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Edited Transcript of PLCS.OL earnings conference call or presentation 27-Feb-20 9:00am GMT

Q4 2019 Polarcus Ltd Earnings Call

Dubai Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Polarcus Ltd earnings conference call or presentation Thursday, February 27, 2020 at 9:00:00am 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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Polarcus' Limited Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on Thursday, the 27th of February 2020.

I would now like to turn the conference over to your speaker today, Duncan Eley, CEO. Please go ahead.

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Duncan Eley, Polarcus Limited - CEO [2]

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Good morning, and thank you for joining us for the Polarcus Fourth Quarter and Preliminary Full Year 2019 Earnings Release. As mentioned, my name is Duncan Eley, CEO of Polarcus. And with me today is Hans-Peter Burlid, CFO.

Moving past our cautionary statement on Slide 2 and on to the agenda for today's presentation. I'll talk through the full year and the Q4 2019 headlines before HP delivers the corresponding financial details. I'll then wrap up with an update on company operations and our outlook.

So moving straight on to Slide 4, for Polarcus 2019 saw substantial positive developments in the marine seismic acquisition market, which translated into significantly improved financial results for the full year.

Revenue was up 44% over full year 2018 to $291 million. And whilst we saw a corresponding increase in operating costs due to the complex nature of several key projects during the year, we saw EBITDA more than double to $63 million. This earnings performance reflects: number one, a solid improvement in pricing across the marine seismic acquisition markets; two, in Polarcus' case, the ability to secure several premium projects and deliver these projects extremely well; and three, it reflects our ongoing focus on cost management and company-wide dedication to efficiency.

As of today, our backlog sits at $240 million, which includes our core fleet backlog of $200 million, the highest level of backlog for Polarcus since 2014, a very solid indicator of where the market has moved to.

To Slide 5 and the highlights of the fourth quarter. Remembering that the fourth quarters of the past few years saw many idle assets in most companies. In Q4 2019, Polarcus revenue was flat year-on-year linked to lower utilization, as a result of multiple vessel repositioning and a prolonged yard stay. However, despite this, EBITDA increased to $7.6 million, up from $2.5 million in Q4 '18 and realized day rates were up 40% over Q4 2018 when the vessels were on projects. This resulted in cash generated from operations for the quarter doubling year-on-year.

Importantly, fleet backlog was built strongly to $240 million on the back of 7 project awards during the quarter. This pushed backlog not only to our highest level since 2014, but up 70% from the end of Q3 2019.

With strong tender activity seen so far in Q1, we see the pipeline for the second half of the year looking solid. We do expect to see our digital offering, Polarcus Cirrus, gain momentum, with clients driven by their objective to reduce time lines from exploration to hydrocarbon production, and I'll come back to this in the outlook session.

So moving to Slide 6. 2019 was a year of material improvements across the industry and to the financial performance delivered by Polarcus, and I believe we are very well positioned to capitalize on an improving market going forward. Our strong standing with many E&P companies and MC companies, who no longer operate vessels, is important to secure optimal backlog for the fleets.

The uniformity and capabilities of our fleet continue to differentiate our offering in terms of operational efficiency, environmental responsibility and geophysical innovation. The work that we've done to prolong the lifetime and optimize the performance of our streamer equipment inventory is paying off. HP will talk through the new stream investments we made during 2019. This, in combination with the increased output from the Polarcus streamer repair facility means we've created the important flexibility in our requirements for additional new streamer investments with a gradual investment profile pushed out to 2022.

Polarcus financial performance is improving significantly in terms of profitability and cash flow, which emphasizes the operational and financial leverage of the Polarcus platform.

And with that, I'll hand you over to Hans-Peter Burlid, CFO.

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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 8. We continue to see improved pricing year-on-year in the fourth quarter. The fleet utilization was, however, soft resulting from planned repositioning of the fleet, as well as delayed contract award on one project and an extended yard stay for one vessel.

Our fourth quarter segment revenue of $55.3 million decreased 5% year-on-year. Gross cost of sales was virtually flat, despite the high costs on the wide-azimuth project, which finished in November. This means that the underlying vessel operating cost was down year-on-year, contributing to an improved segment EBITDA of $7.6 million. The EBITDA improvement is also impacted by higher multi-client late sales and more costs capitalized to multi-clients.

