Brooge Energy Ltd (BROG) 2021 Q2 法說會逐字稿

Greetings and welcome to the Brooge Energy Limited half year 2021 earnings results call. (Operator Instructions) As a reminder, this conference is being recorded.

I'll now turn the conference over to your host, Mr. Valter Pinto, Managing Director of KCSA Strategic Communications. Thank you. You may begin.

Thank you, operator, and good morning. Welcome to the Brooge Energy financial results conference call for the six months ended June 30, 2021. On today's call will be Nico Paardenkooper, Chief Executive Officer; Syed Masood, Chief Financial Officer; and Lina Saheb, Chief Strategy Officer.

We'd like to remind everyone that this conference call contains certain forward-looking statements. All statements that address our operating performance, events, or developments that we expect or anticipate occurring in the future are forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions and are not on the information currently available to our management team. Our management team believes these forward-looking statements are reasonable as and when made.

However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements, either as a result of new information, future events or otherwise, except as required by law.

In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events, and developments to differ materially from our historical experiences or our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our risk factors and elsewhere in our annual report on Form 20-F filed with the Securities and Exchange Commission and those described from time to time in other reports when we file with the SEC.

And I'd like to turn the call over to Mr. Nico Paardenkooper, Chief Executive Officer, Brooge Energy. Nico, please go ahead.

Very many thanks, Valter, for the introduction and thank you, everyone, who has joined us on today's call.

As you know this, there continues to be significant volatility across the world, with [practically] disruption to global supply chains. Our storage (inaudible) provides a crucial service at this time, acting as an essential link in oil industry value chain by supporting the infrastructure and storage needs of the industry and enabling the markets to work efficiently.

Oil storage continues to be in especially high demand. And as our terminals are in the ideal geographical location, it has been incredibly important that we demonstrate reliable service at this time. I'm pleased that we have achieved this with our Phase I terminals continuing to operate seamlessly and at full capacity, despite disruptive market conditions.

This reliable and high-quality service has been recognized by the market with BPGIC winning the Global Ports Forum award for the best terminals of the year in the Middle East for the third time in a row. Moreover, so far this year, we have been able to take advantage of the high demand for oil storage and our growing reputation as one of the best providers in the industry by securing new contracts with more attractive terms.

In June, we renewed fixed lease contracts with our clients for 233,072 cubic meters of Phase I storage capacity, at a premium that is 70% higher than the starting fixed lease storage price of the earlier contracts. The contract renewals consist of a total of 190,072 cubic meters signed with two clients on a three-year term, each consisting of one year plus a two-year mutual renewal clause. The remaining 43,000 cubic meters was renewed by a client for a three-year term consisting of six months plus six months, subject to a mutual return for an additional two years. These developments follow the five new customers that we secured in 2020 at higher fixed storage rates and terms of agreements.

This further demonstrates there is resilience of demand for oil storage during this time of macroeconomic uncertainty. We are pleased to have delivered year-over-year growth in revenue as our business benefitted from higher fixed storage rates. Revenue for the six-month period ended June 30, 2021, increased to $23.3 million as compared to $22.9 million for the same period ending June 30, 2020, with a greater portion coming from fixed source revenues as opposed to variable ancillary revenues.

We also commenced operations at our Phase II storage facility and have received our first cargo at the terminals, following the successful completion of all testing and commissioning at the site and receipt of regulatory approvals. This is a major milestone for Brooge Energy and follows months of careful planning, construction, contract negotiations and testing, all while navigating a challenging macro environment which impacted on our supply chain and construction timelines. The Phase II facility, which now includes capacity to store crude oil along with fuel, is officially open and will be contributing revenues in the second half of 2021, with the entire capacity fully contracted for the multi-year take-or-pay contract.

Our Phase II facility was built with the same award-winning standards as our Phase I facility, utilizing some of the latest technology to maximize company performance and efficiency, while reducing operating costs. Our seamless automated storage solutions use a superior facility design that is designed to reduce product losses for the end users and offer ancillary service solutions such as heating and blending. The facility includes clean petroleum product storage capacity as well as crude oil storage capacity, and is fully contracted. Following the launch, BPGIC is now the second largest independent storage operator in the region with a capacity of approximately 1 million cubic meters, or 6.3 million barrels.

Simultaneously, we laid the groundwork for our Phase III storage facility and refinery projects. E&Y completed the feasibility study for Phase III, the result of which support the financial viability of the project. E&Y highlighted upcoming infrastructure investments in the region as a key driver of sustainable storage demand and rising domestic and export demand for refined products as a key driver of the refinery demand. We are very encouraged by these results.

