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Edited Transcript of BWO.OL earnings conference call or presentation 30-Aug-19 7:00am GMT

Half Year 2019 BW Offshore Ltd Earnings Presentation

Oslo Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of BW Offshore Ltd earnings conference call or presentation Friday, August 30, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marco Beenen

BW Offshore Limited - CEO

* Ståle Andreassen

BW Offshore Limited - CFO

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Conference Call Participants

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* Bendik Engebretsen

Danske Bank Markets Equity Research - Research Analyst

* Haakon Amundsen

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

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Presentation

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Marco Beenen, BW Offshore Limited - CEO [1]

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Okay. Good morning. Welcome. My name is Marco Beenen. It's a pleasure to give my first quarterly presentation to you as CEO of BW Offshore. I was COO since 2016. So for the last 3.5 years, I'm pretty much part of the journey of BW Offshore. But new in this role. So welcome.

Please note our disclaimer. I'm sure you're familiar with that. And then we move on to the quarter. We are very pleased with this quarter. We had a very good quarter, a record EBITDA of USD 191.6 million, mainly driven by a strong FPSO segment that has shown significant growth in the past 2 years. And we're also very pleased that we got confirmation of the growth of our reserves that we have been able to achieve since we acquired the license, the Dussafu license. We tripled the reserves since year-end of 2017 until mid-year this year.

So strong financial results by all metrics, not only EBITDA but also revenue EBIT. And I think what you see here on this slide presents quite nicely how our investments over the past years now fully contribute to the results we have today, and those investments are mainly Catcher, of course, and then the Adolo FPSO, and last but not least, our E&P investments in Dussafu and then contributing now to the first phase.

But our top priority is HSE performance. This is, by industry standards, a good result. However, you've seen we have been doing better in the past, and we have been working on reversing the trend that we saw in 2018. But these are rolling 12-month metrics. So although our results are better in 2019, it takes a little bit of time that this gets reflected in the statistics. But we have -- we are -- well, I am confident that these statistics will be better in -- going forward. What we report here are the lost time injuries per 12 -- per 1 million man hours.

Then the fleet. Here, you see the uptime chart. We have a very good uptime over the last 5 years, above 99%, but certainly also the last 3 quarters showed a very high uptime. And obviously, with the new units that we brought on, Adolo and Catcher, that are the main contributors. This is, of course, the underlying driver of the strong cash flows that we show now in the FPSO segment.

So here, you see them. Catcher continues to produce stable above-nameplate capacity between 65,000 and 66,000 barrels per day. That's about 10% above, and we have agreed a scheme with Premier Oil to get compensated for that, which is really a benefit for both companies, and we have now offloaded more than 30 million barrels, which is, by all standards, a great success for both Premier Oil and also BW Offshore.

Then Adolo. That's our unit which we use on our own field in Gabon, the Dussafu field, also very high uptime, and we have been able to produce still above 12,000 barrels a day. So both good field performance but also a very -- due to the very high uptime of the FPSO. And we're now preparing this FPSO, and we're making modifications so that we can tie in 4 more wells early next year, and that will then increase the production further to about 20,000 barrels per day.

And then Berge Helene. We're now -- we're having her in the yard in Singapore, Keppel shipyard, where we have preservation activities ongoing, but also we are now doing a detailed condition assessment to prepare for redeployment on Maromba.

A very important part of our business, as you know, is the extensions. We have been able to confirm, as expected, 4 out of 6 extensions that were planned for this year. And these extensions are -- even in the, perhaps, bit distressed oil price today, but also we have shown in past years that with lower oil prices, these extensions are, even at low oil price, very interesting for our clients to materialize. And that's why there is a very high probability that those extensions do get materialized, and that's what you see also here. We already reported on Vicente and Polvo in the previous quarter, Abo and Petróleo Nautipa now followed in this quarter. Petróleo Nautipa is the unit that is on the Etame field that is next to our Dussafu field, and our client VAALCO is also -- has started new drilling activities there, which is -- which create a lot of confidence for much more extensions beyond the current extensions.

