included in the operating expenses are an obvious fact, we have mobilized 2 vessels to contract in the quarter, and that comes with some additional costs. Although it's very positive activity to undertake.

We have also had some modest one-off costs related to further reorganizations and efficiency measures implemented in the company. So if I adjust for those, roughly USD 4.5 million, and you would see that the underlying performance in the quarter is even better and the EBITDA margin, equally, is even better.

Depreciation, steady. You know why the number is lower than the same quarter last year.

That's due to the impairments with it in 2017. Otherwise, steady.

On the financial items side, not really much to say on the interest income. On the interest expenses, steady from last quarter's USD 28.9 million, although a little bit up from the same quarter last year, driven by the increase in interest rate level.

However, at this point in time, we are at the point where the interest hedges are sort of turning in the money. And going forward, I will kind of at least largely shield or partly shield any further interest rate increases.

Having said that, though, at the moment, as you read, the curve is very flat, so maybe it'll stay pretty much flat going forward. Other financial items, there is a positive gain related to the revaluation of the interest hedges, which is then offset by unrealized currency loss due to the strengthening of the dollar versus the NOK and the sterling in particular.

And I think in sum, that gives us a net profit in the quarter of USD 7.4 million compared to a loss of USD 33 million in the same quarter last year. And if we look at the full year in total, we have then generated a net profit for the first 6 months of 2018 of USD 23.3 million compared to a net loss of USD 52.1 million last year in 2017.

Looking at the balance sheet, a few comments. Total assets of about USD 2 billion.

Book equity ratio, just above 25%. No covenants attached to that.

Working capital in the quarter, of course, partly impacted by the activity increase, which is temporary, but a positive development obviously. And we are in a position where we have a strong cash holding at the moment, USD 275 million of cash on hand.

So just as a reminder, this is an illustration we have been using for quite some time. And the key point is basically, yes, we have now a strong cash position in the company, about USD 275 million, on the basis of all the efficiency measures that we have been implementing over the last few years, and by the way, which are still ongoing.

We have been able to bring down the cash breakeven EBITDA level to a decent level, which, of course, helps us to protect the financial runway that we are also now strengthening with support from our lenders so that we can position the company towards the upturn. So I guess, with that, I will leave the word back to Jesper.

Jesper?

Okay. Thanks, Stig.

okay, we go into business and operations. So just a quick recap of the COSCO deal.

The 4 main elements of the COSCO deal is naturally price, where we saw an 8% reduction of a competitive price on historical levels. There's the attractive $431 million yard financing where repayment is linked to earnings and interest rate for 2 years and thereafter linked to the day rate levels, possibility of 5 years interest free, then we have the flexibility in delivery, end '19 for Eurus and 5 years for the last vessel.

And then at least, COSCO has the responsibility to preservation, which means that we do not have any significant cost before delivery of the vessels. We also amended the loan terms to match the flexibility we have at COSCO and to enable taking delivery of the vessels.

The elements are familiar. We reduced amortization by $156 million.

We have the option to extend maturity for 1 year. Covenants are eased.

And we have the possibility to scrap up to 3 vessels, which I'll come back to. The process with the banks, I think we announced.

We have 94% acceptance at that time. Now I think we're around 98%.

And basically, the process is developing as we expected, and we expect completion by next week. The second thing worth mentioning is the, as you will recall, the amended loan agreement gives the banks a choice to choose either margin uplift or warrants upon delivery of each of the Nova and the Vega.

That choice is free for the banks to make from as of yesterday, I think, and all the way until delivery of the vessels. And based on the informal feedback and what we hear so far, I think we will assume that the cap on the warrants of $9.78 million will be reached.

And we think that's very positive that the banks are supporting in this respect as well. The final thing I want to say about this is the timing of the deal, and I'll get a bit back to the market outlook.

And this is, of course, the difficult part when you make this deal, when do you reach the bottom of the market? I think I said that it has to be -- market has to be bad enough to get good terms, but there also has to be some concrete prospects, meaning that you need the vessels.

