Prosafe SE (PRSEY) CEO Jesper Kragh Andresen on Q1 2020 Results - Earnings Call Transcript

Prosafe SE (OTCPK:PRSEY) Q1 2020 Earnings Conference Call May 27, 2020 4:00 AM ET

Company Participants

Jesper Kragh Andresen – Chief Executive Officer

Stig Christiansen – Deputy Chief Executive Officer and Chief Financial Officer

Conference Call Participants

Patrick Schweder Schroeder – Reorg Research

Christopher Mollerlokken – Carnegie

Jesper Kragh Andresen

Good morning, and welcome to Prosafe’s Q1 2020 results and market update presentation. Stig and I will share the presentation, as we normally do, and take questions, Q&A session, after the presentation. On a practical note, if you have a question, please use the link below the webcast. I understand that when we start the presentation and maximize the screen, you will not be able to see the link, so possibly, you want to press the link now or send any questions to Stig’s e-mail address.

Starting on Page 4 with the executive summary. The first quarter and the period until to date has been dominated, probably for all of us, by the two black swans caused by the global COVID-19 pandemic and the oil price collapse. That is coupled with the offshore accommodation industry-specific challenges related to the structural shift in demand that we mainly see in the North Sea and the oversupply we have in the industry. As we have said previously, the near-term effects of the two black swans is a lost year, in the sense that much of the work that we see planned for 2020, the projects we saw planned for 2020, are either deferred or canceled.

I’m pleased to say that we have not experienced the adverse health effects of the COVID-19 in the sense that none of our offshore employees have tested positive for the coronavirus, and we have put in place prudent management practices to safeguard the health of our employees. The other combined effect of the two black swans is more on a medium-term uncertainty about the activity level offshore and hence, the demand for our services. So in sum, we are facing a lost year in the near term, coupled with uncertainty about activity in an industry which is oversupplied.

Consequently, we have taken an impairment in the quarter to the value of our vessels of $811 million. I think forecasting – long-term forecasting is never easy, and I think it goes without saying that in the current environment, it’s a tall order. But when we do long-term forecasting, it is always our ambition or aim to remain neutral and avoid airing. On the optimistic side or on the cautious side, that naturally does not eliminate the uncertainty.

Utilization in the quarter came in at 32.7%. But to give an impression of the effects of the COVID-19 and the oil price crash as of today, if we leave Mexico aside as a bit of a special case, I think the current status is that globally, there are two flotels in operation as of today. One is in – operating in the North Sea and one is operating in Brazil, and both are operating for Equinor as a customer.

Our liquidity stands at $184 million at the end of the quarter. So solid cash position that we have. And equally important, we have full support from our lenders to continue and conduct our business. And we have, today, not received any concerns from customers about our ability or capability of doing so. So it’s business as usual from an operational point of view. The final point on the executive summary strategy, how do we address the challenges we face in the industry. The oversupply, one of the key challenges, and we do not believe that there is an overnight cure for especially the oversupply, but it’s a obvious conclusion that scrapping has to take place, as I will come back to – according to my calculations, about 1/3 of the global fleet should be scrapped. And the other inevitable conclusion seems to be that consolidation has to take place.

Turning to Page 6, contains a historic overview of where Prosafe’s earnings has come from. And as you will see from the slide there, basically three key one-offs or special events that historically have contributed with a very significant part of the earnings. Until 2015, the bareboat income from Mexico almost accounted for 50% of EBITDA. At one time, at the peak, Prosafe had seven semisubmersible flotels operating in Mexico. All of those seven are now scrapped and replaced by more modern vessels. And although Mexico is very much on the top of our list of priorities, we do not see it’s realistic that we will have 7 vessels working there anytime in the future.

The second after 2015 from 2015, 2016 to 2018, you can see from the bars that the earnings have been dominated by two factors. One is the tender support contract for Scandinavia, and the second driver for the earnings has been work that we have performed in supporting the hook-up of fixed facilities in the North Sea. And about – from one ongoing project and one future project, that wave has also come to an end. So when we look at the earnings for the past four years of what we call the core and recurring activity, it is about $40 million a year on average.

