Noble Corp (Cayman Island)

NYSE:NE

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Noble Corporation's Third Quarter 2021 Results Conference Call. [Operator Instructions] Craig Muirhead, Vice President, Investor Relations and Treasurer, you may begin your conference.

[Craig Muirhead, executive]

Thank you, Julianne, and welcome, everyone, to Noble Corporation's Third Quarter 2021 Earnings Conference Call. We appreciate your continued interest in the company. You can find a copy of Noble's earnings report issued yesterday evening along with the supporting statements and schedules on our website at noblecorp.com.

Joining me today are Robert Eifler, President and Chief Executive Officer; Richard Barker, Senior Vice President and Chief Financial Officer. Also joining is Blake Denton, Vice President, Marketing and Contracts.

For today's call, we will begin with prepared remarks, followed by a question-and-answer session. During the course of the call, we may make forward-looking statements regarding various matters related to our business and companies that are not historical facts. Such statements are based upon current expectations and assumptions of management and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements.

Please refer to our SEC filings for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results.

Also note, we are referencing non-GAAP financial measures in the call today. You will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website.

And with that, I will now turn the call over to Robert Eifler, President and Chief Executive Officer of Noble.

[Robert Eifler, executive]

Thanks, Craig, and welcome, and thank you to everyone joining us on the call today. I'll begin by highlighting several of our recent key accomplishments and then provide some market commentary before turning the call to Richard to review our financial results for the quarter.

In late October, the Noble Lloyd Noble began work in Norway for Equinor. By many measures, the Noble Lloyd Noble is one of the most capable jackups ever constructed and serves as a perfect platform for Noble's entry into Norway. This tremendous accomplishment required our team to overcome numerous challenges, including substantial COVID-related logistical issues, and I would like to express my appreciation to everyone who worked tirelessly to get the rig ready for work.

I would also like to thank our customer, Equinor, for their support throughout the process. We look forward to a long partnership in Norway.

Earlier this week, we closed the sale of 4 jackup rigs working in Saudi Arabia, which we expect will generate approximately $285 million of cash, net of transaction fees, expenses and settlement of working capital. This transaction is accretive for our shareholders, bolsters our already strong balance sheet and will better position Noble to execute on our strategic and financial priorities. I would again like to thank the employees working in our Saudi operation for their focus and professionalism during the transition period.

The third quarter was also the first full quarter of activity for the former Pacific Drilling rigs as part of the Noble fleet. These highly capable rigs are performing very well in the improving ultra-deepwater market, and I want to quickly walk you through some of the contracting success. The Noble Faye Kozack formerly Pacific Khamsin, recently completed its program with Petronas in Mexico and has mobilized to the U.S. Gulf for work with a number of different operators. We expect that rig to be fully committed through the end of 2022.

The Noble Stanley Lafosse, formerly Pacific Sharav continues its work with Murphy in the U.S. Gulf of Mexico under a firm contract until June of 2022, with great opportunities for follow-on work. The Noble Gerry de Souza, formerly Pacific Santa Ana, is currently in Las Palmas preparing for its next job with APA Corp. and Suriname scheduled to start in early '22. We are upgrading this rig to add a second BOP as well as replacing the existing dual gradient system with an integrated MPD system. We look forward to positioning the rig with these enhanced capabilities in one of the world's most prolific deepwater basins early next year.

Turning to the market. Oil prices remained stable through the third quarter and within a range that provides supportive economics for our customers' offshore projects. Global energy demand also continues to normalize from last year's pandemic-driven lows.

On the back of these global macro improvements, the rig market has continued to show consistent signs of recovery throughout 2021, especially in the UDW segment.

