Noram Drilling AS

OSE:NORAM

Earnings Call Transcript

[Marius Furuly, executive]

Hello, everyone and welcome to NorAm Drilling's Fourth Quarter 2024 Results Presentation. My name is Marius Furuly, and I'm the Strategy and Investor Relations Director here at NorAm. With me today on the call, I have Mr. Marty Jimmerson, our company's CEO and CFO with me from Houston.

We will first go through our presentation of the quarterly results, and recent market development. Before we open up for questions-and-answer sessions at the end of the presentation. And -- sorry, I just need to get up the presentation here.

All right, before we begin, I'd like to turn your attention to our disclaimer section, and I'd like to note that this presentation will contain forward-looking statements and that words such as expects, anticipates, intents, estimates, or similar expressions are intended to identify these forward-looking statements.

Forward-looking statements are not guarantees of future performance and these statements are based on our current plans and expectations, and are inherently subject to risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. You should therefore not place undue reliance on these forward-looking statements.

So with that said, over to you Marty.

[Martin Jimmerson, executive]

Thank you, Marius and hello to everyone, joining us today. This may be a first for NorAm as the temperatures in Texas today are colder than Oslo, and many are saying this is the coldest winter in the U.S. in many years.

I'm pleased to report that during the fourth quarter NorAm performed well, and increased our financial performance in an essentially flat market. U.S. and Permian rig counts were essentially flat during the quarter with a small increase of 1% in the U.S., and a 1% decline in the Permian. Permian rig counts continue to be flat, albeit at 12-month lows.

WTI was range bound during the fourth quarter, trading between $67.71 per barrel. Revenue was $26.6 million, up slightly from the previous quarter. Our utilization increased to 90.6% from 89.3% in the prior quarter.

Adjusted EBITDA, defined as earnings before interest, tax, depreciation and amortization plus non-cash stock option expense, was $6.6 million, up $600,000 or 10% from the previous quarter. Our backlog as of yesterday, was a little over $30 million as a result of successfully renewing contracts with 6-month terms at essentially the same or slightly higher day rates.

Turning to the next page on recent events, during the fourth quarter we paid dividends of a little over $5 million or NOK 1.32 per share. Our announced dividend payable later this week, will represent the 27th consecutive monthly distribution since our listing. With the latest distribution, NorAm has now returned more to our shareholders than we raised in the private placement in Q3, 2022.

As mentioned on the previous slide, our current revenue backlog is roughly $30 million. 8 of our rigs are currently operating under contracts of at least 6-month terms. 2 of our rigs are operating on pad-to-pad contracts that each have multiple wells per pad, and we're on our customer schedules throughout the year.

As discussed last quarter, rig counts in both the Permian and U.S. continue to be flat, which we believe will continue during the early part of 2025 as a result of current WTI prices, economic and geopolitical uncertainties, E&P operating and fiscal discipline, improved well completion efficiencies, and flat to slightly down projected E&P budgets for 2025.

Natural gas prices have yet to impact U.S. rig counts. Nat gas began the fourth quarter around $3 and is currently trading well above $4. We continue to believe that stability of $3 or more, could be a catalyst for increased nat gas activity, and demand for high end drilling rigs.

Speaking with our customers, we are hearing and believe natural gas basins, will be adding rigs in the first half of 2025, based upon current prices.

Now turning to the next page, market side we see the Permian oil production growth has continued to slow, and the latest EIA figures point to only 170,000 barrels of oil per day growth year-over-year during the fourth quarter. The comparable figure was 3x higher at 470,000 barrels per day 1 year ago in the fourth quarter of 2023, meaning that production growth is coming down dramatically.

We are firm believers that we would need to see, an increased rig count to accommodate material production growth in the Permian going forward. With the Haynesville down over 30 years from 2 years ago, any significant increase in rig activity in the gas basins will more than likely require excess capacity of rigs from the Permian.

And now let me turn it back over to you Marius to cover our key operational figures for the quarter.