And I think we are there now. As I mentioned last time, over the past 12 months, we have had 5 instances where we could have used the COSCO vessels in the sense that we would either have one additional work or we will go to higher rates or want a longer duration.

Now what we are seeing as we will come to on the next slides is that we see some concrete opportunities in Brazil, and we see a turn in the market with the MMO activities coming back. I'll come back to that.

So the COSCO deal, of course, had a profound effect on our fleet profile. It goes from basically, I think, 35 years of history to 35 years of future.

And you will see that in the middle column, we have currently 9 vessels on the water and then 3 at the yards, and then we have a future projection of 10 where we have 2 legacy vessels under consideration. We have decided to scrap the Safe Astoria in the near future.

When the bank agreements become effective, the Astoria will be scrapped. I don't want to speculate about price, what we will get from that.

There are some good equipment on the vessel that we can use for the rest of the fleet. But as you know, there will be no adverse cash impact.

We do not have to repay under the loan agreement, and it does not have any accounting effect either. Apart from the Astoria, we do not have any plans for scrapping.

Currently, we are marketing and seeing good interest in all the vessels we have in the fleet. So I think with the Astoria gone, I think we have a very competitive fleet for what we are seeing in the market.

Quick update on Westcon, not much to add. We won the case in the first quarter, and it was appealed in the second quarter.

We do not have any specific time frame for this case yet, but a realistic guess would be that this will be resolved in the second half of next year. In the meantime, we, of course, working to improve our condition.

The claim against the yard is secured by our parent company guarantee, but we are naturally seeking to secure our claim even further by attaching assets of the yard. Okay.

Then a bit about market outlook, which is a bit interesting. First, let's take a look back.

I think this is a familiar slide. It's been here for ages.

And it shows, of course, first of all, the historic backlog of Prosafe and what this company is able to produce. And it also shows the familiar trend and how the backlog has depleted in connection with the downturn and the historical legacy contracts going off higher.

What we are mainly focused on and will focus on the next slides is naturally the forward-looking trends, what does it look in terms of our prospects, how they transform into tenders and ultimately increase backlog. So since the second quarter, we had 2 wins to report, the Scandinavia to Ula.

The Scandinavia is currently on location, and we expect it will be on hire for around 1st September. So that has mobilized in about 6 weeks' time.

And the job, it will be of course the modification -- support in connection with the modification of the Ula platform via BP. The second contract we announce was the 200-day contract in Brazil, whereby the Concordia goes back into Brazil.

This is not a significant EBITDA contribution, but nevertheless, we are quite pleased with this contract as we think we can make a niche for the Concordia in Brazil for maintenance. Finally, as already mentioned, we have seen extensions of the existing contract portfolio 2 months on Boreas and 1 month on the Caledonia.

So the optionality of our existing contracts is playing out. The contract backlog, looking in a different way, is I think 2 things to note is, first of all, on 1st April, we had 3 vessels working.

On 1st September, we will have 6 vessels working. The Astoria will go out.

As you can see, the existing contract or the existing jobs are heavily linked due to hookup and commissioning. You see almost all the jobs are new fields, apart from, of course, the Ula job and the MODEC job for the Concordia.

So I think looking at our coverage in the near future, we have almost all of our vessels working in the North Sea. The market is reasonably tight in the North Sea in the near term, and we have a bit of available capacity to capture those opportunities.

And then an old slide, we have -- I thought it was time to bring back, as we see something changing. As you know, accommodation is basically linked to mainly 3 phases: hookup and commissioning during the production phase in connection with maintenance; and modification and some decommissioning.

And as you know, the historical share of the market, looking 10 years back or so, is that hookup and commissioning was about 25%; the maintenance modification, 75%. The difference or the characteristics of the hookup, they have high market visibility, long lead time and about 8 months' duration.

The maintenance, on the other hand, have low market visibility and short lead time. As I just mentioned for the Scandinavia, it took us 6 weeks to turn that around from one place to another.

And the contract award, I think, was on 6 July, and now we are gangway down very shortly thereafter. So it's a bit of a different dynamic.

