Aker ASA (OTCPK:AKAAF) Q3 2022 Earnings Conference Call November 4, 2022 4:00 AM ET
Company Participants
Fredrik Berge – Head, Investor Relations
Oyvind Eriksen – President and CEO
Svein Oskar Stoknes – CFO
Conference Call Participants
Fredrik Berge
Hi, everyone and good morning. Welcome to the Presentation of Aker’s Third Quarter Results for 2022. My name is Fredrik Berge, I’m Head of Investor Relations at Aker. We will start today’s presentation with Aker’s President and CEO, Oyvind Eriksen, who will take you through the highlights of the quarter and how the Industrial Holdings portfolio developed. Our CFO, Svein Oskar Stoknes will then cover the financial investments portfolio and the third quarter accounts in more detail. There will be a Q&A session following the presentation. [Operator Instructions]
And with that, I hand it over to Oyvind Eriksen.
Oyvind Eriksen
So thank you, Fredrik. And first and foremost, a heartily welcome to Aker. I think it’s your fourth day in the office. So good morning, everyone. And we are today reporting yet another quarter marked by extreme volatility and uncertainty. Never in my nearly 14 years at the helm of Aker have witnessed geopolitics so potently impact energy markets and energy security.
People in all corners of the world are facing the consequences with many having to endure an economy dismantled by trade and financial sanctions. The turbulent times and hazy outlook are and a reminder of Aker’s strength to keep a steady course, pursue strong partnerships and collaborative efforts and reflect on learnings to grow and make sound strategic decisions.
Despite the volatile markets and uncertainty, we experienced strong momentum across our portfolio. And hence, the Board of Aker ASA today announced the decision to pay a dividend of NOK 14.50 per share in the fourth quarter. This comes on top of the similar amount paid in cash dividend earlier this year.
Aker ended the period with a net asset value of NOK 69 billion or NOK 929 per share, a decrease of 4.1% from the second quarter. The change is mainly explained by value reductions of the investments in Aker BP, Aker Horizons and Aker BioMarine, partly offset by value increase in Aker Solutions.
The Aker share decreased 6.6% in the quarter to NOK 706 per share. This compares to a 5.8% decrease in the Oslo Stock Exchange Benchmark Index. Aker’s value-adjusted equity ratio at the end of the period was 87% and our liquidity reserves stood at NOK 7.4 billion, of which, cash amounted to NOK 2.5 billion. Aker’s gross asset value decreased from NOK 81.6 billion to NOK 79 billion in the third quarter, with 80% in listed assets and cash, the Aker portfolio is still highly liquid.
Our Industrial Holdings portfolio accounted for 85% of our gross asset values. Aker BP remains the largest asset in our portfolio at NOK 41.8 billion and continues to be an important source of liquidity providing valuable upstream cash as we continue to invest in and develop our portfolio along macroeconomic trends.
In total, renewables, software, seafood and marine bio tech made up around 26% of Aker’s gross asset value in the third quarter. Aker has growth platforms in multiple segments, while hydrocarbon-related industries still account for the majority of our Industrial Holdings, we’re allocating more and more resources to renewables, industrial software, seafood and marine bio tech.
For Aker BP, the third quarter was the first quarter of the enlarged Aker BP, following the completion of the Lundin transaction at the end of June. During the period, the two organizations were successfully integrated. The company is currently working systematically to mature field development projects and is aiming to submit 15 PDOs by the end of 2022.
Before making final investment decisions, the company is carefully considering macroeconomic factors, including geopolitical instability, increased interest rates, supply chain disruptions and volatile markets, as well as the impact of the Norwegian government’s proposal to tighten the temporary tax rules.
Overall, Aker BP is well underway towards its goal of becoming an industry-leading, low-cost, low emissions company, positioned to deliver profitable growth into the next decade. The company has a target of net zero emissions by 2030 and is offering a reliable and secure source of energy. Aker BP will continue to drive the digital transformation of the oil and gas industry with the aim to increase productivity and reduce costs and CO2 emissions. Aker’s industrial software companies will be an important part in delivering software solutions, enabling this transformation.
