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Edited Transcript of PLCS.OL earnings conference call or presentation 24-Jul-19 7:00am GMT

Q2 2019 Polarcus Ltd Earnings Call

Dubai Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Polarcus Ltd earnings conference call or presentation Wednesday, July 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Duncan Eley

Polarcus Limited - CEO

* Hans-Peter Burlid

Polarcus Limited - CFO

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Conference Call Participants

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* Christopher Møllerløkken

Carnegie Investment Bank AB, Research Division - Research Analyst

* Glenn Lodden

Nordea Markets, Research Division - Analyst

* John A. Schj. Olaisen

ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Q2 2019 Polarcus Limited Earnings Conference Call. (Operator Instructions) I must advise you the conference is being recorded today, on Wednesday, the 24th of July 2019. I'd now like to hand the conference over to your first speaker today, Duncan Eley. Please go ahead.

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Duncan Eley, Polarcus Limited - CEO [2]

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Good morning, and welcome to the Polarcus Earnings Release for Q2 2019. My name is Duncan Eley, CEO of Polarcus. And with me this morning is CFO, Hans-Peter Burlid.

Turning past our standard disclaimer on Slide 2, we move straight to Slide 3 and the agenda. I'll talk through the headlines of Q2 and some of the drivers of our performance. HP will then walk us through some of the financial details. I'll then come back to provide some perspectives on the evolving marine acquisition market, our operational performance and the market outlook.

So to Slide 4. Q2 2019 saw our financial performance exceeding analyst consensus and was significantly up compared to Q2 2018. Revenue of $65 million was driven by improvements in achieved day rates of approximately 50% year-on-year, more than offsetting the lower utilization that was anticipated due to vessel repositioning early in the quarter.

EBITDA was up more than 120% from Q2 2018, emphasizing our continued focus on cost management and optimizing margins. It must, however, be noted that the underlying business conditions and performance are improving, that multi-client late sales and other revenue sources contributed to this performance somewhat buoying the result, and HP will talk through these details shortly.

The improvement in achieved day rates reflected a combination of pricing improvements and strong operational performance including the successful commencement of the industry's largest multivessel 4D project taking place in the Far East.

Market conditions continued to build with solid E&P company tendering and multi-client acquisition activity increasing. Our fleet backlog of $200 million is significantly improved, both sequentially and year-on-year.

Moving on to Slide 5 and an overview of where Polarcus is today. On the right-hand side, you see literally where we are with our active fleet of 6 vessels distributed and fully utilized across the globe. Polarcus currently holds around 20% of the 22-vessel active global fleet, interestingly, a market share that is almost double that in 2014 where we held around 10% market share of more than 60 active vessels globally at that time.

In addition to the dramatically reduced global fleet counts, we see these vessels soon to be in the hands of only 3 global marine seismic acquisition companies, representing significant consolidation. We continue to deliver our innovative geophysical services on our uniform fleet of vessels with leading environmental credentials that have enabled us to be IMO 2020 compliant since inception in 2009.

I'm also very proud of what Polarcus employees have achieved in cost reduction across our efficient and streamlined organization, and focus on this remains key to optimizing margins going forward. And in addition, our debt per active vessel is the lowest in the industry. The output of all this, as I alluded to in the Q2 headlines, is that after 4 years of the market going sideways, we now see improvements in Polarcus revenue generation and margins in combination with continued positive activity indicators.

I'll now hand you over to HP to talk through some more details of the Q2 results.

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Hans-Peter Burlid, Polarcus Limited - CFO [3]

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Thank you, Duncan, and good morning, all. Turning to Slide 7 and a deeper look at the revenue increase year-on-year. The 34% increase to $64.8 million was driven by several factors. We saw improved pricing as the biggest driver, offset by lower utilization as vessel repositioned for new projects early in the quarter.

We recorded $3.6 million of multi-client late sales. And in addition, the hybrid project which was completed in the quarter contributed positively, together with $3.7 million of insurance revenue while the management fee was reduced to 0.

Turning to Slide 8. As expected, the second quarter saw reduced utilization due to repositioning of the fleet after a strong utilization in the winter, and utilization in the first half 2019 was 82%. And we expect Q3 utilization to be in line with H1 with associated stronger contract revenue.

Turning to Slide 9. Q2 segment revenue of $64.8 million grew year-on-year driven by improved pricing, multi-client late sales and the hybrid project, as I mentioned earlier, and the improved revenue for the quarter was accompanied by increased costs driven by the hybrid project, but also some project-specific items.

Cost of sales was $45.1 million, an increase of 19% year-on-year. And segment EBITDA of $16 million that improved both sequentially and year-on-year, and the improvement is driven by high revenue and a continued tight cost control.

Turning to Slide 10. Cash from operation was $16 million for the quarter before working capital movement. The CapEx investment continued to be disciplined with $1.8 million for the quarter.

The vessel allocation in the quarter was solely on contract so multi-client cash invest -- there was no multi-client cash investments recorded. And the total cash balance at the end was $23.8 million. This was impacted by $11.1 million negative working capital movement while the $40 million working capital facility was undrawn.

