Gulf International Services Q.P.S.C. (GISS) Earnings Call Transcript

Good day, and welcome to the Gulf International Services Company Quarter 2 2021 Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Bobby Sarkar. Please go ahead, sir.

Thanks, Simon. Hello. Good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to GISS Gulf International Services Second Quarter 2021 Results Conference Call. So on this call, as usual, from QP's Privatized Companies Affairs Group, we have Mohammed Al-Sulaiti, who is the Manager of Privatized Companies Affairs; Sami Mathlouthi, who's Assistant Manager in Financial Operations; and Riaz Khan, who is the Head of IR and Communications. So we will conduct this conference with first management reviewing the company's results followed by a brief Q&A. I would like to turn the call over now to Riaz. Riaz, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Hope you're all staying safe. Before we go into the business and performance updates of GIS, I would like to mention that this call is purely for investors of GIS, and no media representatives should be attending this call. Moreover, please note that this call is subject to GIS disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call. On 5th of August, GIS released its results for the 6 months period ended 30th of June 2021. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights of GIS. We have structured our call as follows: At first, I will provide you a quick insight on GIS ownership structure, competitive advantages, overall governance and BOD structure. Secondly, Sami will brief you on GIS key operational and financial performance metrics. Later, I will provide you with insights on the segmental performance. And finally, we will open the floor for the Q&A session. To start with, as detailed on Slide #6 of the IR deck, the ownership structure of GIS comprises of Qatar Petroleum with 10% stake being the parent shareholder; whereas GRSIA, with approximately 22% stake, is the largest shareholder. As detailed on Slide #5, Qatar Petroleum provides most of the head office functions through a service level agreement. The operations of GIS subsidiaries are independently managed by their respective Board of Directors, along with the senior management team. The BOD structure is detailed on Slide #7 of the IR presentation. In terms of competitive advantages, as detailed on Slide #8, all of the GIS group companies are strategically placed having significant market share in the respective business sectors within Qatar. For example, drilling business is the only Qatari onshore drilling service provider with 100% market share and having more than 50% market share in the offshore drilling business in Qatar. Similarly, the aviation business of GIS is the sole provider of helicopter services in Qatar's oil and gas service sector, and being one of the largest operator in the MENA region. In terms of insurance business, it is one of the leading insurance providers in Qatar. This is supported by an experienced senior leadership team, having expertise in relevant business segments. In terms of governance structure of GIS, you may refer to Slides 29 and 30 of the IR deck, which covers various aspects of GIS code of corporate governance in detail. I will now hand over to Sami.

Thank you, Riaz. Good afternoon, and thank you all for joining us. During first half of 2021, oil and gas industry showed positive signs of recovery with constructive macroeconomic drivers on the back of effect of vaccination campaigns leading to ease of lockdown restrictions in major markets linking to a heightened economic activity. However, the post-pandemic recovery within the group remained uneven, with aviation and insurance segments reported improved set of results while the macroeconomic tailwinds were not immediately felt within the drilling segment. In terms of group financial performance, as detailed on Slide 12, the group total revenue for the first half of 2021 declined by 8% compared to the same period of last year to reach QAR 1.4 billion. Revenue growth from insurance segment was entirely offset by reduction in revenue from all other segments. For the 6-month period ended, the group average EBITDA of QAR 245 million were a decline of 32% versus same period last year. The group reported a net loss for the first 6 months of 2021 of QAR 0.8 million as compared to a net profit of QAR 54 million for the same period last year. When analyzing the profitability in more detail, as reflected, on Slide 14, the main contributors towards the decline in the bottom line profitability was the overall decline in revenues, which contributed by QAR 127 million negatively towards the current period's bottom line earnings versus same period last year. Direct costs at the group level increased by 2% versus first half and contributed negatively by QAR 21 million to the net earnings. On the other hand, finance costs contributed positively to the bottom line earnings and decreased by 34% on the back of the declining interest rates. General, administrative expenses also declined by 10% on account of continued optimization drive. Moreover, the performance of the group investment portfolio was positively impacted due to the recovery in capital markets and a recovery amounting to QAR 44 million category was noted on account of unrealized gains on revaluation of investment securities when comparing current period investment portfolio performance was the same period last year. Moving on to quarter-on-quarter analysis. Revenue for Q2 2021 represented a moderate increase of 3% compared to Q1 2021, mainly on account of growth in revenue from aviation and drilling segments, offset by a decline in revenue from reinsurance. The overall growth in quarter 2 2021, revenue was mainly attributed to improved flying hours with better MRO activities within the aviation segment and deployment of 3 new rigs within the fleet of Gulfdrill joint venture during Q2 2021. Net profit for Q2 2021 amounted to QAR 4.8 million, increased by 186% compared to quarter 1 2021. The improvement was mainly due to constructive growth in bottom line profitability across all the segments on account of healthier top line by certain segments. However, higher interest rates contributed negatively towards the bottom line. On an overall basis, our base case strategy will continue to focus on market development, focusing on building market share, reducing operating costs and continue to improve utilization of assets. I will now hand over to Riaz to cover the segmental performance.

