Prosafe SE

Okay. Good morning, and welcome to Prosafe's fourth quarter 2018 presentation.

And thanks to those in the room for defying the snowing conditions outside. We will start with highlights briefly.

Stig will take us through financial results and an update on our business and operations. I'll touch a bit on outlook and then round us off.

Highlights for the quarter and recent developments. We have seen a fairly good utilization in the fourth quarter 2018 of 63%.

As you know, fourth quarter is not exactly peak season for floaters. So we are pleased to report the highest utilization in a quarter for the past 3-years plus.

EBITDA comes in before nonrecurring items at $31.7 million. Cash flow from operations at $25.6 million, which gives us a cash balance of $140 million.

And then if we add the drawing right we have on the revolving credit facility, we have a total liquidity reserve of $277 million. And if you compare to the start of 2018, that is an increase of about $45 million over the year.

Our recent activity. We came first in an auction in Brazil for 3 years work for Petrobras with a contract value slightly above $80 million in a competitive online auction.

Safe Concordia also commenced working in Brazil, reentered Brazil working for MODEC FPSOs in a new niche for that vessel. And I think on the last working day before Christmas, on 21st December, we were pleased to announce 2 contracts for Regalia and Caledonia, whatever vessel we may choose for that job.

On the U.K. sector related to maintenance and modification.

And as you can see, we see evidenced by the recent contract that was for Regalia and Caledonia we see increased maintenance and modification activity, especially on the U.K. Continental Shelf.

And as I will show on one of the last slides, we also see some increase on the tendering activity. Stig?

Thank you, Jesper, and good morning, everyone. So moving on to the income statement.

Jesper has, of course, covered the key points already in his introduction, so thanks, Jesper. I've seen some morning reports this morning, and I think you have picked up the key points.

The revenues are slightly higher, I think, than some had expected. But that is cyclical nature of the business, other income that is not directly related, i.e.

additional services which adds to the revenue side. And I think we can say that in Q4 '18 other income is more than twice the same level as we had in the same quarter in 2017.

So that increases the revenues but of course also the cost side. I think the EBITDA comes in pretty much in line with expectations, which we are pleased to announce.

Depreciation is a little bit higher than some had expected, but it's -- it will fluctuate a little bit even though it's a straight line. So there are some particular depreciations on certain items on Scandinavia in the quarter.

Interestingly on the interest income side, not that much to add obviously. We have brought down the cash holdings as Jesper alluded to.

But it's extremely important to underscore that the liquidity reserve remains as high as it was in the previous quarter. We have basically used cash to pay down on the revolving credit facility, which of course leads me to the next line.

It brings down the interest expenses in the company. So that's at the moment the best cash management measure we can do in Prosafe where the liquidity position is to pay back on the RCF which is committed and drop when the cash is needed.

Other financials, of course, fluctuates quarter on quarter, impacted now by changes in the long-term interest rate curve in essence. On the tax side, a small positive in the quarter.

You could call it the year-end adjustments, but it's also a positive effect of the company redomiciling for tax purposes from Cyprus to Norway. So the company is now a Norwegian tax entity.

And we are also working to move legally. So we hope that during 2019 Prosafe will be a Norwegian company altogether.

On the balance sheet side. I think I possibly addressed that already.

The key points to note is that the interest-bearing debt is reduced as we have used cash to pay off on the revolving credit facility. And as Jesper alluded to, we have also, therefore, less cash in hand in the balance sheet.

But again, the liquidity reserve is very strong at USD 277 million at the end of 2018, and a nice growth through 2018. Book equity stands at 23%.

Looking at business and operations in brief. Let's recap what we have done.

And it's been an interesting journey. As you know, we had a major restructuring in '16, did some -- had some normal times perhaps in '17.

'18 again we did the COSCO deal. And we did another deal with our lenders.

And clearly, Prosafe coming out of 2018 is transformed and repositioned in terms of quality of fleet, including the COSCO deal and in terms of financial runway based on the agreements we have with our lenders. In addition to that, as you know, we have turned every stone when it comes to looking for efficiencies in the companies, when it comes to the cost level, how we operate, how we work.

We have scrapped 6 vessels which of course leads to reduced costs and tying up capital in the company. And recently we have also started to see the MMO market coming back.

We have seen quite a few awards which basically tells us that the company is now in a great position to try to take advantage of any opportunity that may present itself in the markets going forward. That doesn't mean that we are done.