I will now hand back to Duncan to talk you through the operational update and outlook.

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Duncan Eley, Polarcus Limited - CEO [4]

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Thanks, HP, and moving on to Slide 12. In addition to successfully mobilizing for the industry's largest 4D project of the year, we were able to secure and announce an important award for a wide-azimuth project that will commence in the Americas in August totaling 6-vessel months of acquisition.

We continue to generate new clients and deliver repeat business to an extensive global client base due to our enduring reputation for delivering safe, highly efficient and environmentally optimized marine seismic services.

Our quarterly emissions performance is outlined on the top right of Slide 12 with carbon dioxide, nitrous oxide and sulfur oxide emissions per square kilometer in Q2 slightly elevated over Q1, driven by that lower fleet utilization. And with the increased utilization anticipated in Q3 as outlined by HP, we expect to see our emissions profile improve next quarter.

The bottom right-hand side of Slide 12 emphasizes how we're operating within IMO 2020 sulfur content requirements. The Polarcus fleet average sulfur content of 0.06% versus the IMO 2020 requirements that come into effect within 6 months of 0.5% confirms we are operating some 10x under the IMO requirements.

Slide 13 outlines the reshaping of the marine seismic industry witnessed over the last 18 months. We can see that vessel ownership has meaningfully consolidated to 3 global players, and an increase in marine seismic acquisition client base has materialized due to there being more multi-client-focused companies that do not own or operate vessels.

Further on the supply side outlined on Slide 14, we see the dramatic reduction in the total global fleet count since 2014 and the breakdown of the 22 vessel active global fleet as of now.

It's important to emphasize the limitations on increasing the vessel count from where we are today. We estimate there are only up to 4 additional vessels that could come back into the market without significant investments and it is estimated that there are another 4 to 5 vessels that, while having attractive age and capacity profiles, are all cold stacked and without streamers providing an additional barrier to them returning. We do not expect to see any further vessel reactivations across the industry in 2019 and we see a stable global fleet in 2020.

Slide 15 shows the proprietary E&P company tender activity per quarter since Q3 2016, indicating an improving trend throughout the period. The first half of 2019 saw solid tender activity, and importantly, we see a healthy opportunity pipeline for the winter months driven by both proprietary tenders and multi-client acquisition requirements. The areas driving this off-season demand tend to be in the Southern Hemisphere including South America, Africa and Australasia.

Slide 16 shows our backlog that is up more than $50 million compared to the same time last year with the increase in proprietary contract backlog almost doubled to $153 million. We're 100% booked in Q3 and 60% booked for Q4. And as stated, we do see a healthy pipeline of opportunities and anticipate awards during Q3 that will start to fill up Q4 and Q1 2020.

So moving on to our closing remarks on Slide 17. Against the backdrop of meaningful consolidation for the vessel operators, Polarcus is demonstrating strong growth in both revenue and EBITDA. Our portfolio of project is strong and comprises both complex 4D and large-scale wide-azimuth projects that are contributing to our increased backlog. And tender levels, multi-client activity and pricing all continue to improve.

We do expect to see a strong Q3 driven by improved utilization and pricing, and while we do see some open time in Q4, activity levels appear buoyant. And this leads us to reiterate our previous guidance of delivering improved EBITDA and cash flow in 2019 compared to 2018.

And with that, I will now hand back to the moderator to coordinate any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of John Olaisen of ABG.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [2]

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Yes. Congrats with a great quarter. A couple of questions. You're saying that you saw prices up 50% year-on-year in Q2. I just wonder, is that representative of what you see in the industry contract rates at the moment? Because if I remember correctly, the previous time you mentioned contract prices, you said you expect general contract prices to be up 25% to 30%.

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Duncan Eley, Polarcus Limited - CEO [3]

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Yes. John, I think if we look at the 2018 average price, in the first half of 2019, on average, we do see about 25% up. But in Q2, we did have a good run driven by operational performance and some pricing developments that took us up 50% for the quarter. And we do see that as indicative across the industry, I think, supporting some of our peers' recent comments.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [4]

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And now that you're fully booked for Q3, I guess the key focus now is over the winter. Winter you're usually a bit softer than the summer. How do you see contract prices for the upcoming winter? Are we talking 25%, 30% up compared to last winter? Or -- and how -- yes, maybe you could answer that first for me.

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Duncan Eley, Polarcus Limited - CEO [5]

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Maybe -- I think we do see that cyclical tightening of the market throughout the year. So I think if you looked at Q4-on-Q4, probably that 25%-plus pricing is a realistic assumption. But I think what we have seen in previously -- previous years is activity and pricing tighten significantly during the summer and drop off quite a lot.

And with the activity levels that we mentioned, we expect to see more of a flattening rather than a reduction in pricing. So we'll have to see how that plays out. But I think the Q4-on-Q4 reference you mentioned is a good one.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [6]

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Sounds good. And in Q2, you had the hybrid project that includes ocean bottom seismic. Will that -- is that project extending into Q3? And also, are we likely to see more of these kind of projects from Polarcus going forward, maybe ocean bottom seismic in particular? Maybe if you could comment, please.

