Paratus Energy Svcs Ltd

Good day, everyone. Welcome to this third quarter 2024 results presentation for Apparatus Energy Services Limited. My name is Robert Jensen, and I'm the CEO of Apparatus. Joining me on the call today is Baton Hajimimadi, our CFO. Before we begin today's presentation, I would like to remind all participants that some of the statements on this call may involve forward-looking statements. Forward-looking information involves risks and uncertainties by nature that may cause actual results to defer materially from those projected in such statements. I therefore refer you to our latest public filings. The third quarter results for Pareto's were largely as expected, given our high contract coverage across our assets. We reported Q3 revenues of 110 million, including 8 million of variable revenue previously not recognized in Mexico. Third quarter EBITDA came in at 63 million on the back of solid operational performance and good cost control across both our operating companies. Adjusted for the 8 million previously not recognized revenues in Mexico, third quarter EBITDA was 54 million, essentially flat from 55 million in the second quarter. We reported a net loss of $15 million for the third quarter, which includes a $35 million non-cash charge relating to the partial early redemption of our 2026 notes in July. We exited Q3 with a cash balance of $165 million and $597 million in net debt. In line with our policy of targeting stable long-term distributions to our shareholders, the Board of Directors have authorized a cash distribution to shareholders of 22 cents per share for the third quarter. This is the same level as was distributed for the second quarter. Including this distribution, we will have returned more than 10% of our current market cap to shareholders since early September. The Q3 distribution will be in the form of a return of previously paid-in capital, and the payment will be made on or about December 13th. Following the end of the quarter, we also invested $12 million, our prorate share, in a private placement in Archer to fund the acquisition of wellboard fishing rental and tools. WFR is a US-based well technology player focused on fishing operations in the oil and gas sector. This acquisition will strengthen Archer's presence in the Gulf of Mexico and position the company for the estimated $18 billion deepwater P&A market emerging in the Gulf of Mexico. The acquisition is estimated to have a payback of approximately three years, improve Archer's 2025 EBITDA by 10 to 15%, and increase Archer's cash flow to equity on average by $15 to $20 million annually over the first few years. As shareholders in Archer, we are very excited about this transaction. Combined with the solid sequential earnings growth in Archer in recent quarters, We believe this will be key to unlock and drive long-term value to us as a shareholder. On November 13, Paratus commenced trading on Euronext Oslo Börse, following a successful uplisting from Euronext Growth Oslo. This marked another important milestone for Paratus in 2024, and it enhances our market visibility and attractiveness for investors. In recent months, Sea Gems have added another 32 million of backlog to the Esmeralda, as the vessel continues to perform short-term jobs at very attractive rates. This incremental backlog covers about three months of additional work, which will be executed ahead of the new three-year Petrobras contract. We may explore more opportunities to add a bit more work to the vessel beyond this. Under the new Petrobras contract, we have the flexibility to push the start date to early May 2025. Finally, as part of the contractual market index mechanisms for the Fontys contracts in Mexico, our day rates saw a 4% increase effective from mid-August. Including the adjustment in February, the day rates have now increased by 15% since the start of 2024. Now let's look at the quarterly review for each of our two operating entities. We begin with the CGEMS. And please note that all numbers referred to on this slide are on 100% basis, of which we own 50%. Excuse me. CGEMS reported Q3 revenues of $94 million for the quarter and an EBITDA of $49 million. Revenues in EBITDA saw a modest decline quarter over quarter, due to a combination of longer-than-expected off-hire periods prior to commencement of new contracts, as well as the ONIX completing its first full quarter under its ANALTA contract, which comes at a lower day rate. The average contractual day rate was $186,000 per day in the quarter, compared to $201,000 per day in the previous quarter. Technical utilization came in at 97.7%, a modest decline from the exceptional 99.3 achieved in the second quarter. OPEX and GNA amounted to 17 and 3 million, respectively, which was broadly in line with the previous quarter. Overall, the EBITDA margin dropped to 55% from 58% in the previous quarter, which we expect to be the low point for CGEMS this year. Year-to-date capex spend stands at 19 million, which is lower than expected. This is mainly due to our election to push out the start date for some of our new Petrobras contracts. At the end of the quarter, total backlog for Sea Gems stood at $2 billion. Beyond what we have already mentioned for the Esmeralda, there are no changes to the fleet status as the fleet remains largely contracted until 2028. I would also like to take a minute to give some appreciation to the operations of our JV, In September, Sea Gems received the 2024 Petrobras Best Supplier Award as the best pipeline company working for Petrobras. This is the third time in seven editions that Sea Gems received this award. In addition, Petrobras introduced a new operational assessment methodology in January this year called the Operational Performance Index. We are proud to say that Sea Gems has ranked as number one on this index every single month this year. Now let's move over to Fontys Energy. Our wholly owned drilling company reported Q3 revenues of $63 million, which compares to $72 million in the previous quarter. In the third quarter, we booked $8 million variable revenue for previously unbilled services, which was down $15 million compared to the second quarter. EBITDA for the quarter came in at $39 million compared to $47 million in Q2, But adjusted for the previously mentioned unbilled revenues for both quarters, the third quarter EBITDA was 54 million compared to 55 in Q2. It is important to recognize that this limited sequential decline was achieved despite the planned out-of-service period for the courageous. Including transit time, the rig was off-hire for 58 days in Q3 to install a new crane and simultaneously conduct a UWILD survey. Following completion of the yard stay, the rig had to wait on weather due to the passing of the Hurricane Milton, which caused an additional 14 days of off-hire for the rig in early Q4. Q3 OPEX and GNA came in at 24 million for the quarter versus 25 million in Q2, which contributed positively to the EBITDA. However, the main offsetting factor was the 4% increase to our contractual day rates as a result of the market index mechanism in our contracts. Fontys achieved an average day rate of $135,000 per day in the third quarter, compared to $127,000 per day in Q2. Technical utilization was 99% in Q3 versus 99.8% in Q2. Year-to-date CapEx spend has been $11 million, and we closed the quarter with $317 million remaining contract backlog for our rigs. With that, I'll leave the word over to you, Barton, to walk us through the financial results for Paratus in more detail. Thank you, Robert.

