Øyvind's corner

Annual Letter 2020: Navigating turbulent times for transformative change

6. apr. 2021, 09:12

Looking back on 2020, with all its surprises and challenges, it also turned out to be a year of opportunity in ways we could hardly have imagined as we entered into the decade. I am deeply imporessed by how Aker's portfolio companies, with employees, business partners and customers, weathered the storms and came toghether in an unparalleled effort. It turned into an extraordinary endeavour that led to a transformation of the Aker group through the most challenging times in recent memory. The year left us with learnings on which to build and drive further value creation in both existing and new parts of the Aker portfolio.

When the pandemic hit, Aker and our portfolio companies were suddenly faced with an unprecedented intersection of emerging and existing risks: securing jobs and employee wellbeing while simultaneously reeling from a collapse in oil prices and economic uncertainty – all while managing megatrends that require adaptability, resilience, and skill to remain relevant in the long-term. We asked ourselves: how can we tap into our 180- year history as industry builders to innovate, be a responsible employer and active owner through a time of crisis, and ensure profitable operations that both secure jobs and create value in a new market reality and outlook? The result is a year that ended with an all-time high net asset value.

As the virus spread and oil demand and prices plummeted, extraordinary measures were quickly implemented across our portfolio companies. I am deeply impressed with the collaborative efforts to protect our workforce and adapt to a new normal. Management teams regrouped to respond around the clock to one of the gravest disruptions in recent memory and employees put in a tremendous effort to adapt to uncertainty, working from home, social distancing and isolation. A year later and we are still not out of the woods. Cases of Covid-19 are surging, and many experts are also increasingly raising concerns over the potential long-term impact on mental health – problems that could far outlast the virus. Employee health, safety and wellbeing remain at the top of Aker’s managements’ and boards’ agendas.

Accelerated transition for sustainable growth

The pandemic and the collapse in the oil price and demand that hit in the first half of the year opened up for new business opportunities and a window to accelerate our ongoing transition to more sustainable business segments. A strong financial position with low gearing, strong liquidity and cash allowed us to seize opportunities under highly uncertain market conditions. This was coupled with the temporary tax changes implemented in June that strengthened E&P companies’ investment capacity and quickly unlocked new field development projects. It contributed to not only higher activity and increased value creation, but also allowed for a structured transition where we maintained the capabilities of Norway’s world-class offshore supplier industry – an industry hit especially hard by the pandemic. We were, and still are, firm in our belief that it is on the shoulders of today’s skilled service workers and engineers that we will succeed in making a green energy transition.

This was our starting point of what has become the second largest asset in our portfolio and among our strongest growing platforms for future value creation. And it’s been full speed ahead since then. Aker Horizons now consists of a four platform companies, including Aker Offshore Wind, Aker Carbon Capture, Mainstream Renewable Power and Aker Clean Hydrogen, as well as a portfolio of companies which represent a promising opportunity space, including within hydropower and transmission technology. 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 green ammonia.

Focused and targeted strategies

The changes made in 2020, is not so much an execution of a diversification strategy as it is a timely transition into new industry segments. At the beginning of the year, oil and gas-related assets made up nearly 80 per cent of Aker’s portfolio. The pandemic placed the oil and gas industry in a fast-forward scenario, where a sector that is used to volatility and is cyclical by nature, underwent a more rapid and collective grappling with how to act, redefine strategies, diversify operations, and redeploy capital. Aker BP remains Aker’s largest asset and will continue to play an important role in our portfolio going forward. More important than ever is that the company focuses its future-oriented strategy on the Norwegian Continental Shelf and that its growth contributes to maintaining low cost, low emissions, and continued strong upstream cash contribution. With these elements in place, 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.

These kinds of ‘focus discussions’ are ongoing in many parts of the Aker portfolio. Following the merger with Kvaerner, Aker Solutions is increasingly concentrating on becoming a digitalized engineering company for both the oil and gas and the renewable energy industry. This includes exploring how the service offering can be even more focused and targeted going forward. While not necessarily a strategic shift, it’s an opportunity to leverage the digitalization and software capabilities in other parts of the Aker group to differentiate itself in a competitive global supplier market. Discussions and actions like these will likely be the key enabler of success as the industry’s wheat is separated from the chaff.