We have to continue to look for efficiencies in the way we work so that what we have achieved so far remains sustainable so that we maintain the competitive position as the market hopefully continues to gradually improve going forward. But I think we have done what we have promised and we will continue to do that.

Current fleet status. Jesper alluded to this, but obviously, we had a very high utilization in the quarter.

And before we start taking new builds out of the yard, which Jesper will come back to, we are pretty much sold out for the certainly 2019 summer season. We will continue to of course position ourselves for any future opportunities that might come.

But bear in mind, in our industry we are used to not only short contracts but also short visibility. So in terms of further work, late '19 or certainly for 2020, it's still -- it's still very early days if we look at it in a historic perspective.

So let's focus on '19 first and then we can see how when things start to materialize for 2020. That goes for our vessels.

We are also working specifically now for opportunities for the Safe Swift, which we are finding increasingly interesting. And we hope to get some work for her as well.

And in the future, I think you might see that the fleet of vessels in Prosafe not necessarily only contains semis but possibly also other types of vessels. But that's to be discussed later on.

So I think at the moment we are delivering on what we have promised. We have a pretty good situation for 2019.

And with that, I think I'll just leave the word back to you, Jesper.

Thanks, Stig. Okay, let's see a bit on our key regions.

Starting with the U.K. As you know, we have the Caledonia working for an MMO contract in U.K.

shortly. And as mentioned, we announced recently the 2 awards for Regalia and Caledonia in 2020 also MMO related.

So we see increased activity on the MMO side. And we also need that, as you know.

Currently, hookup and commissioning projects are accounting for a very large part of total demand and we need to see some of the maintenance and modification activities coming back. And as you also know, maintenance and modification activities have a shorter lead time and less visibility than hookup, so I'm pointing to some of the interesting drivers, observations pertaining to maintenance and modification activities.

So first of all, of course it's interesting to note the plant turnaround and life extensions of certain fields over the next 5 years. In 2020 we have a shutdown planned of the Forties pipeline network.

And that I think will give some customers an idea whether you should use that shutdown to do a turnaround or other activities. There is currently 1 tender in the market that would indicate those thoughts.

Generally speaking, looking at the 1990's installed platforms which are now getting to a fairly progressed age and therefore more prone for maintenance and modification activity, they are fairly lean design. If you look, some of the more recent designs, I think they have a bit more flexibility.

In looking at some of the 2019 are a bit more lean and therefore could be more prone to use adjacent facilities for their planned work scope. Finally, and as you know, quite a number of operators on the U.K.

are announcing positive expectations and desire to grow their activities. And the trend we see where new entrants or private, mainly private equity-backed players are buying into existing operators' activities normally ties in with an aggressive or new plan to revitalize or add more activity.

And we think that is positive for activity also in our segment down the road. So these are some of the indicators I think is good to watch out for.

And then we have just illustrated on the graph to the top left for me, top right for you, the yellow portion, which is the turnaround and life extension that hopefully will take over from much of the green, which is the hookup and commissioning. So we will see a bit of a transition in that respect.

And the recent fixtures we have done also seem to indicate that. Norway, not so much to add, it's basically the same situation.

As you know, we have the Scandinavia working for Aker BP on Norwegian Continental Shelf on Ula. And I believe that they have to decide on their first option, is it later this week or early next week, and then we will see how long that contract will remain.

Brazil. For those of you who are recurrent guests, you have seen Brazil slide many, many times where we have predicted that sooner or later there would be something coming out of Brazil.

And we have had the same slides for quite a few quarters and been honest about the uncertainty regarding timing. But it came just before Christmas where Petrobras announced the 2 tenders for 2x 3-year work in Brazil.

And we were pleased that Eurus came first in the real-time online auction that was conducted. Naturally, competition was very fierce.

We were competing mainly against some units already mobilized to Brazil with no intentions or desire to leave Brazil. But I think we still managed to prevail at a competitive rate, which I'll come a bit back.

Looking at Petrobras contract backlog for floaters. We believe that they have incremental demand also in the near term.

And looking at the MMO spending for Petrobras, we will see that exceed $3.5 billion in 2020, which is a very positive trend. Apart from that, as you can see to the far right from you, all the green arrows shows that the trend of investment for others than Petrobras is quite clear.

So we believe that Brazil will remain active and will be important for Prosafe and for Eurus particular. 3 years from now is not too far away from when we have to possibly do a refinancing.

And in that connection it will be very important to have good forward-looking contracts for some of the key units, and hopefully the Eurus will be extended at that time. I'm recycling slides a bit.

