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Edited Transcript of SBX.OL earnings conference call or presentation 15-Aug-19 6:00am GMT

Q2 2019 SeaBird Exploration PLC Earnings Call

Oslo Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of SeaBird Exploration PLC earnings conference call or presentation Thursday, August 15, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hans Petter Amundsen Klohs

SeaBird Exploration Plc - CEO

* Per Nils Christian Haugestad

SeaBird Exploration Plc - CFO

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Presentation

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Hans Petter Amundsen Klohs, SeaBird Exploration Plc - CEO [1]

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Good morning, everyone, and welcome to this presentation of SeaBird's second quarter results. I'm Hans Petter Klohs, CEO of Seabed Exploration. And together with me presenting is CFO, Nils Haugestad.

Turning to Slide 3, the agenda. In this presentation, we will take you through the highlights of the second quarter, our market and operational review, our financial review, before we wrap up with a summary, outlook and Q&A session.

Please turn to Page 5. In the second quarter, SeaBird achieved 68% vessel utilization. Revenues came in at USD 9.2 million, while EBITDA was negative USD 1.7 million. This includes the loss provision for Q3 relating to the ongoing Nordic Explorer contract of USD 1.3 million.

In the quarter, we completed the acquisition of the BOA Galatea, while the BOA Thalassa was acquired in July. To finance the acquisition, the company completed the NOK 250 million private placement and NOK 28 million share issued to bondholders as part settlement of BOA Thalassa acquisition.

The quarter included delayed revenue recognition and higher costs due to stream-related challenges on Nordic Explorer and the Harrier Explorer, while we experienced continued good operational performance for the rest of the fleet.

This includes the Eagle Explorer, which since the acquisition late 2018, has seen a 100% utilization with less than 1% technical downtime. The company also decided to decommission the Aquila Explorer, which has been stacked for 3 years. Select size picking equipment such as compressors will be reused on rigging the Fulmar Explorer.

Turning to the segment split, presented on Slide 7. Revenues in the fourth quarter of USD 8.3 million, were split between 6 vessels. 83% of the revenues came from source operations and while the remaining 17% was relating to proprietary 2D and 3D acquisition. Revenues were geographically split between 3 regions, where the American region is contributing with 77% of total revenues.

As you will see from Slide 8, and as previously commented, the Q2 results was affected by operational issues on 2 stream projects. The 3D survey in West Africa with Nordic Explorer is estimated to be completed mid-September. This is 2 months later than the original plan. So the survey is acquired with 2 streamers instead of 4. The project is estimated at a negative margin of USD 1.4 million and an onerous contract charge of USD 1.3 million has been booked in Q2.

The 2D survey in South America with Harrier Explorer is estimated to be completed ultimo September '19. This is also 2 months later than the original plan. The extended survey duration would result in increased operating expenses and generate an estimated project margin of close to 0.

Both surveys are affected by difficulties with availability and lead time of select seismic streamer equipment parts related to the DigiSTREAMER technology.

Turning to Slide 9. We will go through the causes and the status of the DigiSTREAMER problems. The Harrier Explorer was reactivated in 2019 and acquired 6 2D surveys with good operational performance before commencing on a 2D project in South America.

Nordic Explorer was chartered-in including streamers in April '19 on project basis to acquire the 3D survey in West Africa. The root cause of the problems we have seen in Q2 related to an increased repair period and logistical lead times exceeded the equipment-related contingency included in the project plans.

Further, the service offering, repair facilities and inventory level for certain technology components have all been significantly downscaled post 2014 downturn. Finally, we experienced the worst expected condition of the streamer equipment onboard the Nordic Explorer.

Based on this, what are the lessons learned from the operational problems we are starting to see play out. Well, we are not -- first of all, we underestimated the supply chain and logistical bottlenecks relating to repair of DigiSTREAMER sections. In addition, spare part contingency included in the project plan should have been more robust.

So what is the operational status after this service has been completed? For the DigiSTREAMER, SeaBird will have a significant pool of repaired and tested streamer ready for use. In addition, comes a larger pool of Sercel Sentinel streamer. The current DigiSTREAMER problems are thus not expected to have any effects on future 2D and niche 3D projects.

Please turn to Page 10. Following the fleet renewal, acquiring 3 high-end vessels the last 12 months, SeaBird currently has a fleet of 7 vessels. We diversified and diversified service offering in 2D, 3D, source and EM segments. This is a step change compared to 1 year ago, where we had a fleet of 4 vessels, whereas 2 in operation.

As you will see from Page 11, we have strengthened the balance sheet. The $40 million fleet renewal that has been concluded at attractive vessels values has also strengthened the asset side of the balance sheet. All the tangible assets include a significant pool of in-sea equipment worth about USD 10 million to USD 15 million in the second-hand market.