Turning to Slide 9 and a detailed look at the revenue development year-on-year. As I mentioned, we continue to record improved realized day rates year-on-year for the 10th consecutive quarter. This quarter, the pricing improvement was 50% year-on-year, driven by contract rates up 40% and strong prefunding on this multi-client project of 168%. The price increase was more than offset by lower utilization, while we saw stronger multi-client late sales compared to last year.

We expect utilization to improve sequentially in Q1 with a corresponding increase in revenue.

Turning to Slide 10. We recorded a strong cash generation during the quarter with cash from operations of $21.9 million compared to $11.5 million same period last year. CapEx investments were $5.9 million for the quarter. This includes costs related to 2 class dockings.

We started a new multi-client project in Q4 and recorded $6.1 million of multi-client cash investments, accompanied by strong back prefunding of $10.1 million. And in January, we started a second multi-client project in Australia, and as we speak, we're mobilizing on a contract project in the region.

The total cash balance improved during the quarter to $36.5 million compared to $35.4 million at the end of last quarter and up from $31.2 million at the end of 2018. The $40 million working capital facility remains undrawn.

Turning to Slide 11 and a look at the cash flow for the full year of 2019. You can see the business generated $60.9 million cash from operations. This is compared to $11.3 million last year. After multi-client investments, CapEx and cash interests, the free cash flow was $20.3 million. And this is after we used the opportunity to invest $3.7 million in new streamers on attractive terms. So this investment, along with the increased output from the Polarcus streamer repair facility, has maintained our streamer pool at a healthy level with excess capacity. So this provides flexibility and a more gradual investment profile from 2022.

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

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Duncan Eley, Polarcus Limited - CEO [4]

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Thank you, HP. And turning straight to Slide 13. Strong operations continue to underpin the performance and reputation of Polarcus. We maintained more than 98% uptime of our fleet during 2019, and our proactive and embedded safety culture continues to deliver.

In addition, we've maintained our commitment to the environment since day one of Polarcus, meaning that we've been IMO 2020 compliant since 2009, currently running at less than 0.06% sulfur content across our fleet, 10x less than required.

And in terms of our top clients, they're talking more and more about their ESG agenda and how the Polarcus Explore Green environmental offering can help them with this. It was very good to see TGS promote one of the Polarcus vessels in their recent earnings release as an example of optimizing the carbon footprint of a multi-clients project.

Slide 14 illustrates how Polarcus innovation has revolutionized the marine seismic acquisition industry and continues to do so. Every client across the globe is now aware of the benefits of XArray by improving data quality and optimizing acquisition efficiency. The proportion of square kilometers acquired by the Polarcus fleet using XArray has increased from 30% in 2016 to more than 70% of acquisitions secured for 2020.

2020 also saw the commercialization of our Cirrus offering, which enables clients near real-time access to data being acquired on Polarcus vessels, in combination with enhanced priority processing capabilities. Very simply, this enables our clients to make faster decisions and achieve better results, as measured by their exploration and production objectives.

The supply side picture is displayed on Slide 15. The consolidation of the global marine acquisition markets from 5 players in 2018 to 3 in 2020 is now complete. Importantly, the number of high-end 3D vessels has stabilized at 22, down from more than 60 vessels in 2014, and we do not expect to see any additional capacity introduced to the high-end towed streamer segment during 2020.

Slide 16 illustrates the steadily growing tender demand that continues into Q1 2020 with more than 75,000 square kilometers coming in the door for the rolling 6-month period, Q4 '19 and Q1 '20. With one month of tender activity remaining for the quarter, we expect to see this increase further.

Large-scale exploration surveys has driven this tender activity so far and with a solid number of 4D programs also scheduled for the year. In addition to E&P company tender activity, the multi-client providers without vessels are providing a solid pipeline of exploration surveys with a clear focus on the southern hemisphere.