Then Umuroa, I'm very confident that we get an extension very soon, a 1-year extension. Also there, our client is drilling. These results will become clear towards the end of the year. So it's too early to say. But if these results come in good, then we also talk about 2 years or more years of extension on that unit.

And then last but not least, Pioneer, that's our unit in the Gulf of Mexico. We are -- or this unit has a client that is -- or was in transition phase from taking over from Petrobras. They have been focusing on understanding the field and making field development plans, which are the basis for the extensions of Pioneer. We have agreed to terms of a 1-year extension, but both parties would actually prefer a 5-year extension. So the discussions are ongoing to see if we could also, in time, agree on a 5-year extension. And otherwise, we'll have to fall back on the 1-year extension and continue the dialogues thereafter.

And that results in this fleet contract review. A familiar picture, I'm sure. But what you see is, on the top, we have the latest units that obviously show the largest firm backlog going forward. And then if you go further down, you see the more older units that, by the nature of their contracts, are in the option periods. And a lot of these contracts have 1-year options. So our clients has the right to take 1 year at a time, and that's what a lot of them do. So we just roll over these options every year, and that's why a lot of the light green will become dark green. And it's also good to realize that a lot of the dark green that is on the -- on your left side of the red line, that was actually light green before. So this is the nature of our business. So we reflect the dark -- the light green into the dark greens as we go.

This is a nice display of the results we have been able to achieve at our FPSO segment. We basically doubled the EBITDA of our FPSO segment in the last 24 months. Largest contributors were, of course, Catcher that came on -- in the field in 2018 but was on full production and above production towards the end of 2018. And at that time, we also brought Adolo on. And then in 2019, we agreed the excess production scheme with Premier. And so that's a big part of the growth in the curve that you see. And notice the $156 million you see there, there is about $15 million of one-offs. That's mainly settlements from the past that we got agreements on in this quarter. So that's slightly inflated. But nevertheless, the trend is doubling. And I think this is interesting. We've done that in a window where, I think, generally, the industry, in both in the service segment and the E&P segment, consider that as a challenging period.

Then E&P segment. We're even more pleased there. Our investments in the Dussafu field continue to exceed expectations. High production. 1.1 million barrels in this quarter, or in quarter 2, with an average production still above 12,000 barrels per day. And that's really due to the fact that we still don't have seen waters or no water caveats. And that results in a slower decline of the production as we would have -- as we originally expected. So that's very good news, and that allows us also to up the guidance on the production towards year-end. So we originally said 3.9 million to 4.2 million barrels, we're now guide on a range of 4.1 million to 4.4 million barrels.

Then on the liftings. Important. We had 1 lifting in May. So for this quarter, it was 1 lifting to BWE of 615,000 barrels. Then in July, there was another lifting. So that contributes to the third quarter that we'll report the next time. And then for the fourth quarter, there will be 2 liftings: one for us and one for the state and our partner GOC.

This is old news. We announced it yesterday publicly, but it's very good news. It shows how we have been able to grow the reserves in the Dussafu license so far. And this has now been confirmed by Netherland, Sewell. So in reference, when we took FID, we took into account 50 million barrels. And here, you see from year-end 2017 through the production of Tortue Phase 1, but also with further discoveries in Tortue and also in Ruche, we've now been growing this to 66 million. And then if you add the 3.5 million that we already produced, that gives the total of 70 million, which is a tripling of what was originally confirmed. So very pleased with that.

So that encourages obviously to continue to develop the Dussafu field. We are now drilling, we're drilling the Hibiscus exploration well, and we've encountered hydrocarbons. So we'll now continue with the sidetrack to better understand what volumes we're talking about. And after we've processed these data, we will come back with an update on that, which probably takes 2 or 3 weeks from now. After that, we will continue to drill 4 more production wells, and we then will tie that back with 4 risers to the FPSO Adolo. We expect first oil in the first quarter next year, first, 2 wells. And then the quarter after that, we bring in the other 2 of the 4.

Investments level of -- for the field is about $240 million and then there's a $30 million we invest in the FPSO to make modifications to tie in those 4 risers.

