Prosafe SE

Okay. Good morning.

Good morning and welcome to Prosafe's Third Quarter 2019 Presentation. I will leave the disclaimer, just a second, but as you will recognize, there should be no changes compared to last time.

The agenda for today, we will split it between Stig and myself. I will take the 2 first items, and then Stig will round us off.

We have adapted the agenda to reflect what is probably the most, main priority and interest for the audience. So I will go through the reassessment of the market outlook and the financial implications, as many of you have seen this morning, an update on the merger.

Stig will take us through the good financial results for the quarter and summary. So in the quarter, we have reassessed the market outlook and drawn the financial conclusions or implications of that.

On the market outlook, we see a prolonged downturn and weaker outlook in the North Sea, in particular. There are currently no tenders in the North Sea, and few contract opportunities are anticipated in the next coming years in Norway, in particular.

I will come a bit back to what we see in the market right now in the North Sea. Brazil offer opportunities, although the rate labels are, of course, a bit more modest.

Two tenders are currently ongoing, but are not concluded. We have increasing focus on other markets such as Mexico, where we see some traction.

So the financial implications means that the lower expected activity, in particular, the North Sea, means that the cash flow projections in the year ahead, of course, also are lower, and that accounts mainly for the less versatile or older rigs in the fleet as the modern rigs can move easily around. As a consequence, we have recognized the impairments in the quarter of $341 million on our book value of the assets.

Resulting book equity at end of third quarter is $14 million. Let me say what we see a bit in the North Sea.

As you know, we have, in recent years, mainly worked on some of the legacy large hook up and commissioning projects for fixed platforms. We account Johan Sverdrup, the Mariner in the U.K., the Clair Ridge and others in the industry, also the Kollsnes and the Martin Linge.

And these are, if they haven't tailed off being completed, perhaps with the Martin Linge as an exception. Looking forward, we see 1 hook up project in the Norwegian sector of our fixed platform and we see 1 hook up project in the U.K.

of a fixed platform. Both hook ups will be assisted by a heavy-lift vessel, which will perform a single lift that naturally helps the unfortunate consequence for us that it reduces the offshore manpower requirement.

And hence, the requirement for PEPs that we provide. This is not a revolution that has happened overnight.

But it seems to be the best practice for hook up of the fixed installations. On MMO, I think the competition process that we have been through has brought a new level of transparency.

Elements of how customers do MMO have previously been treated as business secrets and are now becoming more transparent. The conclusion, I think, about MMO is that the bar has been raised from when MMO activity triggers demand for a Floatel of the kind that we are providing.

And that is one of the main drivers for the reduced outlook in the North Sea, in particular. We see it in Norway with high cost of labor, and we also see the trend in U.K., not elsewhere.

And then finally, I think I would say about the impairments, which Stig will go into details, is that naturally with the limited order book and the limited visibility we have, it's naturally an exercise that is clouded by some uncertainty. And 2 other important points.

Prosafe has adequate liquidity of $216 million at the end of the quarter. So maybe it goes without saying, but allow me to say it anyhow, it, of course, means that we can and will fulfill our contracts with customers and our obligations, and we will, of course, take on and can take on new business.

No change in that. The company is solvent.

And to my understanding, we have not triggered any events of default. To ensure that the company will have a good, long-term horizon, we have or will start a proactive dialogue with our lenders to ensure sufficient flexibility for the longer term.

We are naturally optimizing the business. We have, I think, very good win records on competitive tenders.

We are -- have reduced costs and we'll reduce cost even further onshore, offshore CapEx, but it goes without saying that when you look at our cash expenses, then the financing part is, of course, the most significant element that we have to address. So we will go into a dialogue with the banks to make sure that the current stability also is extended for the longer term.

Stig will come more back to the details in the numbers. Let me give a quick update on the merger.

As you have seen, the Norwegian authorities decided, on the 28th of October, not to approve the merger, and that is a decision we do not agree with and which we intend to appeal. There's another 2 weeks left of the period in which we can appeal.

Obviously, as I mentioned, we disagree with the decision. There are key arguments and aspects of the case, which has been overlooked or wrongly assessed by the authorities.

Mistakes have been made in the case handling, which we have informed the authorities underway. And I think the unique element of this case, every case is unique, but at least a special feature in our case is the fact that the decision by the Norwegian Competition Authority basically overrules the opinion of the key customers of what serves their best interest in this market.