Now, as this is only our second time that we report our quarterly results as a listed company, let me spend a couple of minutes to explain how we present our financials. What's important to note is that the figures here are based on what we call management reporting. Here we present our financial results which includes our 50% share of the CGEMS results on a proportional basis or growth basis. This way of presenting reflects the way we operate and monitor the company's operational and financial performance. However, in our financial reporting under the US GAAP, CGEMS financial results are reported based on the so-called equity method presented brought to this equity fair of the CDEMS net financial results in one line in the P&L and the balance sheet, as opposed to on a line by line basis under the management reporting. Please note that this is only presentational, as there are no differences in the net income or net asset figures. For further information, I refer to our Q3 financial statements for a definition of management reporting, and we have also provided a reconciliation between management reporting and financial reporting in the appendix to this presentation. Okay, now let's start with the review of the Q3 results compared to the previous quarter Q2. Paratus reported a net loss of the tax of $50 million compared to a net income of $34 million in Q2. As one can clearly see from the upper graph to the right, the reported earnings were mainly impacted by a one-time non-cash accounting expense of $35 million related to partial redemption of the 2026 notes, which happened in July. Excluding for this one-time accounting item, Paratus generated net income of $20 million. Additionally, as Robert explained earlier, we reported a modest decline in EBITDA of $7 million, which was mainly driven by lower variable revenues billed and recognized in Fontys and the planned auto service time during the quarter for the Courageous rig. And also lower revenues from season due to lower day rates achievement seasons. This was partially offset by lower SCNA costs of around $6 million compared to Q2, mainly explained by the transaction costs that was booked in Q2 in connection with the, among others, the IPO, bond placement, and the uplisting. Now I will provide a high-level review on a year-to-date basis with comparison to last year. For the first nine months of 2024, we reported a net income after tax of 29 million compared to a net loss of $24 million last year, representing a significant improvement from last year by $53 million in net profits, despite the one-time accounting charges that we booked in relation to the partial redemption of the 2026 notes in Q3. The main drivers for this were as follows. The group achieved an EBITDA of $189 million on a year-to-date basis, which represented an increase of $24 million compared to the same period last year, which was explained by a $39 million revenue increase at Fontys, primarily driven by strong technical performance, combined with achievement of additional invoicing of previously unrecognized variable revenues, and increase in contractual day rates. The increase in revenues of $39 million, as mentioned earlier by Robert, comes despite the planned downtime for the Courageous rig in Q3. Increase in revenues at Fountains was partially offset by low reported revenues from Sea Gems by $60 million, our share, primarily driven by a combination of longer than expected off-fire periods for the Onyx and Jade vessels prior to commencement of new contracts, as well as the Onyx operating at first sorry, our first full quarter unresolved contracts at lower day rates. The other factors which contributed to the improved net income for 2024 compared to last year were mainly due to lower depreciation and amortization charges and lower non-cash and or one-time accounting transactions mainly related to the early termination of a management incentive deed procedural in 2023. which counts for about 13 million of the variance and lower use gap amortization of historical acquisition costs. This was partially offset by the higher financial expenses as explained earlier. Now let's look at the cash movement during the quarter. And now we're on page six. At Paratus consolidated level, We exited the quarter with a cash balance of $150 million compared to $232 million as of Q2. The movement in cash during the quarter was mainly impacted by no collections of outstanding receivables in Mexico, settlement and payment of 2017 tax audit claims in Mexico, and payments to vendors related to transactional costs in connection with the IPO, partial redemption of 26 nodes, and the bond issuance, which explains the operational cash flow of 45 million negative. The spending of $7 million relates mainly to the installation of the new crane on the during Q3. After distribution from CEGEMS to Inventure amounted to $22 million for the quarter, which were offset, partially offset by net interest payment of $4 million paid during the quarter and around $12 million of costs associated with the partial refinancing of our 2026 note, which was settled in July. Finally, we paid $37 million to our shareholders during the quarter, following which we ended the quarter with a cash balance of $150 million. On the top of this, the company share of the cash in the CGEMS JV was $50 million as of Q3, taking the total group cash balance to $165 million. Moving over to page seven to talk about our capital structure and selected balance sheet items. There were no changes to our capital structure during the quarter. As mentioned earlier, we exited the Q3 with a group cash balance of $165 million and $597 million in net debt, which brings our net leverage ratio to 2.2 as of Q3. We continue to have discussions with various capital providers with respect to refinancing of the remaining $250 million of the 2026 notes. These will not become current in our balance sheet until Q3 report, meaning that we will still maintain the flexibility in how we pursue a refinancing. On the other selected balance sheet items, as you can see from the chart on the lower right side, our accounts receivable in Mexico increased to $283 million at the end of Q3, up from $215 at the end of the second quarter. This increase was due to no payment being received from the customer during the third quarter, consistent with trends among the other similar service companies in Mexico. The increase, please note that increase in the receivables reflects billed and accrued revenues for the third quarter, as well as the $8 million, which was invoiced for previously unbilled services mentioned earlier. And with that, I will hand the word back to Robert.