The Phase III expansion project is for 2.5 million cubic meter storage oil facility, a modular 25,000 barrel a day refinery, and a larger 180,000 barrel a day conventional refinery. The successful build out of our Phase III facility would position the company as the largest independent oil storage facility in Fujairah, with capacity to store clean petroleum products, middle distillates, high- and low-sulfur fuel, as well as crudes. The Phase III expected construction period is two years.

The feasibility study indicates that the project has robust economics and reinforces the strength of our business strategy, highlighting that the oil market is expected to continue to be the most important energy source going forward, with the Middle East region continuing to be the leading producer and exporter of crude over the medium to long term.

Our strategic positioning in Fujairah, where there is a high utilization of third-party storage terminals, along with upcoming infrastructure investments, is expected to drive sustainable and growing demand for our storage solutions. To leverage this opportunity as much as possible, we also plan to build out a modular and a conventional refinery, including the capability to comply with the new IMO 2020 low sulfur rule at a time when the UAE is adding to its oil production capacity, which we anticipate will drive demand for refinery services for both the domestic and export market.

We have signed a refinery agreement with an oil trading company for the 25,000 barrel a day modular refinery. We plan to sublease the land to the oil trading company, which will be responsible for constructing the refinery, including bearing the full cost of the construction. When the construction is complete, we will be responsible for operating refinery, earning revenue from tolling fees on a take-or-pay basis. The agreement between BPGIC and the oil trading company includes a tolling contract for a tenure of 20 years, two zero, consisting of a five-year contract to commence upon completion of the construction of the refinery, and three renewal periods of five years each.

With UAE adding to its oil production capacity, which we anticipate will drive demand for refining services to both the domestic and export market, we believe this is an opportune time to enter this segment of the oil industry. This agreement is a low-risk approach to advancing these plans as a toll trading partner will own the asset and take on the cost of construction and the oil price risk, while our focus remains in our area of expertise as the operator of the facility. This is expected to drive additional revenue to Brooge Energy, at favorable EBITDA margins.

We are now looking forward to potentially starting construction to Phase III over the next several months. Meanwhile, we are also in discussions with top global oil majors which have expressed interest in securing portions of the capacity of our Phase III storage facility. Prior to beginning construction, we will ensure that the capacity is fully contracted on a multi-year take-or-pay contract to provide revenue, stability, and visibility.

With that, I will now turn it over to Mr. Syed Masood, our CFO, to talk through our financial results. Syed, the floor is yours.

Thank you, Nico, and welcome, everyone.

Revenue for the six-month period June 30, 2021, was $23.3 million, up from $22.9 million in the same period of the prior year due to higher storage rates. In 2020, higher storage demand was triggered especially after the WTI crash, and a global shortage of storage was highlighted more specifically in Fujairah, which drove the storage fees higher and the demand for ancillary services lower. In addition, the company's high-tech and high-speed facilities with the lowest product loss ratios attracted increasingly more attention, enabling the business to obtain five new customers with high premiums.

The decrease of $4.1 million in ancillary services as compared to the same period of the prior year was offset by $4.5 million from new contracts at higher storage rates and terms of agreement. Ancillary services revenue also includes port charges of $1.3 million that are paid by the company to the port authorities and recharged to the customers.

Direct costs increased by $1.1 million or 17.2% to $7.2 million in the first six months of this year. The largest expense increase was $0.6 million in port expenses due to the increased port activity and movement with the introduction of more customers. Next was an increase of $0.2 million in inventory in preparation for the operating of Phase II operations. The remaining $0.25 million reflects high insurance charges, maintenance charges for the port equipment, and higher [depreciation] for normal increases in office expenses.

Gross profit for the first six-month period was $16.1 million compared with $16.7 million in the same period of the prior year, representing a year-over-year increase of 4.0%. This decrease of $0.6 million in gross profit is a result of an increase in direct costs by $1.1 million, partially offset by increase in revenue by $0.4 million, as I just mentioned.

General and administrative expenses increased by $1 million or 38.9% to $3.7 million in June 2021. The major reasons for the increases are an increase of $0.66 million in professional charges, which includes legal, consultancy and research charges, as well as professional audit fees of $0.06 million due to the audit of BEL and BPGIC for the half year and year end. An increase of $0.39 million in salaries and wages, which is due to the new recruitments starting from April 2020. An increase in insurance charges of $0.2 million, which includes insurance for executive level employees and directors, as well as an additional increase of $0.04 million in Board member fees.

