Fourth quarter 2020: Record results and tectonic shifts
It is with deep sadness that I begin this letter with a few words about Finn Berg Jacobsen, who passed away peacefully on 13 February at the age of 80. Finn was the deputy chair of Aker’s Board of Directors, the chairman of the Audit Committee, a board member of Cognite, and a trusted advisor and friend. Finn used to encourage me to make these letters more personal. This quarter it is difficult to not make it too personal. It is my first time penning a quarterly letter without Finn’s input and feedback. He will be both missed and remembered for his invaluable contributions through his analytical and technical expertise, strategic abilities, and intelligent humor. Yet, Finn’s presence is still imprinted on these pages, as he has left a lasting mark on Aker and our development the last 20 years. His final quarter with us delivered the best results in our company’s history.
“There are decades when nothing happens; and there are weeks where decades happen,” a leader once said. A poignant description of the last few months in Aker. Global capital allocation is undergoing a tectonic shift and industry and market transitions that might have taken years to happen have instead unfolded in a matter of months. In all of this, Aker’s method of work remains steadfast. We combine organic growth with transaction opportunities, transition when the time is right, and continue to build on the shoulders of existing capabilities. The result was the largest quarterly value increase Aker has seen.
In the fourth quarter, Aker’s Net Asset Value increased by a record NOK 22.4 billion to NOK 53.4 billion. The return to shareholders was 41 percent, including dividend paid, compared to 14 percent in the benchmark index. The underlying results paint the picture: Aker Solutions and Aker BP increased 78 percent and 49 percent, respectively, in the quarter, and our new renewables investment platform, Aker Horizons, increased 122 percent. In other words: a combination of organic growth and M&A activity has positioned Aker with a diversified portfolio along several global trajectories and set the stage for future value creation.
Strong (and increasing) forces are driving us in a greener direction. A shift is underway towards a fundamental reallocation of capital. The number of sustainable investment options have exploded, as has the flow of capital and resources. But as ESG-focused stocks significantly outperform their parent benchmarks, the global economy remains carbon intensive. Global oil demand, which fell by 25 percent in April, has rebounded. And as long as demand for energy is rising, the global population growing, and large parts of the world urbanizing, demand for and consumption of oil and gas will continue for years to come. Nonetheless, the pandemic has placed the oil and gas industry in a fast-forward scenario. A sector that is used to volatility and is cyclical by nature has in a matter of months undergone a collective grappling with how to act, redefined strategies, diversified operations, and redeployed capital. As we enter 2021, the oil and gas industry is beginning to separate the pioneers from the followers.
Aker BP remains Aker’s largest asset and will continue to play an important role in our portfolio going forward. As an E&P company, it is faced with the challenge of bridging continued demand for its product with a world in a climate crisis. Aker BP is rising to the occasion. Its future-oriented strategy has it producing smarter, more efficiently and more sustainably than ever. It is leveraging partnerships and deploying technology to understand how to reduce the footprint of its operations and product. Strong organic growth at low cost and low emissions, coupled with a strong upstream cash contribution, means Aker BP remains an important and attractive value and liquid investment in Aker’s portfolio as we carve out our path forward in the energy transition.
Digitalization and deploying industrial software is paramount to the success of the transition – both in more sustainable production of oil and gas, as well as in enabling optimal and increasing use of renewable energy sources. A key challenge in the global energy transition is the management of intermittent renewable power, like weather-dependent wind and solar. By deploying digital technologies, data can predict patterns of supply and demand, allowing for optimal coordination of when electricity should come from renewables and when it is needed from conventional power plants. At Aker, this is an area we see great promise and in which we are well-positioned for growth, combining software expertise in Cognite and Aize with Aker Horizons’ strengthened renewables portfolio and Aker Solutions’ superior track record within engineering, project management and execution. Yet again, we have an advantage of deep domain expertise across the Aker ecosystem where we can build on the shoulders of our existing capabilities. As Cognite and Aker BP have worked together to create two best-in-class companies, our industrial software experts in Cognite and Aize will be an integral part of the new parts of our portfolio within renewables and green technology. Not least enabled by the invaluable expertise in scaling and commercializing software brought by Cognite’s new strategic partner, Accel.