Turning to Slide 7, shows a clear picture of an oversupplied industry with a significant supply and demand imbalance. The illustration is, however, looking a bit worse than it is in reality. As you will know, the supply side in offshore flotels is not commoditized, and the technical specs vary significantly. So obviously, of the 38 vessels, not all of those 38 vessels can compete for every job. Some of the 38 vessels are regional in nature.

The second element is the demand. The demand is in vessel years. And as you know, for instance, in the North Sea, it takes more than one flotel to perform one vessel year of demand. But as you will see, overall, the demand side has remained fairly stable or flattish. Underlying activity in the North Sea has declined, but it has been outweighed by increasing activity outside the North Sea. The challenge in the industry is – you can see from the red line, is the supply boom, the newbuilding boom, which has caused, from 2012/2013, a doubling of supply compared to a flattish demand. So the oversupply that we are facing in the industry and the scrapping, which I’ll come back to, this is not trivial.

With that, I will leave it to Stig to take us through some of the financial sections. Stig?

Stig Christiansen

Thank you, Jesper, and good morning, everyone. So now we are on Slide number 8, reassessment of outlook and financial implications. In short and without repeating all the text on the slide, this is a short-form summary of the background to our reassessment and conclusions about facing a new reality, which I believe Jesper has addressed well already. And consequently, to the right on the slide, therefore, we see, amongst others, the 800 million – US$811 million impairment in the quarter, and therefore, also the book equity turning significantly negative as a consequence of that. We are, as you know, however, already, for a good while, in a constructive process with our lenders to find a long-term sustainable financial solution to the situation.

Turning to Slide number 10. Again, we have, for quite some time, kept the market updated and reiterated the fact that our financial position is unsustainable after years of recession across the industry. We are, in our mind, facing a new reality, and we have reassessed the outlook accordingly. And we’re doing our utmost on all accounts to adapt to that new reality, to protect value and hopefully, yet again, create value down the road.

We have asked lenders for an extension to the so-called forbearance arrangement, which currently runs till end of May. And the forbearance arrangement basically means that we are halting payments of interest and amortization to lenders, in agreement with them in order to protect cash, while we work to steady the ship and create sustainable financial solution.

We anticipate to get support for such an extension till end June this year, and we target to have a solution in place by the end of that time line. Importantly, the process vis-a-vis lenders remain constructive. And on that basis and given the liquidity situation of the company, we continue to operate on a going-concern basis. We’re open for business, honor our obligations towards trade creditors and clients and pursue new business to the extent available. I can also say that while we would like, to some extent, to be more open about the specific proposal that we have presented to our lenders, please respect that given uncertainty related to what an eventual solution might look like and, of course, timing as well, this has so far led us to hold back on details on the specific proposal that we have presented to lenders. And we will revert in due course and as and if required, on further details.

Moving then on to Slide number 12. Q1 2020 in short. Well, as both Jesper and I have already mentioned, the key points, and we will revert to some of them in the presentation ahead. I think I will just move on to the next slide, Slide number 13, order backlog. And in short, our firm order backlog by the end of Q1 2020 was US$127 million. At this point, this has not changed. Although given ongoing discussions with clients, there is some uncertainty also to the extent to which this will be recognized in 2020, as scheduled.

Then moving on to Slide 14, fleet status. In short, the Caledonia, as we have already announced, Caledonia contract with Total is now already moved from 2020 to 2021. The Notos and the Eurus are both in suspension in Brazil for up to 220 days since early April, although the suspension period will be added to the firm contract period once we recommence operations for both Notos and Eurus.