This includes source equipment plus recording and streamer equipment. When it comes to liabilities, the company continues to limited financial indebtedness. The SBX04 bond has normal value of $4.8 million due in June 2020. In addition, comes a trade payable agreement of $0.4 million also due in June 2020.

Turning to Slide 12, the operational update. SeaBird had 6 operational vessels in the second quarter. Harrier Explorer completed a source project in Gulf of Mexico and started on a new 2D project towards the end of the quarter. While the Eagle Explorer completed its source project in Gulf of Mexico and mobilized for a new project in Northern Europe.

Osprey Explorer executed a source project in the Gulf of Mexico, while the Petrel Explorer, which was delivered to SeaBird in mid-June continued its contract with EMGS. Of the chartered vessels, the Nordic Explorer commenced the 3D project in West Africa, towards the end of the quarter, while the Voyager Explorer completed its source project in Asia in April 2019 and has been idle since.

On Slide 13, you will see the current fleet positioning. A diversified and global presence means that with most cases, we have a relatively limited time in transit to new projects. This is particularly relevant for the seismic industry with shorter lead time for new projects.

To give an update on the contract situation. Please go to Slide 14. The Eagle Explorer is working on a source contract, with CGG in Northern Europe with estimated completion late August. Following this survey, the plan is to acquire a 2D survey for Wintershall Dea at Norwegian Sea with an estimated duration of 1 month.

The Petrel Explorer is in contract to EMGS until March 2020, whereas the EMGS options to extend for 2 periods of 6 months. Harrier Explorer works on a 2D contract in South America, with estimated completion late September.

While the Osprey Explorer is mobilizing for source project on the NCS, with estimated completion late September, early October. Of the chartered-in vessels, the Nordic Explorer is acquiring a niche 3D survey in West Africa, with estimated completion mid-September, while the Voyager Explorer is idle and marketed for project in Asia and Africa.

Turning to Slide 15, market trends. We see that there was some seismic -- bottom seismic market remains in structural growth trend, where demand largely driven by focus on increased order recovery and producing fields and new-field exploration.

Various market reports indicate a busy 2020 for OBS with a combination of proprietary surveys and multiclient projects. Demand for proprietary 2D and niche 3D exploration surveys continued as a -- at a moderate pace. We note a high conversion ratio but the surveys has limited size and duration.

Due to macro developments, energy security is emerging as a positive demand driver in select regions. For 2D multiclients, we see a tender conversion is still lagging due to limited prefunding.

Turning to the tender activity on Slide 16, we see that there is a healthy OBN-related tender activity, with the year-over-year growth in tendered vessel months but with a sequential drop. 2D tendering continues at a moderate pace. As before, we note that there is a short late lead time from contract award to project start-up.

And now our CFO, Nils Haugestad, will take you through the financial review. Nils?

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Per Nils Christian Haugestad, SeaBird Exploration Plc - CFO [2]

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Yes. Thank you, Hans Petter. Turning to Slide 18, as Hans Petter mentioned, our Q2 revenues were at $9.2 million, $0.9 million in multiclient sales and $8.3 million in contract sales. We'll come back to that number a bit further in the later slides.

On the EBITDA side, minus $1.7 million and this includes the $1.3 million provision that was mentioned earlier and we'll have some more details on that. The capital expenditure side, here, we want to highlight that there is a difference, of course, between what we were showing as capital expenditure on this slide versus what's being reported in the cash flow statement because there's some noncash items here which relates to the acquisition of the BOA Thalassa where part of the consideration was in return for shares. On the vessel utilization, 68% for the period, slightly down from Q1 of 76%.

Turning to Slide 19, looking at the utilization, we had 8% of the time in yard stays. This relates to the Osprey -- the Harrier -- Osprey had main engine overhauls. And on the Harrier, we did some upgrade work on the streamer winches so that's about 8% of the time. Otherwise, 68% in utilization.

Turning to Slide 20. On the income statement side, $9.2 million in revenues, cost of sales of $9.4 million. This is where you'll find the $1.3 million loss provision taken. On the SG&A side, $1.8 million. This is generally in line with the numbers we've been seeing before and also in line with what we would normally expect. It does include approximately $100,000 of noncash expenses that relates to the option program from last year.

With regards to other income, that's primarily recharges, taking us to an EBITDA of negative $1.7 million. Depreciation of $2.5 million. This number will, of course, increase slightly as we take the Thalassa and Galatea into the accounts, and we would expect that to go up slightly.

Amortization of $0.7 million. This has 2 components: one is amortization related to the multiclient sales and the other part is the Voyager, which is on a lease, but it's now being capitalized under our new accounting regulations and amortization charge of a little less than $150,000 per quarter.

