Paratus Energy Svcs Ltd

Good day, everyone. Welcome to the second quarter 2024 results presentation for Paritus Energy Services Limited. My name is Robert Jensen and I am the CEO of Paritus. Joining me on the call today is Baton Hajimemedi, our CFO. Before we begin today's presentation, I would like to inform everyone that we may make forward looking statements on this call. So we recommend everyone to read the disclaimer in the back of the presentation. With that out of the way, I'm very pleased to welcome you all to our first quarterly presentation as a public company. The second quarter was an extremely busy quarter for Paritas. We began our life as a public company following the successful listing on the Oslo Euronext Growth in late June. I would like to take the opportunity to thank everyone involved in making this happen. In conjunction with the IPO, we issued 15.3 million new shares, raising gross proceeds of $75 million. This transaction was very well received and ended up being more than 10 times oversubscribed. Prior to the IPO, we also completed a partial refinancing by issuing a new five-year bond of 500 million with a 9.5% coupon. Following this, we now only have 215 million of debt coming due prior to 2029. As for the quarter itself, we reported revenues of 124 million and an adjusted EBITDA of 70 million on continued strong operational performance across both of our operating entities. Credit for this performance goes to our operational teams who have delivered more than 99% utilization, which is an impressive feat. We exited Q2 with a cash balance of 246 million and 518 million in net debt. In May, we announced that Sea Gems, our 50% owned joint venture, added 1.8 billion of new backlog by successfully recontracting all of its six vessels for three years with Petrobras in Brazil. Today, we also announced that Sea Gems have added a further 74 million of new backlog from contract extensions with the same customer. Last but not least, today we announced our shareholder return program. As we stated during our IPO Roadshow, we believe that our cash flow belongs to our shareholders. And as a result, Paratus intends to return a majority of its excess free cash flow to shareholders. through stable long-term sustainable distributions or share repurchases. Any such distribution will always be subject to allowance under existing indentures and board review. The intention is for this distribution to be on a quarterly basis. As a first step, the board of directors yesterday approved a quarterly cash distribution of 22 cents per share for Q2. The dividend will be payable on or about September 23rd. In addition, the board of directors have approved a share repurchase program of up to 100 million. The timing and amount of any share repurchases will be based on evaluation of market conditions and other factors as permitted by security laws and other legal requirements. The program comes with no fixed expiration date and may be modified, suspended, or discontinued at any time. Now, let's move on to the operational update for each of our two operating entities. We'll begin with CGEMS, and please note that all numbers referred to on this slide is on a 100% basis, of which we own 50%. CGEMS reported Q2 revenues of $104 million for the quarter and an EBITDA of 56 million. Revenues were slightly below Q1, mainly due to an average achieved day rate of $201,000 per day compared to $209,000 per day for Q1. The lower day rate was partially offset by technical utilization of 99.3% in the second quarter versus 98.7% in Q1. OPEX was also slightly lower in Q2, resulting in EBITDA margin of 58% for the quarter versus 55% for Q1. CapEx spending amounted to 11 million for the quarter, and the total backlog stood at 2.1 billion at the end of the quarter. As noted earlier, we also announced today that we have received some extensions following the end of the quarter. Ruby has been awarded a 235-day extension to its existing Petrobras contract, adding a total incremental backlog of 62 million. Similarly, the Esmeralda has received a short-term extension to its existing contract, increasing the duration by 60 days. The total value of the backlog for this extension is 12 million. Both vessels will complete these new commitments prior to the start of the new three-year contracts awarded by Petrobras earlier this year. These extensions will likely also have some positive effect on the CAPEX spending this year due to the delayed startup of the new three-year contracts. Overall, the fleet is now fully contracted until late 2027 and well into 2028 in some cases. Moving over to Fontys Energy. Our wholly-owned drilling company reported Q2 revenues of $72 million for the quarter and an EBITDA of $47 million. The notable sequential increase in revenues was due to recognition of $15 million of revenues that had previously not been billed, as well as higher day rates following the market indexation we achieved in February. Fontys achieved an average contractual rate of $127,000 per day in Q2 versus $118,000 per day in Q1. Technical utilization continued at a very high level with 99.8% for the quarter, largely in line with 99.6% in Q1. Cap expense was only 2 million for the quarter, but we note that the majority of the cap expense this year will occur in the second half. We closed the quarter with a contract backlog of 369 million. With that, I will leave the word over to Barton to walk you through the financial results in some more detail. Thank you, Robert.