And as indicated by the light blue bar on the Notos, we continue to pursue more work for that vessel in Brazil. Similarly, for the Safe Zephyrus, she will not perform the Shearwater contract in 2020. And we are in discussions with the client on that situation, as also indicated by the light blue bar to the right of Safe Zephyrus. Finally, the Regalia will now be marketed for recycling. That will then be the eighth vessel. That process have recycled since 2016. And I think it’s safe to say that, therefore, we are clearly taking responsibility as far as supply side reduction and fleet enhancement is concerned, in addition, of course, to focusing in on cost performance and cash preservation.

Then moving on to Slide 15. As illustrated by the graph, we continue to work on the cost and spend side without compromising safe operations and the integrity of our assets. We continue and will continue going forward to turn every stone to be cost-efficient and a margin leader in our industry. We have recently done some further reductions to our organization, both onshore and offshore, however, always balancing this against critical competence retention in order to ensure safe, efficient and commercially attractive solutions vis-a-vis clients and support our ambition to remain a leading global player within offshore accommodation.

Moving on to Slide number 16, the income statement. In short, revenues of US$25 million in the quarter based on the utilization of 32.7% in the quarter compared to 62.5% utilization in the same period last year. In addition, as you will see on the commentary to the right on the slide, average day rates in Q1 2020 is about 35% lower than the average day rates in the same period last year. So the combination of that and the utilization clearly explains the revenues in the quarter of US$25 million. And of course, as a consequence of the reassessment of the outlook, impairments of $800 million or $811 million to be precise in the quarter, resulting in a net loss of $865 million in the quarter.

Then moving on to Slide number 17, the balance sheet. And again, following the impairments, total assets are down from US$1.7 billion to $639 million at the end of Q1 2020. And the book equity, as I alluded to earlier, therefore, turned further negative by US$859 million at the end of Q1 2020. However, just to repeat that again, we are working constructively with lenders to find a sustainable financial solution and remain optimistic that we will get there eventually. And in the meantime, we continue to operate on a going-concern basis with lender support and sufficient liquidity.

So I guess with those comments, I leave the word back to you, Jesper.

Jesper Kragh Andresen

Okay. Thank you, Stig. Turning to Page 19, we have outlined some of the key goals and value drivers that we see. The first is, as Stig has just elaborated on, to secure a sustainable financial solution. As Stig has just mentioned, we have presented a proposal which we think will meet that goal.

Second bullet is to maintain our commercial win rate. That bullet is reflected that we have had a strong commercial performance over the past four years. Over the past four years, we have been operating and controlling about 25% of the global fleet. And with that 25% of the global fleet, we have captured about 50% of the market, 50% of the market in terms of the number of contracts awarded, 50% of the contract value or revenue awarded in the period, and most importantly, 50% of the EBITDA in that period.

Reenter Mexico remains high on our priority, and we are optimistic that, that will eventually come true. We are focusing specifically on Scandinavia. We had some traction before the oil price crash and COVID crisis, which hope that we can pick up when the crisis or the worst effects of the crisis is over. Consolidation and fleet renewal is imperative for the industry and for Prosafe, in particular, and we believe that we are very well positioned to do that, and we will do our part.

And then finally, we are pursuing certain ESG initiatives. The main I would highlight is to reduce our emissions, our footprint by reducing the fuel consumption on our vessels. We turn to Page 20. As we say, scrapping will gradually and eventually rebalance the market, but it will take time for two reasons. First, as you can see to the left, the global fleet of flotels is fairly young. The average age of the entire fleet is about 11 years, and what we perceive to be the most competitive, the best technical spec vessels, the average age is only six years.

Secondly, as you can see to the bottom right, the cost of cold stacking a vessel and subsequent reactivation of between $2 million to $15 million, depending on the time of the duration of which it’s been cold stacked, has – at least, now to date is seen as prohibitive to take an option value on your rig and basically keep them idle for an extended period of time, believing that there is an option value. According to our calculations, however, we believe that there’s at least 12 vessels globally that we believe have a negative net present value and, therefore, should be scrapped.

And as you can see on the bar to the left, there are not that many vessels left from the 1980s and the early 2000s. It means that some of the scrapping candidates have been built fairly recent but, obviously, should never have been built. Turning to Page 21. Consolidation is inevitable and will take place in our industry. As the graphs or the bar shows, it’s a fragmented market with many operators unable of operating their fleet in an efficient way.