Thank you, Baton. Let's move over to Mexico. So last week we announced that Fontys has received notification from its client that Courageous will temporarily cease operations for 45 days due to delays in the client's preparatory activities at its next location. Operations at the Courageous current location is expected to be completed in early December, upon which the rig will remain in standby at its location for 45 days. The contracts for all Fontes-Jacobs permit activity to be temporarily ceased for up to 45 days during the contract term, without revenue being generated during such a period. However, any deferred days will extend the contract duration accordingly. The estimated EBITDA impact of a 45-day suspension through the end of the firm contract is expected to be about $3 million. If you multiply this number to account for five rigs, you will see that our overall contractual off-hire exposure is limited. In recent weeks, we have seen several public commentaries by the client and the newly appointed administration in Mexico around finding constructive solutions to resolve issues with delayed payments. It has been stated that suppliers and contractors are essential to the oil and gas operations. and to support the target of increased oil production in Mexico going forward. As we have stated on several occasions, payment irregularities have been common in relation to our operations in Mexico for several years, and more so during election years that bring change to the top management of the national oil company. As indicated on the slide on screen, we have since 2021 booked revenues of $825 million. Gross collections in the same period has been 850 million. In this period, there has been multiple periods where payment irregularities have been present. But ultimately, we have always collected what we are entitled to. Bear in mind that the current activity level in Mexico remain well below previous peak levels. And our client, like many other oil companies, is working hard just to offset depletion rates. We believe that achieving their target oil production of 1.8 million barrels per day will not be accomplished by reducing the rig count over the long term. We would therefore expect any reduction in activity to be short-term adjustments during which we have all our rigs on contract. Over the longer term, we would not be surprised if there will be a need for more rigs than what is currently operating in the country. Consequently, we remain optimistic about the prospect for future work for our rigs in Mexico. We get a lot of questions from the equity investors about Mexico and about our client. But it should be noted that the general credit market appears to be much more relaxed about the credit risk for our client now compared to only a few months ago. Both CDS and bonds are generally indicating a much lower risk of default for our client in Mexico. While we expect the situation in Mexico to improve by payments resuming, as it has in the past, we believe there are financial instruments available in the market that can be used to monetize a receivable balance if we wish to improve our liquidity. We have several incoming requests from parties wishing to explore this, and we have recently had several discussions with counterparties who have shown an interest in such structures. These are structures which have previously been utilized by other companies in the oil service industry. Ultimately, the cost associated with such structures will determine if and when we decide to pursue this, which will be evaluated in the context of our bond coupon and our distribution policy. The receivable balance as of Q3 was 283 million. And depending on the cost and the structure, it could obviously be very interesting to accelerate the conversion of some of this to cash. As we announced last week, we have revised up our 2024 full year guidance. This increase comes on the back of stronger than expected operational execution year to date and reflects a combination of several factors, including higher than expected variable revenues for previously unbilled services in Mexico during the year, increased day rates for our rigs in Mexico because of the market index mechanism, increased revenues generated in Brazil, mainly from the short-term contracts secured for the Esmeralda, and finally, lower than expected costs across the group structure. Based on this, we now expect full-year 2024 revenues to come in between 455 to 475 million compared to 435 to 475 million previously. We expect full year 2024 EBITDA to be in the range of 250 to 260 million, up from 220 to 240 million previously. As for our CapEx, we're also reducing the guidance for 2024 to be around $30 million compared to our previous guidance range of 30 to 45 million. The majority of this capex reduction will be shifted into 2025 as projects have not been canceled, but largely deferred. For transparency, we have included a quarterly breakdown of our capex for each of our two operating companies on the chart. Please note that the CGEMS numbers shown here are on 50% basis to reflect our share of the capex. And with that, I think we can open up for Q&A.