In the U.S. Gulf of Mexico, where 4 of our drillships are working, floater day rates have surpassed the late 2019 peak. Market is now approaching $300,000 per day for the most capable drillships, as evidenced by our most recent contract for the Noble Faye Kozack at $290,000 per day. The majority of contract durations remain short with most new opportunities for 1 to 2 well programs, which has limited additional drillship mobilizations to the fewer long-term programs. Leading indicators such as FIDs, investment levels and operator conversations continue to support robust demand growth in the ultra-deepwater segment.

Before moving on from the Gulf of Mexico, as previously reported, our Noble Globetrotter II was impacted by Hurricane Ida and is currently in the shipyard undergoing repairs. We expect to be back in service by the end of the year, and Richard will provide some additional financial details in a moment.

In South America, utilization and rates have increased quarter-over-quarter, and the deepwater fleet is fully contracted. Petrobras had year-to-date awarded almost 23 rig years of work, mostly in the form of multiyear contracts, with roughly half of those awards going to local contractors. Brazil continues to be a bright spot for future demand in the region with potential incremental demand from Petrobras as well as IOCs over the next several years.

Our strongest position in South America is in the Guyana-Suriname basin, where we currently have 5 high-spec ultra-deepwater rigs under contract. Our operations in Guyana represent a great example of how a healthy and long-term strategic customer partnership can enhance the level of service we can provide.

Our scale in the region with 4 similar rigs working for the same customer, creates a number of operational efficiencies, while the duration allows both parties to optimize the full capabilities of these drillships.

Moving to the North Sea. I would characterize the jackup market is steady, although tender activity has been strong since the last few weeks of the summer, mostly for 2022 programs. Supply continues to outpace demand, and each tender will be competitive.

In Norway, we expect softness during 2022, but are fortunate that the Noble Lloyd Noble is contracted through the majority of the year, with options that extend into late 2023.

Summing up the North Sea, we expect activity and rates to reflect modest improvement in the near term, with demand in the Norway sector increasing from 2023 onwards.

Overall, we expect a stable market for our jackup fleet in an improving market for floaters. We are encouraged by the activity levels for ultra-deepwater floaters and the resulting day rate improvement, which we expect to contribute to improving results as we move through 2022.

I will now turn the call to Richard to provide more details on our financial results and guidance.

[Richard Barker, executive]

Thank you, Robert, and good morning, all. In my remarks today, I plan to provide some brief highlights of our third quarter results, provide a progress update on the Pacific Drilling integration and round off with some comments around our outlook for the remainder of 2021 and full year 2022.

Turning to our quarterly results. Contract drilling services revenue for the third quarter totaled $231 million versus $200 million for the second quarter. The increase in revenue was largely due to higher operating days across both our floater and jackup fleets, with a contract commencement on the Noble Faye Kozack as well as a full quarter contribution from the Noble Scott Marks, the Noble Tom Prosser and the Noble Clyde Boudreaux being the key drivers.

Our contract drilling costs were flat in the third quarter compared to second quarter. As a reminder, the second quarter was negatively impacted by the operational ramp-up of several rigs. During the third quarter, we incurred approximately $10 million of hurricane costs related to the inspections and repairs on the Globetrotter II as well as the LMRP recovery efforts.

Adjusted EBITDA, which excludes hurricane-related costs for the third quarter was $47 million, up from $10 million in the second quarter. Capital expenditures for the third quarter came in lower at $39 million compared to $55 million in the second quarter. This is largely due to the completion of contract-specific capital projects on the Noble Lloyd Noble, Noble Don Taylor and Noble Tom Madden.

From a cash flow perspective, we received a cash tax refund of approximately $24 million related to foreign tax credits in the third quarter. In the fourth quarter, we still expect to receive the remaining portion of the CARES Act tax refund of approximately $15 million.

Maintaining a strong balance sheet and liquidity position remain a key focus for us, and these were further enhanced by the closing of the Saudi asset sale this week. Pro forma for that sale, our total liquidity at September 30 would have been approximately $870 million. Additionally, our revenue backlog of $1.4 billion, which excludes the recently divested rigs, provides strong visibility into 2022.