The impairment of $2.3 million, we'll come back to that in a little bit, but that relates to the Aquila. So in decommissioning the Aquila, we have kind of 3 components coming out. On the one hand, we're taking equipment off the vessel, that is going to be used in the rigging of the Galatea. Secondly, we are then selling the remaining part of the vessel net of costs that we will have up until that point in time.

And then we're taking the impairment as the difference, the third part, and that's the $2.3 million that you're seeing before the EBIT number of negative $7.2 million.

The interest expense is a positive $0.1 million. The reason for that is we have a small reversal of some interest expense that we thought we would be liable for, but we're not. So we've reversed that. Other financial items is primarily foreign exchange benefit of period. This is really the U.S. dollar swings that happened in the period. But just so people are aware of why that subtle change in there. Then income tax of $0.1 million, takes us to a net loss of $6.6 million.

Turning to Slide 21. On the balance sheet, so there are some meaningful changes here just makes sense to go through. So people follow them. On the PPE side, the $47.3 million now then includes the Thalassa but it does not include the Galatea yet. That's a handover that happens in July. So that's a Q3 event.

On the other hand, you have Aquila we talked about so that's not been taken out of there, and you'll see the remaining portion we talked about listed under assets classified as held for sale. And that is simply just the smaller remaining portion, net of all our related expenses. And then coming into Q3, we will have the PPE also then go up by the acquisition value of the Galatea.

On the cash side, $18.9 million. So this is, of course, following the equity issuance. But it is before the cash consideration for the takeover of Galatea than happens in July again. So that will go down by approximately $7.5 million with regards to that transaction.

On the equity side, $60.6 million. So just to take that number, this number again then will be slightly upwardly adjusted because of the equity portion of the Galatea acquisition, that's a July event. And otherwise, no major changes there.

But that takes us currently, as Hans Petter mentioned earlier, to an equity ratio of 72%. The other observation is on the borrowing side. So the outstanding SBX04 and the trade credit facility we have has a maturity of June 30, 2020. So that's now listed as current borrowings with a year left to maturity. So that's obviously something that we are looking at how we want to handle at this point.

Last observation on this page is the share count. Since there's been a number of adjustments there, the 538.9 million shares outstanding are the shares outstanding as of today, so after the Galatea transaction. So that is the last share count as of today.

Turning to Slide 22. On the cash flow statement, cash from operation, negative $2.6 million. As a result of this, you see the CapEx of $9.3 million. That is the cash portion of the capital expenditures. Then we have the proceeds from ordinary shares, that's the NOK 250 million transaction, it does not include the shares issued as a part of the acquisition of Thalassa. Then we have transaction expenses. Note also that transaction expense, of course, relate to all the shares, not just the NOK 250 million share issuance. Taking us to an increase in cash for the period of $14.7 million, with $4.3 million at the beginning of period, $18.9 million cash at the end of the period.

Go to Slide 23 on the multiclient side. So we had $0.9 million in sales, $0.8 million of that is related to the 2018 surveys and 0.1% is a small multiclient sale from earlier periods. That takes our book to value there now to $1.1 million, and there are no additional multiclient spending in this quarter.

Turning it back to Hans Petter.

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Hans Petter Amundsen Klohs, SeaBird Exploration Plc - CEO [3]

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Thank you, Nils. Turning to Slide 25, we have wrapped up where SeaBird is today. Q2 was unfortunately hampered by technical streamer issues on 2 projects.

We see that the structural growth in the ocean bottom seismic activity is expected to continue. While the proprietary 2D and niche 3D demand is in early stage of cyclical recovery, predominantly for proprietary work in regions focusing on energy and security. Day rates in 2019 is up 20% to 30% year-on-year.

And following the acquisition of the BOA vessels, the fleet renewal is completed, and we now have an enlarged and versatile fleets with a global footprint. As a result of the fleet renewal, SeaBird has significant strengthen, as such, the balance sheet, with a continued low limited financial indebtedness.

So with this, I would like to thank the audience for listening in and open the Q&A session.

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Questions and Answers

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Unidentified Analyst, [1]

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The loss provision on the Nordic Explorer, how confident are you? Estimate there, is that finalized? Or are you into there -- will there be additions or deductions?

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Hans Petter Amundsen Klohs, SeaBird Exploration Plc - CEO [2]

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Loss provision. This is an ongoing survey. It's based on an estimate of the survey. I think the contracts -- contractor survey, we completed mid-September. Of course, it's always subject to uncertainty as long as there is an ongoing project. But we are -- and again, the estimates has been -- we are carefully looking at estimates, and it's the best estimate now.

Any questions? Okay. Thank you all for listening in.