So some may have a déjà vu as this is the exact same slide we had in August when we announced the COSCO deal, and I just want to refresh a bit. As you know, we have a competitive financing.

We do not pay any interest to COSCO on the seller's credits that we have on Eurus. And we have a minimum repayment to the yard of $2 million per year.

So as you will see, actually the year 1 to 3 cash breakeven of $53,000 a day is actually for Nova and Vega. So if we were to do the same for Eurus, and looking at Brazil, we would take away the $7,600 a day because that relates to Nova and Vega delivery.

The minimum payment is the same. And OpEx, I would expect to be slightly above $40,000 as there is a bit new scope in Brazil.

All in all, the Eurus cash breakeven is below $50,000 a day. And that means that taking into account mobilization, the rates and interest payments, repayment through the yard, we are cash positive over the 3-year period.

Mexico is -- we'll touch very briefly on that. It's another case of positive signs on the activity side, but with an uncertain time horizon.

The only thing I would like to point out is, as you see, we follow development very closely. The political situation seems to be somewhat stabilized.

And we see starting activity mainly in the drilling segments. And we have some optimism that that will spill on to our segment sooner or later.

And we are ready to pounce on those opportunities arising in Mexico. Then just a bit on -- we have said activity coming back.

And then one of our -- your good analyst was good to make a short overview of the activity we have seen in 2018. And as you can see, on the number of contract we have seen a significant increase in activity compared to 2017.

And when you adjust for the contract months, you will see that the average duration of the contracts in 2018 has probably been a bit shorter than 2017. But still also on the number of contracted months we have seen a very significant increase in 2018.

50% of the new contracts are maintenance and modification. And that is on a backdrop of a very bleak few years before that.

And as you have probably also calculated, historically 92% of options are called. I don't think that's necessarily a proxy for the future, but it's at least matter of fact on a historical basis.

So we do see activity on the increase. Finally, so our order backlog is leveling out a bit, more contracts but lower average day rate as we have pointed out, leads to about a stabling in the contract backlog.

Naturally does not include anything in Brazil as yet as that will only be included upon contract award. Historically, the Prosafe has been awarded 41% and 76% of global and North Sea contracts over the past 6 years.

And I think even the percentages have been higher in recent years. So we are well positioned.

Then just briefly, our tendering and prospects outlook what you will see is comparing the highest bar of January '18 with January '19. You will see a slight drop in the prospects column.

And you will see that the tendering column has increased. So you see basically some of the prospects spilling over to tendering '18 compared to '19.

So on total, activity is good and we see more tendering activity. As I mentioned, right now we have with near-term conclusion at least 1 ongoing for the North Sea, and we would expect a bit more in the months to come.

So sum up, good utilization -- highest utilization for the past 3 years, even at a time of year which is not known for peak season. We see some activity on the maintenance and modification.

But we need that to rebound to set off the high activity we have currently within maintenance and modification. It seems that the U.K.

sector is a bit ahead on Norway in maintenance and modification. And possibly Forties pipeline shutdown could give some inspiration to operators to use that.

We have concluded the auction in Brazil. And if we get the contract, it will be Eurus that's going there for 3-year work.

Concordia is back in Brazil and will hopefully stay there some time. Regalia and Caledonia, on contract.

The Regalia means that we will reactivate the Regalia. It has been cold for some time.

But this even short contract will be cash positive after SPS. So Regalia will be ready for work with short notice after it has completed its work this summer.

Safe Caledonia is booked for 2020. We can substitute with other vessels.

We have a suite of vessels we can use. So it puts a bit of utilization in the 2020 bucket.

And then we can schedule the rest of the fleet around that requirement. I think that works quite well.

Tendering activity picking up a bit. And then we are hoping for also a positive development on the rates.

As Stig mentioned, consolidation and fleet enhancements remains very much on the agenda. But it's unknown exactly what time horizon we are looking at in that respect.

I think that sums up our presentation for the fourth quarter and recent events. And we will be happy to take any questions.

Yes. And maybe we should start by questions on the web this time.

Yes.

We're not used to that, but this time we actually have 2. So let's go with the first one first which is kind of extensive, Jesper.

So I will read it, Jesper, aloud.

Okay. Read it aloud, yes.

Very interesting, though. "Could you comment on the market outlook, i.e.

tendering activity, industry utilization and day rates? And how has this changed in the past 6 months?

If optimistic on outlook, what will it take for Prosafe to bid higher day rates? Thank you."

I'm not sure if that's competitor asking or whether it's others asking, but I think we've already touched a bit upon that. I don't -- I think it's already been covered in our presentation.