As this is the first time that the company releases its quarter and half year report after the IPO, I would like to spend a couple of minutes to explain our way of reporting and presenting our financials. The table to the left, as you can see on the slide, provides a financial summary of our results for the quarter versus previous quarter. The column to the left labeled reported consolidated numbers reflects our financial reporting under the US GAAP, which accounts for our 50% share in the net income from CGEMS based on the so-called equity method. While the column to the right, which we call management reporting group numbers, here we show our financial results, which includes our 50% share of the CGEMS income statement on a proportional basis. which means on a line-by-line basis. This way of presenting reflects the way we operate and report our operational and financial performance in the company. For further information and description of this, margin reporting is defined and described in more detail in our alternative performance measure section in the financial statements and the notes. Just for information, the graphs to the right shows our main KPIs, revenue and EBITDA per segment on a quarterly and half-yearly basis with comparison figures from last year. Okay. Now I will talk more about the main highlights of the group financials for the quarter compared to Q1. Starting from the top with the revenues, the group contract revenues stood at $124 million compared to $109 million in Q1. which represents an increase of $50 million or 14% from previous quarter driven by the revenue increase in Fontys, which is mainly related to the recognition of revenue from previously unveiled escalations, as mentioned by Robert earlier. While the contribution from Sea Gems was broadly in line with Q1. Moving further down into NPL, on the cost side, total rig Total group rig and vessel OPEX in the quarter amounted to $42 million, which is slightly down compared to $43 million in Q1. The SG&A for the group was $9 million compared to $6 million in Q1. And the increase in SG&A from Q1 was mainly due to one-off transaction costs, expense in connection with the IPO placement, and placement of bonds expense the transaction fees were expensed during the Q2. These items along with the higher revenues in Fontys explains increase in our adjusted EBITDA from $56 million in Q1 to $70 million in Q2, which represents an increase of around 20% plus. Moving on to financial expenses, further down in the P&L, the net financial expense amounted to $13 million in Q2, which was down from $80 million in Q1. The decrease in net financial expense relates mainly to unrealized FX gains of CGM's operations in Brazil and unrealized currency reevaluation effects of the tax provisions in Mexico at quarter end. With that, we are pleased to report net income after tax of $34 million for the quarter, representing more than a threefold increase compared to Q1. The half-year results are explained in more detail in our financial statements in the MD&A sections. So I will refer you to that. OK, moving on to cash flows, which is in page 7 of the presentation. At Paratus consolidated level, we exited the quarter with a cash balance of $232 million, which was up with $123 million from last quarter. In the following, I will go through the main cash flow items during the quarter, explaining the increase in cash. Operating cash flow of $54 million was primarily driven by solid operating performance and higher collection of our outstanding receivables. During the quarter, the company collected $90 million from our client in Mexico, up from $60 million in Q1. As we have noted before, we expect the fluctuations in payments in Mexico to continue. CAPEX additions during the quarter were $2 million compared to $3 million in Q1. And as previously announced, pursuant to an agreed plan amongst the joint venture shareholders, including Paratus, CJEMS distributes all excess cash to its shareholders. During Q2, VJV distributed $40 million to Paratus compared to $24 million in Q1. The net proceeds, as you can see on the graph there, from the private placement in relation with the IPO was 73 million dollars net of issue costs and transaction costs and the company paid interest of 16 million dollars which was at the same level as q1 on the top of the reported cash of 232 million dollars as explained here the company's share of the cash in cgms was 40 million dollars as of q2 taking the total group cash to 246 million dollars I have now turned to page eight, and we'll talk about our flexible capital structure. Here we show our current debt and results of the recent partial refinancing in July, as mentioned by Robert. We now have the majority of our debt pushed out to 2029 maturity. We believe that with this capital structure, we have great flexibility in how we can deal with the remaining portion of the 2026 notes of $250 million, down from $715 million. It is also important to note that there is flexibility in our bond terms for distribution to shareholders. As mentioned by Robert, we expect to be able to distribute most of our excess free cash flow to shareholders and still be within our incurances test as per the bond terms. And in addition, as per the terms of the agreement, we maintain a basket of $100 million until end 2017, plus proceeds from the IPO of $75 million, which can be distributed outside of our distribution test. Looking at other selected balance sheet items of importance in this slide, our outstanding accounts receivable The balance was $250 million as of Q2, down from $222 million compared to the previous quarter, Q1. However, please note this number included in the, sorry, the $222 million number also reflects the recognition of previously unbilled revenues of around $20 million, including VAT, which was mentioned earlier. So actually the trend for the receivable balance is therefore more positive than what may be seen from this chart. Okay, and with that, I will give the word back to Robert.