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Duncan Eley, Polarcus Limited - CEO [7]

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Yes. So just to be clear, that project was completed in the quarter, so there will be no activity on that particular project in Q3. We certainly planned for there to be more projects in that area with the combined streamer and node that we're referring to as hybrid projects.

We do see it as an opportunity to complement the node business and an opportunity to develop the streamer business on our side. So there are certain areas around the world where we see quite a good pipeline of opportunities and we definitely plan to see more activity in that space.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [8]

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Interesting. My final question is regarding the vessel booking. You say you booked to 60% of the capacity for Q4. You probably listened into PGS, they said they're fully booked for Q4, but they include the projects that have not been signed yet but are very close to being signed.

And it seems like you're having a bit more conservative definition of vessel booking. But if you like included projects that you think are very close to being signed, how does it look then for the upcoming winter, Q4, Q1 maybe?

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Duncan Eley, Polarcus Limited - CEO [9]

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Now look, I think, first of all, I don't have that much time to listen into PGS. But we definitely -- we do see that pipeline and we do not include any booked capacity until we have a confirmed agreement. We don't want to talk specifics. But as we said, we do expect to see awards during Q3 and hopefully not too far into it.

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Operator [10]

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Our next question comes from the line of Glenn Lodden of Nordea.

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Glenn Lodden, Nordea Markets, Research Division - Analyst [11]

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First of all, congratulations, gentlemen, on the very good results. A couple of questions. Now that you are pointing more and more to the cyclical recovery of the industry, have you given any thought to reactivating the Nadia?

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Hans-Peter Burlid, Polarcus Limited - CFO [12]

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Well, we are obviously monitoring the global fleet development closely and the opportunities of bringing additional vessels back to the market. But as we said, we don't expect any additional vessels to be activated in the near future, and we hope we can enjoy a further improvement in the market driven by the increased demand without additional supply coming in.

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Glenn Lodden, Nordea Markets, Research Division - Analyst [13]

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All right. That's clear. Also, on multi-client feeds, there were about $3 million, $4 million this quarter. Are you expecting any further multi-client revenues throughout 2019?

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Duncan Eley, Polarcus Limited - CEO [14]

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We do expect to see small amounts. As you are aware, we have decreased the size of our library over the past few years, so there will be some activity. It is not going to be significant similar to next year where we'll see some activity, but it won't be material. So it was a good quarter for multi-client late sales and we expect them to be a little bit volatile at small levels.

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Glenn Lodden, Nordea Markets, Research Division - Analyst [15]

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Okay. Got it, got it. Final question, financing. How do you view the financing market at the moment?

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Hans-Peter Burlid, Polarcus Limited - CFO [16]

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I mean we are not active in that market at the moment. We have attractive maturity profile and we're focusing on operating the business and generate strong margins.

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Operator [17]

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And your next question comes from the line of Christopher Møllerløkken.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [18]

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The pricing in second quarter was surprisingly strong. Were there anything specific effects that caused it to be as high as it were in second quarter? Or is this the new baseline for Polarcus so to speak?

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Duncan Eley, Polarcus Limited - CEO [19]

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Look, I think we did make the comment, Christopher, that your pricing estimate [was] quite low. We do see this, as I mentioned to John Olaisen, this movement and the level that we see is indicative in the change across the industry. So I think it has shifted to this level, and of course, we're pushing to see how things progress going forward.

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Hans-Peter Burlid, Polarcus Limited - CFO [20]

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And also remember, there was a -- we have a big 4D project, which tends to be priced well. And of course, with the low utilization means that that is a big part of the total revenue in the quarter and we are seeing a portfolio of projects. So some higher, some lower, but definitely, we see a solid increase in pricing.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [21]

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I also noticed that you deferred $14 million of steaming costs in second quarter. Will those be expensed in third quarter or second half?

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Hans-Peter Burlid, Polarcus Limited - CFO [22]

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So this is the costs related to the 4D project, but also to the West project, so we will have most of it expensed in Q3, but some will be expensed in Q4.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [23]

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Final question. In terms of the 4 vessels that you see, which have available streamers, does that include the Nadia? Or is that other vessels not controlled by Polarcus?

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Duncan Eley, Polarcus Limited - CEO [24]

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So at the moment, we do not have vessels sitting on the Nadia. We have around 4 streamer kits sitting in our inventory, but Nadia is not included in that. It's definitely a priority for us to do whatever we can with Nadia. But as HP alluded to, we need to be very responsible on the supply addition back into the market.

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Operator [25]

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Thank you. There are no further questions coming through on the line. (Operator Instructions) No questions coming through, sir.

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Duncan Eley, Polarcus Limited - CEO [26]

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No. Very good. So with that, I'll thank everyone for their time in joining us this morning and we will look forward to updating you again towards the end of -- well, at the end of Q3. Thank you very much, and good morning.

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Operator [27]

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Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stay on the line.