So Jan, please go ahead. As a reminder, during this Q&A section, you can ask your questions via text through the Q&A button on the bottom right corner of the player. Thank you, Jan. Let's start with the first question that we have received in the Q&A.

The first question relates to the Jacobs in Mexico. What is the outlook for further work after end of contracts for the Fontys fleet, and what is the status of the negotiation discussions for that?

Right, so I think we obviously have ongoing discussions with our existing client about their future requirements. I think based on conversations that we have had, we remain positive that there is a need for our jackups beyond our contractual terms for these rigs. We also have ongoing discussions with other clients outside of Mexico. However, the situation And the general jacket market, given what's happened in the Middle East, has obviously had an impact. But I think ultimately we will evaluate the opportunities inside of Mexico and outside against each other before we decide. But I think we are like to remind everyone we're very comfortable with being in Mexico. We've been there for a decade. Our operations have always been and continue to be very efficient. So I think when we're looking at where we are today and talking about contracts, we will obviously communicate to the market if and when we have something concrete to discuss. But I think we certainly do look at Mexico as a market where our rigs will remain there if we want them to remain there. So we're quite comfortable with looking at the fleet profile. And we still have some time before we need to conclude anything on the Titania and then

Secondly, on the Oberon. The other question relates to

where will be in the check of debtors to Pemex? And then related to the question as well, how much longer would you wait on payments from Pemex before you would reconsider the dividend policy?