The interesting thing here is that, first of all, the current market activity, as I just showed, is heavily dominated by the hookup. And for a long period of time, I think everybody has been asking where is the maintenance and the modification.

I just want to point out that the current tenders we have, and as you will see on the other slides, it's just not 1 or 2. More than 50% are related to maintenance and modification.

We see an increase in the number of tenders, and we see an increased percentage of the maintenance and modification tenders. So something is changing.

And a quick look at the business life from Rystad Energy. This is a quick look on how it looks in Norway and focusing specifically on lifetime extensions.

On the left, you have the original lifetime of the installed base in Norway, and on the right, you have basically the 667 years of life extensions that we're seeing. And if we go a bit back, you can see some of the wave of lifetime extensions happening, and I think what is interesting, first, is this group down here that we call additional opportunities, as this group we have down here could represent a second wave of life extensions, which often triggers a requirement for a floater.

And I just want to mention that in the tenders we have out now, none of these are included, so we see that as additional opportunity. I think it's a quite interesting dynamic we will see playing out over the next years.

Okay, looking a bit internationally to the 2 other important markets for Prosafe: Brazil and Mexico. The deal with COSCO means that we now have 3 qualified vessels or additional 3 qualified vessels for Brazil: the Eurus, Nova and the Vega.

All are compliant with Brazil specification -- or the Petrobras specification rather, and a representative from Petrobras has been onboard to inspect 2 of the 3 vessels, so I think we are good in that respect. We do anticipate tenders for Brazil, but I do not know the exact timing, and I do not know the number of vessels that would be tendered for, but we expect it to be more than one.

In Mexico, I think all knows there has been a change on the political scene with Amro being elected and taking office around September 1, and the climate is a bit volatile. The fleet that's currently in Mexico probably has the largest band of any region.

We have some of the oldest vessels or simplest vessels, and we have some of the most modern vessels, of course, 1 of them or 2 of them being sisters, the Eurus and the Notos. We are following the development quite closely, and we think that the dynamic situation will create opportunities for re-entry for Prosafe.

And then the familiar slide we have on the prospects and tendering, and I think for some time, we've had questions basically when do the prospects translate into tenders, and that's a very fair question, and at least, we can see that this is what's happening now. We've always had good prospects.

They are even on the increase currently, but what we are seeing now are 12 tenders ongoing or double the amount that we have seen in Q1. And the interesting thing is, of course, that even though it doesn't say here, as I mentioned, more than 50% of the tenders we are seeing here are related to maintenance and modification.

This is a very significant shift. Of course, there are also a few interesting tenders in the North Sea going on.

Within a too long time, we would expect conclusion on some of those. Not included in the bars here under prospect, but not under the tendering are the Brazil opportunities, we think, will come up and also activity in Mexico.

None of that is included in the tendering comment. Okay, Stig, will you take us through the final 2 parts?

Thank you, Jesper, will do. So a little bit of repeat, but I'll be short on the basis of the COSCO -- of course, the fleet renewal strategy and the financial improvements that we have now agreed soon with the lenders.

Obviously, Prosafe has the strategic and the financial room to maneuver to position the company in a very optimal way, going forward, and make sure that we are ready for when the market finally comes back. And as Jesper has spoken to, we see that -- we now see clear signs of that beginning to happen.

I think it's fair to say that we have been seeing red lights for the last 2 to 3 years, fighting fires, red light, hitting the brakes with both feet. At the moment, I think we're maybe beginning to warm up the engines, and the light is yellow.

But as Jesper talked to, we see the green shoots. We think we are at the turning point.

And we shall be ready on the basis of all the work done when the green light goes back, so we can accelerate and optimize the opportunities that will present themselves in the market. But we have the flexibility to maneuver in the meantime, and that's the key point.

I think the company is now very, very well positioned to counter for -- or to not counter for, but to benefit from the upside. So to sum up, in short, the company is being transformed, as the market is bottoming out, and the macro indicators or the market indicators are turning positive.

Financial performance, operating performance in the quarter is very good. Not unimportantly.

We have had new contracts and option extensions. And we see now that, going forward, we expect with some seasonality and some gradual uptick in utilization.