Operating one to two vessels globally is simply not efficient from a cost point of view and not from a commercial point of view either. It is, in our view, important to have a foothold in the key regions going forward, and that includes, of course, Mexico, Brazil and the North Sea, whereas having a regional strategy only focusing on one region is, in my view, a very risky proposition. So we would definitely take pace in consolidation, and we believe that we are well placed to extract the efficiencies from that.

Turning finally to Page 22, the summary. As we have said, we have a solid liquidity position of $184 million. We have presented a restructuring proposal to the lenders aiming at a sustainable balance sheet. Firm backlog is $127 million, as Stig has said. Ongoing discussions with customers means that it’s a bit uncertain when they will be booked. The fleet utilization of 32% in the quarter, but however, very few vessels are actually operating as of today because of the double black swan we’ve been hit.

Accordingly, we have taken an impairment of $811 million, and we continue to seek entry into new geographical markets. And here, we are focusing mainly on Mexico. So our ambition remains to pursue sustainable financial situation and pursue a leading position based on a global presence with safe and low-cost operations and fleet enhancement. And as I have mentioned a few times, consolidation has to happen, and we think we are very well placed to do that.

And finally, I would just add that we have a capable and retained competence in our organization to deliver on that ambition. That ends the presentation, and I will turn over to Stig to see if there was any questions that have popped in during the presentation.

Question-and-Answer Session

A - Stig Christiansen

Yes. Thank you, Jesper, and there are. So let’s do them one by one. First, we have five questions actually from one of our private shareholders. So starting with the first question, which I think is for you, Jesper. When and why do you think the market will improve in the coming years?

Jesper Kragh Andresen

Yes. So that’s very – yes. So that’s a very good question. And I say that I wish I could answer that precisely. As we have covered in the presentation, I don’t want to set a particular time on it, but it’s – it will require, first of all, at least, that we see more certainty about the activity level, hopefully, at levels that we’ve seen historically. And then the question is really when do the scrapping take place, which will rebalance the market. And as you’ve seen, it’s not a trivial oversupply.

So exactly how long time it will take is a very good question. We believe it should take place. And our calculation shows excessive NPVs on – negative NPVs on a large part of the global fleet. But we also have to be realistic that until to date, we have, apart from the vessels that Prosafe have scrapped, only see very, very limited scrapping activity. With the outlook we are looking at, it should definitely pick up from now.

Stig Christiansen

Good. Then we move to question number two, which I can respond to, Jesper, and then you can supplement or correct me, as the case maybe. Second question being, is raising equity or letting the lenders change debt to equity part of the refinancing plan? And I think, as I alluded to it in my part of the presentation, it’s, again, a very relevant question, obviously, but it’s too early for us to comment specifically on the contents of the restructuring proposal. And therefore, I would refrain from any further comments at this stage.

Question number three from our shareholder, which is for you, Jesper. Is it an option to ask the competition authorities for a new opinion on the Floatel merger given the current market conditions?

Jesper Kragh Andresen

Yes. I think, as Stig said, we are currently, of course, focusing on the restructuring. And the only thing I would comment on that is when you read the decision from the competition authorities, you would see that the main difference between our view and the competition authorities was a difference in how we expected the market to develop. And the only thing I will comment is that the recent developments we have seen in the market are very similar to what we have presented to the authorities and quite distant from the assumptions that the authorities have made.

Stig Christiansen

Moving on to question number four, which is for you, Jesper. Are you in talks with other companies regarding merger at this moment?

Jesper Kragh Andresen

No, I think we will not disclose concrete discussions in that respect. But I think we normally try to keep in contact with – and keep an eye on, on what’s going on in the industry and try to understand which of – if any of our competitors have a strategic decision to leave the industry, and therefore, it’s interesting to sell where, of course, we are an obvious place to go, considering our cost competitiveness and good commercial performance. So we’re trying, of course, to understand the dynamics, and we would expect that many of the competitors with one to two vessels would be interested in exiting our niche.