Next is Aker Solutions, which delivered strong results for the period. In the quarter, the company announced an agreement to form a joint venture by combining its subsea business with that of SLB, formerly known as Schlumberger with Subsea 7 as the third JV partner. The joint venture brings together highly complementary businesses, both in terms of products and services, as well as customer and geographical presence.
The agreement further signifies a deepening of Aker’s existing collaboration with SLB with which we share a commitment to innovation such as deploying digital and technology innovation to drive improved performance, while increasing efficiency and reducing emissions. This was the first of two partnerships formed with SLB during the third quarter. I’ll come back to the second partnership between SLB and Cognite shortly.
The transaction between SLB, Aker Solutions and Subsea 7 means that Aker Solutions can both unlock value creation and free up capital for greater investment capacity. Through the transaction, Aker Solutions will receive USD 700 million in total consideration for the sale of at 20% ownership in the joint venture, and we’ll retain another 20% ownership itself.
It will also retain an estimated USD 300 million of cash generation from its Subsea business until closing. The transaction allows Aker Solutions to accelerate its transformation and create a digitally powered engineering and project execution company, enabled by Cognite’s data platform and Aize’s software applications.
I’m confident this makes Aker Solutions more competitive for opportunities, both in ensuring Aker’s energy security through its oil and gas business as well as its ongoing work to take part in the energy transition. And with renewables, Aker Solutions will, over time, continue to grow its business in a gradual and disciplined manner.
Moving on to Aker Horizons. It’s been a turbulent periods of time for renewables stocks. The S&P Global Clean Energy Index has declined 11% this year and Aker Horizons has felt the effects or high volatility. We established Aker Horizons’ current structure in a completely different capital market. As the current energy crisis underscores, the energy transition is urgent, but will, unfortunately, take time and require enormous investments.
Aker and Aker Horizons is responding to the shifting market challenges by simplifying the structure and creating a larger and even more robust Aker Horizons. The company has also initiated dialogue with Aker Asset Management in the future, branded industrial capital partners, which in the future will operate together with other Aker companies, including Aker Horizons and Aker Solutions, to differentiate itself in a highly competitive renewable market segment.
Overall, Aker Horizons is still well positioned for long-term trajectories pointing to a greener future. During the quarter, Aker Horizons combined two of its portfolio companies, Mainstream Renewable Power and Aker Offshore Wind. The combination establishes Mainstream as a global frontrunner in offshore wind and to create a stronger renewable company with a 27 gigawatt portfolio across solar, onshore wind and bottom-fixed and floating offshore wind projects.
The structural changes in the portfolio are in line with Aker Horizon’s clear ownership agenda and the company is well positioned to leverage a world moving towards increased renewable energy production and which will have to both change energy sources and at the same time, use energy more efficiently in order to reach climate goals. The IEA states that global electricity production must be dominated by solar and wind already by 2030.
Moving on to Aker BioMarine. Offshore production volumes in 2022 have improved considerably compared to previous years and total krill meal volumes in the first nine months of the year are 23% higher than the same period last year. Sales across all segments, including in Ingredients and Brands were higher in the third quarter compared to the same period last year.
Moving on to our main unlisted assets, starting with our portfolio of software businesses. First, Cognite. The strategic partnership between Cognite and SLB announced during this quarter is yet another steps to deepen Aker’s collaboration with SLB and gives customers in the global energy sector access to data on an unprecedented scale.
The partnership is a recognition of Cognite’s global potential and is another example that some of the biggest players in oil and gas like SLB, Total and Aramco are choosing Cognite data fusion as the basic architecture for their respective digital tools. These are the kinds of partnerships with the potential to transform how digital workflows and applications are developed and deployed across the energy value chain to reduce costs, optimize production and decrease operational footprint.