Thanks, Baton. As we close the first half of 2024, we have also narrowed the financial guidance for the year slightly higher due to the strong results achieved during the first half. For the full year, we expect contract revenues in the range of 435 to 475 million. For EBITDA, we now expect adjusted group EBITDA in the range of 220 to 240 million compared to our previous guidance of 210 to 240. CapEx is now expected to be 30 to 45 million dollars compared to our previous guidance of 45 to 55 million dollars. Most of this reduction should be assumed to be deferral into next year. Before we open up for Q&A, I'd just like to reiterate some of the key highlights for Paratus. We have an exceptional cash flow position today, and this will be further improved as we transition over to the new PLSV contracts in Brazil in the next several quarters. We have a very efficient balance sheet with about two turns of leverage. We have flexible terms and most of the maturities, as mentioned before, pushed out to 2029. We have a substantial backlog that with an average remaining contract duration of about three and a half years, and although market fundamentals currently appear very solid for both of our operating segments, this backlog creates security, stability, and visibility on earnings. With that, I think we can hand it back over to Jan, who will inform you on how we conduct the Q&A session.

Dear ladies and gentlemen, we will now be moving on to the Q&A part of the call. If you want to put in your questions for the Q&A sessions, please use the button on the bottom right corner of the player.

Okay, we have received one question from the participant.

So Robert, I think this is a question to you. When do you list the company on the main list?

The uplisting process is something that is ongoing. We are working through the administrative process required. We've said all along that we will do it as soon as practically possible. The target is still to complete this this year. but we'll do it as quickly as we can.

There's another question there.

When will discussions begin for the extensions of the contract for the Fontys fleet?

So we obviously have ongoing discussions with our clients about the existing client about their future requirements. In addition, we have stated that while we're very comfortable with our operations in Mexico, we'll always evaluate operations in other jurisdictions. But I think as you can see, our operation in Mexico is very efficient. But I would say we have dialogues ongoing. We still have some time before we need to finalize or secure new commitments for the Titania and the Oberon, which are the two rigs expiring next year. So I think we will update the market if and when we conclude on something.

Do you still believe Petrobras is undersupplied on TLSV? Can Paratus introduce third-party capacity?

Well, I think Petrobras will have to work under the supply that is available. What we've said since we at least started to have public appearances as a company, we view the full PLSV fleet worldwide as fully occupied, and we saw that in the most recent Petrobras tender. I think Petrobras is obviously mindful that capacity is somewhat set over the next three to four years. I think if you had asked them, they would probably have liked to add one or two more vessels. But I do think that if you look towards the end of the decade, that's where we see the real supply increase that may be requiring more units than what we currently see. Over the next two, three years, I think the fleet is obviously contracted fully, so there's not much you can do about the capacity. If Petrobras wants more assets, then obviously they will have to try to incentivize the market for new assets to be added. But as of today, the fleet is fully occupied. With respect to the third party capacity, the answer is yes. I think it is well known in the market that we did bid a third party asset into the Petrobras tender late last year, the one that was concluded at the beginning of this year. So we have obviously good cooperation with our JV partner, but there is an ability for us to deploy assets through that operational platform. So it's certainly something that we are looking into to see if there's some way we can utilize that platform and the strong relationship and know how that has been built up in Brazil in the last decade.

There's a question about receivables. How should we think about Pemex receivables going forward? Do you have any predictability into timing of repayments?