Thank you, Sami. I will start with the drilling segment, where you may refer to slides 16 till 18. The segment reported a revenue of QAR 440 million for the 6 months period ended 30th of June 2021, down by 16% compared to the same period last year. The reduction in revenue was primarily driven by ongoing risk expansion within the onshore fleet and lowered rig day rates effective since July 2020. The segment reported a net loss of QAR 132 million compared to a net loss of QAR 44 million for the same period last year. This notable increase in net losses was primarily driven by negative growth in the top line. However, this negative growth was partially offset by lowered finance cost. Moving on to the aviation segment, as detailed on slides 19 till 21. Here, the segment reported a total revenue of QAR 338 million for the 6-month period ended 30th of June 2021, down by 1% compared to the same period last year. The negative growth in revenue was mainly on the back of lower revenue from international segment, which was partially offset by increase in MRO-related revenue and improved flying hours. The segment's net profit reached QAR 111 million, representing a growth of 18% compared to the first half of 2020. Profitability improvement was mainly supported by realized savings in operating costs due to lower repair and maintenance expenses. This was slightly offset by overall decline in top line for the segment. Moving on to the insurance segment, as discussed on Slide 22 till 24. Revenue within segment for the 6-month period ended 30th of June 2021 increased by 2% as compared to the same period last year to reach QAR 481 million. This growth in revenue was mainly due to higher premiums from general insurance segment, partially offset by a decline in premiums from the medical line of business. Segment's profitability for first half of 2021 increased by 161% compared to the same period last year. The strong growth in bottom line profitability was mainly supported by significant improvement in premiums coupled with strong performance of investment portfolio on the back of recovery in capital markets. Finally, moving on to the catering segment, as detailed on Slides 25 till 27. The segment reported a revenue of QAR 172 million, with a decline of 24% compared to first half of 2020. This was mainly as a result of lower number of meals served across majority of catering locations due to COVID-19-related restrictions. This was in addition to demobilization of some contracts within both the manpower and catering contracts during Q4 2020, which hampered segment's top line growth trajectory for 2021. The segment reported a net loss of QAR 9.4 million for the 6 months period ended 30th of June 2021 compared to a net profit of QAR 4.7 million for first half of 2020, mainly due to lowered margins and declining revenues. Now I think we can open the floor for the Q&A session.

[Operator Instructions]

Thanks, Simon. This is Bobby again. While we are polling for questions, I have a couple of questions that I can get started with. Could you just refresh our memory with the names of the 2 initial rigs that were deployed in the NFE project? And then the timetable on when exactly were each of these 5 rigs deployed? Then staying on NFE project, are you still comfortable with the -- I think you had mentioned QAR 2.39 billion total value of the contract and single-well expansion options totaling another QAR 2.5 billion. Are these estimates still valid? And then third, just moving upside of the NFE project in drilling, could you let us know which offshore and offshore rigs are working in the second half? And what is the average rig rate and percentage increase for the offshore rigs in the new rigs that you talked about in the presentation that came in effect in July? And how long will these rigs be effective for?

Yes, I will start with the first question, Bobby. So in terms of the new JV rigs that has been deployed, so we have the Java Star, West Tucana and West Telesto. So the Java Star started in 9th of May 2021. West Tucana started in 23 of June 2021, and West Telesto in 31st of May 2021. So those are the 3 rigs that have been deployed in 2021 together with the initial 2 rigs that has been started in 2020. So one has been deployed in 24th of March 2020, and West Castor you see the second one, has started in 14th of August 2020. So those are the main rigs. In terms of your second question relating to the assumptions of those JV rigs, I think most of the assumptions are still valid. We are still yet to reconfirm which are based on the late deployment of the 3 rigs, which are supposed to start in the beginning of Q1 2021. But unfortunately we lost few days in terms of deployment, and this will affect the whole model and will affect the whole assumptions in terms of revenue generation and in terms of net profit.

Okay. And so for the third question, for the rig rates and the percentage increase and what rigs are being deployed, both offshore and onshore?