Stig Christiansen

And then the final question, which I think I can comment shortly on, what are the tax consequences of the impairments? And the short answer to that is that there are no tax consequences following the impairments. Then we have some further questions. This time from – this time, I will mention name because this is an institution. And I’m sorry if I pronounce the surname wrongly. This is from Patrick Schweder Schroeder, analyst at Reorg Research.

Patrick Schweder Schroeder

The first question is, how are you looking at addressing the significant working capital requirements going forward?

Stig Christiansen

And we can both comment on that, Jesper. To be honest, I’m not quite sure if this is related to only the fact that the activity is very low and also ongoing discussions with clients. In any event, I think the short answer from my side, before Jesper might want to comment, is that we are doing two things, number one – or three things.

Number one, we are trying to optimize every commercial opportunity always. That also goes vis-a-vis our old vendors. Number two, we are, as we have alluded to, doing our utmost to turn every stone and operate efficiently and reduce any working capital requirements.

And number three, of course, we are in agreement with our lenders, holding on to and protecting the cash position to allow us to stay afloat and operate as a going concern until we are yet again in a stabilized and more normal situation and can continue to address these matters on a more normalized basis.

Patrick Schweder Schroeder

The second question, what incremental benefits do you think Prosafe can achieve by being the first mover in scrapping fleets, i.e., vessels ahead of the market? I don’t know if you want to comment on that, Jesper?

Jesper Kragh Andresen

Sure. I think – yes, I think it’s a question of who moves first. But I think the situation is really a different one that the entire industry and many of the owners of fairly modern assets has to think very hard about the realistic prospects of keeping their vessels in layoff for an extended period of time. I think that’s really the key. Of course, we have some older vessels, and of course, they don’t have an unlimited expiry date when you’re built in the 1980s.

But I think one of the things to note is, for instance, if you take a vessel like the Caledonia, as you will see from the rates and income we have reported in previous years, it has had a continuous, very solid utilization and has been a cash positive and contributed positively to the group. So it’s – there’s a need to, for all the industry, to take a look. And we have so far scrapped eight vessels.

Stig Christiansen

Yes, including Regalia in Q3.

Jesper Kragh Andresen

Yes, yes. And so we have taken the first step, and on our part, I think it’s a – others have not followed suit. So I think everybody has to make their own assessment. But according to our calculations, I think it’s a – everybody has to think very hard about the value of their vessels and how to best employ them.

Stig Christiansen

Then we have a third question from Patrick, which I can respond to, I think.

Patrick Schweder Schroeder

The question is, how sustainable is the balance sheet that even post restructuring is levered considerably? And then in parenthesis, assuming no further equitization of that, that still maintains significant fixed financial costs, given the time it looks like it will take to restore the market to normal levels.

Stig Christiansen

And I think, as a short comment without revealing any secrets or details that we basically said we couldn’t share, I think when we are looking for a sustainable financial solution, then I don’t think a highly levered balance sheet is a sustainable solution. So let’s revert on that when we are in a position to do so in more detail. Then we have a question from Christopher Mollerlokken at Carnegie, analyst at Carnegie. And I can respond to that.

Christopher Mollerlokken

The question is, could you update us on how much support you have received so far for your restructuring proposal from lenders?

Stig Christiansen

And the short answer to that is that we are in the midst of a process, and we are not yet at the stage where we are specifically counting support. That doesn’t mean to say that we don’t think there is conceptual support to – from, at least, some or perhaps even many, from our thinking. But in terms of detailed specific committed support, that’s way too early to address at this point in time. So those were the questions, Jesper, and everyone. There is no more on my screen at this stage.

Jesper Kragh Andresen

Good. Okay. Well, thank you all for participating, and I think we will end the presentation and the Q&A session on that note. Thanks to all. Have a nice day.

Stig Christiansen

Thank you.