[Marius Furuly, executive]

Thank you, Marty. So in the fourth quarter, we achieved a rig utilization of 90.6% that was up from 89.3% in the previous quarter. We continue to have one warm rig stacked, and we are looking for employment for the rig.

Revenues came in at $26.6 million up from $26.5 million in the previous quarter, and we had an adjusted EBITDA of $6.6 million up from $6.0 million in the third quarter. On the cost side, our operating expenses decreased as repair and maintenance expenses decreased from the previous quarter.

Our all in breakeven was around 18,400 per day for the working rigs, and we expect this metric to remain at or around this level going forward. The idle rig is stacked at about 30% lower cost.

On the right hand side, the income statement. We had an operating profit of about $1.6 million, compared to an operating profit of about $1 million in the previous quarter. We had a net financial loss of $26,000 as a result of various banking fees, and mark-to-market loss on FX, due to a devaluating NOK versus dollar currency.

We continue to have a debt free balance sheet and in the fourth quarter net profit after tax, was $19,000 versus a net profit of $700,000 in the previous quarter, due to a tax expense.

And then turning over to our balance sheet and cash flow statement. NorAm has a debt free balance sheet and minimal investment requirements. We ended the quarter with a cash balance of $8.4 million. As a result of slightly higher CapEx and a working capital buildup during the fourth quarter.

We are currently laying with a little excess liquidity, versus our self-imposed $11 million minimum cash balance, which is including non-utilized revolving credit facility of $4.5 million. The excess liquidity we carry, will be used as working capital funding for future reactivations, and we do not expect any reactivations to interfere with our dividend policy of continuously paying out excess free cash flow from our operations.

In the fourth quarter, the company paid out $5.1 million or NOK 1.32 per share in monthly distributions. And we have since quarter end declared 2 new distributions of approximately $0.08 per share. We will continue to pay distributions, subject to continued positive net cash flow from operations.

So to conclude this presentation, NorAm has a fleet of 11 ultra super spec rigs fully upgraded with state-of-the-art working systems and racking capacity with a track record of drilling the longest and most efficient wells in the Permian. We are strategically positioned to 100% in Permian which is the largest U.S. shale basin, where our rigs are among the very top performers in terms of drilling efficiency measured by feet per rig per day.

We retain a top quality customer portfolio of 5 E&Ps ranging from super majors, to smaller private companies. The company has an industry low cash breakeven, and minimal investment requirements in the rigs to keep them at the top of the market.

We have a clear dividend policy of returning all excess cash to our shareholders, and since our listing we have returned USD 72.5 million to our shareholders equal to NOK 17.72 per share. And our last monthly cash distribution implies an annual yield, of approximately 16% as of closing price yesterday.

So thank you for listening to our presentation, and we would now like to open up for questions from the audience.

[Marius Furuly, executive]

[Operator Instructions] We have our first question from Bard Rosef of Pareto.

[Bård Rosef, analyst]

Just quickly on tax, you had the $1 million in cash taxes, $2 million I think in P&L taxes this quarter. We've gotten used to no taxes. Can you just touch on that and how we should think about that going forward?

[Martin Jimmerson, executive]

Yes. Bard, great to catch up. So our fourth quarter tax expense includes the catch up for the entire year. And if you think about the total tax expense for the year, approximately $800,000 of it was true taxable income from the interest on our intercompany notes in excess of our expenses in Norway.

Then another $800,000 was the culmination of income associated with the intercompany notes as we converted the dollar back to the NOK as the NOK had devalued, as many of you know. And then the residual would be just an increase in deferred taxes. As we think about it going forward, assuming that the NOK does not devalue anymore, we think our true taxable income in Norway probably is around $0.5 million or $600,000 and continuing to go down slightly as we pay off the intercompany notes, getting money back to the Norway for the dividend.

And then any additional would just be subject to whatever the NOK does. If the NOK strengthens, we could even lower that. So as I think about it, for 2025 at least $500,000 to $600,000 for kind of true taxable income. And then, there could be some incremental taxes associated with any devaluation of the NOK as we pay down the intercompany notes. I hope that helps.