Yes, we do see a bit of increased activity, but we also need increased activity to basically offset the current hook up and commissioning. So there is a bit of balancing going on.

And of course the balance will dictate what are the possibilities on the rates. So I think it's too early to say.

Yes.

Yes.

Fully agree on that. Then there's another question.

"Are there any options on the table to work for lithium harvesting companies which extract lithium out of the sea?"

That's, yes, deep sea mining I guess is...

Yes, yes.

It's not our core strategy, but of course with the assets we have available, they can basically work globally and of course mainly through oil and gas. Down the road, there may be other opportunities, but I wouldn't expect that that particular activity would be predominant for us any time soon.

Okay. Any questions from any of you present there?

Questions in the room?

Christopher in Carnegie. Just a quick question on other income which was quite high in fourth quarter.

Could you give any guidance for 2019 and going forward?

Thank you, Christopher. No, not really.

I think we have never guided on that. And the reason is it's very contract-specific.

Obviously in '18 there are some IFRS adjustments [ and the right ] noncash IFRS adjustments. The market is aware of those.

And those are very limited in '19 and they have also been published. So then you're back to contract-specific, client-specific items that drive that element.

And even for us it's difficult to predict because it depends very much on contract and client. So I think it would be wrong of us to guide specifically on that.

I think if you look -- if you were to do some historics, I can give you some indication. Historically over many years, you will probably see that somewhere between 6% and 10% perhaps of the revenues have been coming from other income than chartering income.

But that's just a rough historical guidance. It doesn't mean that that may go for the future.

Okay. Anybody else?

Magnus Olsvik, Kepler Cheuvreux, Swedbank. Now the new tender in Brazil, just related to the online auction, do you see it as -- that as a new standard in Brazil for future tender as well?

And secondly, and more broadly, have you seen any changes through contract terms, tender terms in other regions as well over the last year or so?

Good question, Magnus. No, no, we haven't seen it.

And it's a -- I would expect that Petrobras would do some lessons learned on this process. I think it's -- the process they have conducted this time around, they have inversed the process.

Normally there's a technical qualification and then the commercial. Now it's been inversed.

So we came out on top. But I think in only slightly different circumstances I think it could have been a bit chaotic I would say.

So I don't want to call it a contractual near miss, but it could easily have been a bit chaotic. I think in this particular circumstance Petrobras did have quite some choice especially in Brazil where it could have made sense to come out of ties the process as such.

Whether it's an ideal formula for Petrobras going forward, I'm not so sure. I think it would depend a bit on the situation.

So it's definitely a new procedure they've implemented. Whether you would see the same going forward, I'm not so sure.

And if you could see some adjustments, I would think to make it a bit less risky also for Petrobras point of view.

Tobias with Clarksons. Short question on scrapping.

What are your expectations going forward for the industry?

Yes, for us, no. As you know, we have flexibility to scrap, means that we don't have to accelerate loans if we do scrap.

But right now and with the utilization we see with Regalia being going from cold to an operation, we basically only have one cold vessel and that's the Bristolia which will then have, be closest to scrapping. But right now we don't have any plans in that respect.

We market that a bit globally. That may be on the industry globally well perhaps one or two that we could suspect would not survive for too long.

But we don't see a massive scrapping wave coming.

Haakon Amundsen from ABG. Just a couple of questions on '19.

Could you give a rough indication of the CapEx level expected in '19? And secondly, you're stating also that backlog and rates are not sufficient to lift earnings in '19, but consensus is expecting a significant drop.

Is it possible to comment on whether the current consensus looks realistic, only a bit off for '19?

Stig?

Good questions, but we don't guide on that. So I don't want to comment on -- we don't guide on that other than what we have stated in the report, basically that you just repeated.

So I don't think we want to add any comments to that. When it comes to the first question, CapEx, we don't really guide on that anymore either.

I think what we can say is that we have generally tended to say that in the normalized activity situation, which is not the case at the moment, but still you would spend on average $2 million to $3 million perhaps per vessel per year. And if you foresee a normalized situation in Prosafe with the fleet of 10 operating vessels on and off, you could see CapEx levels annually of somewhere between USD 20 million and USD 30 million.

But we are not there yet. But being precise on 2019, we don't want to be.

Probably a little bit higher than '18, that's as far as I want to go and main reason, of course, being reactivation of the Regalia. Okay, any further questions?

Okay, no further questions. Thank you.

Thank you very much for coming.

Thank you.