Then after we've done the 4 production wells' drilling, we will move on with 1 more exploration well in the Ruche area. And we are currently reprocessing all the seismic data we have to take a decision on where we would do that drilling. So here, you see the Ruche area or the Ruche bigger area. And then here, you see the Ruche field. This is the FPSO, BW Adolo. And currently, we produce here to 2 wells. We bring in these other 4 wells, as I just explained. And then we're now preparing for an FID for Ruche, finalizing the concept for that to develop Ruche here. And we will do that by installing a wellhead platform and then tie back to the FPSO.

We will produce to 6 wells, and we will -- we're targeting the reservoir of about 25 million barrels, as it is defined today. First oil is then targeted for quarter 4 '21, so end 2021. And that will bring another 15,000 barrels per day in addition to the production that we will have after Phase 2.

CapEx of that development will be in the order of magnitude of $375 million, but we'll fund it largely through our operating cash flow of Phase 1 and Phase 2. That's the whole concept of the phase development. Then if we have success on Hibiscus, that will obviously add to the reserves and the resources that we base our FID on. So then we have also more here, and it will also learn us more about other prospects, which could be Espadon or Hibiscus North, and all of them, we can just tie back to the same wellhead platform back to the FPSO.

Then a short update on a new field acquisition we've made, as you've -- as you know, I assume, Maromba in Brazil, the Campos Basin. We have now been approved by ANP as an operator in Brazil. We have also been approved -- or ANP also approved the transfer of the participating interest to BW Offshore, and that triggers the first milestone payment of $30 million. The remaining $85 million will be paid through milestones close to the first oil date. And that date is -- first oil is targeted for early 2022.

We're working currently to the field development plans. The idea is to basically do exactly the same as we did in Gabon, a simple phased-development plan based on 2 or 3 subsea wells and then tie into our FPSO Berge Helene. Target oil quarter 1 '22, I think I just said that, and we have the recoverable reserves around 106 million barrels. So that's the difference with our Gabon undertaking that the initial reserves are much larger than what we -- there, we took in FID on 50 million barrels. Here, we have 100 million barrels. So this is a much bigger field in terms of reserves and also potential upsides after that.

Then an update on the BWE listing. You may recall that end of quarter 1, we announced our intention to list BW Energy on the Oslo Stock Exchange, aiming for the second half of this year. And after that, we have done some market sounding in May and June, and we got very encouraging feedback from investors, both BWO existing shareholders but also potential new investors. So that encouraged us to proceed full ahead with the preparations for the listing and the restructuring of the assets -- of our 3 assets into the BW Energy company. So that's progressing well. Currently, the market is volatile. And we're not in a rush. We'll do this for growth of BW Energy. So we're just monitoring the market. And once we're ready, we will just wait for the right window and then we'll act.

And with that, we're over to finance, Ståle Andreassen, our new CFO.

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Ståle Andreassen, BW Offshore Limited - CFO [2]

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Thank you. Good morning. We'll start with some segment information. And as you can see, and as you heard Marco saying, the performance from both our segments have been really strong lately. Operating revenues from the FPSO segment was $251 million for the quarter, that was up from $231 million last quarter. Operating revenues from the E&P segment was $56 million for the quarter, which is down from $84 million as we had last quarter.

Moving on to the EBITDA. The EBITDA from the FPSO segment is $156 million, which is up from $137 million, which we had last quarter. This is, of course, as Marco mentioned, driven by very strong commercial uptime, close to 100% from the fleet, but also to the fact they've been able to materialize on excess production from BW Catcher.

And it's worth noting, as Marco also touched upon, that there is a $10 million -- $15 million one-off, nonrecurring items in the quarter, which will materialize as we were closing out some of the extensions that he referred to. For the E&P segment, we had $43 million EBITDA in the quarter, down from $55 million last quarter.

From a production point of view, production was very, very strong this quarter as well, basically equal to previous quarter. However, since we use the sales method where we only record revenues and operating expenses when we basically sell the crude, we are delivering a slightly lower EBITDA this quarter than the previous quarter.