Together, SLB and Cognite can deliver a step change for industrial digitalization at scale, not unlike the ongoing work with Cognite’s joint venture with Aramco called CNTXT, which aims to support industrial digitalization in the Kingdom of Saudi Arabia and the region. Furthermore, the agreement with SLB is a massive opportunity for Cognite to embed Cognite Data Fusion within existing SLB customers operations, gaining access to a huge network of customers across geographies and demonstrating Cognite Data Fusion’s readiness for scalability in the industrial data hub space.
After quarter end, Cognite also announced the signing of another exciting strategic partnership with Rockwell Automation. One of the largest industrial automation companies in the world with a dominant presence in North America.
Together, Cognite and Rockwell will develop a unified Edge-to-Cloud Industrial Data Hub-offering for the manufacturing industry. The announcement heralds Cognite’s first major OEM partnership in North America, where Cognite Data Fusion will serve as an integral data foundation across Rockwell’s software offering.
Our other software company, Aize is an industrial software application company, enabling businesses to visualize, navigate, collaborate and work on the digital representation of an asset. In the period, Aize has deployed software for project execution in the NOAKA field development and further signed two pilots in new regions with one of its key customers, a global oil major, and a one-year contract with a new customer, a North American oil company.
Aker Energy, our oil and gas company in Ghana, has completed feed and prepared a revised plan of development for the Pecan project. However, due to uncertainties like supply chain constraints, inflation and the consequences of the war in Ukraine, the plan of development will not be submitted until the challenges have been resolved.
Lastly, SalMar Aker Ocean. Maintenance and upgrade of Ocean Farm 1 is progressing according to plan. The units is currently at Aker Solutions’ yard in Verdal. Next production cycle for Ocean Farm 1 is planned to commence in the spring of 2023. SalMar Aker Ocean has worked towards a final investment decision on a new semi-offshore unit named Ocean Farm 2. There is also an ongoing process for design of the Smart Fish Farm offshore unit.
During the quarter, SalMar Aker Ocean continued its collaboration with Norwegian authorities, the aquaculture industry and other interested stakeholders for the establishment of regulatory frameworks for offshore and semi-offshore salmon farming. This work now also includes the effects related to the proposed resource tax system. SalMar Aker Ocean is committed to new offshore investments as soon as an overall and predictable regulatory framework is in place.
Well, that’s concludes my portion of today’s presentation. Now I hand it over to Svein Oskar, who will take you through the financials for the quarter.
Svein Oskar Stoknes
Thank you, Oyvind and good morning. I will start out spending a few minutes on Aker’s financial investments before I go through the third quarter results in some more detail. The Financial Investments portfolio accounted for 15% of Aker’s total assets or NOK 11.9 billion, up NOK 410 million from the previous quarter. This is mainly due to an increase in cash holdings of NOK 467 million and investments in Aker Asset Management Holding of NOK 219 million.
This was partly offset by a value decrease for our listed financial investments of NOK 329 million, and a lower value related to the AMSC total return swap agreements of NOK 104 million. AMSC is formerly known as American Shipping Company. As before, the main components on the Financial Investments are cash listed financial investments, real estate investments and interest-bearing receivables, all of which I will now go through in some more detail.
Then as usual, starting with cash. Our cash holdings represented 3% of Aker’s gross asset value or NOK 2.5 billion. This is up NOK 0.5 billion from the previous quarter. The cash inflows were primarily NOK 2 billion from the issuance of two new unsecured green bonds and dividends received from Aker BP and AMSC of the equivalent to NOK 706 million.
The main cash outflows in the quarter were loans to and equity investments in portfolio companies of NOK 215 million, of which, NOK 155 million equity in Aker Asset Management Holding and a NOK 50 million loan to Alma Clean Power. Other cash outflows were primarily debt repayment of NOK 1.9 billion. Payments for operating expenses and net interest were NOK 160 million in the quarter. And our liquidity reserve was a solid NOK 7.4 billion, including undrawn credit facilities of NOK 4.8 billion.
Listed investments included in our financial portfolio represented about 2% of Aker’s total assets at the end of the quarter or NOK 1.9 billion. The total value of this portfolio decreased by NOK 329 million in the third quarter, mainly explained by value decreases of our positions in Solstad Offshore of NOK 241 million and in AMSC. The equity investment in AMSC had a value decrease of NOK 69 million in the quarter. The TRS agreements related to the same company decreased in value by NOK 104 million. In addition, Aker posted a total dividend income from AMSC of NOK 35 million in the quarter.