These increases were partially offset by repairs and maintenance cost which decrease during first six months of 2021 by $0.09 million. Due to restrictions associated with the COVID-19 pandemic, traveling expenses decreased by $0.062 million, advertisement expenses decreased by $0.07 million, and business promotion expenses decreased by another $0.087 million.

During first half of the year, finance costs increased 64.8% year over year to $5.6 million from $3.4 million. The main reasons for the increase in finance costs are the finance costs on borrowings and bank charges includes interest expense of $4.8 million on the $200 million bond financing facility as compared to $2.3 million in interest expense for the six-month period ended June 30, 2020, on term loans which were settled in November 2020 with the proceeds from the new bonds.

Adjusted EBITDA was $15.3 million or 65.7% of revenues in the first six months compared with $17 million or 73.9% of revenue for the same period of the prior year. This represented a decline of $1.6 million or 10%.

The main reasons for the adjusted EBITDA decline are as follows. Number one, there was an increase in total direct costs of $1.1 million, as previously discussed. Number two, also general and administrative expenses increased by 39% or $1 million from $2.7 million. Lastly, this overall increase in revenue by $0.3 million and increase in expenses by $2.1 million contributed to the decrease from adjusted EBITDA.

Net profit was $11.1 million in first half 2021 compared to $16.2 million in the same period of 2020. The decrease was primarily due to the higher finance costs and a lower non-cash benefit from changes in fair value of derivative warrant liability.

Our balance sheet remains solid with cash and bank balances of $37.2 million at June 30, 2021. Capital expenditures to June amounted to $14.7 million, with the majority of the funds utilized for Phase II construction. Specifically, these payments were $11.5 million, of which $1.1 million was provided from the company's operating cash flow, and the balance of $10.4 million from the proceeds of the 2020 bond financing facility.

Capital expenditures in the remainder of 2021 are expected to be approximately $14.1 million, which is expected to be funded primarily through cash from operations and from the remainder of the proceeds from the 2020 bond financing facility. These planned capital expenditures will consist primarily of expenditures related to the construction of the Phase II facility.

With that, I will now turn the call over to operator to open the lines for Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) We'll pause a moment to allow for questions.

Marta Szudzichowska, Edison Investment Research.

Hello, congratulations on reaching the milestone and launching Phase II. So the first cargo was announced back in first half of September. And will Phase II be operating at full capacity soon, or does it need a ramp-up period, and how long that will take?

Well, thank you for your question. Nico Paardenkooper over here. The ramp-up period is -- first of all, the facility is fully contracted. And as you correctly mentioned, we have started the operations. Obviously, you cannot bring all the 600,000 cubic in one go. And based on today's information, we anticipate this to be completed between four and six weeks.

Thank you. Just to follow up on Phase II. We know there are contracts for Phase II were already secured in advance. Is there any possibility to renegotiate the contract to get more favorable conditions based on the high demand on storage?

Yes, I think that you need to see the next announcement of the company in the next few days or week. And then your answer has been given on that part. At this moment in time we did not have an answer to issue. (multiple speakers)

Thank you very much.

You're most welcome, and thank you for your questions.

(Operator Instructions) Elvira Scotto, RBC Capital Markets.

Hi, everyone. Just a couple of questions for me. Quickly, on the costs, the cost increases that you outlined in the press release and that you've talked about on the call. I mean, are those all recurring costs? So should we think of this as the new cost run rate?

Thank you, Elvira, and good morning to you. (multiple speakers)

Yes, thank you, Elvira.

Syed, can you please take this question?

Yes, yes, thank you, Elvira. So these costs, basically so this is the full year's cost now for the six months and these are the run rate costs. This will not be going out of the -- in the terms of percentage, this has not been including more than what it is now. These are the [maximum] cost that we have already incurred.

Okay, great. Thank you. And then, where are you on the progress now of contracting Phase III? I think you said you were in discussions with some potential customers, but just curious how far along you are. And do you need to contract the entire 2.5 million cubic meters in order to proceed with construction of Phase III?

Thank you, Elvira. So we haven't announced any of the contracts as yet. The team and myself, we are very close to closing partially of the contract capacity.

Obviously, we only built -- as we always did in Phase I and Phase II -- only built and construct what we have contracted. We're not doing on speculations. The capacity is obviously large, 2.5 million cubic whereby we believe that we can announce, let's say, before we start in the construction or what type of capacity amount we have been contracted.

Does that answer your question, Elvira?