The ability to continuously adapt is in Aker’s DNA. While there has been no shortage of value-accretive activities in the last few months, this is not in a race for Aker. Rather, it is an execution of our long- term strategy to position ourselves in additional industries where we believe we can create strong shareholder value over time. Aker is not “turning off brown and turning on green” – our diversification is gradual and deliberate, and we transition when the time is right. In fact, the establishment of Aker Horizons exemplifies this strategy. Capabilities and opportunities identified in Aker Solutions formed the first two building blocks with Aker Carbon Capture and Aker Offshore Wind, companies that have seen a significant value increase since their listing. Shortly after the end of the quarter, we were very pleased to announce the next building blocks with the addition of Mainstream Renewable Power to the Aker Horizons portfolio. Mainstream is a highly competent organization with presence in 11 countries and a significant portfolio of renewable projects within onshore and offshore wind and solar.
In addition to adding invaluable competence to the Aker ecosystem, Mainstream further secures Aker Horizons’ foothold in the growing market for hybrid projects, where different renewable technologies can be combined. Aker Horizons’ ‘energy vision’ is to create green value chains for a zero-emission society. This includes having a strong position across 1) energy production, such as wind and solar and converting intermittent renewable energy to baseload, 2) energy transmission, including innovative grid and power transmissions technology and lastly, 3) energy use, including capturing GHG emissions using carbon capture and replacing fossil fuels through clean hydrogen.
And there is no shortage of activities to reach this vision. Aker Horizons recently announced its entry into hydropower with the acquisition of the Norwegian company Rainpower as an entry point. Aker’s history in hydropower traces back to the very start of the industry when Kvaerner developed the first ever Norwegian turbine and formed the basis for an entire Norwegian supplier industry, including Rainpower. Fast forward to 2021, and the story comes full circle. Aker Horizons will use Rainpower as a platform to build a next generation technology company to optimize hydropower developments and operations. In true Aker spirit, we are identifying opportunities to build on our track record and capabilities to drive value creation.
Partnerships are already an integral part of the way we do business. For decades, we have leveraged a combination of transactions and strategic, collaborative efforts to grow and create value. Finding solid, long-term partners with complementary capabilities is a cornerstone of our strategy going forward. The great collaboration with BP as fellow shareholders in Aker BP is an example of the strategy put to life and that has also inspired us to pursue new partnerships. Cognite’s partnership with Accel is one example. Shortly after the end of the fourth quarter, Aker Horizons announced a collaboration with Norwegian industry heavy-hitter, Statkraft, a company that has been making clean energy possible for over a century. Together with Aker Offshore Wind, Aker Horizons will collaborate with Statkraft for offshore wind projects in Norway – where coupling Europe’s largest renewable energy producer with Aker’s 180-year track record and industrial expertise, especially on the NCS, has the potential to redefine Norway as an energy nation. Norway’s leading offshore industry, including a strong supplier industry, means we already have the building blocks and capabilities in place to be at the forefront of the offshore wind industry in Norway. Going forward, Aker Horizons’ portfolio and partnerships will also allow it to evaluate export possibilities to Europe and the UK and electrification of oil and gas assets for possible value adding offtake.
Seizing on opportunities and forming these kinds of partnerships are positioning Aker’s portfolio for developing entire industries, reducing emissions, and creating new jobs for the future. We are now looking at the most solid foundation in our industrial history. Just a few weeks ago, we invited other investors to join us on the journey by carrying out a private placement in Aker Horizons and listing the company on Euronext Growth Oslo. The intention is to seek listing on the Oslo Stock Exchange main list within the next 12 months. Industrial software is also becoming an increasingly important part of our industrial portfolio, with Cognite, Aize and Abelee already forming a solid foundation for growth. Going forward, we expect accelerating growth and allocation of resources to our software segment as we move towards enabling companies to digitalize and integrate their entire industrial value chain.
It has been quite a quarter, quite a year, and quite a start to a new one. To sum it up, in the midst of an energy transition, where the world is moving towards more sustainable energy production, Aker is continuing its commitment to create shareholder value by being well positioned for its companies to take part in a prosperous journey towards a better future -- for our people and the planet.