Moving on to the income statement. And as you've seen, overall revenues, $286 million for the quarter. Operating expenses, $94.8 million for the quarter, slightly down. That's linked to the less offloading or lifting from our E&P segment. That gives an EBITDA of $191.6 million for the quarter.

Depreciation, amortization and impairments more or less in line with the previous quarter, which gave us an EBIT of $90.5 million in total. And just for reference there, when you look at segment information in the previous graphs and try to compare that to totals, do note that there's an element of elimination as we have the lease on the BW Adolo from our FPSO segment to our E&P segment. So that will affect both top line revenue as well as EBITDA. We have provided more detailed information on that in earnings tables, which are posted on our website.

Moving on to net interest expense, more or less in line with the -- or basically, exactly in line with the previous quarter. However, when you move to financial instruments, as U.S. dollar swap rates have continued in a downward trend in the quarter, we have had further losses on interest rate hedges that we have.

Overall, profit before tax, $50.7 million. Looking at taxes, slightly up, mainly a result of better profit from the FPSO segment, so driving taxes slightly up from there. And overall, we delivered $29.4 million in total net profit.

And as we see, and as Marco touched upon, we're really now seeing that the better performance from the FPSO fleet, in particular, but also from the E&P segment is kind of driving -- strengthening our financial metrics and strengthening our balance sheet. Our net debt continued to trend downwards. And we're -- by the end of the quarter, we were just about $1 billion net debt. But you can also see that the graph there for the leverage ratio has been continuously trending down since -- over the last 12 months, basically, again driven by the contribution we are getting from a stronger EBITDA and is now at a very comfortable level at 1.6x.

On the right-hand side, you can see the equity ratio continued to trend upward, actually deliver positive results, and it stood at 40.5% by the end of the quarter.

Quick look at the cash flow waterfall. Good operational cash flow from our business, $142 million for the quarter. We actually had a positive net investment in our E&P segment. This was a result of the $28 million we received from partner GOC at the farm-in to the Dussafu license.

We spent $31 million on existing FPSOs. A good portion of that is linked to BWO Adolo as we're getting her ready for Phase 2 of Tortue, and the rest is linked to ongoing life-extension activities that we are carrying out on the fleet. We closed our corporate facility, the new one, in May. So we did an initial drawdown of $340 million on that facility. And we paid down $355 million on existing debt, of which $327 million of this is repayment of the old corporate facility.

We paid $15 million in interest expenses, and we paid $8 million to noncontrolling interest. So that left us with $265 million in cash by the end of the quarter. We're very happy with the liquidity position that we've been able to achieve as we have closed the corporate facility. As you can see, our liquidity is now above $0.5 billion in total. This does not include the uncommitted accordion that we negotiated as part of the new corporate facility. It's a $300 million accordion, which was negotiated into that facility to give us financial flexibility for redeployment activities that we have a plan to carry out. It's very convenient to have this available now that we are intent to start work on Berge Helene as we're getting her ready for Maromba. And we anticipate that we will address this as we are getting close to FID for that development.

Last quarter, we also mentioned the reserve-based lending facility that we're working on. Work on that one is progressing well. It's taking a little bit longer than our -- kind of our initial plans. It's a $200 million initial facility linked to the Dussafu development, with another $100 million accordion, which will be available post-FID for the Ruche development. As it looks like right now, we still believe that we'll be able to close the facility within the fourth quarter.

Then we will turn our focus to the bonds. As you can see on the graph, we have -- our bonds start to mature in 2020. It is our intention to addressing the bond portfolio and to refinance the bonds. We haven't said if we're going to do all of them, but we will start addressing them. Luckily, we are in a good position financially with a strong liquidity, and we also have a fleet that generates a healthy amount of cash flow. So we're in a position where we can time the market to find the right window to go with the refinancing of the bond portfolio.

Then my last slide showing the revenue backlog for the FPSO fleet. It stands at around $6 billion in total. That includes both firm and probable option. It's options that we believe will be executed by clients based on our understanding of the field that these units are operating on. And as Marco mentioned also, the -- since -- as we're getting extensions confirmed, we're very pleased to see that we are able, on an ongoing basis, to convert these probable options into firm, secure future revenue and cash flow and give us additional visibility going forward.