Next, real estate and other financial investments. Combined, the two represented 9% of Aker’s gross asset value or NOK 7.5 billion in total. Aker’s real estate holding, Aker Property Group stood at the book value of NOK 973 million at the end of the quarter. Interest-bearing receivables totaled NOK 4.2 billion, including a NOK 2 billion loan and a NOK 1.2 billion convertible loan to Aker Horizons. Other equity investments totaled NOK 1.4 billion, of which, the main components are related to our investments in the company’s Abelee, Aker Asset Management Holding, Seetee and Clara.
Fixed and other interest-free assets totaled NOK 908 million. The increase in interest-bearing receivables is mainly explained by a loan to Alma Clean Power of NOK 50 million, and the increase in other equity investments is mainly explained by the investment in Aker Asset Management Holding of NOK 219 million. The decrease in other interest-free assets is mainly explained by negative value development of the previously mentioned TRS agreements related to AMSC.
Then let’s move to the third quarter financial highlights for Aker ASA and Holding companies. And let me start with the balance sheet. The book value of our investments is down NOK 1.3 billion in the quarter. This is mainly explained by negative value changes in Aker Horizons of NOK 1 billion, Aker BioMarine at NOK 330 million and Solstad Offshore of NOK 241 million. This is partly offset by the increased investments in Aker Asset Management Holding of NOK 219 million. The book value of our assets was NOK 35.7 billion.
And in our accounts, we use the lowest of historic cost and market values. The fair value adjustment illustrated in gray color on this slide was down in the quarter to NOK 43.2 billion from NOK 45.1 billion in the second quarter. This is mainly explained by a negative value adjustment in Aker BP of NOK 3.9 billion, offset by a positive value adjustment in Aker Solutions of NOK 2.2 billion. The gross asset value stood at NOK 79 billion at the end of the quarter, down from NOK 81.6 billion at the end of the second quarter.
Aker’s liabilities consisted of a bond debt of NOK 5.6 billion, of which, two new green bonds of in total NOK 2 billion. In addition to US dollar-denominated bank loan of NOK 2.2 billion and Norwegian kroner-denominated bank loan of NOK 1 billion and a NOK 1.1 billion euro-denominated loan.
The book equity was NOK 25.8 billion, down NOK 1.1 billion, explained by loss before tax in the quarter. If we adjust for fair values of our listed assets and Cognite, we get our net asset value of NOK 69 billion at the end of the third quarter. The net asset value per share was NOK 929 and the value-adjusted equity ratio was 87%.
Our total interest-bearing debt was NOK 9.8 billion, which is up NOK 271 million from the previous quarter, mainly due to the issuance of new debt and foreign exchange effects, offset by debt repayments.
On the back of the BBB- investment grade rating from Scope in August, we issued two new unsecured green bonds in fixed and floating tranches, totaling NOK 2 billion in September. Aker also bought back NOK 420 million of the AKER14 bond in conjunction with the new bond issues. In addition, we repaid the AKER09 bond at maturity in September with NOK 1 billion and a total of USD 50 million of bank loans was repaid in the quarter. This means, the NOK equivalent of about NOK 3.2 billion of bank loans is currently outstanding with approximately NOK 4.8 billion available to draw.
The average debt maturity at the end of the quarter was 2.5 years. Maturity of the bank facilities are 3 years with two one-year extension options for NOK 4 billion and 5 years maturity for the remaining NOK 4 billion. Taking into account, available credit lines and extension options on the bank loans, the implicit maturity of the entire loan portfolio is down 4.3 years.
Then to the income statement. The operating expenses for the third quarter were NOK 82 million. The net value change in the quarter was negative NOK 1.5 billion, mainly explained by value reductions in Aker Horizons of NOK 1 billion, Aker BioMarine of NOK 330 million and Solstad Offshore of NOK 241 million.