Yes. So for the rig rates, so the percentage of increase, we are looking at 15% to 20% increase in terms of offshore rig rates. That's based on the new formula that is indexed to the oil price. Offshore rigs, most of the offshore rigs are operating. Onshore rigs, so we have 3 rigs that are supposed to start in Q3 2020. So one of them, which is GDI-7, has already started on 6th of August. And the 2 other rigs, so GDI-4 and GDI-5, they're ready, and they will be deployed during this Q3 2021.

Okay. And offshore rigs, the new rate, the 15%, 20% increase, how long -- what's the effective period of these? Are they effective for the next year? Or how does it work?

Yes, they are effective for the next year. And then a discussion will start with QP in terms of the new rates.

Okay. So until July of next year. Okay. Great. Simon?

On the rate, the rate formula that was agreed, so the rate formula would depend on the oil price in a given quarter. So the formula calculates the average oil price. So as long as oil price, on average in a given quarter is above $40, there's a premium towards the contract price. So given where oil prices are nowadays, you're talking about roughly a 20% increase in rates for Q3. But again, that would really be very dependent on the oil price, let's say, movement and how they trade during a given quarter.

Okay. And so just to -- Mohammed, just to follow up, if, let's say, prices drop below the $40 level, is it possible for the rig rates to come down again? Or how does it work? Like what's the delay period between [indiscernible]?

There's a floor and a cap. There's a floor and a cap. So the floor is $40, and that's the price that we concluded with our clients last year, 1st of July. So that's the floor price. And then the premium kicked in on 1st of July 2021. So if the oil is trading above $40, then there's a premium that is calculated towards the rig rate. And again, similarly, as we've agreed, the floor, the clients as well agreed as ceiling. So the ceiling is $74,000.

Okay. Great. Thank you so much. Simon, can we open up the call to outside questions, please?

[Operator Instructions] We'll now move to our first question over the phone, which comes from Nitin Garg from SICO.

This is Nitin from SICO. I have 2 questions. First one is, from your fleet, how many rigs are looking for work? I mean, how many are idle? I remember attending the call, I think, at the end of FY '20 results. I think I missed last quarter. So that time, 3 onshore rigs were looking for work. So what's the status now? And coming to the rig rates, so last year, I mean, we remember when oil prices went below $40, the rig rates were lowered. Now the rig rates are ranged upwards, from July. So as you told, the premium kicks in after $40. So let's say oil stays above $70, $75. So this ceiling will prevent $74,000 you said or the premium will increase, if you know oil sustained $75?

So at the current oil prices, you are not yet at the ceiling price of $74,000 per day per rig for the offshore fleet. So you're still within the range of the maximum. So there's still a bit of more room. I did not calculate the formula to make sure or to understand what is the ceiling oil price. But that's something that maybe we could get back to you on. As for the onshore rigs that are currently idle, I'll hand it on to Sami. Sami could -- maybe you could answer that question, please?

Yes. [indiscernible], Mohammed.

Just to answer, the offshore fleet is all utilized. It's only on the onshore fleet. So maybe, Sami, you could get back.

Yes. In terms of onshore fleet, so we have 3 rigs, which has been suspended, which are GDI-4, GDI-5 and GDI-7. So GDI-7 has been returned back to operation on 6th of August. GDI-4 and 5, they are available for operation. They're expected to return back during Q3 2021. And then we have GDI-8. That's the only rig which is not utilized. And yes, so based on that, and we have GDI-3, which has been fully impaired last year.

So 2 rigs are idle as of now, 2 onshore rigs?

It's only 1 onshore rig, which is idle, which is GDI-8. And GDI-5 and 7, they are ready, and they will start very soon.

So 7 has started from 6th August, right? 5, you are expecting to start...

4 and 5 are expecting to come back very soon.

Okay. So 8 is idle?

Yes.

GDI-8. Okay. Okay. Just one follow-up on the rig rates. So we still have not reached the ceiling $74,000. Can we ask -- I mean, when oil went below $40, how were the rig rates at that time last year, last year July?

Sami, what was the average offshore rig rates from the contracts last year?

Yes. Same as current rates, but I think it's around $60,000.

$60,000 last year. Okay. And now also $60,000 from July 2021?

Well, from July 2021, the rates has not changed yet.

It would depend on the end of the quarter, where end of the oil price is calculated to -- for the formula to kick in. But at the end of every quarter, they look at the oil price average during the quarter, and then it'd be compensated on the formula and the contract. So at this stage, we know we're in a premium, but we're calculating roughly 20%. It would depend on how the oil price behaves in the remainder of the quarter.

So the premium is above $60,000, right? So $60,000 is the base. So premium is -- when you say 20%, it's on $60,000. Am I correct on this?

Correct.