And with that, I'll give it back to Marco for the outlook.

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Marco Beenen, BW Offshore Limited - CEO [3]

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Yes. Last 2 slides. Outlook. I'm pleased with the way we progressed to deliver on our strategic priorities. First of all, we have the FPSO backlog as the long-term cash flow visibility. So that's the foundation of our strategy.

Oil price fluctuations are at levels that they don't really impact the ability to extend the contracts. It is still very economic for our clients to extend the existing FPSOs on the fields they have today with current oil price, and we have also seen in the past years that even when the oil price is much lower, that still continues to happen. So that's good.

We are remaining quite selective on bidding new projects. We will only participate if we see that these opportunities meet our investments criteria. We will focus on the redeployment to generate value in field developments, unlocking field developments that may otherwise not have happened, but also other redeployment opportunities, if we see them.

The concept of phased field development in combinations with redeploying our FPSO, we believe we have proven that, and we are ready to now roll that out in other areas to start with Maromba. And then the last but not least, we will proceed with the preparation for the BW Energy listing when the window in the market is there.

Last slide, the event guidance. The green part is the FPSO segment, the blue part is the E&P segment. We talked about the extensions, update on Mateus is quite short. We have an agreement or we have a settlement agreement with Petrobras, however, that needs to be approved by the Petrobras Board. We were advised that, that approval would come September. But then recently, we got an update that the Petrobras Board needs more time, and they now advise October. So we will wait until October.

On the E&P segment, we talked about the listing of BW Energy. We're also looking at a reserve-based lending facility. We're drilling Hibiscus. And then the 2 production wells first and -- in this part of the year and then followed by the other 2 next year. The Ruche FID towards the end of the year, and then we continue to make the field development plans for Maromba and also for Kudu.

Then next year, first half FPSO segment events are mainly the Berge Helene redeployment and extensions as they are rolling over from Abo and Polvo. Then E&P, the exciting event obviously will be first oil on Tortue Phase 2. And then after that, the other 2 production wells. And then the second exploration well, as I explained, and then we will also start Phase 1 of the Maromba project.

That concludes this quarterly presentation. But I'm very happy to take questions, if any.

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Questions and Answers

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Bendik Engebretsen, Danske Bank Markets Equity Research - Research Analyst [1]

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Bendik Engebretsen from Danske Bank Markets. Thank you for yet another quarter with good results, strong cash flow, happy to see the continuous cash flow and the updated guidance on production. Two questions from me. Premier Oil has kept a quite steady ongoing information flow regarding their Sea Lion projects. BW Offshore has remained quite silent since you communicated the FEED study. Could you give us -- I see now that it isn't -- it's not included in the event guidance here. Could you give us an update on how that project is going, how the FEED study has been going?

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Marco Beenen, BW Offshore Limited - CEO [2]

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Yes. Well, the news on Sea Lion is really as Premier has communicated. And we've delivered the FEED to Premier. And on that basis, they have made their plans. And now -- their big task now is to get the finance in place. And they've submitted their plans to the U.K. exports and finance agency. And so once the financing of that project comes in place, then we can start to look at it as well. Until then, it's a bit premature for us.

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Bendik Engebretsen, Danske Bank Markets Equity Research - Research Analyst [3]

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All right. Second question. Brexit hasn't really been a topic for BW Offshore before. But I know that BW Offshore Catcher Limited is incorporated in the U.K. Do you see any risk of disruptions in operations or any staggering in cash flow from -- resulting from a potential hard Brexit from the subsidiary to the parent?

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Marco Beenen, BW Offshore Limited - CEO [4]

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Do you want to answer that?

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Ståle Andreassen, BW Offshore Limited - CFO [5]

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Well, the -- I think the straight out answer is, no, at the moment. We don't have any indications that there'll be any changes to the flow of cash, even though we have, as you say, an operating unit or operating entity registered in the U.K. Yes.