Our net other financial items were positive NOK 508 million, mainly explained by dividend income of NOK 718 million. This was partly offset by negative value development of the TRS agreements in AMSC of NOK 150 million and foreign exchange effects of NOK 65 million. And the loss before tax was then NOK 1.1 billion in the quarter.
Finally, as also announced this morning, Aker’s Board of Directors has approved to pay a cash dividend of NOK 14.50 per share in the fourth quarter. This will bring the total dividend paid in 2022 to NOK 29 per share. And the Aker share will trade ex-dividend on the 8th of November.
Thank you. That was the end of today’s presentation, and we can then move on to take potential questions.
Question-and-Answer Session
A – Fredrik Berge
Okay. We have received a couple of questions. The first one is about SalMar Aker Ocean. Are you dependent on adjustments or CapEx deduction mechanisms to the resource tax to see a viable business case for SalMar Aker Ocean?
Oyvind Eriksen
Well, it’s not clear what the tax system for offshore fish farming will be. So some kind of resource tax is likely, but the details are yet to be discussed and concluded. So it’s just simply – to put it so simply, it’s too early to answer that question.
Fredrik Berge
Okay. The next question is about dividends. How do you think about your dividend policy in an environment with increasing interest rates?
Oyvind Eriksen
Well, Aker has applied the same dividend you know policy, consistently since 2004. And the policy is to pay between 2% and 4% of net asset value in cash dividend to our shareholders annually. So we have no plan to change the current dividend policy.
Fredrik Berge
Thank you. The next question is about Aker Energy. What is the worst case outcome given the current situation with Lukoil?
Oyvind Eriksen
Well, the fact is that the resources are there. So the rational view is that, the resources should be produced, and one day they will. So – but it’s unfortunate that the geopolitical situation and the situation in the supply chain with cost inflation, et cetera, continue to challenge the timing and hence, the decision to postpone yet another time the submission of the PDO. So I’m not here to speculate in worst case, but I’m struggling to see that the natural resources, Ghana and desperate need to produce. I’m struggling to see that they will not one day be produced.
Fredrik Berge
Thank you. The next question is about the energy market. How do you assess the current attractiveness of future investments in oil and gas versus renewable energy? And given the current outlook in oil and gas, does this alter any plans for how you think about additional investments in Aker BP or other oil and gas opportunities?
Oyvind Eriksen
Well, the energy market, we tend to discuss it as one global market. But the fact is, as most of us know, there are huge differences between the regions and between energy sectors. But in this complex landscape, my view is that, Aker has a very good position and is well positioned, both to contribute to energy security and over time and with discipline also contribute to the energy transition.
And as far as investor climate is concerned, which was the question, Aker is experiencing a very attractive investment environment for oil and gas, quite frankly, more attractive than the amount of investment in that sector for the time being, probably once again due to concerns triggered by the longer-term transition. But in oil and gas, we are – Aker is expecting good returns on investments in the years to come.
Renewable is for the time being, far more complex. Once again, huge differences between regions and the renewable sectors. But overall, an imbalance between the high level of ambitions expressed by our political leaders and the financial realities which – on which private companies like Aker then have to make decisions. So my view is that, we need to find a different way to collaborate between public and private sector in order finally to fast track the transition – people in general are expecting.
Fredrik Berge
Thank you. The next question is, could you give some more flavor on the way forward for Aker Asset Management in terms of when you expect the investment operations to start? And what Aker Asset could contribute with and seed capital and when do you target to have first round of external capital raise for Aker Asset Management?
Oyvind Eriksen
Well, for those of you – with some knowledge about [investments] [ph] then you’re probably not surprised when I say that the establishment of Aker Asset Management, which has been rebranded to Industrial Capital Partners. That’s progressing according to plan, with a high amount of discipline. According to that plan, Aker Asset Management or ICP will start raising capital next year and also start investing in the second part of next year.
Fredrik Berge
All right. Thank you. That was our final question today. So thank you, everyone for listening and I wish you a nice Friday.
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