[Bård Rosef, analyst]

That really answer everything on the question. Regarding just general operating expense, anything we should expect there on the trend going into '25?

[Martin Jimmerson, executive]

Yes. No, great question. And we're not seeing, what I would call, any significant inflationary pressures. The only thing that, I kind of worry about as we move forward, is just the kind of the natural impact that's going on in insurance world across the globe. And so that could impact us. I don't think it's going to be a huge number. But I think we'll still be able to operate within kind of the same range that we operated during the fourth quarter.

[Bård Rosef, analyst]

I will just finish off with a last one. In terms of CapEx, you've given some guidance for '25. Are there any -- I mean, there have been -- many doing upgrades to the rigs for sort of doing longer laterals, et cetera. Is that something you considering or is that something you see as not necessary on your part?

[Martin Jimmerson, executive]

No, I think for the most part we completed those upgrades. We're not seeing any additional demands for longer laterals. We think we've completed those upgrades. Anything new that we're doing, it would just be kind of more, spare equipment related, maybe a top drive, maybe an extra engine, et cetera.

So we're very comfortable, we'll be able to operate within that $4 million guidance that we provided for 2025, and none of that will be what I would consider significant upgrade requirements.

[Marius Furuly, executive]

Yes, we'll wait a couple of more seconds for any follow-on questions from other people in the audience. You can unmute, Bard.

[Bård Rosef, analyst]

Just on the OpEx, I saw a slight increase in the, the OpEx on the idle rig. And then I get hopeful. Maybe you can update us on the situation there and maybe a touch on why that's a tad higher than in Q3?

[Martin Jimmerson, executive]

Yes, so little higher in the current quarter we had some top drive and catwalk repairs as we continue to ensure the rig's ready to go to work. We're actively showing that rig. I like your thinking that as the expenses are going up, that means we're optimistic and we're showing the rig to interested customers.

We do and are seeing some opportunities, albeit, it's one opportunity here, one there, and it's -- there are a couple available hot rigs in the market competing for those opportunities. But we remain optimistic that we'll get this rig to work shortly as we move forward.

[Bård Rosef, analyst]

I mean, I'm just continuing if there's -- I have a lot of questions. You had a few contracts, I think, rolling off in February, and from the backlog figures it looks like you've done some good extensions there. Can you may be shed some light on them, and also perhaps on the client list you're working for at the moment, which we can see on one of the slides and who the clients they are?

[Martin Jimmerson, executive]

Yes, yes. And so, as mentioned earlier, we're very pleased that we continue to renew our contracts essentially with the same contract terms of generally 6 months. We currently -- and this is public data, if you have the right source. We have one rig working for Conoco. We have 3 rigs working for Oxy, we have 2 rigs working for Permian Resources, 2 rigs working for Firebird, and 2 rigs working for Double Eagle.

As many of you may have seen, just yesterday, Diamondback announced that they were acquiring some acreage from Double Eagle. Double Eagle, just so you'll know, they have multiple funds. And the acreage that Diamondback is acquiring is -- sits within an entity called Double Eagle IV, as we refer to it. They're already operating and stood up a Double Eagle V with a lot of property. Double Eagle is maintaining some acreage within a Double Eagle IV.

And so the bottom line is, both of the rigs that are working for Double Eagle have several months under contract. And as you would imagine, we've already met with both Double Eagle and Diamondback and we remain very optimistic that both rigs will remain with either Double Eagle or Diamondback. And even if they don't, for whatever reason, those rigs are hot rigs. They're great rigs, performing very well, and they would have, in my mind, no trouble finding work in this marketplace.

[Marius Furuly, executive]

All right. There are currently no further questions in the audience, so I think we can conclude there. Thank you to everyone that joined us today, and I hope to see you again next quarter. And thank you to the NorAm family of employees, and suppliers and customers for supporting us during the fourth quarter. See you again next quarter. Goodbye.