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Bendik Engebretsen, Danske Bank Markets Equity Research - Research Analyst [6]

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Can you give any more color on what type of consequences we might see in such a scenario, a hard Brexit scenario?

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Marco Beenen, BW Offshore Limited - CEO [7]

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The only thing I could see is, and we've prepared for that, is that operationally, we're bringing some equipment in or just a whole crystal clear ends. Logistically, maybe there's some delay. So we just have to plan things a bit more in advance. But I mean we operate Catcher very locally. So it is actually really within the U.K. operations. So it's just whenever we have to bring in something that we can't get in the U.K. But that is -- yes, all these things you can see coming and we can plan. We can order stuff 1 year ahead to make sure it's there if it would otherwise take 3 months. So that's just a logistical problem. But otherwise, I don't really see a problem for us.

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Unidentified Analyst, [8]

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It's [Frederick Slabach]. I have a question related to the extensions. If you look at the VAALCO, they're planning 5 new wells at Etame. And if you see -- look at their production profile, they expect production beyond 2028. At the same time, they only have the FPSO contract extended to 2021 with an option for 2022. And you can see a similar situation with the BW Pioneer, where you have a contract that expires in 2020 and the previous plans from Petrobras and Murphy and its production way beyond the -- at least for the large part, until next decade. So how -- at the same time, you also have very -- a tightening FPSO market. How should we think about your plans to extend these contracts and your pricing power?

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Marco Beenen, BW Offshore Limited - CEO [9]

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Well, it's actually when there is no options anymore in a contract. That's, in a way, good for us because it means like if there is a field, then there's all that our client want to produce, but we're not locked in by a particular option. These options are, in a way, a ceiling. So if they're not there, it's a more open negotiation of how can we work together to make that development as successful as possible for both. So -- but obviously then, because it is an open negotiation, it also takes a bit longer to agree because if there's -- if everything is defined in the contract, then it's just -- it's a call option for them, they can just say yes or no. And that's it. There is nothing to negotiate. When you go beyond, well that's actually the interesting period. There's a lot more to negotiate. But then obviously, you can see, typically, negotiations take often as long as the time allows. So -- and that's why you then see those negotiations were often much closer to the -- lock that date when it has to be agreed.

But what's happening in Gabon with VAALCO is actually very positive for us. It's actually also positive in the view of it's the same formation as Dussafu. So the fact that they're still drilling and have new plans is just a confirmation of how attractive that area is, and it's another confirmation that there is a good future for our Petróleo Nautipa. And for Murphy, I mean you have seen they have paid a large amount of money to become -- to take over the operatorship there. So they have clearly big plans. And -- but we're just negotiating now how we fit in these plans. And I think it's okay to take our time to get that right.

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Haakon Amundsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [10]

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Haakon Amundsen from ABG. I just wondered if you can talk a little bit about what -- how your shareholder return policy will be in the kind of new, clean FPSO company. You have stated that you will address the refinancing of the bonds, which had some restrictions on dividend, for example. What's your thoughts on that?

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Ståle Andreassen, BW Offshore Limited - CFO [11]

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Can I comment? Yes. No, I kind of assume that you're alluding to dividends. And we have a plan, and there's a number of activities we want to carry out because if we intend to restart dividends, we need to address certain things first, and that is to make sure we have full visibility on the funding and the cash flow situation. And we have the activity of the listing of BW Energy that's coming up. We have the RBL that we want to close. We want to make sure that we overall know that we are fully funded for the development on our E&P segment. Then we want to address the bonds. And as you mentioned, there are restrictions there. And then we can come back to whether it's appropriate to pay dividends. So -- but we do understand that. And when you look at our cash flow, if we don't have any large investment CapEx on the FPSO segment in isolation, and you have a fully funded E&P program, it would make sense to restock with some dividends at that point in time. But I don't want to be giving you anything specific because we want to address these things first.

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Marco Beenen, BW Offshore Limited - CEO [12]

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Any further questions? Then I'll thank you for your attention.

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Ståle Andreassen, BW Offshore Limited - CFO [13]

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Okay. Thank you.