Those questions are a little bit different, but I think we obviously, we're not going to be speculating the client's ability or their liquidity. But I think what we obviously take a lot of comfort in, as we said in the prepared remark as well, there's been several news articles confirming that our client is working with a consortium of banks to provide financial support to their service suppliers. We've seen the Mexican president as well as the CEO or the C-suite of our client talking about a payment plan that they are working on in an effort to help or to repay the debt to their vendors. The president also said that Pemex will never fail on its debt payment. So I think we're not going to speculate about the sustainability. But I think when you talk about sort of the payments in Mexico, I think we've obviously... As we've said before, as we've said during the last conference call, it's common for us to see payment irregularities during the year. It's not something that is new to us. It's something we just need to plan around. Based on the history, it would probably be wise to continue to plan around the irregularities. They can be lumpy and fluctuate, but we have always collected what we have been entitled to. We take fluctuation in payments into account when we consider cash flows and our cash needs. So I think we expect payments to resume as they've always done in the past. We hope it will take place shortly. At the same time, this is ultimately something we cannot control. And that's why we said we are looking at other options, something that is within our control. including monetizing part of our receivables. We obviously have a significant receivable balance, and we have discussions with several parties, and we're exploring options for how we could potentially monetize this. If you look at the size of the receivable, it's about one-third of our market cap. So if you look at this in the context of our bond and our distribution policy, It's obviously material to us if we can be able to monetize something like this. I think you can probably imagine roughly what the structure will look like if you look towards other public oil service companies that have been involved in these type of arrangements before. Some of these financial institutions will probably be involved again, and we are therefore talking to these institutions to see if there's something we can consider. So I think while we have an ongoing dialogue, we're not able to discuss much more than that. But that is obviously something that factors into our decision about future dividend payments. Any dividend or cash distribution will ultimately be decided by the board. But I think we're obviously planning and expecting a resumption of payments in the near term. But To be prudent, as we said, we are looking at other ways, including monetizing our receivable balance, which will certainly be supportive to all cash needs of the business.

There's a short question here about the cash position at Fontys on restricted cash. How much of the Fontys cash is restricted cash? I refer to the Note 6 in our quarterly interim report. You will find the overview of, you will find the split in cash. In Note 6, you see that the restricted carry was $22 million. As of Q3, we also have disclosed that we have released Around half of it in Q4.

So around $11 million we have released in Q4.

There's a question here about the Mexico market. Do you still intend to expand your footprint outside of Mexico to avoid late payments?

I think as we've said before, we obviously have... I said it on the call just a few minutes ago. We have ongoing discussions with other potential clients outside of Mexico, also other clients outside of the one we have in Mexico today. We're obviously interested in diversifying our client mix going forward. At the same time, we have contracts that we need to run out. That said, if you look at the history of these assets, they've been working in Mexico for 10 years. as I said before on the call, we've always been able to collect what we are owed. So we do think that this is a good home for our rigs. But again, if we see better opportunities outside of Mexico, we will obviously evaluate that and see if that's the best for our shareholders. And I think right now, obviously, there is some impact from what's happening in the Middle East, but ultimately, We're looking long term and we will see where our rigs will be best fitted.

There's a question if we can provide some clarification on the courageous situation. How long do you believe the suspension will last and are there any signals from Pemex that more rigs will be suspended?

So today we have no indications that they want to suspend or cease operations on any of our other rigs. I think ultimately it will probably be a factor of when payments start to resume. I think if you look at the overall market in Mexico right now, I think it's been well documented that there are issues with payments. That has a knock-on effect across the whole value chain. But I think our contracts are very solid. And on that front, we have, as we've announced, the client has the ability to put operations on hold for up to 45 days during the length of the contract. That is the financial implications that will come to us if any other rigs are being put on hold. But as of today, no indications on anything else. With respect to the courageous, the discussions are obviously ongoing with the client, but as we said in our initial press release, the reason for the rig being put on standby is because the next location where the rig was supposed to move, the platform or the installation from which the rig would be drilling next to was not available or it was not ready to receive the rig. So the 45 days is what we have been informed by the client, and that's what we expect the standby to be.

There are two questions that seem to be related. Are you able to provide a ballpark estimate of the cost involved in monetizing your receivables if you were to do so today? And what is the typical cost, for example, for local factoring or credit default swaps, CDS?

Well, I think we're not going to get into the details exactly on what the cost would be. I think it's also a little bit premature for us to be able to communicate that. But I think, as I said, you can probably imagine what the structure would look like. There's a question about the CDS. There's obviously some of the structures we're looking at will be sort of involving that type of protection mechanism. CDS for the client have traded insignificantly over in the last several months. I think they're below 400 basis points at this stage. But again, it's premature for us to say what the cost will look like. But I think for us, ultimately, we need to look at how much can we monetize, if we can monetize it, and then evaluate that up against where we see payment regularities in Mexico and if it's to the best of our shareholders to take or to pay that cost. But I also think that we are looking at structures that come with very limited costs. So I think, again, we don't want to put too much speculation out on this call because we are evaluating these structures as we speak.