Organizations forming a stable backbone

The digital ecosystem in Aker is itself expanding rapidly. Built on the Cognite Data Fusion (CDF) platform, Aker’s digital ecosystem is set up grow with contributions from external customers and partners that provide data and applications. A good smartphone has a stable operating system and hardware. While you don’t need to predict all the applications it will have from day one, it needs a stable platform to add new inventions and capabilities without having to reinvent or replace the backbone itself. CDF is this stable backbone for Aker’s future growth within software and industrial digitalization more broadly. Through the CDF technology, we can attract both partners and customers, but also have a starting point for new business opportunities, such as our new industrial software application company Aize. 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.

Cognite is addressing a massive market opportunity and has a product that is set up for global growth. However, the company would not have seen its remarkable growth and success over the last four years without a strong organization and leadership. As Henry Ford once said: “Coming together is a beginning; keeping together is progress; working together is success.” With John Markus Lervik at the helm, the company has had an unwavering commitment to attract top quality candidates to every part of the organization. This is the ‘secret sauce’ that has brought Cognite and CDF, but also Aker, to where it is today. I am sure that Aker’s 180-year old history would have turned out quite differently without a relentless focus on attracting top talent. A small, but highly skilled organization is our stable backbone. That is why helping to form and strengthen the organizations in other parts of the portfolio is currently at the top of our ownership agenda. In 2020, Aker Horizons’ companies came together; in the months that followed, they have made tremendous progress; going forward, it will need to form solid management teams and organizational platforms that work together to drive both organic and inorganic growth. Its platform already places the company well on its way to reaching its energy vision. It now needs to build robustness to handle volatile market fluctuations natural to the industries in which it operates.

Partnerships for growth

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. In the last year, we formed important partnerships with Accel, Microsoft, Yara and Statkraft. Coupled with M&A activity, these collaborations allow us to build stronger and more competitive companies, building skill and leveraging complementary capabilities for growth.

On the more personal level, I continue to experience the importance of a well- functioning, long-term partnership through my work with Kjell Inge. This year marks 25 years of working together. Over the last 12 years as President and CEO, I have had the pleasure – and challenge! – of putting his visions into life. He is undoubtably full of ideas and inspiration, but even more importantly, he is a unique main shareholder that is actively involved in business decisions. This involvement provides an anchoring and implementation ability that is unique and different from any other active ownership structure.

A transformative time to prosper

This year marks Aker’s 180th year of industrial pioneering. Over decades, the company has evolved in pace with shifting market trends, technologies, regulations, and customer preferences. Today, the ESG considerations are also high on that agenda. From a mechanical workshop to shipbuilding. From offshore construction, oil field services and exploration and production of oil and gas to renewable energy and industrial software. Each transformational change and new business opportunity has been built on the shoulders of existing capabilities. Each venture is based on being complementary, rather than in conflict with existing Aker businesses. When managed and balanced properly, we can make changes with acceptable risk tolerance and without compromising value creation.

This time last year, shortly after the first lockdown, I wrote in my quarterly shareholder letter that I thought we might look back on the pandemic and its widespread repercussions and see that it triggered fundamental changes to our portfolio and industrial activities more swiftly than envisioned – and, as a result, create an even more prosperous Aker. Today, I can rest assured that my predictions held true, but I am also be reminded about why we have been so occupied by building robustness, resilience, and optionality, both at the Aker level and in each portfolio company. As 2020 exemplified, we are prepared for rainy days. Our umbrella remains a solid financial position with low debt ratio, predictable upstream cashflow, maintaining a liquid portfolio of assets and well performing industrial holdings with focused strategies and strong organizations that enable us to weather the storms. While we are full speed ahead, we do not waver from our core strategy: provide attractive cash dividend to our shareholders and pursue value accretive opportunities for long-term value creation.