Yes, yes, that answers my question. And then also on the Phase III refinery. Is the 180,000 barrels a day, is that the expectation for the refinery or is that just the maximum size depending on contracting?

The maximum size of the plot of land is -- what we mentioned in the announcement just now -- is 2.5 million cubic storage capacity, a 25,000 barrel [low sulfur] refinery, and 180,000 barrel refinery. The 180,000 barrel refinery on (inaudible) land is the maximum what we can add with having the other two in place, being the low sulfur refinery and the 2.5 million storage capacity.

Okay, great. Thank you very much.

Thank you, Elvira, for your questions.

(Operator Instructions) Gus Chehayeb, Sancta Capital.

Yes. Hello, Nico, Syed. Nice to be in touch with you again and congrats, guys, for getting Phase II launched. That's wonderful. I have just a couple of questions for you. One is, can we expect the gross margins on Phase II -- I mean, once -- after the ramp-up phase, do you expect them to be at the similar levels to Phase I or higher or lower? That's the first question.

And secondly, do you expect any increase in your G&A costs for Phase II? Do you think you need more manpower at the headquarters level and overall G&A for Phase II? Or should it be expected to stay around the same levels it is now?

Good afternoon, Gus. Thank you so much for your question. Let me take the second question from you first and then turn it over for the first question to Syed.

So the number of manpower in the facility, as you know, there are seven people operating the asset. For the $1 million, we don't foresee significant increase of manpower due to the automation. The asset is managed from a control room with the DCS, whereby additional manpower operating that asset is not envisaged to be [if it is] insignificant number for the operations at large.

Syed, can you please take the first question from Gus?

Yes, sure, Nico.

Hi, Gus. So we expect the gross margins to improve, obviously, by Phase II revenues kicking in. Since we have been making almost all the expenses on the [maxim] size as of the June 30 results from the Phase I revenues. So we expect the margins to be improved. And as Nico said, that for the assets, in terms of direct costs, that might be slightly, very slightly, it might increase because of the automation of terminal. It will not be a significant increase.

Wonderful. Thank you, both.

Thank you, Gus, for your questions.

Marta Szudzichowska, Edison Investment Research.

I've got a question on Phase III. So we know the total land capacity for Phase III site is 3.5 million cubic meter but the feasibility study was based on 2.5 million. So is there any scope to extend this storage capacity in the future?

Thank you, Marta. So the length can house 3.5 million cubic storage capacity overall if the land is fully being built with tanks. Because we are adding refinery of up to 180,000 barrel, that means a significant size, roughly about 1 million cubic storage capacity.

Therefore, the land, as we have mentioned in the discussion earlier in our call today, that we can build 2.5 million cubic storage capacity, the 25,000 barrel a day low sulfur refinery and 180,000 barrels a day conventional refinery on that bottom land. So in case the refinery would not materialize, then the land can be constructed with 3.5 million storage cubic capacity and the low sulfur refinery.

Okay. Thank you. So in the light of this different capacity, how is that reflected in a potential capital expenditure for Phase III? So the previously guidance for the presentation available from one year ago, it was $1.1 billion. So how we should think about it?

Marta, the numbers that we produce in our previous IP, they were indeed USD1.1 billion, estimate of course from management side, based on the 3.5 million storage capacity. The EY study revealed that the 2.5 million cubic storage capacity pro rata was not far off what the management has already forecasted back in 2020.

Okay. Thank you.

Does that answer your question, Marta, or do I need to elaborate more?

As a follow-up on this CapEx, so how we should think about the timing of the capital expenditures? Should we expect [tanks] for the 2021 and split evenly between 2022 and 2023 or a --?

The project, obviously, is a project lasting around 24 months to complete, the 2.5 million storage capacity, if we will do it in one go. So pro rata, the construction, obviously, is going as per the project schedule and the project costs and the project financing arrangements or if we would go and embark on such route. So the costs will be prorated over the upcoming 24 months from the moment that we start constructing.

Thank you very much.

Thank you, Marta.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Paardenkooper for any final comments.

Thank you to everyone who joined today's call. This is an exciting time in our developments. We are poised to generate significant growth going forward with Phase II construction now complete and the facility operational. In parallel, we are progressing with our plans for Phase III facility, which will include crude oil capabilities as well as adding more capacity for fuel and clean products and are encouraged by the feasibility study completed by E&Y.

I look forward to providing you with further updates on our progress on future earnings calls. I will now ask the operator to close the lines. Operator, kindly close the lines.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.