And often, after utilization, you can start looking for an average improvement also in day rates. I think it's fair to say at this point that we have been guiding for quite some time that 2019, we're now with the earnings low point for Prosafe in this down cycle, so that will be a financial bridge year in a way, but it will still be an important year on the back of the deals that we have now done with COSCO and the banks, and the fact that we will hopefully see a resolution on the Westcon case, and get more cash in, and that we are likely to take delivery of the Eurus or the first COSCO units, and hopefully, that will be against an exciting contract.

So it will be an important year, but the earning's low point, and then we are well positioned for further uptick going into 2020 and beyond. So I think with that, we conclude and open for questions.

Okay. Any questions in the room?

Any questions? Yes?

Møllerløkken from Carnegie. In terms of the -- you might be tired of replying on this question.

But in terms of the opportunities from Petrobras, what's the latest view there in terms of when do you expect them to materialize?

Yes, I wish I could tell you a very precise answer, then I would. But I think we have, for some time, heard that it will be within the next 1 to 3 months, but that was also the case 6 months ago.

But when we look at the contract coverage and so on, it's -- yes, it's going to be sooner rather than later, I think.

And in terms of the competitive landscape, you do expect improved utilization and further on, improved day rates, but would you say that the competition has eased up slightly? Or is it still highly competitive in the accommodation market?

It depends. It's probably more regional view.

I think in the North Sea we see right now, if you look at the -- right now, if you look on the Norwegian sector, I think it's almost fully booked. If you look in U.K., there's a few vessels available of varying quality in the near term until mid-2019, then you can see it opening a bit up.

So it depends a bit on the time horizon you have. And then in Mexico, as I said, currently, it has a very wide span in terms of what vessels they are seeking.

We think it will probably graduate towards the higher-end vessels, which we understand are performing better. And then in Brazil, Petrobras seems to have undertaken a learning curve and now have a fairly fixed idea of what they need in terms of specification, and that reduces some of the more mid-level vessels, such as the Concordia that could have a different life or different jobs.

But I think it's a bit regional where -- how the demand and supply balance is looking, but I think the general tightening is there.

Just adding one thing. There was an important point from the summary slide that I didn't address.

Consolidation is still on the M&A. So it's a pretty transparent landscape in the global offshore accommodation space, so there isn't much more necessarily to be done before you have a further, call it, tightening and the improvement of the fleet.

Yes.

Can you please turn the mic to -- on the back? On the back.

All right.

Magnus Olsvik, Kepler Cheuvreux. Can you just remind us on the SBS cost for Scandinavia?

What do you expect on the budget there, and how does it compare to the other vessels?

Yes, the roughly, the SBS cost on the Scandinavia will be about total of around $5 million -- $4 million to $5 million. Mostly, it will be done this year.

Maybe some will be left for 2019, and it corresponds well to, I think, numbers we have talked about recently on how cost-efficient we can do this SBS if we're just focusing doing the SBS and not everything else, which has been a tendency in the past. As an example, when we did the Caledonia last year, it was pretty much the same number, a little bit lower, just over $4 million.

So it's in that range, and that is doable, $4 million to $5 million.

Yes. And once outstanding, we can do offshore.

We have already done it in 6 weeks turnaround. We have already prepared for the SBS next year, so yes.

And then a broader question on day rates again. You mentioned some differences between regions.

But do you also see potential for day rate divergence between assets within the different regions and to which extent?

Yes, we do. And I think that's also fair to say that even with the existing tenders we have on the -- played even within a region, the customer requirements are quite different.

So there's definitely a ranking of the different vessels with a limited supply for the high end and a broader supply for the more long-term work jobs. And then for the DP high POB, then you have fewer vessels available.

So it's difficult to say how much, but I think it's more than the OpEx that will be the difference. So yes, there will definitely be a different earnings potential for the vessels, absolutely.

I think the only exception is Brazil. If you're above the technical specification, then it's a commodity game.

Any further questions? No questions on the internet?

Yes.

Good. Okay.

Well, thanks for coming.

Okay. Thank you.