Slide 18 shows the backlog secured to date that I referred to earlier, which has grown some 70% since the end of Q3 2019 on the back of the 7 contract awards secured during the period. This backlog provides us with very important visibility. The fleet bookings into late Q2 leads us to expect robust utilization for the first half of 2020. And we do anticipate a number of outstanding tenders to be awarded in the coming months, and I believe Polarcus is well positioned to secure a number of these to further build our backlog into the second half of the year.

As announced recently, the Vyacheslav Tikhonov remains on bareboat charter to mid-May of this year, and we are in close contact with the Sovcomflot about expending -- extending the bareboat charter further.

So in closing on Slide 18. Q4 saw significantly higher pricing and improved EBITDA over Q4 2018, despite lower fleet utilization. Full year 2019 saw EBITDA double compared to 2018, driven by pricing, operational execution and effective cost management. Very importantly, again, we've optimized our streamer inventory through careful equipment handling, improved throughput of the Polarcus streamer repair facility and enhanced by the small but important new streamer sections that were procured during 2019 at favorable terms.

Despite global sentiment fluctuation during recent weeks, we continue to see positive developments of industry indicators, such as tender levels, multi-client activity and price points. The situation around COVID-19 will continue to evolve, and we'll carefully monitor the impact of this going forward.

And finally, our sales organization has provided important visibility through these 7 project awards, securing the largest backlog for Polarcus since 2014. And whilst I'm sure 2020 will see a variety of challenges, we also see opportunities, and I'm confident that Polarcus is well positioned to optimize our performance.

I look forward to updating you throughout the year. And with that, I will hand you back to the moderator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question today comes from the line of Christopher Møllerløkken of Carnegie.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [2]

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Yes. Is it possible to give an indication of the backlog at year-end 2019? I noticed that the backlog number included some awards that also were booked during first part of Q1 '20.

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Duncan Eley, Polarcus Limited - CEO [3]

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That's actually -- it was actually the same at the end of the year. So the bookings are to the end -- are to date, but it includes awards -- the number of awards for the same at the end of the year.

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Hans-Peter Burlid, Polarcus Limited - CFO [4]

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Yes. The only difference is on the bareboats where we had the extension in Q1. But on the core fleet, the $200 million was the same.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [5]

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In terms of CapEx going forward, is 2019 a fair assumption for 2020 and 2021? Or was there anything particular causing CapEx to be on the high side in 2019?

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Hans-Peter Burlid, Polarcus Limited - CFO [6]

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Yes, it was on the high side. We had 2 class dockings. We have no class dockings planned for next year. And we also invested in streamers, as I mentioned, and we have no plans to -- or requirement to invest in streamers until 2022.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [7]

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The final question. In terms of the implied day rates and cost level from Q4, is that representative going forward? Or were there any elements that caused it to be artificially low after a very high third quarter?

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Duncan Eley, Polarcus Limited - CEO [8]

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If your question was on cost, Christopher, I think the cost is a reasonable indication going forward. But we've got our costs very much under control, and it will fluctuate with activity throughout the year, but we believe that's a good indicator.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [9]

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And in terms of pricing?

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Duncan Eley, Polarcus Limited - CEO [10]

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In terms of pricing, so we did see that our pricing was up sort of 40% to 50% 2019 over 2018. And we've seen positive momentum continue into 2020. So we -- at the moment, in the first half of the year, we see flat pricing up somewhat. And we expect that to build during the second part of 2020, but those data points are still yet to come. So we stand by a slight uptick in pricing into 2020 on the back of a very big increase 2019 over '18.

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Christopher Møllerløkken, Carnegie Investment Bank AB, Research Division - Research Analyst [11]

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But first half '20 is comparable to first half '19?

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Duncan Eley, Polarcus Limited - CEO [12]

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No. First half of '20 is substantially up over first half '19, but I think we see flat to slightly up if you look at the full year.

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Operator [13]

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(Operator Instructions)

It appears there are no further questions at this time. Please continue.

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Duncan Eley, Polarcus Limited - CEO [14]

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Okay. Look, once again, I thank you very much for joining us for today's earnings release, and look forward to updating you throughout the year. Thank you very much, and good morning.