I want to give a quick update on our Pacific Drilling integration. We exceeded our targeted synergy run rate of $30 million during the third quarter. The 3 active rigs are contributing to our improving cash flow and all have good contract coverage moving into next year. Our attitude towards the stack drillships has not changed. We will not begin a reactivation of the Meltem or the Scirocco without an appropriate contract that would justify the required capital investment.

In our earnings press release yesterday, we provided some updated guidance for 2021 and 2022. Speaking firstly to 2021 and the remainder of the year. We expect our adjusted revenue to be slightly higher for full year 2021, primarily driven by the Saudi asset sale closing later than originally estimated. We are maintaining our 2021 ranges for adjusted EBITDA and CapEx.

While adjusted EBITDA is positively impacted by strong cost control, both offshore and onshore as well as the slightly delayed Saudi closing, there are 3 main drivers that had a negative impact. Firstly, the Noble Lloyd Noble commenced its contract in late October, a few weeks later than anticipated. The successful start-up of the Noble Lloyd Noble is a key component to our improving financial outlook in 2022.

Secondly, as Robert mentioned, the Globetrotter II is in the shipyard, undergoing repairs and inspections and is currently estimated to be back working in the second half of December. In total, across all periods, we expect a net cash impact due to hurricane losses of approximately $10 million to $20 million. Thirdly, the Hans Deul is currently experiencing an unplanned delay for up to 60 days as it undergoes leg bracing repairs.

Turning to full year 2022, we see adjusted revenue between $1.05 billion and $1.125 billion and adjusted EBITDA between $300 million and $335 million. The increase in our 2022 outlook is primarily driven by the continued improvement in the flow to market. Lastly, capital expenditures are expected to normalize to a more maintenance-type level of $115 million to $130 million.

Our CapEx guidance excludes any capital for potential customer requests we may have for rig upgrades or for the reactivation of any cold stacked rigs. As we move into the fourth quarter in 2022, we continue to remain focused on controlling costs and exercising strict discipline when making capital-related decisions. The combination of an improving market with our cost structure and capital structure should facilitate our ability to generate an attractive level of positive free cash flow in 2022.

That concludes my prepared remarks, and I'll now turn it back to Robert.

[Robert Eifler, executive]

Thanks, Richard. Noble supports a sustainable energy future through our operational efforts to protect the environment and safely deliver reliable and efficient drilling services. We are pursuing a number of initiatives to reduce emissions-related offshore drilling operations, and we'll publish our sustainability report covering these items in more detail in the coming weeks.

We have accomplished a lot so far in 2021. We have signed and closed 2 strategic transactions that are highly accretive to our shareholders, and we are well positioned to benefit from the improving market conditions going forward. We will continue to benefit from the synergies generated through the Pacific Drilling acquisition. Scale is important in our business as it can help drive efficiencies, that lower costs for us and allow us to better meet the needs of our customers by leveraging investments over a larger fleet.

We have taken action with the Pacific Drilling transaction, and we'll continue to evaluate any opportunities to further improve our scale and efficiency in ways that benefit our customers and our shareholders. We are encouraged by oil prices, which have steadily improved throughout the year and are at levels where our customers are able to generate returns. We expect the commodity price environment should be a more constructive backdrop as our customers set their budgets for next year and should set the stage for continued demand and rate improvement, particularly for ultra-deepwater floaters. These recent market trends are encouraging and are supportive of our strategy to implement a sustainable return of capital policy.

Thank you for your participation in our call today, and I'll now turn it back to the operator for Q&A.

[Operator]

[Operator Instructions] We have no questions at this time. I'd like to turn the call back over to Craig Muirhead for closing remarks.

[Craig Muirhead, executive]

Thank you, Julianne. We apologize to everyone for the dial-in confusion this morning. But thank you very much for your participation in our call today and your continued interest in Noble. Good day.

[Operator]

This concludes today's conference call. You may now disconnect.