But we'll report to the market if and when we have something concrete. Another question with regards to rig suspensions.

Can Pemex suspend a rig multiple times for 45 days each or only once during the contract?

In our contracts, the client has the ability to suspend operations for up to 45 days throughout the contract. So if you've used up 45 days, there is no more ability to utilize that. an accumulated number of days, which is 45 per rig per contract.

Any more updates on the reprocessed programs?

We have debated this internally during the quarter, but as you know, as of today, we have not utilized any portion of the authorization. If and when we do, this will be communicated to the markets We focus on a distribution policy of targeting stable long-term distribution to shareholders. And in setting this policy, I think we try to account for fluctuations in payment from our client in Mexico. During months of lower collection, it may be more prudent for the company not to utilize the buyback program, particularly given that we had an opportunity, for instance, to invest in Archer. So I think Ultimately, we will evaluate that on a case by case and see if and when we decide to utilize that authorization.

where are you seeing the most opportunities to refinance the 2026 debt?

I think what Barton said on the call in his prepared remarks is fairly accurate. I think we still have some time. A year from now, it will become current on our balance. As we said before, we have the flexibility to look at debt elsewhere in the structure. We still have significant backlog across at Paratus level. But obviously in Sea Gems, we have the concentrated backlog. So we are still in discussions with potential lenders in that company that may be utilized in some shape or form to refinance the 26 debt. Then at the same time, we do think the credit market is still open if we do want to do something at the Paratus level. So ultimately, I think we do have that ability, that flexibility that we will monitor for a few more months or going into 2025 and then decide what route is best for the company over the longer term.

How surprised is the company that the stock has been this cool received thus far? especially given the substantial insider purchases earlier this fall. And can you explain why Gerevan is listed with 29% on the FIP instead of 32%?

Well, I... The market is obviously, I think there are multiple ways to look at this, right? I mean, we obviously see the stock price and how it has performed. I think there are a number of factors playing into this. Obviously, the overall jackup market has been hit with some news that are not necessarily positive. I think that is isolated, impacting any company owning jackups. Secondly, I think with the ongoing disruptions on payments in Mexico, there is obviously some risk associated with that, and people are not perhaps as comfortable with the situation as we are. As we've tried to be transparent, we've always said that there will be payment irregularities in Mexico. But I think if you look at that isolated, the market may have – been caught a bit by surprise. People were not as familiar with this as we expected. We're still very comfortable in the situation. We've seen this before. We've been here for 10 years. But I think the market reacting negatively to this is not super surprising. But at the same time, what we can do is control what we can control and deliver to shareholders what we've promised to deliver. And then hopefully we'll eventually see the the market take care of itself. With respect to why that specific shareholder is listed with 29 instead of 32%, I think if you look at the prospectus filings, there's been a natural dilution through the IPO and the private placement that we did earlier this year. But we don't want to comment on individual shareholders trading or positions.

Does any interest accrue on overdue receivables after a period of time? And also, do you have any FX exposure on the receivables, or are they all in US dollars?

The simple answer is no to both of them. Essentially, no interests are being booked on the receivable. On the FX, it's highly limited FX exposure. Um, so we're a USD denominated company in Mexico.

There's another question about the Mexican market.

Is the Mexican market short of jack-up rigs?

I think ultimately that depends on your long-term, where you believe the Mexican oil production is going to be targeted. I think if you look at where they're producing today versus what they're, at least the public target is, we think you need to increase the number of rigs rather than reduce it. As I said in the prepared remarks, we're still seeing activity well short of the previous peaks. There has been periods with more than 50 rigs in Mexico or 32 today. So I do think that to increase production, that's generally not done by reducing the rig count, certainly not in a mature basin as the Mexican Gulf. So ultimately, it depends on the long-term strategies of the oil companies. But as I said, we are optimistic about the future for our rigs. The Mexican market is somewhat isolated. So the rigs that are in that market, we at least think will be needed to meet the production targets in the country.