And I think that makes it a particular suitable case for an appeal. The time frame we'll see in Norway, we expect a decision in February, March.

And as you will note from an U.K. time line that fits very well with a Phase 2 decision around March, if no remedies are offered.

If we have to go into remedies, it goes on to about June. I will leave it to Stig to go through the financials.

Thank you, Jesper, and good morning, everyone. So let me go through the financial results and the states of the business, a little more in detail and then also sum up at the end.

If we do the quarter in short, utilization was pretty similar to the same quarter last year, just over 48%. Order backlog per end of quarter, USD 170 million.

That's firm order backlog. In terms of results, we saw some reports this morning as well.

And as Jesper alluded to, underlying performance is good. Cost performance, we think, is very good, and that gives us a reported EBITDA in the quarter of USD 26.3 million.

Impairments, as Jesper alluded to, and let me say now, USD 345 million -- USD 341 million. Of course, reflecting the reassessment of the market outlook going forward, particularly focused on the North Sea and Norway, in particular, within that again.

In the report, you will note that we have been quite open on some of the key assumptions applied in addition to the general market view. We give you the cost of capital, and we also say something about what type of fleet utilization we have applied or assumed in general from now and then towards 2024 and the terminal period.

So I'll try to give you some guidance there on the underlying thinking behind the impairments. And the impairments, of course, largely impacting the older part of the fleet.

But as a consequence, the book equity at the end of the quarter is USD 14 million. And of course, the equity as such is slim and as such as risk as has been visible, I think, from the equity market pricing of the company for quite some time.

Cash flow from operations though is good, partly due to good underlying performance, as we said, but also due to positive working capital developments, $39.1 million in the quarter, and we have adequate liquidity throughout 2020 and into early 2021. As we say in the report, all else equal, based on current contracts and our best view on current obligations and cash in hand.

If we look at the order backlog, it's kind of illustrative, I think, what we're talking about. We have, unfortunately, believed we have been at the bottom of the market before.

Current order backlog firm of USD 170 million. It was, in fact, marginally lower in Q1 '19, as you will say -- as you will see, but if you disregard that, then clearly, you see the developments from 2016, as evident by the chart, and it's probably the lowest level we have seen almost forever.

So it says something about the hill climb we have ahead of us, certainly in respect of -- or certainly, in light of what we see in the North Sea -- North Sea region and Norway, in particular. Contract status at the moment.

Right now, we have 1 rig operating, and that's the Safe Notos, which operates on a long-term charter for Petrobras in Brazil. So right now, 1 vessel operating.

However, the Eurus -- Safe Eurus will commence later in the month on her long-term contract in Brazil. So at the end of November, we have 2 vessels operating.

And then as you see, come next year, we have a couple of contracts luckily in the U.K. for the Caledonia as well as the Safe Zephyrus.

But that's what we have at the moment. That's the visibility we have at the moment.

But as Jesper alluded to, even in that perspective -- not sure what happened to the -- even in that perspective, the commercial win rate in the weak market is very high. We've won basically everything.

And we have every intention of continuing to do so. So in light of that, we are -- I mean it's not that we haven't tried to cut costs, reduce spend, the first spend in the years ahead, but we keep learning and we keep driving ourselves, and there is more to come.

It's being worked on as we speak. And those effects will be seen increasingly going through 2020, both organization side onshore as well as offshore.

And of course, in terms of how we manage the vessels in lay up, ramp down, ramp up between contracts, how we do SPS, how we plan projects, CapEx, et cetera. So we will turn every stone to continue to preserve cash, obviously.

For sake of good order, although we have talked about it, let's take a quick look at the P&L. EBITDA, as reported, USD 26 million.

And I think that's -- if you look at that compared to revenues of $57 million, you see that the margin is better than the same quarter last year, and the margin illustrates the good cost performance, I would claim in the company despite a soft market. There isn't really much more to say on the P&L as such, unless there are questions after.

But obviously, going forward, the depreciations will come down as a direct consequence of the impairments. So annual depreciations as from 2020 will, of course, be reduced.

Still not sure what happened to the screen, but sorry about that. Now it's back again.