I think the nature around operations in Mexico will always come with some payments and certainty. I think we've been very transparent about the irregular periods of payments in the past and I think we will try to be as transparent as possible. There are The uncertainty relates to timing of payment, not on the payment itself, which is very important to know. We have collected more than $800 million from our clients since 2021. So I think we think about it as it will remain irregular, probably for periods. It's not something that is ideal, but we've learned to live with it. We understand the situation of Pemex. So I think we will as bottom alluded to in his prepared remarks we will we expect continued fluctuations on the payments but it's more a timing issue than anything else the way we we view it yep there's a question concerning our ownership in archer how do you look at your ownership in archer So it's something that we don't spend a lot of time on in the presentation. From an EV perspective, Archer is a small part of our overall portfolio. That said, I do think it is a very interesting company. I think if you look at the development of this company since the refinancing that took place last year where we participated, they've had steady growth. They operate in... attractive markets with good, strong fundamentals. We think the company provides our portfolio with a very nice optionality. I don't think it's too far-fetched to think that that company can, over time, get a more appropriate capital structure, lower the cost of capital, and potentially talk about dividends even in the future. So I think we're certainly not happy with the valuation of the company, but as I said, it's a It's a very nice option to have in our portfolio.

Could you comment on the jacket market momentum at the moment?

So the jacket market has obviously had its fair share of noise, I would say, in the last several months, beginning with the initial suspensions that we saw in the kingdom in Saudi Arabia. I think the number of suspended rigs are now in the 20s. There was obviously speculations and some noise around the second round. So I think the near-term noise has obviously had some impact on the market. Longer term, overall, we see this as a very strong market. You still have a utilization that is around 90% or slightly above. So the way we view it, the long-term demand should be have the ability to absorb the capacity potentially coming out of Saudi. But near-term, it's certainly not a positive signal that's being sent. But we do believe strongly in the long-term fundamentals in this market. I would also just add that I think Mexico in particular is a market that is somewhat overlooked. It used to sit next to a strong U.S. Gulf of Mexico market. That market has gone away. So it's now a somewhat isolated market. We don't see many rigs moving in or out of the region. So it is a market that is, I think, at least based on the last few quarters, it's more a stable market. But it obviously has its...

it's challenges as well but we're very happy with what we have in Mexico and longer term as I said we do like the the jacket market we got another question regarding the local style the region but I think you have already asked but there's a question from one of the participants given paratus due to achievements including the $500 million bond issues, extending maturities to 2029, and a $1.8 billion backlog in CGMs. How does the company plan to balance its $100 million share repurchase mandate with debt reduction and fleet investments, particularly in light of its net debt position of $518 million in upcoming COPEX? It's a long question.

Yeah, but I think I got the essence of it. I think first and foremost, we are extremely happy with our current balance sheet. As I said, we have about two turns leverage. We've repaid over the last several years. These assets have retired a significant amount of debt. So we feel that we have an efficient use of shareholders' capital with two turns leverage. So we're not with what we know of the market with our backlog and our projected cash flow. We don't see the need to retire debt. We obviously have the 2026 maturities coming in sort of a year and a half time. We do feel we have flexibility to deal with this maturity, either down at the subsidiary level or at Pareto's level. So I think from the net debt perspective, we're very happy with the balance sheet that we have today. Obviously, with the cash flow, with the backlog, we do have the flexibility to reduce that leverage if we want to. But prioritizing cash flow right now, I think the board has made a statement by returning cash to shareholders. How we balance return of capital in the form of cash contribution or distribution to shareholders versus share repurchase I think is something that will be evaluated on the basis of projected cash flow. We've said in our policy that we target a stable cash distribution to shareholders. We do have a very large receivable in Mexico that we expect to unwind over time. So there may be periods where we have excess cash, which may not align with the stable dividend. And this program offers us an opportunity to create and return value to shareholders beyond cash distribution. At the same time, as we've said, we haven't put forward any plans or we're not communicating how we'll use it. We have the opportunity to use the $100 million buyback program, but the board will evaluate how we best use it and when we use it.

Ladies and gentlemen, as a reminder, the Q&A can be used through the button on the bottom right corner of the player. So if you have a question, please put it in through the bottom right corner of the player button. If there appears to be no further questions, I will now hand back to the management for closing remarks.

All right. I think we'd like to thank everyone participating on today's call. And please reach out if you have any questions that was not answered during the call. I look forward to seeing you next time. Thank you. Thank you.