Balance sheet, obviously, the long and short of it, it reflects the impairment of $341 million in the quarter. And of course, you'll see that the book equity is now USD 14 million, although the company has sufficient liquidity.

And of course, the interest-bearing debt, reflecting the fact that we took delivery of the Safe Eurus, which is now soon commencing contract in Brazil. So how do we sum this up?

Sorry about the issues with the screen, don't know what's happening. Okay, let's stand still and see if it works.

EBITDA, $26 million in the quarter. Reassessment of the market outlook and the consequent impairments.

One comment there, just to remind you, over the last roughly 10 years, we've had a substantial part of the revenues from the North Sea, interchangeably between Norway and U.K. If we go back to 2011, '12, the North Sea in those days were about 50% or accounted for about 50% of revenues in the company.

Although in the last few years, it's been around 80% between Norway and U.K. and hook up in particular.

So those numbers says something about, if we are right now in terms of the North Sea market and Norway, in particular, we really have to compensate by getting much more contracts outside of North Sea, which is the plan. And also think about what else we can do with our great assets to generate revenues going forward.

As say Jesper alluded to, we will engage with our lenders proactively and in good time to protect values and find the best way forward to develop the company through these tough market conditions. And as stated, obviously, we are doing our share in terms of strategy, thinking, cutting costs and spend, and we will continuously pursue the merger with Floatel, try to get clearance.

So that is an option in terms of consolidation on a global scale in the next instance. So I think with that, we can round off, and we can take questions.

Yes. Questions?

Who goes first?

Haakon Amundsen from ABG. A couple of questions for me.

First, if you could just elaborate a little bit on the MMO comment. Just trying to understand the shift, the triggers that has been raised in terms of demand for rigs.

Is that simply that oil companies have designed their upgrade projects with that specifically in mind? Or what is actually just to understand how much of this is a structural issue that will persist?

If you can give some color on that.

Yes. Yes, it's probably a lengthy answer, but I'll try to keep it short.

And I think the truth is that we are not looking at -- if you look at the hook up, you have a disruptive technology change in the heavy lift vessels, that reduces. The MMO is probably more of a change of management practice.

You have a combination that if you push your maintenance programs over a longer period of time, reducing the, I would say, workload -- the POB workload to perform that gives you more options of reducing adjacent capacity, different assets or basically your existing living quarter capacity if you have optimized your operations, you'll have to manage more spare capacity and so on. And then, of course, there is an element that business case and the customer helps to substantiate moving forward commencement of a project, and that is probably also partly oil-price related.

So I think it's a combination of things. But I think the shift we are seeing is at least a significant shift, and we see some customers being able to perform modifications to a greater extent than they have done in the past without our services.

And then there's probably a level on how big, but that's not something that can be said very tangibly.

Understood. Okay.

And just on the liquidity, if I remember, last quarter, you did have an availability on RCF, if I'm not mistaking and now you have $216 million in cash and you say you've ample liquidity throughout 2020. Does that mean that you will not breach any covenants during 2020 so that you still have that full availability?

Not necessarily in terms of covenants as such. In terms of cash, what I said is true based on current commitments and obligations, as such, we have cash into early 2021.

Factoring in the cash covenant, yes. Of course, in terms of the earnings outlook for 2020 isolation.

If you read the material from the latest, call it, arrangement with the lenders, then we have an interest rate coverage kicking in at the end of Q3 2020. That is more likely than not to become a challenge then and that we just need to deal with in time.

But in terms of cash, we're good for the -- in the near term.

Anyone else? Yes, we are saving costs.

So we perform everything here.

Truls Olsen from Fearnley Securities. And not to be...

From?

Fearnley Securities. Not to be beating a dead horse.

But over the last couple of years, you have and your pending merger partner have stated that there's been underinvestments on the MMO side by the oil companies. Do you actually see that to be the case?

Or is this structural change, if you will, actually sort of meaning that oil companies are fine.

I think, actually, if you look at some of the MMO hours spent offshore, you will see there is an increase, actually, in some of the levels on MMO. So you have not just seen that spill over to our segments.

And then you see some deferrals and more reactive planning from customers. But I think the conclusion is just clearly that we don't see that spillover to us to the same extent as we had hoped previously.

Yes. Can we pass on the microphone if anyone else?

Any other questions? Any online?

No.

Okay. Okay, thanks for coming.

Thank you.